Congressional “reform” plans for credit default swaps are full of loopholes, guaranteeing that another derivatives-fueled financial crisis awaits us. According to the Bank for International Settlements, credit default swaps with a face value of $36 trillion were outstanding in the second quarter of 2009, the most recent figures available.

Credit default swaps are “a way to increase the leverage in the system, and the people who were doing it knew that they were doing something on the edge of fraudulent,” said Martin Mayer, a guest scholar at the Brookings Institution and author of 37 books, many of them on banking. “They were not well-motivated.”

Mr. Mayer has been critical of credit default swaps almost since they arrived on the scene. In 1999, for example, he wrote an opinion piece for The Wall Street Journal entitled “The Dangers of Derivatives.”

“These ‘over the counter’ derivatives  created, sold and serviced behind closed doors by consenting adults who don’t tell anybody what they’re doing  are also a major source of the almost unlimited leverage that brought the world financial system to the brink of disaster last fall,” he wrote, referring to the market turmoil of 1998. “The derivatives dealers’ demands for liquidity far exceed what the markets can provide on difficult days, and may exceed the abilities of the central banks to maintain orderly conditions.”

Calling credit derivatives “the most dangerous instrument yet,” Mr. Mayer concluded in his article that neither banks nor bank examiners have any idea how to handle them. “The system is easily gamed, and it sacrifices the great strength of banks as financial intermediaries  their knowledge of their borrowers, and their incentive to police the status of the loan,” he wrote.

Pointing to a study by the Federal Reserve Bank of New York, he said: “In the presence of moral hazard  the likelihood that sloughing the bad loans into a swap will be profitable  the growth of a market for default risks could lead to bank insolvencies.”

How’s that for prescient?

His predictions having come true, I asked Mr. Mayer for solutions to the problems that credit default swaps have created. He had several.