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Keeping a sharp eye on Wall Street

OUR OPINION: Upgrade regulatory framework of financial markets

Whether the $700 billion financial rescue plan will get the economy out of a jam is anyone's guess, but have no doubt about how we got into this mess in the first place: a regulatory system that failed to do its job. In one of the most astonishing statements to come out of the Wall Street scandal, Christopher Cox, chairman of the Securities and Exchange Commission, told Congress, ``The last six months have made it abundantly clear that voluntary regulation does not work.''

Voluntary regulation? Isn't that an oxymoron, like unsupervised supervision? Mr. Cox's comment speaks volumes about the mind-set in Washington that led to the present fiasco. The regulated captured the regulators, aided by well-connected lobbyists and members of Congress from both parties who were only too happy to wear blinders when it came to financial markets. Not only did the government fail to examine the books, it aided and abetted financial managers who didn't want anyone looking over their shoulder.

In the program cited by Mr. Cox, major investment banks lobbied for the SEC to monitor their parent companies. This allowed them to avoid regulation of European operations by the European Union. As Mr. Cox noted, however, ''investment banks could opt in or out of supervision voluntarily.'' This, he noted dryly, ''weakened its effectiveness.'' No kidding.

The backlash against this sort of nonsense has prompted Congress to awake from its prolonged sleep, if only to appease angry taxpayers. It is refreshing to hear words like ''accountability'' -- punishing those who break the rules -- and ''transparency'' -- making sure the numbers in the ledgers are clear and understandable -- being used once again in reference to Wall Street. But it's going to take more than stern words to rein in a system that prefers to play by its own rules.

The SEC's oversight responsibilities involving Wall Street's largest investment banks and their operations are being taken over by the Federal Reserve. Congress has also been asked for legislation to allow regulation of credit default swaps, complex financial instruments traded in unregulated markets that figure prominently in the debacle. These are good first steps, but the next Congress has to make regulatory overhaul a priority, and not just in the financial markets.

Just as we now know that lax regulation left American households exposed to unnecessary financial risk, so has poor regulation left the public vulnerable in other areas.

Remember the Vioxx scandal? For a time, it was the world's No. 1 pain medication, reaching $2.5 billion in annual sales until Merck withdrew it from the market four years ago when it was linked to thousands of deaths. The Food and Drug Administration gave Vioxx a clean bill of health because it lacked staff and resources to do its job properly.

Then there was the Consumer Product Safety Commission, whose staff was similarly gutted by foes of regulation. That left the agency unable to check the safety of toy imports from China and domestic and foreign products in a number of areas. Or the Environmental Protection Agency, which failed . . . well, you get the idea.

Yes, providing more resources takes more money. But it saves lives and prevents bad practices from exploding into calamities. Ultimately, though, greed and cunning cannot be outlawed. The late Supreme Court Justice William O. Douglas, an early chairman of the SEC during the New Deal, famously compared innocent investors to ground squirrels and Wall Street's sharp operators to coyotes who feed on them.

This is why you need regulation, he said. It's going to take that kind of avid skepticism and due regard for the public's well-being to bring honest dealing back to Wall Street and effective regulation back to Washington.

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