A good crisis should never go to waste. In the world of financial regulation, experience has shown—since at least the time of the
South Sea Bubble three hundred years ago—that only after a catastrophic market collapse can legislators and regulators overcome the resistance of the financial community and adopt comprehensive “reform” legislation. U.S. financial history both confirms and conforms to this generalization. The Securities Act of 1933 and the Securities Exchange Act of 1934 were the product of the 1929 stock-market crash and the Great Depression, with their enactment following the inauguration of President Franklin Roosevelt in 1933. The 1932 to 1934 Pecora Hearings before the Senate Banking and Currency Committee fueled public indignation and shaped these statutes. Following the collapse of Enron in late 2001, WorldCom in 2002, and an
accelerating crescendo of financial statement restatements by other public corporations, Congress enacted, possibly in some haste, the Sarbanes-Oxley Act (SOX). The Dodd-Frank Act, enacted in 2010, followed an even greater financial collapse, one that threatened financial institutions on a global scale and brought the problem of systemic risk to the attention of a public already infuriated at financial institutions (and their highly compensated investment bankers) being bailed out at taxpayer expense. Both of these episodes revealed abundant evidence of financial chicanery and fraud that outraged and repulsed the public. Not surprisingly, the comprehensive reform legislation that followed in the wake of the market collapse showed hints of the public’s desire for retribution. All that differs this time is that the crisis may be wasted—as hereinafter explained.
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