If you want to see a perfect example of how completely broken our regulatory system is, look no further than a speech that Daniel Gallagher, one of the S.E.C.'s commissioners, recently gave in Denver, Colorado.

It's a speech whose full lunacy is hard to grasp without some background.

It's by now been well-established that the S.E.C.'s performance in policing Wall Street before, after, and during the crash has been comically inept. It would be putting it generously to say that the top cop on the financial services beat has demonstrated particular incompetence with regard to investigations of high-profile targets at powerhouse banks and financial companies. A less generous interpretation would be that the agency is simply too afraid, too unwilling, or too corrupt to take on the really dangerous animals in this particular jungle.

The S.E.C.'s failure to make even one case against a high-ranking executive involved in the mass frauds leading to the 2008 crash - compare this to the comparatively much smaller and less serious S&L crisis twenty years earlier, when the government made 1,100 criminal cases and sent 800 bank officials to jail - became so conspicuous that by the end of last year, the "No prosecutions of top figures" idea became an accepted meme in mainstream news media coverage of the economic crisis.

The S.E.C. in recent years has failed in almost every possible way a regulator can fail to police powerful criminals. Failure #1 was that it repeatedly fell down on the job even when alerted to problems at big companies well ahead of time by insiders. Six months before Lehman Brothers collapsed, setting off a chain reaction of losses that crippled the world economy, one of Lehman's attorneys, Oliver Budde, contacted the S.E.C. to warn them that the firm had understated CEO Dick Fuld's income by more than $200 million; the agency blew him off. There were similar brush-offs of insiders with compelling information in cases involving Moody's, Chase, and both of the major Ponzi scheme scandals, i.e. the Bernie Madoff and Allen Stanford cases.

And:

Just so we're clear about what we're talking about here: the S.E.C., rather than go after serial violators like Bank of America and Chase, proposes that the best place to find crime is in small-cap companies, because that's where fraud "proliferates."

In the last year or so I've heard from several attorneys who represent smaller clients who tell me they're flabbergasted, watching the S.E.C. give the Chases, Goldmans, and Citigroups free ride after free ride while their pockmarked little clients at fledgling public companies get served the whole regulatory meal for minor disclosure violations - even cases that simply involve bad paperwork, where money isn't even stolen. If you're a little tech startup and there's a $100,000 problem in your books, you can expect the full Princess Bride torture machine treatment, with multiple agents assigned to your case, serious criminal penalties, asset seizures, etc.

Want an example of the S.E.C.'s idea of "shot selection"? Every year, a parade of itty-bitty failed public companies lets their paperwork lapse. Dead little companies sitting in the bureaucratic atmosphere doing nothing at all are a major threat to national security, of course, so the S.E.C. flies in to the rescue and feverishly revokes their registrations.

These actions are called "12(j) registration revocations," and the beauty of them, from the S.E.C.'s point of view, is that it can list each one of those revocations as a separate enforcement action, when it goes before Congress at the end of every year to brag about all the good work it's done.

David Fuller's view We have seen the same thing in the UK. Regulators want the quiet life, with public sector job security and retirement benefits, or perhaps even a cushy swansong non exec job with one of the big fish they were supposed to be regulating. They do not want to go after the biggest transgressors, who will fight back, including wielding political influence.

Temperamentally, regulators are more sadistic than masochistic, in the clinical meaning of these terms. That is why they regulate, rather than become entrepreneurs. Their preferred modus operandi is to churn out a blizzard of rules, regulations and written examinations. This busy work creates job security for the regulators and will snare a sufficient number of inefficient or overwhelmed small fry businesses, to bolster the regulators' catch rate in the eyes of their bureaucratic overseers.

We do not need more regulation of this sort. What we do need is simplified regulation which provides common sense rules which everyone can understand. For instance, the liar loans mentioned in the article above should never have been allowed. Similarly, the segregation of clients' funds is an obvious point and should not be difficult to monitor. Moreover, financial crooks should know that they will be heavily fined and also face prison sentences if convicted. This would be a deterrent.