Nearly five years after the government took over the mortgage giants Fannie Mae and Freddie Mac, Congress is slouching toward remaking how Americans buy homes.

Gingerly, Sens. Bob Corker, Republican of Tennessee, and Mark R. Warner, Democrat of Virginia, have been working up a bill. Yet it's striking how much the process is being dominated by emotional battles and financial interests.

In the right corner — politically as well as figuratively — we have the contingent that despises Fannie Mae and Freddie Mac. These people continue, against the evidence, to consider them the central cause of the financial crisis. Their preferred solution is to wipe these companies from the earth and somehow get the government out of housing. The hope is that a thousand flowers will bloom on their graves, as private investors rush in to finance mortgages.

In the left corner — politically speaking, we are talking left of center — is a group of financiers that favors a plan to bring back Fannie and Freddie. The argument, forwarded by the banker James E. Millstein, who served as the chief restructuring officer in President Obama's Treasury Department, is that they can be fixed.

Investors like the hedge fund manager John Paulson and Bruce Berkowitz of Fairholme Capital Management have embraced this idea, contending that Fannie and Freddie can pay back taxpayers, be recapitalized and live again. Not incidentally, they could profit handsomely if this works, as they have bought up positions in Fannie and Freddie. It's a time-honored strategy: Make one Wall Street investment and then make a second investment in some Washington lobbying to protect the first.

The Corker-Warner plan creates a government insurance operation, similar to the Federal Deposit Insurance Corporation, that would insure mortgage-backed securities. Private investors would have to shoulder the first losses, probably about 10 percent. Taxpayers would not have to bail out those investors should things go south.

It's an appealing notion and the plan has commendable aspects. But if the system worked as advertised, it could make the next housing crisis worse.

To understand why, we should revisit what we have learned about the American housing and mortgage market.

First, we learned that the housing market is so central to people's wealth and the economy that the government will try to save it in a crash. At least Corker and Warner's plan grasps that, unlike the most fervent conservatives.

Second, Fannie and Freddie were fatally flawed. They were hybrids, privately held institutions with government charters — along with too much political influence and too little capital. Investors believed they were implicitly guaranteed by the government, and so they were. (Shareholders got hugely diluted, but not wiped out.) The plan tries to solve this by making the insurance explicit and then supposedly cutting off the private players from the government trough.

Neither of the two senators' offices made someone available for comment. A statement from Corker's spokesman emphasized the plan's protection for taxpayers; Warner's added a goal to maintain access to credit.

The Corker-Warner proposal, which borrows ideas from the recent Bipartisan Policy Center proposal and the left-leaning Center for American Progress, depends on getting three things exactly right. Private investors will need to have enough incentive to buy the securities (or, to use the jargon, there will need to be adequate liquidity in the market). These private entities will also need to put up enough money to have enough skin in the game to prevent taxpayers from taking a bath on the mortgages. On top of that, these firms and insurance companies will need enough capital to prevent taxpayers from having to step in to take over the companies.

There's reason to be skeptical that Congress will succeed in fine-tuning all of this. Unless the new insurance corporation regulates all housing-related investors, they will be subjected to different oversight from different agencies. Typically, businesses will gravitate to the most lenient agency and the one requiring the least capital.

If the Corker-Warner proposal were to go through, the private companies that have pole position would be the private mortgage insurers. The Republican Party has a fondness for this industry, going so far as to blow it a kiss in the party's 2012 platform. Uncomfortably, private mortgage insurers were quietly a major part of the problem after the housing bubble burst. They were woefully undercapitalized and have been operating almost as zombie institutions.

The 10 percent private investor number also poses a concern. It's a satisfyingly high number. But it's a number that will probably create big problems when housing goes into a downturn. Remember the Great National Housing Crash? Private investors fled. Fannie and Freddie needed to step in to provide liquidity. And the real Big Daddy was the Federal Reserve.

Without some mechanism to ease the requirement, the contemplated reform could exacerbate a panic, not ameliorate one. A Harvard finance professor, David S. Scharfstein, has a proposal that would remedy this, with the government stepping in during a crisis, ramping up its mortgage insurance business only in a downturn when private investors are fleeing.

What's striking is how much we've learned about housing since the crisis that isn't reflected in the reform efforts.

We have learned, for example, that the mortgage servicers have been unholy disasters, foreclosing on homeowners incorrectly, fighting principal reduction and dragging their feet on mortgage modifications that would have helped people stay in their homes. One lesson, then, is that separating mortgage servicing from ownership is a bad idea. The banks that kept loans on their books have been more ready to work out loans to keep people in their homes. The current Washington plans don't do much about this.

We've also learned that having an oligopoly of giant banks controlling the mortgage market leads to higher rates. And, because of the backlash against Fannie and Freddie, we are in danger of turning against the idea that the government has an important role in providing access to credit for those who might not be able to otherwise buy or rent homes.

Corker and Warner nod to providing greater access for small banks to compete with the big boys. And it provides a mechanism to provide access to housing for the credit-impaired. But in their fixation with solving Fannie and Freddie, the current Washington efforts give these important reforms short shrift.

The work is in the early stages. But the narrowness of the conversation is troubling.

Shareholders can't be counted on.

That's the message from the dispiriting shareholder vote on whether to leave Jamie Dimon as both the chief executive and the chairman of JPMorgan Chase, or to split the roles. Even more shareholders backed him in his dual role this year than did last year.

For some time, reformers have hoped that shareholders might ride to the rescue to solve the problem of Bank Gigantism, otherwise known as Too Big to Fail.

Big-bank critics, like the freethinking analyst Mike Mayo, analysts at Wells Fargo, and Sheila Bair, the former head of the Federal Deposit Insurance Corporation — and others, including me — have raised the possibility that shareholders might revolt over banks' depressed stock valuations and seek breakups. Broken-up banks would be smaller and safer.

No, it's not going to happen. Shareholders are part of the problem, not the solution.

No group has skated free of severe (and deserved) criticism in the wake of the financial crisis: financial firms, regulators, credit rating agencies, borrowers and the news media. That is, except one, which happens to be among the most culpable: institutional investors. Yet today, the structure of institutional investing is the same. And so is shareholders' view of their responsibilities.

When applied to banks, corporate governance campaigns are wasted efforts.

"We need to recognize that corporate governance is not going to fix the financial sector," said Lynn A. Stout, a Cornell law professor, who is a critic of the notion that companies should be run primarily to maximize shareholder value. "We have to have effective government regulation."

By keeping Dimon in his two roles, shareholders indicated their belief that only a supposed superhuman executive could run such a banking monstrosity.

But he either failed to rein in his bank's reckless trading, or he failed to understand it. And he has failed in the most basic responsibility of any steward, to plan for his succession.

These transgressions may not have been worth ousting Dimon. But hardly anyone called for that. Instead, shareholders had an opportunity to reorganize the company to diffuse a little power and increase oversight.

They punted. So what explains this shareholder fecklessness?

In some sense this was an act of reflexive class fealty. In rejecting a split of the chief executive and chairman roles, institutional shareholders seemed to prefer spiting pension funds (for their perceived union bias) to rebuking a CEO whose actions last year actually put them at risk.

That's not the only reason shareholders are immobilized. Giant bank financial disclosures are too incomprehensible for even the most sophisticated and dedicated professional investors.

Shareholders suspect that management wouldn't break up the banks in a risk-reducing way. They would be separating whole businesses, not shrinking the size of any one division. Therefore spinoffs would mean that the unknowable supernova risks, like that of derivatives businesses, would be concentrated in smaller entities.

But the most important reason is that shareholders benefit from the big banks' structures. Stout points out that shareholders want companies to take high-risk, high-return bets. They capture the unlimited upside and their losses are capped.

This is true across sectors, which is what helps drive so much short-term corporate thinking. But with banks, things are even worse. Big banks benefit from government subsidies, both implicit and explicit. As the Federal Reserve moves interest rates down and engages in huge asset purchases, the holdings on bank balance sheets rise in value. Shareholders are the chief beneficiaries.

The economy? Not so much. Not when unemployment is at 7.5 percent and so many Americans have "jobs" that can't support anything close to a middle-class life.

Shareholders, a group that includes executives who were larded up with options, helped push banks into the financial crisis. And then, in one of the most damaging and least remembered episodes of the debacle, learned some valuable lessons about what a protected class they were.

When JPMorgan saved Bear Stearns in early 2008, Treasury Secretary Henry M. Paulson Jr. initially pushed for a symbolically low price for the stock — $2 a share. Such a low price would have sent a punitive message. Bear Stearns was going down; shareholders would have gotten absolutely nothing if JPMorgan hadn't saved them.

Yet instead of being grateful, they revolted. They threw tantrums and bluffed. And it worked. JPMorgan raised its offer to $10 a share.

Of course, shareholders did get wiped out in the Lehman Brothers bankruptcy.

But what was the lesson the government drew from that? To rush in to save every institution it can.

Today, the government says that it has ended Too Big to Fail. By the provisions in Dodd-Frank, the government plans to seize holding companies of failing financial companies, wiping out shareholders and even some debtholders. The government might be able to carry this through if just one giant bank fails on its own for an isolated reason, like the storied British bank Barings did in 1995.

But most of the time, if one giant bank is going down, they will all go down together. Inevitably, the Federal Reserve spigot will open and the Treasury and Congress will find a way to intervene, as the economist Simon Johnson recently pointed out.

If shareholders really believed that bailouts were a thing of the past, they would be acting responsibly. From the JPMorgan vote, we can see that they aren't.

May 17: In response to the discussion this column generated, it has been updated with a response from the author.

The economics world has been having a lot of fun with hedge fund managers.

After several such managers at a recent conference denounced the aggressive money-printing policies of Ben S. Bernanke, the Federal Reserve chairman, the economic blogosphere rose up to mock them.

Many hedge fund managers have been predicting that high inflation and fleeing creditors would send interest rates skyrocketing. Stanley Druckenmiller, Paul Singer, J. Kyle Bass and David Einhorn — all big names in the investing world — have warned against the supposedly runaway central banker. Mr. Druckenmiller said that Mr. Bernanke was "running the most inappropriate monetary policy in history."

And they have been wrong. Those silly hedge fund managers. They don't understand macroeconomics! As Paul Krugman (and many others) have explained, the lack of demand explains why there isn't any inflation and why interest rates haven't risen despite all the money-printing.

Economists and bloggers have been competing to figure out why these supposedly smart guys are so confused. In an astute post, a Berkeley economist, Brad DeLong, explained his theory: Hedge fund managers thought they could muscle the Fed into caving on its big trade, much like they got JPMorgan Chase to cave on the "London Whale" trades. But they fought the Fed, and the Fed won.

Or perhaps they are simply expressing class preferences. They are ideologues, worried about their tax bills and redistribution policies. Hedge fund managers are wealthy. Asset owners hate inflation because it destroys the value of their holdings.

Or, more subtly, maybe it's an expression of preferences in their narrow professional role. These fund managers get paid mainly to manage other people's money. It's much easier to do that when assets are more volatile and when the short-term interest rates are significantly lower than long-term rates. Fixed-income managers like Pimco used to make a decent return buying long-term Treasuries, essentially investing in risk-free assets and charging fees to do it. No longer. Mr. Bernanke has revealed many of these managers to be empty suits — and they are lashing out.

The Druckenmillers of the world have been and will continue to be wrong about a coming debt crisis and runaway inflation. A dose of moderate inflation would help the economy right now. It would spur spending and investment, and ease debtors' plight.

But what these investors are expressing should trouble all of us: they have almost no confidence in the Federal Reserve or the economics profession. And for good reason.

It's impressive that the Fed and many economists have successfully predicted the path of interest rates and inflation in the wake of the worst financial crisis in a generation. But neither the central bank nor academicians managed to predict or prevent the crisis in the first place. The failure dwarfs the accomplishment.

The Fed's track record is out-and-out abysmal. Fund managers remember only too well how Alan Greenspan encouraged the stock bubble of the late 1990s, convincing investors that he would bail them out if the stock market dropped severely. Worse, Mr. Greenspan urged people in 2004 to buy homes by taking out adjustable rate mortgages. Then the central bank did nothing to curtail the housing bubble. (Whether the Fed kept rates too low for too long is hotly debated; in Mr. Greenspan's defense, the credit bubble kept inflating after the Fed started raising rates.)

The Fed began its lender-of-last-resort role in 2007, but did little to avoid or minimize the financial crisis. Once it hit, it did the right thing to flood the markets with money, but — along with the Treasury and a passive Justice Department — let banks and top executives off the hook. And now, asset prices are going wild. Junk bonds are up. Stocks are up. Housing in Phoenix and Brooklyn is going mad.

This prebubble euphoria only undermines the Federal Reserve's fragile credibility. It reinforces the notion that it seems to know only two things: how to inflate bubbles and how to studiously not recognize them.

Flush from their victory predicting inflation and interest rates, some economists discount the worrisome market activity. Mr. Krugman, a columnist for The New York Times, recently urged Mr. Bernanke to ignore bubble talk.

And lo and behold, the Fed chairman gave a talk on the very subject last week.

The Fed needs to convince the markets that it is on high alert for excesses that could cause the next crisis. And it has to come from the chairman. Encouragingly, Mr. Bernanke said the Fed was on the lookout for unusual valuations, high leverage, new and dangerous products and excessive risk-taking.

Alas, the speech had shortcomings. Right up at the top, Mr. Bernanke delivered this laugher: "Of course, the Fed has always paid close attention to financial markets, for both regulatory and monetary policy purposes."

Of course. With notably rare exceptions, as Mr. Greenspan might put it.

Then Mr. Bernanke scared hedge fund managers out of their open-collar shirts and fleeces by reiterating long-standing Fed dogma: that bubbles cannot be identified ahead of time and that "neither the Federal Reserve nor economists in general predicted the past crisis."

Answering questions, he gave an example of what the Fed might be looking for. "Microsoft's stock is worth well more than it was some time ago, and it could still prove to be a bubble," Mr. Bernanke said, "but so far, so good."

Microsoft? Hello 1999! Is this what state-of-the-art monitoring gets us?

But Mr. Bernanke hasn't spoken about what may be a deeper problem: What if the Fed's loose monetary policy, with its giant bond purchases, is harmful?

If the price of lower unemployment were that hedge fund managers get a little richer, of course, we'd take the jobs. And if the choice were between helping someone get a job today or curtailing a potential crisis in the future, you put people to work now (though it depends on how big the crisis is likely to be).

But that might not be the choice. It sure seems like Fed policy is helping only the wealthy, and not doing much for the economy. The net worth of the top 7 percent of American households rose in the first two years of the recovery, while the net worth of the bottom 93 percent declined. The percentage of working-age people who have jobs is dangerously low. Median income was lower in 2011 than it was in 1999. This cannot all be laid at the feet of the financial crisis. Working-age male income has been squeezed for decades. The economy has deeper problems.

Maybe monetary policy is simply reinforcing these trends.

Professional investors see it that way.

"What a lot of hedge fund managers are worried about is the inflation in asset prices, not cost and wages," said James Chanos, a noted hedge fund manager who is left of center. "This is leading to recurring booms and busts, which in addition are exacerbating income inequality."

The Fed has explicitly welcomed rising asset prices as a sign that its monetary policies are working, as lower rates push investors to put their money to work. But something is wrong. Companies are sitting on their profits. Businesses aren't investing and hiring enough.

In fact, the Fed may be inadvertently making things worse. What if it succeeds in bringing average people back into the markets right at the top? Is the Fed setting these poor suckers up to come in to buy from the hedge fund managers?

"The people you are trying to help don't get the message till the end of move," Mr. Chanos said. "You keep impoverishing them."

Now, I'm not remotely suggesting that the hedge fund denunciations are motivated out of a desire to help the unemployed. Please.

But they can read markets, and they can see that the Fed isn't engineering the hiring, inflation and recovery it would like. Instead of dismissing the critiques, the Fed and economists would do well to pay heed.

* * *

Update (May 17):

My most recent column incited a robust and welcome discussion. But few of my many critics, including Paul Krugman on his blog and many commenters on DealBook, seem to have engaged with my main point.

My piece was not celebrating hedge fund managers. It was not predicting inflation and imminently rising rates or a debt crisis. Nor was the main point to rehash who got the financial crisis right or not.

Lastly, the main point was not to dwell on the Federal Reserve's credibility problem, though I think that's important.

What was my main point? We are four years into the One Percent's recovery. Now, we are in Round 3 of quantitative easing, the formal term for the Fed injecting hundreds of billions of dollars into the economy by purchasing longer-term assets like Treasury bonds and Fannie Mae and Freddie Mac paper. What's that giving us? Overvalued stocks. Private equity firms racing to buy up Arizona real estate. Junk bond yields at record lows. Ratings shopping on structured financial products.

These are dangerous signs of prebubble activity.

But, much more important, quantitative easing is not giving us a self-sustaining recovery and job creation. As I put it in the column, hedge fund managers "can read markets, and they can see that the Fed isn't engineering the hiring, inflation and recovery it would like." There's been a breakdown in the connection between wages and productivity. Labor participation is desperately low.

So are we moving from the bust to the bubble and missing the recovery for average people?

And if so, why?

Many people argue that we need more fiscal stimulus. That's persuasive, but it's clearly not happening with today's Washington.

In response to my column, people have said: What else should the Fed do? Things would be far worse if the Fed weren't buying $85 billion in bonds a month. Look at Europe, whose monetary policy has been almost as big a disaster as its fiscal policy.

But how long do we have to wait? How much more wealthy do the One Percent get to become through speculation — how much house flipping do private equity firms get to do — before we see some sustained improvement in the rest of the economy?

And could it be that with a heavily indebted populace and a dysfunctional banking system still unable to lend effectively, that this round of quantitative easing is having a counterproductive effect? As evidence that the banking system transmission mechanism isn't working well, small businesses are having a hard time borrowing, according to a recent New York Fed poll.

One solution is that the Fed needs to have a heavy regulatory hand to limit speculative activities. Perhaps regulators should raise margin requirements for stocks. Put the ratings agencies on notice that they are watching out for any loosening of criteria. Make these efforts public and keep talking about them.

And then, maybe quantitative easing needs to be refocused away from long-term Treasuries and housing. Maybe the Fed could figure out a way to buy student debt or municipal bonds to support infrastructure.

If quantitative easing is necessary, it should support investment, not speculation.

The biggest banks have done an excellent job of delaying and undermining the Dodd-Frank financial overhaul law and staving off criminal investigations into wrongdoing.

Maybe, just maybe, they’ve been too successful.

Senators Sherrod Brown, Democrat from Ohio, and David Vitter, Republican from Louisiana, introduced a bill last week that calls for two things: making the giant banks much safer and tying regulators’ hands to prevent them from using taxpayer money to save a failing financial institution.

If the bankers who blew up the financial world had been held accountable, the popular fury that fuels this bill would have dissipated by now. And if Dodd-Frank were fully in place today, instead of being bogged down in the courts and in the halls of Washington regulatory offices, there would be no political momentum behind such an effort.

Now, we will see whether the bill is simply a barbaric yawp of anger at the big banks or something with actual force. It probably won’t get passed, but its underlying premise cannot be dislodged from the Washington conversation.

The Brown-Vitter bill calls for the banks with more than $500 billion in assets — I’m looking at you JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley — to have capital reserves of 15 percent. That’s a much higher standard than exists today, especially because the current requirements have weak definitions of capital and total asset size.

The banks have rounded up a bunch of critics, led by the likes of the law firm Davis Polk & Wardwell and the lobbying firm Hamilton Place Strategies, the volume of their lamentations likely in direct proportion to the hourly rate they bill their clients. They invoke terrifying, talismanic statements: The bill is a “punishment” to big banks. It is simplistic, impossible, will render American banks “uncompetitive,” lead to financial crises and probably cause tooth decay.

This naïve bill would force the giant banks to raise too much capital and would hurt the economy as the companies were forced to shrink or break up. Standard & Poor’s is one of the observers warning of a financial crisis. And who better to know than the people who brought us the last one?

Goldman Sachs and S&P estimate the big banks might be forced to raise $1 trillion or more. That’s a lot, so much that the leviathans’ agents cry out that they couldn’t sell that much stock. But they don’t have to raise it all at once. And they can retain their earnings and stop paying dividends in addition to selling shares.

In putting that argument forward, they don’t realize they make Senators Brown and Vitter’s case for them. If investors are so terrified of the big banks that they won’t buy their stock, that’s a terrific problem. Most of the big banks trade below their net worth, an indication that investors don’t trust them. Brown-Vitter might actually help banks by restoring that trust.

The Brown-Vitter bill serves as a good time to remind defenders of big banks what bank “capital” is. As Professors Anat Admati and Martin Hellwig have pointed out in their indispensable book “The Bankers’ New Clothes,” capital is not a rainy-day fund. It’s not stored away in a vault somewhere, never to be touched. Capital — the rest of us know it as “equity,” like the down payment on a house — is simply money that absorbs losses. The more money a bank raises from shareholders, the more profit it keeps on hand, the less it has to borrow and the more solid it is. The bank can still lend that money. And if JPMorgan Chase doesn’t lend to some small business, perhaps a regional or community bank will.

There might be some trade-offs to higher capital requirements, but we know there are costs to lower ones: financial crises. Some try to argue that the banks faced a liquidity crisis in 2008, what we call a run on the bank. Yes, that was true in the autumn of 2008. But the crisis didn’t start then. It started in the late summer of 2007. If the banks had been more solidly capitalized, there would have been fewer panicked investors.

Banks desire as little capital as they can get away with. It’s easier to make higher returns on equity with greater debt. Often management is paid in stock. But society as a whole doesn’t benefit from banks that are running with too much leverage. They collapse.

So, it is better to have higher equity capital. But Brown-Vitter doesn’t go far enough. The bill’s definition of equity could be tighter. It still contains bookkeeping entries called intangible assets and deferred tax assets, which don’t absorb losses.

But, gratifyingly, Brown-Vitter does tighten up the definition of assets. Capital is the numerator and assets are the denominator. Both need to be made as solid and trustworthy — and resistant to manipulation by banks or regulatory capture — as they can be. When calculating assets, Brown-Vitter tightens up rules on things like how the banks measure their exposure to derivatives.

Oh, the critics shout, this is just a backdoor way of making banks smaller. The bill’s authors fail to understand that diversity of exposure saves gargantuan banks, they say. This requires a slap to the side of the head and a one-word rebuttal: Citigroup. Citi blew up because of its exposure to collateralized debt obligations. That exposure was dismissed and misunderstood by the top ranks because it was seemingly small as a portion of the bank’s balance sheet. It was wonderfully diversified into all kinds of investments, which didn’t help at all. Sure, small banks are less diverse. But when they collapse, the problem is more manageable.

Brown-Vitter inhibits regulators from using risk-weighting of assets, where banks and regulators determine which kinds of investments are safe and require little capital behind them. Davis Polk declared that getting rid of risk-weighting is “too blunt,” somehow immune to the absurd spectacle of lawyers opining on proper risk management.

In fact, risk-weighting has a storied history of blunder. Residential mortgages and sovereign debt, like that of, say, Greece, were once viewed as carrying little risk. Risk-weighting encourages banks to crowd into assets thought to be safe, in that way making them unsafe. It lulls them, and regulators, into a false sense of confidence. Perhaps throwing out risk-weighting might lead lots of banks to buy stuff that is known to carry risk. It’s far better to have them piling into investments that are known to be risky and count those purchases with a clearer, less manipulated number. Then, regulators need to pay attention, which, call me crazy, is their job.

Brown-Vitter also ties regulators’ hands on whether they can pour taxpayer money into failing banks. Here, it’s less plausible. Dodd-Frank has given regulators resolution authority, which gives them the power to unwind failing institutions and impose losses on the shareholders and creditors. Brown-Vitter tries to eliminate what Dodd-Frank skeptics see as too much regulatory flexibility.

It’s a noble idea. But the problem, as Paul A. Volcker has pointed out, is that if JPMorgan Chase is truly failing, it’s almost a certainty that Citi and Bank of America are going down, too. And taxpayers would then have to step in in some fashion.

So, taxpayers are implicitly on the hook for the financial sector, even with Brown-Vitter.

That’s why we need the biggest banks to have truly clear and understandable balance sheet fortresses.

April 17: This post has been clarified.

Are we moving from the crash to the bubble, dispensing with that pesky economic recovery thing altogether?

The Federal Reserve is well into its third round of "quantitative easing," in which it buys longer-term assets to bring down long-term lending rates. We are about five and a half years into the Fed's extraordinary monetary policies (its out-of-the-box lending programs began before the crash, in late 2007).

The effect the central bank hopes to produce hasn't materialized. Despite modest growth, the economy remains a wellspring of misery, with mass unemployment, wage stagnation and factories going unused. In March, a smaller percentage of working-age people were actually working than at any other time since 1979.

Through its unconventional policies, the Fed is trying to alleviate the crisis. It has succeeded in driving down lending rates. Ben S. Bernanke and company would also like to kindle inflation expectations, spurring people to buy and companies to invest today instead of waiting until tomorrow. Supposedly, all of this will drive a self-sustaining economic recovery.

Instead, the Fed has kindled speculation. Investors are desperate for yield and are paying up for riskier assets. In areas like real estate, structured finance and equities, the markets are ahead of the fundamentals. It doesn't look to me like a bubble yet. But I would call it the Dysplasia Stage, abnormal growth that looks precancerous.

It's not just an economic or financial issue, it's cultural and psychological. We seem to have unlearned what real growth is and simply substituted speculative bubbles. Policy makers are either paralyzed or barrel forward because this is all they know how to do.

Let's first take the stock market. On the standard measures of looking at estimated earnings, the Standard & Poor's 500-stock index isn't particularly high. But that's misleading. Corporate earnings are extremely high as a percentage of the gross domestic product. Margins are high. Is that sustainable?

There are more reliable measures of stock market value, and they look frothy. One gauge, the price of stocks based on the past decade of earnings, is named after the Yale economist Robert J. Shiller. Using that, stocks are too expensive by 65 percent. Alternatively, many investors look at something called the Q, devised by the economist James Tobin, which compares stock prices with corporate net worth. The nonfinancial companies are overpriced by 57 percent. The stock market is not at 1999 or 1929 levels, but it has reached other previous peaks of 1906, 1936 and 1968, according to Smithers & Company, a London-based research shop.

To make stocks correctly priced, "either earnings have to explode heavensward for 10 years or else stock prices have to come in a lot," said Scott Frew, who runs Rockingham Capital Partners, a small hedge fund. He expects earnings to fall.

It's not just stocks. Investors are bidding up junk bonds, commercial mortgage-backed securities and bundles of corporate loans called collateralized loan obligations. Last month, investors were paying more for such loans than at any time in the last five years. They are snapping up billions of dollars in securities made up of subprime auto loans.

And the housing market isn't just rising, but roaring back so fast you can feel the G-force coming off the reports. Home prices in Phoenix went up 23 percent over the last year, according to the latest Standard & Poor's Case-Shiller index. More than one in four homes in Phoenix were purchased by investors who bought more than five homes apiece, up from 16 percent a year earlier.

"I am now starting to become less skeptical" about the worries over a new housing bubble, said Christopher J. Mayer, a real estate economist at Columbia University. When local money is on the sidelines and outside buyers come in to snap up real estate, that typically ends badly, he added.

So what's going on?

The Fed is engaged in "trickle-down monetary policy," said Daniel Alpert, managing partner of Westwood Capital, an investment bank. "This type of monetary policy is making the wealthy wealthier and hoping that it trickles down to the shop floor."

But "trickle down has never worked," he said. "The wealthy don't need to consume. And when there is oversupply of capacity, the wealthy don't need to invest in new capacity."

Has the Federal Reserve monetary policy reached the average American? To a certain degree, yes. Many Americans have been able to refinance their homes. Those auto loans may be helping people get to and from work.

But the economic effects are modest for the size and scope of the effort. Investors, meanwhile, glory in the asset inflation. The most pronounced effect of low mortgage rates has been to allow people with good credit and low debt to refinance multiple times over the last few years. Stock ownership is concentrated among the wealthy; junk bonds and collateralized loan obligations only more so.

Alpert says the first round of quantitative easing was necessary to alleviate the liquidity problem in the markets — the unwillingness of investors to conquer their fears and buy up assets. But the third round is "unnecessary," he said.

Others disagree. Dean Baker, an economist from the liberal-leaning Center for Economic and Policy Research who warned about the housing bubble much earlier than most, doesn't see a bubble yet. He advocates continuing quantitative easing.

Baker adds a note of caution, however. Regulators should move to high alert; Federal Reserve officials should start speaking out to signal that they are paying attention to the abnormalities. Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, gave a recent speech raising areas of concern, only to dismiss them as not overly worrisome yet.

At least he was thinking about the issue. As with cancer, the key is to intervene early.

Clarification: A quote from real estate columnist Christopher J. Mayer has been clarified to read that he has "become less skeptical" about the worries over a new housing bubble, not less skeptical that we are moving toward a new housing bubble.

When he left physics, John Breit had the choice of a job in naval intelligence or on Wall Street. "My wife said I couldn't be a spy. She hates capitalism, but said to go to Wall Street," he told me recently. "And then I ended up running a spy network."

Calvin Trillin once attributed the financial collapse to the influx of smart people on Wall Street. The physicists, computer scientists and mathematicians displaced the slow-thinking country club types. With their incomprehensibly complex models, the smart guys' hubris brought our economy low.

Mr. Breit was part of that initial incursion. A Ph.D. in physics from Columbia, he was doing postdoctoral work when he realized that he could never be as good as his contemporary Edward Witten, who went on to pioneer string theory.

So in 1986, he joined Wall Street, moving not to the trading floor, like many of his fellow rocket scientists, but into risk management. In 1990, he took his skills to Merrill Lynch, rising to become the firm's head of market risk oversight. The physicist came to understand the limits of mathematical models. He learned that his job was really psychologist, confessor and detective. He became the financial version of a counterintelligence officer, searching for the missed clues and hidden dangers in the firm's trading strategies.

Mr. Breit is retired now, studying ancient Greek in his spare time and volunteering as an adviser for New York's pension funds. He comes across as George Smiley if he were a Southerner — gracious, reluctant to talk about himself, with iconoclastic opinions just below the surface. I've been talking to him periodically over the years about how giant financial institutions should manage the aggressive traders slinging giant sums around the world in ever more complex transactions.

After the Senate issued a report last month on JPMorgan Chase's multibillion-dollar "London Whale" trading loss, an incident where the mathematical modeling went seriously wrong, I reached out to him again.

That debacle encapsulates much of what is wrong about how banks manage their risk and how the regulators oversee those efforts. At JPMorgan Chase, the risk models hid — and were used to hide — risks from the traders and top executives. Too many measures and too many numbers undid the risk managers. But ultimately, they failed because of human frailties; the risk managers lost sight of their mission and tried to protect the traders and their trades. As in all spy debacles, the counterintelligence officers got co-opted.

Early in his career, Mr. Breit figured out that models for markets aren't like those for physics. They don't come from nature. It was necessary to know the math, if only so that he couldn't be intimidated by the quantitative analysts.

But the numbers more often disguise risk than reveal it. "I went down the statistical path," he said. He built one of the first value-at-risk models, or VaR, a mathematical formula that is supposed to distill how much risk a firm is running at any given point.

The only thing from capital markets math he came to embrace was this immutable law of nature: Investors make money by taking risk. "If it's profitable and seems riskless, it's a business you don't understand," he told me.

Instead of fixating on models, risk managers need to develop what spies call "humint" — human intelligence from flesh and blood sources. They need to build networks of people who will trust them enough to report when things seem off, before they become spectacular problems. Mr. Breit, who attributes this approach to his mentor, Daniel Napoli, the former head of risk at Merrill Lynch, took people out drinking to get them to open up. He cultivated junior accountants.

"They see things first," he said. "Almost every trading debacle was sitting on some accountant's desk."

All the while, he was on the lookout for bad trades. Most traders who get into trouble, he thinks, aren't bad guys. The bad ones, who try to cover up improper trades, are relatively easy to detect. The real threat, he said, comes from the "crazy ones" who really believe they've found ways to spin flax into gold. They can blow up a firm with the best of intentions.

They don't do it suddenly. "I hate the whole Black Swan concept," he said, referring to the notion, popularized by Nassim Nicholas Taleb, that the true risks lie in unforeseeable events that occur with much more frequency than the mathematical models suggest. "It takes years of concerted effort to lose a lot."

Yes, a big market move might reveal a fatally flawed trade, but that volatility is not the root cause of an oversize loss.

The problem, as Mr. Breit sees it, is that this has nothing to do with how risk management is practiced today, or what the regulators encourage. Regulators have reduced risk managers to box checkers, making sure they take every measure of risk and report it dutifully on extensive forms. "It just consumes more and more staff, turning them into accountants and rotting brains."

Take VaR. In Mr. Breit's view, Wall Street firms, encouraged by regulators, are on a fool's mission to enhance their models to more reliably detect risky trades. Mr. Breit finds VaR, a commonly used measure, useful only as a contrary indicator. If VaR isn't flashing a warning signal for a profitable trade, that may well mean there is a hidden bomb.

He despises the concept of "risk-weighted assets," where banks put up capital based on the perceived riskiness of the assets. Inevitably, he argues, banks will "pile into" the same types of supposedly safe investments, creating bubbles that make the risks far more severe than the initial perceptions. Paradoxically, risk-weighting can leave banks setting aside the least capital to cover the biggest dangers.

"I could not be more disappointed," he said. "The cynic in me thinks this is all in the interests of senior management and regulators to avoid blame. They may not think they can prevent the next crisis, but they then can blame the statistics."

Instead, Mr. Breit believes that regulators should encourage firms when they reach different conclusions on what is risky and what is safe. That creates a diverse ecosystem, more resilient to any one pestilence.

And the regulators should empower risk managers by finding out how many times they meet with chief executives and what they have recently vetoed and by judging whether the traders respect the executive. "It's all completely unquantifiable and vague," he said, adding that a risk manager should be divorced from the profit and loss statement, the one "who throws sand in the gears."

Mr. Breit's sand-throwing days are over now. Undermined during the credit boom, as the firm's head, E. Stanley O'Neal, became isolated and paranoid, he resigned his position in the middle of 2005 (but stayed at the firm). By the summer of 2007, he realized that something was terribly wrong with Merrill Lynch's subprime mortgage exposure. He began calling in favors from junior finance staff members to find out what was going on and became alarmed. Eventually, Mr. O'Neal called him in, seemingly thinking that Mr. Breit was still his risk manager. It was too late for anyone to save the firm from billions in losses.

When he resigned his position at Merrill Lynch, did a board member or regulator call him to ask why?

"Not a one," he told me. Government overseers need to develop human sources, too.

People have learned their lesson.

We've been told that so many times since the near-death experiences of the financial crisis. Bankers and regulators have flipped roles: Now it's the bankers who are cautious and their overseers who are aggressive.

Details of JPMorgan Chase's multibillion-dollar trading loss — brought to light by a riveting and devastating report from the Senate Permanent Subcommittee on Investigations — demonstrate what a sham that is. Bankers aren't acting cautious and chastened. Risk managers aren't in the ascendance on Wall Street. Regulators remain their duped and docile selves.

What we now know about the incident is that, as the cliché has it, the cover-up was worse than the crime. The losses out of the London office weren't enough to take down the bank. But as they were building, JPMorgan traders fiddled with risk measures and valuations. The bank's risk managers defended the traders and pooh-poohed the flashing red signals. The bank gave incorrect information to its regulator. Top executives then made misleading statements to shareholders and the public. All the while, the regulator served its typical role of house pet.

As JPMorgan got into trouble, traders and the responsible executives treated the valuation of trading positions, made up of derivatives, as a puppet made to do what they wanted. The traders pulled on this calculation or that to change the way they were valuing the position to reduce the losses.

Ina Drew, the head of the bank's chief investment office, referring to how the positions were calculated, asked an underling if he could "start getting a little bit of that mark back." She then asked if he could "tweak at whatever it is I'm trying to show." She might believe it is exculpatory that she prefaced the comment by saying to do it "if appropriate" and that the tweak should come with "demonstrable data," but any idiot working for her would know exactly what she meant: Create some rationale to manipulate the valuations to make things look better than they really are.

This discussion did not make it into the bank's internal report on the incident from January. Imagine that.

Yes, Ms. Drew was ousted. But her actions show that what financial executives do postcrisis when faced with trouble is no different than what they did precrisis. In testimony on Friday, in a quiet voice, she deflected blame up to Dimon and down to her traders, claiming she was kept in the dark.

The Senate report makes it clear that JPMorgan misled shareholders and the public, particularly on its April 13, 2012 conference call.

That call, which makes up a particularly damning portion of the Senate report, featured a haughty Jamie Dimon famously dismissing the problem as a "tempest in a teapot."

Of course, it was no such squall. On the call, the chief financial officer at the time, Douglas L. Braunstein, made a number of what appear to be misleading statements about the trades. Braunstein said the trading decisions were made on a very long-term basis, when in fact the traders were shuffling positions almost daily in order to make profits and then to disastrously "defend" their positions from further losses. Braunstein reassured investors and analysts on the call that the trades were vetted by the firm's top risk managers, when they were not (though top officials, including Dimon, knew about repeated risk-measure breaches).

This means "there was risk oversight" for the office that made the trades, and the trading "positions needed to comply with limits," a JPMorgan spokesman, Joseph Evangelisti, said. "We were not aware at the time of all the deficiencies in the risk organization" of the trading group.

On the conference call, Braunstein also said that the trades were "fully transparent to the regulators," but, in fact, watchdogs didn't receive any regular reporting of the positions and only received specific information just days before the call.

"What Doug said was accurate," Evangelisti said. "No one in senior management at that time believed there was a larger problem in the context of the firm's size and scale."

In JPMorgan's internal report, the call receives scant attention. In testimony before Sen. Carl Levin, the Michigan Democrat who heads the Senate subcommittee, Braunstein fell back on the explanation that he was saying what he believed at the time.

Braunstein wasn't available for comment, according to the bank.

Maybe regulators will think it notable that the chief financial officer of JPMorgan misled shareholders in his first extensive comments about the trading losses. Don't hold your breath.

I don't even expect much to come out of the evidence that the bank misled regulators. The bank stopped giving its regulator, the Office of the Comptroller of the Currency, important information. At one point, the bank told the agency that it was reducing the size of its positions when it was actually increasing it, according to the Senate report.

Despite JPMorgan's smoke screens, the regulators deserve the public humiliation they have received. They were alerted to risk-measure breaches that should have warned them of problems. By April 30, 2012, just weeks after the trading debacle came to light and before any serious investigation, the Office of the Comptroller of the Currency declared the matter closed, according to internal minutes from a meeting. (At Friday's hearing, officials from the agency disputed that it was, in fact, closed.)

So, yeah, people have learned their lessons, the real lessons of the financial crisis. JPMorgan repeated the same misdeeds that other banks successfully pulled off at the height of the financial crisis: mismarking portfolios of assets and misleading the public. This was condoned by regulators. Regulators and prosecutors have been averting their eyes for years from rotted bank assets and rotted bank morals; why would JPMorgan expect any different reaction in this case?

Dimon and JPMorgan executives have all publicly donned hair shirts to demonstrate their contrition. Dimon and Braunstein even took pay cuts, going from earning many millions to some fewer millions.

JPMorgan argues that Dimon and Braunstein told regulators and the public only what they believed at the time. Dimon and Braunstein made mistakes, but they quickly worked to clean them up, fire those responsible and change their ways. The losses were small relative to the size of the bank and, if anything, demonstrate the strength of JPMorgan's diversified business. After all, the bank made record earnings last year.

But I suspect that if you dosed JPMorgan executives with Pentothal, they would reveal they believed all of this attention was a media creation and political showboating — still a "tempest in a teapot."

"Not true," Evangelisti, the JPMorgan spokesman, said. "We acknowledged from the outset that we made significant mistakes, and we have repeatedly apologized for them. We do not blame the media or regulators for these issues. This was our fault totally. All we can do now is fix the problems and learn from them."

As has happened so often in the wake of the financial crisis, we are left with the spectacle of bankers — here the well-compensated Dimon and Braunstein — insisting that they were clueless and incompetent, which would shield them from any allegations of intent to defraud.

As for many longtime officials at the Office of the Comptroller of the Currency, they may well think that this was merely a nuanced mistake that calls for nothing more than careful suggestions of remedies that don't harm the bank too much. The new head of the agency, Thomas J. Curry, has begun to clean house and re-energize the place, but the overhaul that is needed looks too big for one person.

So let's take a moment to celebrate a handful of American heroes, Sen. Levin and the staff members at the Senate Permanent Subcommittee on Investigations. Because of them, this corruption has come to light. Friday's hearing served to emphasize how lonely Levin's efforts are. Sen. John McCain, Republican of Arizona and the new ranking minority member on the committee, did a yeoman's job of asking a few questions. Sen. Ron Johnson, Republican of Wisconsin, made a few incoherent statements using the au courant phrase "too big to fail," then scuttled out of the hearing. None of the other senators, Democrats and Republicans alike, bothered to show up.

The 78-year-old Levin, peering over those glasses that seem surgically attached to the tip of his nose, soldiered on.

But let's imagine what would happen if this report does what the senator hopes and puts pressure on the regulators to finalize a simplified and loophole-free Volcker Rule, which would prohibit banks from making bets for their own profit using taxpayer-backed money. Why should we have the slightest confidence that big banks could be persuaded to follow it? And why should we feel reassured that, if they didn't, regulators could or would enforce it?

We shouldn't. And we don't.

Bank of America has been underestimating its legal risks for years, and brazenly so, according to its critics. Is that strategy about to pay off with the Federal Reserve?

On Thursday, the Fed will release figures on how much capital the nation's biggest banks must have to cover a "stress" situation. The following week, investors find out whether those banks will be able to return more of their capital to shareholders by paying dividends or buying back stock.

Last year, the Fed passed most of the big banks and let them pay out billions. Bank of America, picking up an unwelcoming vibe, didn't even ask. This year, however, Wall Street expects that Bank of America will get the green light.

Yet the bank continues to face gargantuan payouts to clean up legal disputes from the bubble years. Now a lawsuit suggests that the bank's mortgage portfolio could cost it tens of billions more than it had planned. In one big case, if things go wrong, Bank of America may be required to make good on many more billions worth of bad mortgages from Countrywide Financial, which the bank acquired, in the sense that one acquires Ebola virus, in 2008.

Bank of America, however, has kept its legal reserves low — perhaps dangerously so.

The dispute involves a 2011 settlement that Bank of America reached with some of the world's biggest investors, including Pimco and BlackRock for $8.5 billion. That amount covers more than $400 billion of Countrywide loans, on which there have been tens of billions of losses. The actual loss total is in dispute because they are estimates, but it ranges from $70 billion or so to well over $100 billion. That means, at the high end of the range, the settlement was for pennies on the dollar. On a conference call last week held by Mike Mayo, the CLSA bank analyst, a legal expert suggested that if things went south in the courts for Bank of America, the settlement might rise to $25 billion to $30 billion.

Bank of America contends that its reserves are reasonable, based on its estimated probable payouts. The bank wouldn't raise them "based on speculation from third-party observers who are not directly involved in any of these matters," a spokesman said.

Even in the fun house of litigation about mortgages, this one is particularly complicated. The dispute revolves around the question of whether another bank, BNY Mellon, working on behalf of mortgage-backed securities investors, was reasonable and acted in good faith in agreeing to the settlement. It is being hashed out in New York State Supreme Court. BNY Mellon is the trustee on 530 securitizations, or bundles of Countrywide mortgages, that were sold to investors.

The insurer American International Group, along with some others, including the New York and Delaware attorneys general, are fighting about the settlement. Eric T. Schneiderman, the New York attorney general, has accused BNY Mellon of breaching its fiduciary duty. A BNY Mellon spokesman said, "We believe we have fulfilled all of our duties as trustee in this case."

The small settlement doesn't sit right. The group of investors who agreed to it hold only about a quarter of the securities, making it appear as if a minority has forced a bad deal on the majority in order to get few quick bucks and resolve any dispute. The Pimcos and BlackRocks of the world don't like to sue big banks. Things can get a little uncomfortable on the golf links. (They contend it was reasonable, given all the legal uncertainties of a protracted dispute.)

And who blessed the $8.5 billion figure anyway? To figure out whether it was fair, BNY Mellon relied on a firm called RRMS Advisors, a mortgage analysis firm.

The RRMS estimate has been in dispute for some time now. The firm relied on information from Bank of America, and critics contend it underestimated problems in the loans and the total losses. How BNY Mellon found little RRMS isn't clear; the bank wouldn't comment. RRMS's Brian Lin, who conducted the analysis, stood by his report, but declined to comment further.

Recently, other court rulings have boded ill for Bank of America. Judge Jed S. Rakoff of the Federal District Court in Manhattan has ruled that an insurer called Assured Guaranty was able to dispute mortgages that it backed and that were made by a small bank called Flagstar, without having to show that the contractual breach was the direct cause of the loss. In other words, the borrower may have defaulted, but Assured didn't have to demonstrate that it was because she didn't make $150,000 a year as a tarot card reader, as had been claimed on the borrower's loan application. If Bank of America is hit by such a ruling too, it might have to pay more. It argues its contracts are different.

So is Bank of America vulnerable? Not surprisingly, it is keeping whole swaths of expensive Manhattan law firms working all hours of the day to make the case that it isn't. BNY Mellon, too, contends it acted reasonably.

And the banks contend the $8.5 billion settlement is in line with other similar settlements. Of course, the investors continue to face huge hurdles even if rulings in this case start to go their way.

But even if the chances are low that the cases don't go in Bank of America's favor, an increase in legal reserves could be huge. So this is a low-probability, high-risk event. Another way of saying that is that it is a "stress" situation. And who just put banks through stress situations? Ah, right, the Federal Reserve.

The Fed, whose earlier decisions have been generous to the banks, declined to comment for this column.

As Professors Anat Admati and Martin Hellwig, authors of the new book, "The Banker's New Clothes," have argued, the big banks are undercapitalized and the simplest way for them to start building capital is to keep their profits instead of returning them to shareholders.

A look at Bank of America's estimates for how much it will have to pay for its mortgage liability is telling. It has gone up steadily each year. In 2009, the bank had a reserve of $3.5 billion. By last year, it had jumped to $19 billion, with an estimate of additional loss of up to another $4 billion.

And so Bank of America seems to have been consistently underestimating its legal exposure. (And it has other, undisclosed legal reserves for different cases. The incentives to lowball those are much greater, because the public cannot scrutinize them.)

In keeping the reserves low, Bank of America has already won. If it turns out that the bank loses its cases and has to fork over much more money, it nevertheless has managed to make its books look that much better for years. That surely helped as it has tried to dig itself out of its financial crisis hole.

"This is an accounting arbitrage," says Manal Mehta, a hedge fund manager who has been on a lonely crusade for years to follow the complexities of these cases. "The accounting rules give you a lot of latitude in setting reserves," he says. Bank of America is "hiding behind that."

Fortune may favor the bold, but regulators just give them a pass.

Obsess all you'd like about President Obama's nomination of Mary Jo White to head the Securities and Exchange Commission. Who heads the agency is vital, but important fights in Washington are happening in quiet rooms, away from the media gaze.

After a widely praised stint as a tough United States attorney, Ms. White spent the last decade serving so many large banks and investment houses that by the time she finishes recusing herself from regulatory matters, she may be down to overseeing First Wauwatosa Securities.

Now, Ms. White maintains she can run the S.E.C., without fear or favor. But the focus shouldn't be limited to whether she can be effective. For lobbyists, the real targets are regulators and staff members for lawmakers.

Ms. White, at least, will have to sit for congressional testimony, answer occasional questions from the media and fill out disclosure forms. Staff members, however, work in untroubled anonymity for the most part. So, while everyone knows there's a revolving door — so naïve to even bring it up! — few realize just how fluidly it spins.

Take what happened late last month as Washington geared up for more fights about the taxing, spending and the deficit. The Senate majority leader, Harry Reid, Democrat of Nevada, decided to bolster his staff's expertise on taxes.

So on Jan. 25, Mr. Reid's office announced that he had appointed Cathy Koch as chief adviser to the majority leader for tax and economic policy. The news release lists Ms. Koch's admirable and formidable experience in the public sector. "Prior to joining Senator Reid's office," the release says, "Koch served as tax chief at the Senate Finance Committee."

It's funny, though. The notice left something out. Because immediately before joining Mr. Reid's office, Ms. Koch wasn't in government. She was working for a large corporation.

Not just any corporation, but quite possibly the most influential company in America, and one that arguably stands to lose the most if there were any serious tax reform that closed corporate loopholes. Ms. Koch arrives at the senator's office by way of General Electric.

Yes, General Electric, the company that paid almost no taxes in 2010. Just as the tax reform debate is heating up, Mr. Reid has put in place a person who is extraordinarily positioned to torpedo any tax reform that might draw a dollar out of G.E. — and, by extension, any big corporation.

Omitting her last job from the announcement must have merely been an oversight. By the way, no rules prevent Ms. Koch from meeting with G.E. or working on issues that would affect the company.

The senator's office, which declined to make Ms. Koch available for an interview, says that she will support the majority leader in his efforts to close corporate tax loopholes. His office said in a statement that the senator considers her knowledge of the private sector to be an asset and that she complies with "all relevant Senate ethics rules and disclosures."

In a statement, the senator's spokesman said, "The impulse in some quarters to reflexively cast suspicion on private-sector experience is part of what makes qualified individuals reluctant to enter public service."

Over in bank regulatory land, meanwhile, January was playing out like a Beltway remake of "Freaky Friday."

Julie Williams, chief counsel for the Office of the Comptroller of the Currency and a major friend of the banks for years, had been recently shown the door by Thomas J. Curry, the new head of the regulator. Banking reform advocates took that to be an omen that a new era might be dawning at the agency, which has often been a handmaiden to large banks.

Ms. Williams, of course, landed on her feet. She's now at the Promontory Financial Group, a classic Washington creature that is a private-sector mirror image of a regulatory body. Promontory is the Shadow O.C.C. The firm was founded by a former head of the agency, Eugene A. Ludwig, and if you were to walk down the halls swinging a copy of the Volcker Rule, you would be sure to hit a former O.C.C. official. Promontory says only about 5 percent of its employees comes from the O.C.C., but concedes about more than a quarter are former regulators.

Promontory, as the firm explains on its website, "excels at helping financial companies grapple with and resolve critical issues, particularly those with a regulatory dimension." But it plays for the other team, too, by helping the O.C.C. put into effect regulatory reviews. The dreary normality of this is a Washington scandal in the Michael Kinsley sense: a perfectly legal one.

Promontory, which demurred on a request to talk with Ms. Williams, has a different view. The firm doesn't lobby or help in litigation. It argues that after banks stop fighting regulators and lobbying against rules, then they come to Promontory to figure out how to fix their problems and comply.

"We are known in the industry as the tough-love doctors," said Mr. Ludwig, the chief executive of Promontory. "I am deeply committed to financial stability, and the only way to have stability is to do the right thing in both the spirit and letter of the law."

Hmm. Remember the Independent Foreclosure Review, the program that the O.C.C. and other federal bank regulators trumpeted as the largest effort to compensate victims of big banks' foreclosure abuses? As my colleague at ProPublica, Paul Kiel, detailed last year, that review involved consultants like Promontory essentially letting banks decide who was victimized. How well did that work? So well that the regulators had to scuttle the program because it hadn't given one red cent to homeowners but somehow, I don't know how, managed to send more than $1.5 billion to consultants — including Promontory.

Promontory maintains that it complied with the conditions set out by the O.C.C. And the review was replaced by a settlement, which the regulators say will compensate victims — though the average payout is small beer.

Who, exactly, makes the rules at the O.C.C.? I mentioned "Freaky Friday." That's because at the agency, Ms. Williams is being replaced by Amy Friend. And where is Ms. Friend coming from? Wait for it ... Promontory. In March, maybe they'll do the switcheroo back.

The O.C.C. didn't make Ms. Friend available but said that her "talent, integrity and commitment to public service are beyond reproach" and would be subject to the rule requiring her to recuse herself for a year on matters specifically relating to her former employer.

I spoke with people who said she was a smart and dedicated public servant, an expert on the Dodd-Frank Act who can help finalize the scandalously long list of unfinished rules and expedite its implementation.

"Amy Friend is absolutely rowing in the right direction," said a Senate staff member who worked on efforts to push for stronger financial regulation.

Let's hope so.

But people also described Ms. Friend as pragmatic. In Washington, that's the ultimate compliment. Sadly, that has come to mean someone who seeks compromise and never pushes for an overhaul when a quarter-measure will do.

Washington today resembles something like the end of "Animal Farm." People move from one side of the table to the other and up and down the Acela corridor with ease. An outsider looking at a negotiating table would glance from lobbyist to staff member, from colleague to former colleague, from pig to man and from man to pig and find it impossible to say which is which.

The unwritten rule of Washington debates about taxing and spending is to never consider anything new. But wouldn't it be wonderful if the pressure of the next few months' debate changed that?

Last month, 11 European countries, including France and Germany, moved forward on introducing a minuscule tax on trades in stocks, bonds and derivatives. The tax goes by many names. It's often called a Tobin tax, after the economist James Tobin. In Europe it goes by the more pedestrian financial transaction tax. In Britain, it goes by the wonderful Robin Hood tax, and is supported in an often clever campaign.

On this side of the Atlantic, there is a ghostly silence on a transaction tax in respectable political quarters. But that might change. This month, Sen. Tom Harkin, Democrat of Iowa, and Rep. Peter DeFazio, Democrat of Oregon, plan to reintroduce their bill calling for just such a tax.

A transaction tax could raise a huge amount of money and cause less pain than many alternatives. It could offset the need for cuts to the social safety net or tax increases that damage consumer demand. How huge a sum? Harkin and DeFazio got an estimate from the bipartisan Joint Committee on Taxation, which scores tax plans. It's a hearty one: $352 billion over 10 years.

The money would come from a tiny levy. The bill calls for a three-basis-point charge on most trades. A basis point is one-hundredth of a percentage point. So it amounts to 3 cents on every $100 traded.

And the bill contains some exemptions intended to make the tax more politically palatable. The first sales of stocks (initial public offerings) and bonds are exempted, so that the markets' capital-raising function isn't harmed. Initial investments and withdrawals from tax-protected accounts, like retirement or education funds, also have a measure of protection.

Critics of such a tax cavil that it will harm our capital markets and won't raise that much money. They argue that such a tax cannot be enforced; that it will depress trading, leading to lower asset prices; and that it will ultimately be passed on to retail investors.

These are anemic arguments, and are completely destroyed in an excellent piece of myth-busting by a group in Britain called Stamp Out Poverty.

Lots of taxes are hard to collect, but this doesn't seem like one of them. Sales taxes have decent compliance, and they are often collected by small businesses conducting commerce in cash. Trading, on the other hand, is conducted by large businesses on computers. This tax would be collected by the exchanges. If there's no exchange involved, the buyer owes it. It would be paid on any trade carried out in the United States or by any American entity or individual (a corporation's offshore subsidiaries can't get around it).

If there is truly a concern, then the tax could be modified so that if it hadn't been paid, neither the transaction nor any legal action arising from it would be enforceable in the United States judicial system. Voilà! Plenty of compliance.

But those who argue against the tax are blind to a sea change in the way society sees the financial sector. They should be asked to make an affirmative case for more frenzied capital markets activity, rather than just assume that tamping it down is malign.

Yes, trading costs have come down and trading has skyrocketed in the last decade and a half. What have we gotten for it? Bubbles, crashes, volatile asset prices and an outsize financial sector that extracts rents from the rest of the economy. Rising volumes and tighter spreads haven't delivered good economic growth, broad-based wage growth or good jobs.

Nor have they even helped the stock market. Where is the boom in newly public companies? The Standard & Poor's 500-stock index is only just now getting back to its peak before the financial crisis. The Nasdaq isn't close to the peak achieved in the year 2000. Stock market valuations are depressed.

So let trading costs rise again, if the Tobin tax would really lead to that. (Other factors, like brutal competition, might still keep them just as low.) Much of the trading that occurs in the market is socially useless. It might narrow slightly the spread between the prices at which securities and derivatives are bought and sold, but the minute there's a crisis, the traders flee. They provide the kind of liquidity that is available only when it is not needed.

The average American, who has limited exposure to the stock market, has little to fear from the tax and much to gain. And if some of the high-frequency trading flees offshore? Good riddance.

Alternatively, let's suppose that a transaction tax succeeds beyond expectations in bringing down excessive trading and doesn't raise as much as projected. Fine. The American capital markets will become less volatile and more connected to fundamentals. Pension fund and mutual fund managers will have an incentive to hold stocks longer and adjust their investing expectations. There is a scourge of short-term thinking in American business; a transaction tax leans against this malign influence.

But what if the tide of technology and investor attention-deficit disorder continues apace, and trading does not decline as much as the securities industry and its paid academic shills claim? That's fine, too. We'll take the revenue.

The politics of a transaction tax are fascinating. Harkin doesn't have the juice to get it done on his own, several Senate staff members and Washington observers explained to me. The transaction tax would need to be embraced by some senators on the relevant committees, like finance or banking. The Senate Finance Committee is a problem because Charles Schumer of New York, the heavyweight Democrat who serves on it, often acts as if his main constituency is Wall Street.

There have been hints of a possible anti-Wall Street/Big Bank coalition between Midwestern and Western Democrats and Republicans. The Ohio Democrat Sherrod Brown and the Louisiana Republican David Vitter don't agree on much, but they co-sponsored a bill calling for more bank capital. Charles E. Grassley, the Iowa Republican famous for skewering vested interests, serves on the Senate Finance Committee. Of course, Republicans have taken blood oaths never to support higher revenue.

If some kind of increase in taxes is inevitable, one that takes aim at high-frequency traders probably hits few Iowans and average Americans in general, while doing much good.

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members' suggestions: "Subprime Meltdown," "Hitman," "Nuclear Holocaust," "Mike Tyson's Punchout," and the simple-yet-direct: "Shitbag."

Ha ha. Those hilarious investment bankers.

Then they gave it its real name and sold it to a Chinese bank.

We are never going to have a full understanding of what bad behavior bankers conducted in the years leading up to the financial crisis. The Justice Department and the Securities and Exchange Commission have failed to hold big wrongdoers to account.

We are left with what scraps we can get from those private lawsuits lucky enough to get over the high hurdles for document discovery. A case brought in the New York State Supreme Court in Manhattan against Morgan Stanley by a Taiwanese bank, which bought a piece of the same deal the Chinese bank did, has cleared that bar.

The results are explosive. Hundreds of pages of internal Morgan Stanley documents, released publicly last week, shed much new light on what bankers knew at the height of the housing bubble and what they did with that secret knowledge.

The lawsuit concerns a $500 million collateralized debt obligation called Stack 2006-1, created in the first half of 2006. Collections of mortgage-backed securities, C.D.O.'s were at the heart of the financial crisis.

But the documents suggest a pattern of behavior larger than this one deal: People across the bank understood that the American housing market was in trouble. They took advantage of that knowledge to create and then bet against securities and then also to unload garbage investments on unsuspecting buyers.

Morgan Stanley doesn't see the narrative as the plaintiffs do. The firm is fighting the lawsuit, contending that the buyers were sophisticated clients and could have known what was going on in the subprime market. The C.D.O. documents disclosed, albeit obliquely, that Morgan Stanley might bet against the securities, a strategy known as shorting. The firm did not pick the assets going into the deal (though it was able to veto any assets). And any shorting of the deal was part of a larger array of trades, both long and short. Indeed, Morgan Stanley owned a big piece of Stack, in addition to its short bet.

Regarding the profane naming contest, Morgan Stanley said in a statement: "While the e-mail in question contains inappropriate language and reflects a poor attempt at humor, the Morgan Stanley employee who wrote it was responsible for documenting transactions. It was not his job or within his skillset to assess the state of the market or the credit quality of the transaction being discussed."

Philip Blumberg, the Morgan Stanley lawyer who composed most of the names, meet the underside of a bus, courtesy of your employer.

Another Morgan Stanley employee sent an email that same morning, suggesting that the deal be called "Hitman." This might have been an attempt to manage up, because "Hitman" was the nickname of his boss, Jonathan Horowitz, who helped head the part of the group that oversaw mortgage-backed C.D.O.'s. Mr. Horowitz replied, "I like it."

Both Mr. Blumberg and Mr. Horowitz, now at JPMorgan, declined to comment through spokespeople at their banks.

In February 2006, Morgan Stanley began putting together the Stack C.D.O. According to an internal presentation, Stack "represents attractive business for Morgan Stanley."

Why? In addition to fees, another bullet point listed: "Ability to short up to $325MM of credits into the C.D.O." In other words, Morgan Stanley could — and did — sell assets to the Stack C.D.O., intending to profit if the securities backed by those assets declined. The bank put on a $170 million bet against Stack, even as it was selling it.

In the end, of the $500 million of assets backing the deal, $415 million ended up worthless.

"While investors and taxpayers all over the world continue to choke on Wall Street's toxic subprime products, to this day not a single major Wall Street executive has been held accountable for misconduct relating to those products," said Jason C. Davis, a lawyer at Robbins Geller who is representing the plaintiff in the lawsuit. "They are generally untouchable, but we are pleased that the court in this case is ordering Morgan Stanley to turn over damning evidence, so that the jury will get to see what Morgan Stanley really knew about the troubled nature of its supposedly 'higher-than-AAA' quality product."

Why might Morgan Stanley have bet against the deal? Did its traders develop a brilliant thesis by assessing the fundamentals of the housing market through careful analysis of the public data? The documents suggest something more troubling: Bankers found out that the housing market was diseased from their colleagues down the hall.

Bankers were getting information from fellow employees conducting and receiving private assessments of the quality of the mortgages that the bank would purchase to back securities. These reports weren't available to the public. It would be crucial information for trading in securities backed by those kinds of mortgages.

In one email from Oct. 21, 2005, a Morgan Stanley employee warns a banker that the mortgages Morgan Stanley is buying from loan originators are troubled. "The real issue is that the loan requests do not make sense," he writes. As an example, he cites "a borrower that makes $12K a month as an operation manger (sic) of an unknown company — after research on my part I reveal it is a tarot reading house. Compound these issues with the fact that we are seeing what I would call a lot of this type of profile."

In another email from March 17, 2006, another Morgan Stanley employee writes about a "deteriorating appraisal quality that is very flagrant."

Two of the employees who received those emails joined an internal hedge fund, headed by Howard Hubler, that was formed only the following month, in April 2006. As recounted in Michael Lewis's "The Big Short," Mr. Hubler infamously bet against the subprime market on Morgan Stanley's behalf, a fact that Morgan Stanley's chief financial officer conceded in late 2007. Mr. Hubler's group was supposed to be separate from the rest of Morgan Stanley, but the two bankers continued to receive similar information about the underlying market, according to a person briefed on the matter.

At no point did they receive material, nonpublic information, a Morgan Stanley spokesman says.

I struggle to see how the private assessments that the subprime market was imploding were immaterial.

Another of Morgan Stanley's main defenses is that it couldn't have thought the investment it sold to the Taiwanese was terrible because it, too, lost money on securities backed by subprime mortgages. As the Morgan Stanley spokesman put it, "This deal must be viewed in the context of a significant write-down for Morgan Stanley in 2007, when the firm recorded huge losses in its public securities filings related to other subprime C.D.O. positions."

This is a common refrain offered by big banks like Citigroup, Merrill Lynch and Bear Stearns to absolve them of any responsibility.

But does losing money wipe away sin?

Yes, Mr. Hubler made his bets in what turned out to be a deeply disastrous way. As part of a complex array of trades, he bet against the middle slices of subprime mortgage C.D.O.'s. He bought the supposedly safe top parts. The income from the top slices helped offset the cost of betting against the middle slices. But when the market collapsed, the top slices — called "super senior" because they were supposedly safer than Triple A — didn't hold their value, losing billions for Mr. Hubler and Morgan Stanley. Mr. Hubler did not respond to requests for comment.

So Morgan Stanley lost a great deal of money.

But let's review what the documents suggest is the big picture.

In the fall of 2005, bank employees share nonpublic assessments of how the subprime market is a house of tarot cards.

In February 2006, the bank begins creating Stack in part so that it can bet against it.

In April 2006, the bank creates its own internal hedge fund, led by Mr. Hubler, who shorts the subprime market. Among the traders in this internal shop are people who helped create Stack and other deals like it, and at least two employees who had access to the private due diligence reports.

Mr. Hubler's group had no investment position in Stack, according to the person briefed on the matter, but it sure looks as if the bank saw what was coming and tried to position itself for a subprime market collapse.

Finally, by early 2007, the bank appears to realize that the subprime market is cratering even worse that it expects. Even the supposedly safe pieces of C.D.O.'s that it owns, including its piece of Stack, are facing losses. So Morgan Stanley bankers set to scouring the world to peddle as a safe and sound investment what its own employees are internally deriding.

Morgan Stanley declined to comment on whether it made money on its Stack investments over all. But it looks to have turned out well for the bank. In Stack, it managed to fob off a nuclear bomb to the Taiwanese bank.

Unfortunately for Morgan Stanley, it had so many other pieces of C.D.O.'s, so many nuclear warheads, that it couldn't find nearly enough suckers around the world to buy them all.

And so when the real collapse came, Morgan Stanley was left with billions of dollars worth of shitbags.

That hardly seems exculpatory.

No matter how many times people debunk the notion that government policy created the housing bubble, it doesn't die. It's part of what the blogger Barry Ritholtz has called the "big lie" of the financial crisis. Now, we are having another argument about whether the government is creating a new housing disaster for taxpayers.

The target this time: the Federal Housing Administration, the government's mortgage insurer mostly for low-to-moderate income and minority borrowers. Late last year, the F.H.A. issued its annual report to Congress. According to estimates, over its lifetime, the agency would have to pay more out on the mortgages it has insured than it has taken in. The report estimated the potential shortfall at $16 billion, which is a lot in absolute terms, but minuscule in relation to the federal budget and the $1.1 trillion F.H.A. portfolio.

Despite these modest numbers (more on that below), the same crew that assailed the government's role in the housing bubble is now rending its garments about the F.H.A. Critics, like Edward J. Pinto of the American Enterprise Institute, argue that the agency has not only failed to help low-income communities, but is actually destroying them with reckless loans.

Next month, we may end up doing it all again, when the Office of Management and Budget issues its analysis of the agency's finances, using a different methodology.

So is the F.H.A. in trouble and in need of an imminent bailout?

Not really. According to the actuarial analysis, if the agency stopped backing mortgages right now, it would have a deficit after 30 years. But even by that analysis, it has enough cash for many years. And it will not stop insuring mortgages. In fact, it's backing what are probably going to be very safe and profitable home loans right now, so even if it drew money from the United States Treasury, it would almost certainly be able to pay it back eventually.

And if there is a Treasury infusion, taxpayers should consider it a bargain. The agency has been a rare bright spot in the Obama administration's otherwise dismal record on housing.

In both the boom and bust, the F.H.A. functioned as one would hope a government lending operation would. As the bubble grew and private lenders went nuts, its market share dwindled. (Maybe this wasn't on purpose, but it's better to be lucky than smart.) When the market crashed, the F.H.A. stepped in.

Without the agency's lending, mortgage rates would have doubled and home prices would have dropped another 25 percent, estimates Mark Zandi, chief economist of Moody's Analytics.

John Griffith, a housing policy analyst for the liberal Center for American Progress, has produced several useful rejoinders to the F.H.A.'s critics. He points out that compared with the private sector, the agency is doing quite well. Yes, the agency faces a high rate of delinquencies, but they pale when compared with private sector subprime loans.

At their peak in the fourth quarter of 2009, 9.4 percent of the F.H.A. loans were seriously delinquent, compared with 30.6 percent of subprime loans, according to the Mortgage Bankers Association.

"To go this far without significant problems after the worst housing crisis since the Great Depression is remarkable," Mr. Griffith said.

The F.H.A. hasn't been perfect. Far from it. The agency was too aggressive with its lending. When it stepped in as the market was collapsing, it should have had more careful lending standards. Now, it has tightened them up and raised its fees, which will put the agency in much better shape.

And its history isn't pure. One of its more disastrous policies was to allow something called seller-financed loans, where a nonprofit organization would broker a deal for a low-income borrower. In truth, someone else, like a developer, would front the costs and this would inflate the cost of house itself. Low-income borrowers could find themselves underwater almost immediately.

"A phenomenal mistake," Mr. Griffith said. The F.H.A. considered banning such loans. But the private sector lobbied for them, and with a push from Congress, the loans continued until 2009.

Yet, the criticism of F.H.A. from Mr. Pinto of the American Enterprise Institute, who in the late 1980s was the chief credit officer of Fannie Mae, goes far beyond that. Mr. Pinto says the F.H.A. has a record of 60 years of "mission failure" and that it's getting worse. Its lending standards have been eroding for years, and now it has an unacceptably high failure rate, he says. His work, including a study late last year, aims to show the F.H.A. has actually hurt the low-income and minority communities it purports to serve.

Mr. Pinto's study cites high rates of delinquencies in many neighborhoods, but that's no surprise. The housing market crashed in many cities. To have high default rates in those areas is hardly a sign of out-of-control government lending.

"I respect Ed, but he's dead wrong," Mr. Zandi of Moody's said. "He's got it absolutely backward." The private sector, not government, led us into the bubble.

Mr. Pinto has been repeatedly criticized for exaggerating the role of Fannie Mae and Freddie Mac in the mortgage crisis. The Financial Crisis Inquiry Commission took a long hard look at them, because Peter J. Wallison, a major proponent of the theory that the government created the housing bubble, sat on the commission. The commission found that the Pinto analysis was flawed.

Mr. Pinto is undaunted. He told me he believes that "federal housing policy was the cause of the housing boom and bust. That was what got us into this mess. People want to deny it."

That is what is known, as the Freudians tell us, as projection.

The debate has important consequences. If the F.H.A. does turn out to be a disaster, it undermines the idea that the government can serve a valuable role in financing loans to deserving and responsible people who can't afford traditional mortgages.

To have one employee tied to insider trading may be regarded as a misfortune. But, with apologies to Oscar Wilde, to have six looks like carelessness.

Poor Steven A. Cohen, the powerful hedge fund manager who heads SAC Capital Advisers. People he employs just keep getting swept up in the sprawling insider trading investigation that has spanned years now. In addition to the six who have gotten in trouble for activities when employed at SAC, at least six others have been ensnared by insider trading investigations after leaving the firm. The latest arrest, of the pharmaceutical industry analyst Mathew Martoma, is the first that ties Mr. Cohen to trades the government says were illegal.

An investment manager has defended Mr. Cohen as the “Michael Jordan” of the investing world. But what if he is the Lance Armstrong?

While Mr. Cohen has not been accused of any wrongdoing, you have to wonder whether his returns have been generated not only through his trading brilliance but also through a culture of cutting corners and pushing employees to the point where they break the law. In the United States, you are innocent until proven guilty, and nowhere can that be seen more than for a man who can generate amazing investment returns.

Astonishingly, investors don’t seem to mind terribly. They added as much as $1.6 billion in new capital to SAC’s flagship fund from 2010 to the end of 2011, when the insider trading investigation was in full bloom, according to Absolute Return, an industry trade publication.

“Insider trading isn’t acceptable in our culture of compliance, and we don’t give a wink or nod to the contrary,” said a SAC spokesman, who declined to make Mr. Cohen available for comment.

At least some big institutions have begun to contemplate thinking about perhaps withdrawing money from Mr. Cohen. Congratulations. What took them so long? Citigroup’s private bank has told its clients not to put in new money, according to Bloomberg. What about getting their clients out? Why hasn’t bank given that advice before this?

A Citigroup spokeswoman explained that the private bank “typically puts funds on watch when there is significant news around a company; that is not a recommendation to move or keep money in the fund.” She declined to comment on Citigroup’s relationship with SAC.

Blackstone is thinking hard about it, according to reports. Think think think. That firm declined to comment.

Several high profile funds-of-funds still have money with him. Société Generale, the big French bank, decided to redeem its money only after the latest allegations. Given all that we know, how in the world do major institutional investors still have any money with Mr. Cohen?

The biggest, most sophisticated investors certainly put enormous amount of pressure on hedge funds. But almost none of it is about ethics and clean culture. It’s about performance. A fund that runs a few ticks lower than its peers for several months running can get put out of business.

But investors seem to demonstrate little interest in whether the person is ethical and trustworthy. Shouldn’t their threshold be a wee bit higher? After all, these institutions are mainly investing other people’s money. Investing money isn’t quite a sacred trust, but it’s a trust nonetheless.

Many institutional investors have so perfected the art of looking the other way that they make bystanders on a New York City subway platform look like models of social responsibility.

The operating standard is to allow fund managers — or affiliated businesses or employees — to go as far as they can until the moment they are caught doing something wrong. Through their actions, Citigroup, Blackstone and the others are sending a message that they will forgive rotten ethics for great returns.

This is a long-standing Wall Street custom. Citigroup and JPMorgan played handmaiden to help Enron commit fraud, according to the Securities and Exchange Commission. The two banks didn’t admit or deny guilt in settling with the regulator.

There is a point where willful blindness turns to complicity. Investors profit from any added juice that SAC might gain, whatever its source. And if Mr. Cohen were to face charges, they would pay no price.

Major banks and investors around the world shoveled money to Bernard L. Madoff despite doubts about his purity. Some thought that Mr. Madoff was using his brokerage firm to front-run. In other words, they thought he was cheating on their behalf, not ripping them off. And that was an enticement.

The arrests and bad trades are finally hitting close to SAC, but there is nothing new about the questions surrounding Mr. Cohen’s business. He was always one of the most aggressive traders on Wall Street. Speculation that he may have tapped into legally dubious information wasn’t just whispered in private but splashed across the pages of The Wall Street Journal in a 2006 profile that raised questions about whether his firm traded improperly.

In the firm’s defense, a person familiar with the firm points out that two of the employees charged with insider trading started their scheme before joining the fund and have admitted taking extraordinary steps to circumvent SAC’s procedures while another was trading in his personal account.

“We expect our people to play by the rules and act with integrity,” the SAC spokesman said.

The firm boasts more than 30 legal and compliance officials in addition to a dedicated technology team devoted to compliance, says the person familiar with the firm.

But given how forgiving institutional enablers are, one wonders why Mr. Cohen even bothers.

The financial industry is obsessed with President Obama's second-term regulatory appointments. Who will be Treasury secretary? Who could head the Federal Housing Finance Administration? But hardly anyone is paying much attention to the Office of Financial Research.

This entity was created by the Dodd-Frank Act to conduct independent research on the sweeping risks to the financial system. Ah, right, another group of Washington wonks who will issue reports carrying vague warnings of risks looming sometime in the uncertain future. Yawn. I hadn't paid much attention either.

But then I spoke to Ross Levine, an economist and specialist in regulation at Haas School of Business at the University of California, Berkeley, and I finally got it. The Office of Financial Research is a great idea. And as I grasped it, I felt a minor sense of horror, as when you see a precious ring slip off a finger in slow motion and go down the drain while you are powerless to stop it.

The office is looking as if it will be a tool of the financial services industry, instead of a check on it. Its main role is to serve the Financial Stability Oversight Council, providing the systemic risk overseer with data and analysis of where the nukes are buried.

But the Office of Financial Research was hobbled from the get-go by a poor design. It is housed in the Treasury Department, while ostensibly being independent of it. It has a small budget. And it has to report to the very regulators it is supposed to report on.

This month, it announced its advisory committee. Thirty big names charged with giving the fledgling operation direction and gravitas. But these same people have also compromised it.

By my count, 19 of the 30 committee members work directly in financial services or for private sector entities that are dependent on the industry. There are academics, but many of them have lucrative ties to the financial services industry. I noted only one financial industry critic: Damon A. Silvers, the policy director for the A.F.L.-C.I.O.

"Academics with a history of challenging regulators are not there," said Anat R. Admati, a finance professor at Stanford and the co-author, with Martin Hellwig, of the forthcoming call to arms, "The Banker's New Clothes" (Princeton University Press). She was among several prominent banking critics who had applied but didn't make the cut.

The Treasury Department sees it differently.

"We were not looking for critics or proponents. That wasn't the goal," said Neal S. Wolin, the Treasury deputy secretary. "We were looking for people with a range of perspectives who understand keenly the systemic risks in the financial system."

Mr. Wolin said that the office would be independent despite its home. The argument for being housed in the Treasury Department is that if it were all by its lonesome, brand new and small, it would be much easier to be squashed like a bug.

Maybe. But it's not as if there isn't a precedent for creating a better advisory council: Sheila Bair did it for another regulator, the Federal Deposit Insurance Corporation. That panel, the Systemic Resolution Advisory Committee, has Professor Admati; Paul A. Volcker; John S. Reed, the former co-chief executive of Citigroup and now a prominent banking apostate; and Simon Johnson, the former head economist for the International Monetary Fund and outspoken banking nemesis.

Perhaps Professor Admati and Mr. Johnson and Mr. Volcker were busy. The world is teeming with expert critics of Big Banking; they just aren't heard from much in the halls of Washington. The Federal Reserve Banks of Kansas City and Dallas have candidates. The economist Joseph Stiglitz would make a good choice. The Bank of England houses two prominent banking critics, Andy Haldane and Robert Jenkins. Outfits like Better Markets or Demos could nominate people who would give Jamie Dimon some indigestion.

Certainly, financiers are not a monolithic lot. Investors often have differing interests from those of banks, and investment banks from commercial banks, and the small from the large. Even in big institutions, there are secret sharers of anti-Wall Street sentiment. And obviously, an advisory committee requires a certain number of experts with real-world experience.

Clearly, there is a place for finance professionals. But shouldn't the balance of the committee be tilted in the opposite direction and give greater voice to the critics and the banking skeptics? This is a panel that is supposed to identify giant risks in the system that bankers ignore in their pursuit of profit and bonuses and to spot flaws in regulations that could cost the public and economy trillions.

It's not as if the poor bankers don't have a voice in Washington, after all. The bankers have the resources. And they are focused. Bankers are in the trenches all day, fighting regulation. The public only glances at these battles.

So why does yet another Washington advisory panel of worthies matter? Mr. Levine has a subtle and fascinating answer. He starts by pointing to the mystery of the home-team advantage in sports, which has long puzzled researchers.

It turns out that umpires are biased toward the home team not out of conscious or recognizable bias. Rather, they subconsciously gravitate toward their immediate "community" — in this case, the home-field crowd, especially at crucial moments in a game. (Researchers will next study how this appears to have no effect whatsoever on the New York Jets.)

To minimize the bias, you can tell the umpires that they are being monitored. Introduce instant replay. With that, you have expanded the community that is watching the umpires to an audience far beyond the home crowd.

Mr. Levine believes that the Office of Financial Research could do the same for regulators. If it independently examined and publicized not just systemic risks, but — crucially — the flaws in how the regulators were approaching those risks, that could have the effect of expanding the regulators' community. Regulators, he said, "operate within financial services industry. They are surrounded by it."

"That means that the home-field crowd is the financial services industry," he said. "The public, if it has a ticket at all, is way up in bleachers, and its voice can't be heard."

The Office of Financial Research is well on its way to barring the gate.

Before the crisis, the consensus was that the Office of Thrift Supervision was the regulator most in the pocket of Big Banking. For its efforts, it got shut down as part of the postcrisis regulatory overhaul.

"Now, the title of ‘Most Captured' is up for grabs," Mr. Johnson said. "And I think we have a contender."

In President Obama's second term, financial regulation would finally appear to have the leverage.

Wall Street spent zillions on Mitt Romney, who had promised to roll back financial reform, and lost. Elizabeth Warren now sits in the world's greatest deliberative body. With the election behind us, regulators are likely to be less intimidated by the specter of being hauled in front of Congress and yelled at, especially by House Republicans.

Already, the Obama administration has been moving to install tougher regulators than it had in the early part of its tenure. The early first-term financial regulatory heads were either conciliators or place holders. Mary L. Schapiro had to reinvigorate a Securities and Exchange Commission that was demoralized from its failures to catch Bernard L. Madoff and to foresee the financial crisis. Treasury Secretary Timothy F. Geithner had to deal with the 2008 crisis and its aftermath, and sidelined banking accountability. Others — like John G. Walsh, who was the acting comptroller of the currency, and Edward DeMarco, who is the acting director of the Federal Housing Finance Agency — have been perceived by reformers as active roadblocks.

The second-generation appointees, like the Consumer Financial Protection Bureau's Richard Cordray and the new comptroller of the currency, Thomas J. Curry, actually evince a desire to regulate.

What's more, the pace of regulation should accelerate. Regulators have been slow-walking the Dodd-Frank overhaul. Only a third of the rules have been finalized — and worse, a third haven't even been proposed, according to the law firm Davis Polk & Wardwell. And it got only worse as we approached the election, because nothing is more abominable to Washington regulators than to become an election issue. If a decision could be ducked or a rule delayed, they did it. At that pace, financial reform would have been completed sometime in the second term of the Sasha Obama administration.

Surely, reformers can now ride in and save the day, right?

Alas, no. While the rule making will speed up, the core problems with the financial system and its regulators are deeper than personnel and sadly impervious to which party occupies the White House. They are bipartisan and structural.

The examples of bipartisan cowardice and ineptitude are legion, but one of the most telling involves a particularly dispiriting disappointment of Ms. Schapiro's tenure at the S.E.C.: the failure to figure out a solution for money market funds, which are able to mask their risk under the current rules. It was a shared fumble, with a Democratic commissioner joining Republicans in proposing more study of the topic in order to issue a report calling for more study.

The structural issues go deeper. The Commodity Futures Trading Commission and the Securities and Exchange Commission still exist as two separate agencies, a huge missed opportunity for Dodd-Frank and one borne of politics. The C.F.T.C. is protected (and bashed) by the Senate Agriculture Committee, the S.E.C. by the Senate Banking Committee. Merging the agencies would mean that one of those committees would lose power, so forget about that. Gary Gensler, the head of the commodities commission, has been tough, but has been limited by his agency's paltry resources. And, anyway, these agencies are still run by commissions, not single heads, and they rely on Congress for their financing. It's little surprise that such a structure creates plodding impotence.

"One of the biggest weaknesses of Dodd Frank is that we failed to look long and hard at true independence of regulators," a frustrated and regretful Senate staff member, who worked on the legislation, told me the other day.

This failure plays out in almost comical ways. The market for credit default swaps, a common derivative, is unified in the business world, but its regulation is split between the C.F.T.C. and the S.E.C. The solution was to let the C.F.T.C. oversee swap indexes of 10 or more components, with the S.E.C. regulating trades in single company swaps and — get this — indexes with up to nine components. In the real world, traders go long (or short) indexes of credit default swaps and hedge with the individual names or vice versa. So, how's that supposed to be overseen? When one agency looks over one half of the trade, the other regulators are mandated to close their eyes, put their hands over their ears and say, "La la la la la la la"? Don't worry: The regulators are hard at work jury-rigging a fix as I write this.

Or take the Volcker Rule, one of the most prominent symbols of the financial overhaul. The rule, which was intended to prevent banks from speculating with money backed by taxpayers, still has not been finalized almost two and a half years after Dodd Frank passed. It's the subject of multiple-agency negotiations, which are going about as well as that phrase would suggest. Representative Barney Frank, Democrat of Massachusetts, had called on the regulators to finish up by Labor Day. That came and went. Senators Carl Levin, Democrat of Michigan, and Jeff Merkley, Democrat of Oregon, the authors of the provision, fired off a letter a few weeks ago, urging the regulators to finish their work.

Now, it would be good if regulators were assiduously working to radically simplify the rule, which is a bloated monstrosity filled with loopholes and exemptions. But they aren't. Instead, they're squabbling over petty turf issues.

In "Bleak House," Dickens wrote of a legal case: "This scarecrow of a suit has, in course of time, become so complicated that no man alive knows what it means." Today, he would set the novel in Congress. Dodd Frank is so sweeping in scope yet so picayune in application that it will be close to impossible for the public to tell whether it's making a difference.

No second term can alter that.

Mortgage rates are so low that it may seem like a great time to get a mortgage. For banks, however, it probably is the greatest time ever.

The profit margin on the rates that they can charge customers and the price they can earn for selling those mortgages to investors is at a record. This is measured as the "spread," or difference, between mortgage securities yields and mortgage rates.

Given that housing prices are beaten up and borrowers must put down bigger cushions than in recent years, it is "the most profitable, safest time ever to be a mortgage bank," says Scott Simon, who is the head of mortgage investing at Pimco.

In the old days, there used to be a word for this kind of thing: price gouging.

And who is doing the gouging? Mainly, Wells Fargo and JPMorgan Chase. In the third quarter, reported in the last several weeks, both banks earned robust profits from the mortgage business.

The president of the Federal Reserve Bank of New York, William C. Dudley, vented this frustration in a recent speech, blaming the concentration of mortgage-making power at a few big banks.

Mr. Dudley is right. But what he didn't say was that his own institution (the Fed), his former boss (Treasury Secretary Timothy F. Geithner) and the Bush and Obama administrations delivered us this mess.

The broken mortgage market is the unintended consequence of the flawed banking bailout and the flaccid regulatory response in the aftermath of the financial crisis.

The government and the regulators have had two broad approaches to banking oversight during the crisis and its aftermath. First, regulators coddled the troubled big banks. The two weak behemoths, Citigroup and Bank of America, were granted time to work off their bad loans. Regulators practiced forbearance, overlooking the self-inflicted debacles — mostly housing related — on their balance sheets.

Regulators, meanwhile, encouraged the healthy giants to get even bigger by gobbling up the small and weak. So Wells Fargo bought Wachovia, and JPMorgan snapped up Washington Mutual.

It would be foolish to blame Wells Fargo and JPMorgan for this situation. Restaurants with 100 customers waiting in line outside the door wouldn't, and shouldn't, be expected to lower their prices; why should banks?

Yet allowing takeovers without forcing weak competitors to get healthy quickly leads to an oligopoly. Exhibit A: Wells Fargo and JPMorgan dominate the mortgage business. They should face some competition. Instead, their biggest threats, Citigroup and Bank of America, are, astonishingly, pulling out.

Citigroup and Bank of America appear to have made a profound mistake. It's one of the many strategic errors that ultimately got Vikram S. Pandit ousted as Citi's chief executive. Mr. Pandit viewed mortgages as a "noncore" business for Citigroup. Whoops.

But it's not a surprising one. These are traumatized institutions, limping along, preoccupied by the past and unable to look forward, says Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation and author of the new crisis account, "Bull by the Horns." She rightly calls it "another downside of the bailouts. We simply propped up weak institutions instead of making them restructure."

The odd twist is that the Federal Reserve is a victim here, too. Despite its move to buy mortgage-backed securities in its latest round of extraordinary measures to lower interest rates, it can nudge them only so far because of the dysfunctional, noncompetitive market.

Regulators could have broken up Citigroup and Bank of America, spinning off their mortgage operations into well-capitalized, nimble competitors. Perhaps they could have forced those banks to take big write-downs on their mortgage assets, settled their lawsuits and moved on, putting the past where it belongs.

Bankers, of course, don't like this analysis. It's common for them and others to argue that what's really ailing the mortgage market are delays in putting new Dodd-Frank mortgage rules in place, like the ones that define the standards for mortgages that can be bundled into securities.

And, yes, that is probably hindering new competition from entering the market, though it certainly can't fully, or even mostly, explain Citigroup and Bank of America abandoning the field. And, of course, the banks themselves bear much of the blame because they went all out to obstruct the rollout of new regulations. But, ultimately, the Dodd-Frank delay is yet another example of how the government's inefficient postcrisis process has hurt the marketplace.

There has been plenty of talk about how the government saved the financial system after the crisis. And it did. Now the question is: Is this what we saved it for?

Thanks to a leaked video, we know that Mitt Romney divides the country into those who pay taxes and those who don't, the makers and the moochers.

There is one perhaps surprising group you can put in the latter category: the nation's banks. Sure, banks pay taxes, but they pay a lot less thanks to a giant and underappreciated distortion in our nation's tax code. Moreover, this tax code distortion makes the financial system and the economy more fragile, prone to bankruptcies and runs. Banks profit, and the economy teeters. Great bargain, huh?

It's the tax code's favoring of debt over equity.

For businesses, debt interest payments are tax deductible; equity payments, like when a company pays out a dividend, are not. At the margin, this encourages entities to take on more debt than they otherwise would, as Steven M. Davidoff noted in a Deal Professor column earlier this year. More debt not only makes companies more vulnerable to bankruptcy but also makes investors more susceptible to panics, when they withdraw their capital en masse. More equity would make the world more stable.

"The worst thing the tax code can do," says Victor Fleischer, a tax specialist at the University of Colorado, "is to make it harder to use a sensible capital structure." Mr. Fleisher, a contributor to The New York Times DealBook, testified in front of Congress last year about this problem.

This distortion is well known. President Obama, in his tax reform proposal, mentioned it, though he didn't make any specific proposal about what to do about it. The Republican candidate, Mitt Romney, is proposing substantial tax cuts with the loss of revenue made up with the closing of loopholes. He has yet to specify any of those loopholes, but corporate debt interest deductibility hasn't been in the conversation.

What isn't well appreciated is how much the debt deduction helps the banks. The first way is direct: Banking is a highly leveraged industry. Banks use more debt than equity to finance their activities. The tax break makes the debt cheaper and encourages banks, at the margin, to gorge on more.

Financing techniques that have become more popular in recent decades benefit from this distortion. Bundling of debt, like credit card receivables or mortgage debt, called securitization, turns out to give banks a tax bonanza. For accounting purposes, banks are typically able to treat their bundling of this debt as a sale. But for tax purposes, banks often get to call it debt. Those payments to the buyers of the securitizations' bonds are therefore tax deductible to the bank.

More important, there's an indirect and unremarked benefit. Banks help companies raise money in two main ways: through the sale of stock (equity) and debt, either through loans or the sale of bonds. When a company goes public, selling stock for the first time, the underwriting banks make more money than they do for a comparable debt offering. But banks make it up on volume with debt. Bonds expire. Companies issue more of them all the time.

Partly because of the tax code distortion, corporate debt is underpriced and overconsumed by the bank's corporate customers. Indeed, the debt business dominates the world of investment banking these days. When corporations raise more debt compared with equity, that fattens bank profits.

Then, too, the trading of debt is more profitable than the trading of equity. Stocks are traded on transparent markets at transparent prices. Debt is traded in opaque ways, where the spread between the offered and requested prices is wider than for stocks. That means more profit for investment banks compared with stocks, whose trading spreads have narrowed for decades. So, too, with derivatives and securities based on debt — things like collateralized loan obligations.

And these complex debt securities give society — what? The system we have subsidizes the middleman to create dubious products. Those products help the middlemen — the banks — but they make the financial system more fragile. So the tax code distortion doesn't just lead to more debt in corporate America and more leveraged banks. It also helps create a finance-heavy economy where the banking sector accounts for a bigger proportion of gross domestic product and corporate profits than it otherwise would. Granted, the tax code is far from the only force in American society that creates a larger financial sector or overleveraged corporations. But it's one of the least recognized.

As most of us have come to understand since the financial crisis, having a bigger finance industry than necessary wastes resources. Banking is supposed to provide capital to help companies create real goods and services, not be an end unto itself.

As it is, lawyers, accountants and investment bankers spend thousands of billable hours analyzing transactions to figure out if there are ways to treat them like debt, rather than equity.

Are there solutions to this distortion?

There are two choices: reduce or eliminate interest deductibility or introduce some deduction for equity.

Neither seems particularly feasible for some time. Reducing the deductibility would be elegant but generate screams of bloody murder from corporate America.

Making dividend payments tax deductible, which would start to level the playing field, might be easier and more popular. Of course, that would reduce revenue to the government and have to be made up somehow, though tax increases elsewhere or decreased services.

Mr. Fleischer suggests that one way to limit the distortion would be to eliminate the deduction to the extent a financial institution exceeds a ratio of debt-to-equity of 5 to 1. If a bank has borrowed $6 for every $1 in stock, then it doesn't get to deduct the interest payments on that extra dollar of debt. That would make debt more expensive and make banks less inclined to borrow as much.

And it would help stop banks from being moochers.

Fresh from having declined to constrain money market funds, the Securities and Exchange Commission has moved to loosen marketing constraints on hedge funds.

Two weeks ago, the agency threw up its hands and said it would not be able to defend millions of investors from money market funds that do things like invest in dodgy European bank bonds yet proclaim themselves to be perfectly safe.

Instead, the S.E.C. — mandated by Congress through its misnamed and harmful JOBS Act — proposed rules last week to lift advertising restrictions for hedge funds and other kinds of private investment offerings. The rules haven’t been finalized, but we can look forward to an ad featuring a wizened couple in matching tubs overlooking a sunset, holding hands and talking about how they just put money with the next George Soros.

The old rules for hedge funds make little sense. Surely, hedge funds should be able to pitch investors with data about their returns and methods. But there’s a problem: The S.E.C. does not have any new resources and has not implemented any policies to police these pitches.

Letting slip the dogs of advertising comes as some professional investors and academics doubt that the industry can continue to produce outsize investment returns — if, in fact, it ever did. As they get bigger, hedge funds struggle to score good results. As investments have become increasingly correlated and interrelated, it gets harder to execute safer and unique strategies.

In a perfect world, hedge fund advertising would improve the world of investing. Hedge funds, after all, are wildly misunderstood. A good hedge fund seeks steady returns in good markets and bad. Many of the best-managed funds aren’t actually trying to beat the market in its best years. And many of the good funds seek uncorrelated results, so that the returns don’t move in lock step with the stock market.

And, honestly, few things could be worse than mutual funds, which in aggregate underperform the stock market and charge too much to do it.

The problem is that the way this loosening looks on paper and the way it will play out in the real world are a tad different.

If Groucho Marx were alive today, he’d say that he would never want to invest in a hedge fund that would have him as a limited partner. One doesn’t see Le Bernardin and Château Lafite filling the airwaves during N.F.L. games. The ban on law firms advertising was lifted in the 1970s. Today, Jacoby & Meyers advertises on television; Sullivan & Cromwell does not. Drug ads have wrought a parade of patients demanding new (high-margin) medicines from their doctors that often offer few benefits over the old (off-patent) ones.

Even professionals have a problem in evaluating hedge fund performance, because distinguishing skill from luck and excessive risk-taking is extremely difficult. For instance, funds often don’t even let their own employees know how much leverage they are taking.

Take the case of John Paulson, who is famous for having shorted the housing bubble, making billions. The result is that many, surely including Mr. Paulson, were convinced of his brilliance.

Before his world-renowned score, he was a grinder, eking out decent returns with a relatively small fund. Afterward, his fund grew exponentially to tens of billions under management.

Then his returns nose-dived. His main fund plunged 36 percent last year and has dropped another 13 percent this year, according to The Wall Street Journal.

Last week, after Citigroup’s private bank pulled out of his fund, Mr. Paulson convened a conference call with Bank of America investment advisers and their clients to explain what was going so horribly wrong with his funds.

It turns out that Mr. Paulson was like the Old Man in the Hemingway novel: He happened to be the guy, through some skill and some luck, to land the biggest fish in the world. How much of each did he have? No one can know.

Another lesson from Mr. Paulson’s experience is that even if a fund manager is smart, people who put their money into them are dumb. Citigroup and Bank of America look as if they were typical. Average investors chase performance, putting in money after the great years. Then they panic, pulling their money out at the bottom.

Look for this to be replicated frequently when hedge funds start advertising. Simon Lack, in an important recent book "The Hedge Fund Mirage" (Wiley), argues that hedge funds have been great for hedge fund managers and not so great for their investors. The managers get huge fees. Investors would have been better off investing in Treasury securities, he says.

The hedge fund trade group says that Mr. Lack has it all wrong. Their logic, however, hasn’t been persuasive. Felix Salmon, a blogger for Reuters, wrote that the hedge fund group’s complaints have "convinced me of the deep truth of Lack’s book in a way that the book itself never could."

At least hedge funds specialize in separating people from their money through excessive fees. Other types of offerings prefer to do so through less savory means. The opening of hedge fund advertising has garnered much of the attention, because of the tantalizing idea that we will all soon be able to invest with the best minds on the planet. But the S.E.C. is also lifting rules on other kinds of securities offerings from small companies. Many of these will require less disclosure and will be particularly ripe for fraud.

So the best-case scenario from the agency’s move is a bunch of Paulsons, while the worst-case is a bunch of Madoffs. It doesn’t seem like a great bargain.

The S.E.C. declares in a fact sheet that it will keep the rules about who can invest. Yet the victims of Bernard L. Madoff, who orchestrated the largest Ponzi scheme in history, were accredited investors. The agency does not plan to mandate any new process to ensure that investors are accredited, or whether their investments are appropriate for them.

This all harks back to a precrisis specialty: get rid of supposedly outdated regulation, but create no new limits or powers to keep things from blowing up.

Aug. 22: This column has been corrected.

Quietly, the Treasury Department is engaged in another bailout of the banks. This time, it's America's small banks that are the lucky duckies.

The federal government still holds investments in hundreds of small banks around the country in the Troubled Asset Relief Program, otherwise known as the bailout. In an effort to wind down TARP, the government is trying to sell off its holdings of preferred stock of the remaining smaller banks.

The problem is that the Treasury Department isn't getting great bids on some of the bank paper, even on the shares of banks with strong profits and strong capital. When the government sold its holdings in MetroCorp Bancshares of Houston this month, the bank itself bought back most of it — at 98 cents on the dollar. Wilshire Bancorp of Los Angeles bought back its paper at 94 cents on the dollar. The Treasury Department sold preferred shares of Ohio-based First Defiance at 96 cents, and Peoples Bancorp of North Carolina at 93 cents. All of these are regarded as healthy.

Who makes up the difference? Taxpayers, of course.

Treasury officials say that is what the market is willing to bear. But the government doesn't have to sell now, and it doesn't have to settle for less than a full repayment.

Why should healthy banks or hedge fund investors get a gift so that the Obama administration can score some political points by raising the number of banks that have left the program? For all the generous breaks that the government gave the gargantuan banks in the bailout, they all at least paid TARP back at 100 cents on the dollar. Why shouldn't the small ones pay 100 cents on the dollar like the big boys?

Sure, the bank portion of TARP has been profitable so far. The Treasury Department estimates that it will make almost $22 billion from its bank support programs. That includes an estimated $3 billion loss from the smaller banks' paper.

“We are winding down the program, at a profit to taxpayers. The program was successful in what it was designed to do,” which was to save the financial system, said Timothy G. Massad, the Treasury Department's point man on TARP. The agency is focused on “what is the way to maximize value, given that it is a temporary program,” he said. “The government is not in the business of running an investment fund and is not in the business of owning stakes in private companies.”

In the auctions, the government has been mainly selling shares it has left of the bigger and healthier small banks. Given that it has sold these shares at discounts, it bodes ill for the stock of the weaker ones that the government still holds, many of which are closely owned and more difficult to unload. Indeed, the Treasury Department didn't get a sufficient bid for some the items in its most recent auction.

Unfortunately, this quiet bailout could get worse if the government continues with its plan.

Treasury officials are contemplating a plan to pool a bunch of these small-bank preferred shares in order to accelerate the sales. The ostensible logic is that a pool — akin to creating shares in a bank mutual fund — will widen the number of potential buyers and raise prices.

Instead, however, this is likely to deepen the discounts. Any large potential investor would still not find it worth the time to analyze each bank in the pool. Rather, the bidder is likely to apply a discount to anticipate any losses.

The potential taxpayer losses from selling shares at too deep a discount could be in the hundreds of millions. Granted, that's not huge when measured against the size of the TARP program, the profits it has made already or the federal budget. But it is big as an absolute figure. It seems likely that some of these losses could be avoided.

You have to feel for the Treasury Department a bit here. It has been assailed from every side for the way it has run TARP. Recently, critics have wondered what its plan was for ending the program. Now that it has a program, critics are attacking that, too.

But much of these problems are of the government's own making. The difficulty the Treasury Department faces is a reminder of just how good the TARP terms were for the banks. Everything that makes the bonds unattractive now for investors made the preferred stock wonderful for banks.

The dividend was a comfortable 5 percent. It will soon bump up to 9 percent, but that is still not onerous for many small, privately held banks. Moreover, some banks in the program can skip the dividend payments at any time. If they miss a payment, they have no obligation to make it up. And the preferred shares never expire, so the banks could keep them as long as they want.

It's a measure of how ungrateful the banks were that even on these generous terms, they still howled about the program and wanted out. Mainly that was because of certain restrictions on executive compensation.

So what's going on here with the Treasury Department? Compass Point Research and Trading, a broker dealer that has been analyzing the auctions, put it delicately in a recent note: "The current administration is very motivated to unwind its crisis-related investments."

Translation: The world has moved on, and the Obama administration seems to be counting on being able to run down the program as quickly as possible without too much scrutiny. TARP is one of the least popular government programs these days (and that's saying something). A job managing TARP no longer burnishes résumés, if it ever did.

But it sure is too bad that, after saving the banking system, taxpayers won't get the best returns we can.

Correction: An earlier version of this column referred incorrectly to the ability of banks to skip dividend payments under TARP. Not all banks can skip the payments; banks that are bank holding companies cannot.

Like a defecting Syrian colonel or converted climate-change denier, Sanford I. Weill has been heartily welcomed among those on the right side of history.

The sheer inappropriateness of the vessel, the breathtaking audacity of the messenger, can oddly confer authority on an idea. If even the creator of Citigroup now believes that the giant banks should be broken up, who could not believe it?

His belated conversion is only the latest from the corner-office-to-Zuccotti-Park banking crowd. The former merger aficionado Philip J. Purcell, who headed up the pithily named Morgan Stanley Dean Witter Discover, wrote a recent Wall Street Journal opinion article suggesting that shareholders should break up the banks. Sallie Krawcheck, a former top-ranking Wall Street executive, recently criticized big banks. Two other former top executives, David H. Komansky and John S. Reed, have attacked the current financial system.

These converts tend to have followed a similar path. They participated in the merger frenzy and pushed deregulation when the getting was good. They departed from finance's sweet embrace sometimes involuntarily, ousted in power struggles. And they stayed quiet, or did little, throughout the debates on how to fix the system when the nation was struggling over the Dodd-Frank financial regulatory overhaul.

That's when it would have mattered.

Those who are left defending the banking status quo are on an island. These are current bank executives — who can be counted on to change their views the instant they lose out in the corporate race and are booted from the organization with engorged severance packages — and the politicians and lobbyists who love them.

And so what? Supporters of change can win all the intellectual arguments they want; the structure of the financial system remains intact.

As every frustrated American knows, no major banking executive has gone to prison or has been fined any significant amount in the aftermath of the financial crisis.

But what's astonishing is that Wall Street bankers seem not to have paid any social cost either. They sit on corporate and nonprofit boards and attend functions and galas. They remain top Wall Street executives, or even serve as regulators. The nation's prominent op-ed pages, talk shows and conferences seek their opinions. If you are rich, you must be intelligent. Your views must be worthwhile, never mind the track record.

The embrace of Mr. Weill sets a new standard for reputation rehabilitation.

Some disagree that he played a central role in creating the modern financial system that blew up the world economy. Perhaps. But these people must concede that he failed on his own terms as a businessman.

Sandy Weill was a deal maker who aspired to more. He had a vision to create a financial supermarket. The scrappy public school graduate from the streets of Bensonhurst in Brooklyn realized his dream and created Citigroup.

And it didn't work.

Mr. Weill's only unambiguous success was to make himself enormously rich.

By the mid-2000s, Citigroup was a flop. The business synergies never materialized and the stock was lagging. Its chief executive then, Charles O. Prince, was divesting divisions. In 2007, investors and analysts called for the very sort of breakup that Mr. Weill now endorses. Then the financial crisis hit and the government had to bail out the behemoth Mr. Weill created.

His institution had also served as a (unheeded) harbinger of the banking rot to come. Throughout the 2000s, Citigroup was riddled with scandal. It settled with the Federal Trade Commission over deceptive practices. Its CitiFinancial unit was embroiled in predatory lending controversies before it was fashionable. The bank was an entwined backer of both Enron and WorldCom. Citigroup employed Jack Grubman, who was at the heart of the research conflict-of-interest scandals of the early 2000s. Even back in his less reflective days, Mr. Weill had to apologize for that.

Things got so bad that the otherwise somnolent Federal Reserve actually banned Citi from making any more acquisitions while it sorted out its mess.

What's a guy gotta do around here to lose a little credibility?

Our society wasn't always this way. In Edith Wharton's novel “The Age of Innocence,” set in the 1870s, the arriviste Julius Beaufort's bank fails (it appears not to be fraud, just recklessness). Mr. Beaufort is banished from New York society for a generation.

After the crash of 1929 and the Great Depression, major Wall Street figures populated prisons, not presidential advisory panels. The head of the New York Stock Exchange, Richard Whitney, who hailed from one of the most patrician families in America, went to Sing Sing for embezzlement.

In 1936, Roosevelt gave his famous speech listing reckless banking and speculation among the "enemies of peace." These enemies hated him and he asserted, “I welcome their hatred.”

It wasn't just rhetoric. F.D.R.'s appointees “were neither impressed by, nor subservient to, bankers,” said Eric Rauchway, a historian from the University of California, Davis. Roosevelt appointed people like William O. Douglas, the future Supreme Court justice, as head of the Securities and Exchange Commission. He threatened to nationalize the stock exchange.

No such situation for us today. Our meager lot is to celebrate when these guys change their minds.