All the plans that I’ve seen to “reform” the financial markets flounder on one problem: They all assume that if you give regulators more power, they will regulate.

 The record says that’s simply not true. And if it’s not, giving the Federal Reserve, the Securities & Exchange Commission, and other regulators more power will do absolutely nothing to lessen the chances of a repeat of the financial crisis that almost took down the world economy.

Consider the slapdown administered by federal judge Jed Rakoff to the Securities & Exchange Commission (SEC) on August 10.

The SEC had proposed settling its case against Bank of America (BAC) with the bank paying $33 million. Bank of America wouldn’t, of course, admit that it had done anything wrong in the case.

The case was yet more fallout from Bank of America’s purchase of Merrill Lynch at the end of 2008. In November 2008, Bank of America sent out a proxy statement to investors saying that bonuses would not be paid to senior Merrill Lynch executives without the consent of Bank of America. In fact, however, Bank of America had already agreed to payouts to Merrill Lynch executives of $5.8 billion in bonuses as part of the original merger agreement.

In other words, the proxy was completely misleading. Someone lied to investors.

What riled Judge Rakoff was that the SEC was letting Bank of America get off without naming that someone.

When he grilled the SEC lawyers they mentioned a raft of names, incluiding Greg Curl, Bank of America’s chief risk officer; John Thain, former CEO of Merill Lynch, and KenLewis, CEO of Bank of America. Which led Judge Rakoff to ask Bank of America’s lawyers if some of these men shouldn’t be held responsible for deceiving investors.

No, the company lawyers said, company lawyers from Bank of America and Merrill Lynch had thrashed out the details of the proxy statement.

That, the judge noted, sounded like an attempt to spread the blame so widely that no one would be truly at fault. The thrust of the Sarbanes-Oxley Act, a piece of reform legislation from the 2000 stock market crash, was that CEOs wee responsible for statements made to investors, he said.

And with that, Judge Rakoff told the SEC that he wouldn’t accept its settlement. It left too many questions unanswered about who was responsible for the deceptive language in the proxy statement. And, he added, at $33 million the settlement seemed strikingly low for the degree of deception alleged.

And this is the new, more aggressive post-crisis SEC?

 A slap on the wrist. $33 million is pocket change for Bank of America. No admission of guilt by the company. And no one at the company standing up to take responsibility and accept punishment.

How exactly is this supposed to deter anyone from anything in the future?

If you want to know what’s wrong with the current regulatory system in Washington, consider the scene in Judge Rakoff’s courtroom. There you had lawyers for the SEC and for Bank of America arguing on the same side in favor of a settlement that would put to rest a major securities case with no admission of reponsibility, no charges against any individual, and a relatively minor cash payment.

Regulatory agencies get captured by the industries that they regulate. The SEC and other financial regulators in Washington hire staff from the companies that they regulate and that staff then goes back to work at companies in the regulated industries. In this scheme, service in Washington isn’t in any sense public service. It’s just something you do for a while to stamp your card so you can climb the ladder once you go back to work in the industry you regulated.

Giving these agencies more power just makes a stint of “public service” more valuable to ambitious executives from the regulated industries. Call it what it is: A chance to entrench the power of the biggest companies in the financial sector and a chance to raise the salaries and bonuses paid to executives who have punched their Washington card. 

If we want to fix the problem, we’ve got to begin with tearing down the existing system–in Washington and on Wall Street–that supports the problem.

The current system of financial regulation in this country is now 70 to 100 years old. It’s time not for reform but to start all over again.

That’s what one of my favorite American radicals, Thomas Jefferson, would propose: ” We may consider each generation as a distinct nation, with a right, by the will of its majority, to bind themselves, but none to bind the succeeding generation, more than the inhabitants of another country.”