Column: Regulators on Crisis Hot Seat

But the decision by Congress to focus its inquiries on government officials was in itself a sort of bailout for another group that could just as easily have found itself in the panel's crosshairs: Bear Stearns' directors.

Directors at Bear Stearns and, in fact, other troubled investment and commercial banks have been spared significant, after-the-fact scrutiny about why they didn't act to rein in excessive borrowing and risk taking. If Bear had been allowed to collapse, questions about such perceived failings would have been heard loud and clear.

But Bear was saved, if you can call it that. Now, the focus instead will fall on regulators. Changes that may be coming will probably diminish the authority of investment banks' directors and executives as risk rules tighten.

The regulatory steamroller that will no doubt follow the our credit crisis is certain to extend and enhance the ongoing scrutiny of investment banks. Some directors might bridle at such constraints, but they will offer those directors a measure of protection. They are also a tacit acknowledgement that it is unrealistic to ask directors alone to shadow and second-guess risk profiles at multinational financial firms.

We'll be well past November's election before we get to see which if any of the already floated plans for regulatory reform get enacted. The idea of handing full authority for regulating securities firms to the Fed from the Securities and Exchange Commission makes a tremendous amount of sense.

"The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability," Treasury Secretary Henry M. Paulson said in recently unveiling the ambitious Washington power-shifting plan. "It will have broad powers and the necessary corrective authorities to deal with deficiencies that pose threats to our financial stability."

Regulation clearly hasn't kept up with market reality. Investment banks aren't like normal companies regulated by the SEC. Their activities bear on the health of our financial system and markets, and they should be regulated in that context.

SEC Chairman Christopher Cox made a reasonable defense Thursday of his agency's actions in the Bear Stearns affair. He called the "crisis of confidence" that led Bear to the brink of a bankruptcy filing "unprecedented" and said Bear never fell below its required capital levels.

But that, of course, proved the requirements meaningless. The Fed, with its broad powers and deep pockets, swept in. The SEC, a lawerly, rules-based agency with limited powers and limited budget simply isn't prepared for such a contingency.

There's little doubt that before Bear, investment bank directors were going to be front and center in the post-mortem blame game. Why didn't they stop excessive risk taking? What did they know, and why didn't they know more?

The questions are good, but not entirely fair. The assumption that even dedicated directors can make a difference in this complex, emotion-driven, leveraged, inter-related world of finance is dubious.

Now investment bank directors' future looks different. Under some new and more appropriate regulatory scheme, securities firms will have some of their risk-taking ability trimmed by government officials, who will also take on responsibility for oversight.

That means directors will have less authority but less to carry on their shoulders.

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Neal Lipschutz is senior vice president and managing editor of Dow Jones Newswires.