No doubt about it, this latest Wall Street scandal season has been lush and prolific. It began with the subprime meltdown in the spring, then brought the failures of Bear Stearns and then Lehman Brothers last fall, and has culminated with the $50 billion fraud of Bernie Madoff, a sort of long, dark winter.

And so it goes throughout time. “It’s a roughly 20-year cycle,” which basically coincides with market crashes, says John Steele Gordon, author of The Great Game, a history of Wall Street’s first three and a half centuries. Seven years before our current misery came Enron and the analyst scandals. Before them, Drexel Burnham Lambert and Michael Milken, which followed Equity Funding and other scandals in a series stretching back to the Dutch tulip mania of the 1630s and probably beyond.

If this sounds hopeless, it’s because that’s exactly what it has been. The accepted wisdom is that financial scandals are an inevitable by-product of greed and human frailty—or even the price we pay for a wide-open system that supposedly gives Wall Street its competitive edge over the rest of the world. “Greed will always be with us,” says Lee Kjelleren, CEO of the Museum of American Finance, in Lower Manhattan. “We’re not going to change that.”

Except that maybe we can. Instead of accepting the scandals with resignation, what’s needed is a radically new way of looking at the problem. No more endless cycle of scandals. As a start, Wall Street should no longer be viewed as a fundamentally sound institution that occasionally runs off the track. Instead, try thinking of it as a police department in which far too many officers are on the take.

Lawrence Sherman has been studying police corruption for most of his life. Sherman, a criminologist at Cambridge University and the University of Pennsylvania, is the author of a seminal 1978 study, Scandal and Reform, that looks at a period that was as dark for the nation’s law-enforcement community as the current moment is for Wall Street.

Like financial crime is now, police corruption was then everywhere: systemic, pervasive, and difficult to uproot. The New York City Police Department, for instance, suffered from a widely acknowledged 20-year cycle of scandal, fed by organized crime and an institutional culture that encouraged dishonesty. Sherman says that cycle was broken by a combination of factors, including public outrage and a city-government commitment, that resonate today with regard to Wall Street, largely because of their absence.

John Bogle, the founder of the Vanguard Group of mutual funds, is among those who think the comparison is apt. Indeed, Bogle goes one step further, blaming bankers and traders for partly causing Wall Street’s cycles to continue. “Not to draw an analogy that’s going to make me even less popular than I am,” Bogle says archly, “but the similarity between police corruption and stock-market corruption is drug dealers with unlimited money to spend. They can make their own law.”

Until recent years, systemic corruption was a persistent issue for police forces nationwide, with cops taking payoffs from drug dealers and gamblers. The corruption was organized and institutional. It seemed so ingrained that it could not possibly be fixed. But it was—in the cities that chose to address it.

Those cities approached their corrupt police forces not as a collection of “bad apples” but as organizations that had gone off the rails. Sherman calls those forces “deviant,” in that they bypass social norms and laws “in order to achieve societally legitimate organizational goals”—bending the rules, in other words, but doing so with decent intentions.

That’s about as good a clinical diagnosis of the problem on Wall Street as one can find. Think about the scandals of the past year—the buildup of leverage, subprime paper, questionable accounting—that doomed major Wall Street firms. Their goal was to achieve profits and bonuses, legitimate aims that our society encourages. But their means deviated from social norms: By disregarding the fundamental principles of risk management, or by ignoring the stretched finances of well-intentioned homeowners trying to buy a bigger house than they could afford, these companies endangered not only themselves but the financial system as a whole.

A second variety of organizational deviants identified by Sherman—the ones with “goals that are deviant from societal norms or laws”—is the group Madoff obviously belongs to, as do the deceitful boiler-room
subprime-lending operators that encouraged people to lie on their mortgage applications to get the deals done. Sam Antar, a convicted securities swindler, believes people like Madoff often don’t set out to become criminals. “He just started the scam and then it built on itself and he couldn’t get out,” suggests Antar, who served as chief financial officer of consumer-electronics retailer Crazy Eddie in the 1980s, when it was involved in several fraudulent schemes; now he lectures law enforcement on how to prevent white-collar crime.