Police corruption thrives when the watchdogs—the municipal government and the senior police officials—are indifferent or ineffective. Antar says the parallels with the Securities and Exchange Commission are compelling. The failures of its enforcement staff, starved for resources under chairman Christopher Cox, mirror the inability in past years to confront police corruption. Those failures were documented by Sherman and chronicled in such books as Robert Daley’s Prince of the City and Peter Maas’ Serpico, the story of a whistleblower (played by Al Pacino in the 1978 film) who fought NYPD corruption. Recently, the SEC’s handling of whistleblowers has also come under scrutiny because of the way it ignored Harry Markopolos, who had tried again and again since 2000 to call the agency’s attention to Madoff and his family.

These attitudes have parallels in the street code of cops to keep silent about corruption in their ranks and to ostracize “rats.” Cox’s famous pre-meltdown verdict on Bear Stearns—“We have a good deal of comfort about the capital cushions that these firms have been on,” he told Congress—seems mind-boggling in retrospect, but it is in keeping with a police chief defending the integrity of his officers. Antar, who spent his formative years cooking books two decades ago, told me that if Cox was on the job back then, “I would still be in business as the criminal CFO of Crazy Eddie today.”

No fight against police corruption has ever been successful without an unsparing examination of the problem. Currently, the details of what happened on Wall Street remain murky. The decision not to bail out Lehman Brothers is clouded in haze, with conflicting accounts leaking out of the U.S. Treasury Department and the Federal Reserve. What triggered the demise of Bear Stearns and Lehman continues to be disputed. The SEC’s only palpable response to the crisis was a crackdown on shorting—which Cox later called the biggest mistake of his tenure. The action, he said in December, was taken under pressure from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

Over the years, 9/11-style commissions have been created to probe such issues and events as the John F. Kennedy assassination, the attack on Pearl Harbor, violence in America, and the Challenger space-shuttle explosion. Surely the banking and regulatory practices that threw the country into a recession deserve the same kind of analysis, probably from an agency with more teeth than the Bush-era SEC.

Launching just such an investigation would give President Obama an opportunity to prove that his campaign slogans about change also apply to the financial world. “Obama has everything to gain by appointing a commission that will propose bold restrictions on the business community,” Sherman says. But he concedes that “there’s a lot of competition out there for being the originator of ­proposals to introduce a reform package for Wall Street.”

In the 1970s, when municipalities were grappling with corruption that had been around for generations, it became apparent that merely punishing past corrupt acts didn’t work. What did work were policies and intelligence-gathering efforts that anticipated the corruption.

When it comes to Wall Street, the SEC and other regulators tend to address wrongdoing after the fact, sometimes years later. That was the agency’s defense in response to accusations that it did nothing to catch Madoff, and in a way, it had a point. The SEC is not set up to conduct investigations ahead of time. It comes in afterward and deals with securities-law transgressions, in most cases through “consent decrees” in which corporate or banker defendants pledge not to repeat offenses they didn’t admit to committing in the first place. The agency’s aim is to eliminate the need for costly litigation while still deterring other possible offenders.

The problem is that punishing people for financial crimes they’ve already committed doesn’t work. Ernest Poortinga, staff psychiatrist at the Michigan Center for Forsenic Psychiatry, tells me that an exhaustive study of white-collar crime found that “there’s absolutely no difference between white-collar criminals and common thieves, other than the opportunity.” The three-card-monte dealer in the park can’t start a Ponzi scheme—but only because he’s not running a Wall Street firm with a lot of naive investors eager to give him money. The law-enforcement approaches toward the two criminal types should be the same.

People like Madoff don’t think about punishment, much less the “threat” posed by an SEC bureaucrat finding out about them. “They don’t think they’re going to get caught,” Poortinga says. Ex-crook Antar says Madoff had no reason to think he would get caught, despite the examples provided by Ken Lay, Dennis Kozlowski, and others. “Once you take from Peter to pay Paul, there’s no way out; it keeps on pulling you back in and you’re stuck,” Antar says. And to actually pull off a scam like Madoff’s takes a degree of self-confidence that makes one heedless of the threat of consequences, he notes. “There is an arrogance to being a criminal that most people don’t possess,” Antar says. “That’s why criminals don’t think they’re going to get caught. It’s a bit like a speeding ticket. People see the cop and slow down, but then they speed up again.”

The SEC has recognized the need to be preemptive—on paper. In 2004, the agency established the Office of Risk Assessment, whose purpose was “to develop new ways to process and analyze information in order to properly assess market risks associated with an increasingly complex market environment.” The problem is that the office, which began with seven people, had withered to a grand total of one staff person by February 2008, when the SEC announced an “expansion.” Today, it again has seven employees, although they are part of a group of 37 people agencywide looking at preventing future crimes.

Financial firms need to suffer some harsh consequences for past, present, and future violations of the public order. Statistics have shown that effective police reform required that large numbers of corrupt police officers were quickly, and publicly, dismissed. Dealing with Wall Street, however, will require something a bit different. After all, many of the executives responsible have already lost their jobs (as have thousands of nice young kids with MBAs and student loans to repay). The worst of them will probably be prosecuted—but that doesn’t really matter, as we’ve seen that punishment does not deter financial wrongdoing. Jail sentences will no doubt be handed to the most egregious offenders in the subprime crowd and to Madoff, assuming he doesn’t somehow beat the rap.

We need to put in place an incentive that will change the way Wall Street behaves. Financial penalties should be increased so that the kind of pain we’ve experienced is shifted to the banks if they screw up again. When a bank or a hedge fund violates the public trust in a major way, fines should be expressed not in dollars but as a percentage of annual revenue or profit, on an escalating scale. If companies can’t afford to pay the fine, they can be nationalized, as has happened in Europe with far less provocation.

If anything can pull us out of the doldrums, perhaps it’s the fact that institutions far nobler than Wall Street have faced corruption for a very long time and still managed to put a stop to it. While Sherman was working on his book in Britain in the 1970s, firms involved in supplying the Royal Navy were prosecuted for kickbacks. “When the arrangements were researched,” he recalls, “it turned out that it had been going on since the 18th century.”