I think that Cox was downplaying his agency’s mismanagement of the financial crisis. But I’d agree with him to this extent: A capital cushion is not synonymous with responsible, ethical management, particularly when regulators like Cox lack a proper grasp of what is going on.

That’s where the “corporate culture” of regulators comes into play. A good example of the deep-seated problems there emerged on Wednesday, in a damning report by the SEC Office of Inspector General on the Bernard Madoff scandal. The OIG report is a recitation of serial incompetence, inexperience, and, at times, downright cowardice—SEC officials visiting Madoff, being alternately charmed and bullied by him, and failing to take the most elementary steps to ensure that an adequate investigation was conducted. The SEC’s incompetence was not solely a failing of the Bush administration, but reached back into the 1990s, when Arthur Levitt, a self-proclaimed “investor champion,” chaired the SEC.

It’s impossible to imagine an FBI white-collar investigation being handled quite so grotesquely. The reason is that the FBI, whatever its other failings, is geared toward the handling of “bad guys.” To the SEC, however, the people it regulates—the Madoffs and Dick Fulds and Alan Schwartzes of this world—are “industry giants,” politically potent friends, and, of course, potential employers. This is what is known as “regulatory capture.”

That attitude, unfortunately, persists not just at the SEC but among all regulators, including the Federal Reserve and the Treasury, where ex-New York Fed chief Geithner has a history of being far too close to Wall Street. Radical action is needed, led by the federal government, to change the behavior of Wall Street. Safeguards need to be put in place to prevent banks from taking risks that put the economy in jeopardy—and the penalties need to be draconian.

It will require a tough attitude, more steely J. Edgar Hoover-like confrontation and less Chris Cox-style cluelessness. Boosting capital levels is a start, and a weak one. Leaving it at that is a recipe for yet another disaster.