Thought provoking piece Criminalizing Capitalism from Nicole Gelinas on the limitations of Sarbanes-Oxley.

Gelinas makes the point that Sarbanes-Oxley not only failed to stop the subprime meltdown with the big banks miscalculating and mismanaging key risks and investor confidence crushed. She argues it probably contributed by giving investors the false confidence that they could rely on the law, and not prudence to protect their market holdings.

I can't agree with her comments about Enron and her claims that Ken Lay and Jeff Skilling were the victims of juror prejudice and ignorance. The bottom line is that Enron created the illusion that it was much more profitable than it actually was and that the blame for its collapse falls exclusively on Lay, Skilling, Andrew Fastow and one or two other henchmen.

The most interesting part of her piece is her observation around the criminalizing of bad internal controls. The mortgage blowout shows that the risk analysis carried out by the banks was just a series of routine chores that offered little protection for investors.

"The most recent round of spectacular business misjudgments raises the question of what happens, in this new era, when a CEO misses a warning sign in his company that later becomes painfully obvious," Gelinas writes. "In the mortgage debacle, the world's most sophisticated financiers, as well as ratings agents who signaled that it was prudent to invest in ever-riskier mortgage-backed securities, seemed to believe that housing prices would keep going up, in large part thanks to cheap and easy credit. Bankers and executives also thought that careful engineering-and, yes, complex accounting and financing-would insulate these securities from precipitous losses even if the housing market did tank eventually. Were their huge and unexpected losses the results of poor internal controls? After all, didn't CEOs, who signed off on such controls, know that their employees, pursuing big bonuses, had an incentive to take bigger risks than shareholders might have recognized? And didn't the CEOs realize that their opaque models for structuring and valuing these securities were disastrously vulnerable to error? Or did the losses simply result from spectacular misjudgments-unavoidable from time to time in a free-market economy?"

The problem, she says quite rightly, is that it creates a false sense of security of investors who might think that aggressive prosecutors will protect their interests. And in any case, it's hard to work out what actually constitutes sufficient levels of disclosure, particularly when a lot of accounting is made up of guesses and estimates.

And let's not forget the role of the Public Company Accounting Oversight Board. Set up post-Enron to compel firms to make more pertinent and timely disclosures to investors, the PCAOB did not force perfect disclosure of banks' subprime-related obligations. How could it? And investors are now paying the price.

The piece is worth reading because it's a timely reminder that laws can only do so much. If investors forget about being prudent, no law can guarantee their protection.