It's carnage time on Wall Street, once again. Friday saw Goldman Sachs charged with fraud in a civil case where it is alleged to have misled investors buying toxic sub-prime instruments.
Shares in Goldman took a beating on the day; not only is the investment bank looking at a large fine if the SEC proves its case, there is also the reputational damage to take into account. The rest of the financial sector followed suit as traders bet on similar cases against other banks emerging in due course.
There's also the important fact that this latest regulatory action makes it all but certain that Wall Street will finally be subject to substantial regulatory reform. The so-called Dodd bill is just going through Congress and there has been a huge lobbying effort under way by the banks to have the terms watered down.
But all of a sudden there isn't a politician on Capitol Hill who has an interest in speaking up for the bankers. Wall Street has singularly failed to understand the depth of animosity amongst ordinary people over the way the banks were bailed out, only for bankers to resume bonus payments almost immediately.
The financial sector is now waking up to the fact that banks are likely to be restricted in size and in the range of activities they can be involved in. It will lead to a substantial shake up in the way the sector is organised. Also, it is quite likely that investment banking itself will become substantially less profitable as we go forward.
The key point to note is that real moves are afoot now to shift so-called over-the-counter trading onto formal, organised exchanges.
The industry has fought hard to resist this – insisting that there will be real economic costs if complex off-market trading is forced on to regular exchanges. But everyone knows that the real reason the banks have resisted this is because OTC usually means the opportunity to earn outsized profits. It is perhaps a little ironic then to look at the SEC case against Goldman and observe that it is not necessarily as clear cut as many headlines have suggested.
In structuring complex mortgage investments for its sophisticated institutional clients, Goldman will argue – if and when the firm comes to court – that it was simply following regular market practice at the time, acting as "market maker".
A key problem with past financial regulation is that it was skewed towards protecting retail investors, while it was assumed that professional investors could look after themselves.
The credit crisis has shown that they could not – that institutional investors and less sophisticated banks were ripe for the picking by Wall Street's finest.
But this was the "normal" state of affairs in financial markets. A founding tenet of financial regulation is that while it cannot protect a fool from losing his money, it should protect a sensible man from being made to look a fool.
But can we really have a regulatory system that can stop institutions acting foolishly?
I suspect that is very difficult to achieve.