The Senate finance committee has questioned regulators who fined 10 leading Wall Street firms $1.4bn for impropriety, and warned that there had to be a change of culture.
The boss of the Securities and Exchange Commission (SEC), William Donaldson, won a lukewarm endorsement from Senators for his "global settlement" with Wall Street stockbroking firms over allegations of stock-pushing by their research arms during the boom years.
Although the brokerages did not admit any guilt, they agreed to cut ties between their share research and investment banking activities.
The settlement not only cost 10 brokerages $1.4bn in fines, but two of them - Citigroup unit Salomon Smith Barney (SSB) and Credit Suisse First Boston (CSFB) - look likely to face fraud charges as well.
Senator Paul Sarbanes, the author of the key corporate reform legislation passed last year, said that he was not sure that the fines had caused a "change of heart" and that the culture of Wall Street might still believe it was okay if they "ripped off" small investors.
BREAK-DOWN OF THE SETTLEMENT
Mr Donaldson said that the SEC would aggressively pursue individuals in higher positions in these firms if they could be shown to be guilty, and did not rule out criminal prosecutions.
But he said that the SEC did not need any new powers, and asked for time to write and enforce a new set of rules to prevent the abuses of the 1990s.
Who will pay?
Last week, Mr Donaldson had clashed with the chairman of Morgan Stanley who told retail investors that the firm "had nothing to apologise for".
Unlike some other internet analysts, Morgan Stanley's Mary Meeker was not singled out in the settlement.
Senator Christopher Dodd said that he was concerned that much of the cost of the settlement could be written off by the firms.
Mr Donaldson confirmed that, although the $485m in fines was explicitly prohibited from being a tax loss, the firms might be able to write off the cost of compensation claims against taxes on their profits.
He said it was up to Congress to change the tax laws if they wanted to.
And he said that after the SEC settlement, there could be a flood of litigation by individuals who believed they had a claim against these firms.
Root cause
Eliot Spitzer, the crusading New York State Attorney General who initiated the actions, told the committee that the root cause of the problem was the "mad rush to deregulation" that began in the l970s.
But, he asked, "where was the leadership at each bank?"
"We know that senior levels of management were cognisant of the conflicts of interest that permeated these institutions at every level... yet no bank was willing to do anything about it."
And he urged Congress not to amend the bankruptcy code to allow banks who had advised bankrupt firms to take part in their reorganisation - a stance endorsed by Mr Donaldson, who said now was not the time for easing regulations, with consumer confidence so fragile.
Biased research
The settlement follows at least a year of negotiation triggered by an array of investigations into the behaviour of investment banks during the 1990s.
Aside from the SEC, state regulators and New York Stock Exchange have all accused the banks of biasing their research to please the big corporations which supplied them with lucrative investment banking business.
During the 1990s, the hottest ticket was the massive mergers and acquisitions business.
Regulators alleged that the banks' supposedly "independent" analysts routinely praised to the skies stocks they privately derided as worthless so as to please the potential M&A clients whose business they were chasing, and gave them privileged access to the initial public offering of the firm's stock - practice the SEC now intends to ban.
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