Hundreds of savings and loan associations will have to be closed down, costing taxpayers hundreds of billions of dollars. Many other financial institutions have been significantly weakened by poor-quality loans and investments. The credit quality of American corporations is at its lowest point since the Great Depression, despite seven years of economic expansion.  The abuse of the credit system began more than a decade ago, through a series of events and developments that loosened the structure of the financial system. That fostered a highly aggressive financial entrepreneurship that severely impaired the remaining code of prudent financial conduct.  The credit system suffered further from the Government's willingness to allow deregulation to proceed in the absence of adequate new safeguards, improved official financial supervision and stricter rules of financial conduct. Instead, from Main Street to Wall Street, excesses multiplied through the employment of novel financial techniques and liberalized credit standards that were unthinkable even two decades ago.  Hardly anyone in authority stopped to question the implications for the financial system. The facile rhetoric was that the ''marketplace'' would discipline the wrongdoers in our financial system.  But relying on the market to discipline financial institutions is generally unacceptable. It is too blunt a weapon for financial institutions, which are thinly capitalized and closely linked through myriads of transactions with other institutions.  Financial institutions are the holders and, therefore, the guardians of our savings and temporary funds, a unique public responsibility. Truly letting the marketplace discipline the financial system would mean acquiescing in an avalanche of potential failures - including many salvageable financial institutions and many of their customers.  The excesses of financial entrepreneurship have been abetted by a kind of ''hollowing out'' of the financial regulatory system. Because of piecemeal legislation, official supervision and regulation is highly fragmented. That has meant heavy and inefficient overlapping authority in some areas and enormous regulatory gaps in other areas.  Specifically, the two agencies with responsibility for the securities industry, the Securities and Exchange Commission and the Federal Reserve Board, hold opposite - and probably irreconcilable - theories of financial regulation and supervision.  In a nutshell, the Fed believes that the holding-company parent and all affiliates of a bank or securities firm ought to be supervised on a consolidated basis. The S.E.C.'s legal authority is narrowly focused on the broker/ dealer operation of a securities firm.  Thus, under the terms of its mandate from the S.E.C., the New York Stock Exchange must concentrate its surveillance on the broker/dealer. It has little authority to go into other affiliates of the broker/dealer's parent, even if they are involved in financial activities.  This regulatory fragmentation, and the loopholes it provides, has not been lost on Wall Street. The leading securities houses have all sought to increase their financial leverage by forming elaborate holding companies. To this end, they use creative, though permissible, accounting techniques to hide from public view their gross asset and liability structures.  Thus, the end of Drexel Burnham does not mean the end of the unwinding of the financial recklessness of the past decade. Continued slow economic growth or a business recession will bring forth failures that are still hidden in the financial fabric.  For many firms in the securities industry, the franchise that they once had will not be recaptured. Wall Street's special role as adviser and investment banker to business and to other financial institutions is waning rapidly. The foundations of this role were based on trust. That trust has been shattered by conflicts of interest that were created when many securities firms rushed to participate in hostile takeovers and direct acquisitions of nonfinancial businesses.  In the wake of the Drexel failure, the task of rebuilding a strong financial base for our corporations and financial institutions will require tax inducements, the strengthening and centralization of official financial supervision and the establishment of standards to hold corporate directors accountable for objective evaluations of corporate management performance.  Under such a stiffened regulatory approach, Wall Street firms would probably be confronted with more stringent capital requirements and closer supervision of all the activities under their holding companies. With the loss of much of their franchise, the number and size of securities firms will eventually shrink. Many will become parts of banks or other financial institutions.  Already, there are voices here and there in the securities industry calling for an end to Glass-Steagall, the Depression-era law that required banking and securities to remain separate businesses. This may signal that a merger with a commercial bank might be a preferred way out of the troubled position that many Wall Street firms now face.  Outside Wall Street, few will mourn this outcome, especially in view of the excesses of the recent past. But however understandable that reaction may be, there will be an indirect economic consequence that we all will have to shoulder.  In the more concentrated U.S. financial structure of tomorrow, conflicts of interest will flourish. This will invite governmental intrusion, less innovation and, ultimately, a more inefficient allocation of capital.
In 1990, in the wake of the collapse of Drexel Burnham Lambert, the economist Henry Kaufman foresaw an unhappy new era in which we would have to pay for Wall Street’s recklessness.