How a map can prevent the next financial crisis.

The shock of the financial meltdown has had congressional committees scrambling for their gavels for the better part of a year. Politicians have been discussing how to make sure that such a near-cataclysm never happens again, and, for the most part, they've focused on the need for new regulation. What's called for, President Obama said in March, is "a financial regulatory mechanism that prevents the kind of systemic risks that have done so much damage over the last several months."

But all the talk of regulation misses a key point: If we don't know which institutions are doing what--if we don't actually monitor what we've regulated--then that regulation won't work.

Indeed, signs of regulators' ignorance about what really goes on in the financial markets have been building up for years. Regulators got a warning in 1998, when a little-known hedge fund called Long-Term Capital Management (LTCM) suddenly faced collapse over a series of bad bets on emerging economies' debt. It wouldn't have made news, except that the little fund from Connecticut turned out to be holding 5 percent of the market where financial institutions traded risk with each other. In Washington, the heads of the major financial regulators were frantic.

"When LTCM came close to collapsing in the fall of 1998, that came as a great surprise to the Federal Reserve Bank of New York and to the Board of Governors, even though the counterparties to the contracts of LTCM were the big banks and the big investment banks," says a highly placed member of the Clinton administration.

Yet the authorities didn't learn. Two years later, the Commodity Futures Modernization Act, whose formulation was guided by a report signed by Alan Greenspan and Larry Summers, removed whole categories of so-called "over-the-counter" derivatives from oversight, allowing financial institutions to trade these securities in secret. It didn't take long to see what could happen: In 2001, the Enron debacle showed how a single company could use over-the-counter derivatives to accumulate billions of dollars in debt--unbeknownst to rating agencies and its own shareholders.