PORT WASHINGTON, N.Y. (MarketWatch) -- Before it gets a chance to embrace another round of irrational exuberance, the U.S. financial system will undergo a complete makeover.

Besides the cost to U.S. taxpayers, banks will find that the cost of the moral hazard provided by the past week's massive government bailout will be more and tighter regulations. This will occur regardless of who is elected president or which party controls the Congress.

Coming down the pike is nothing less than a modification of our capitalist system. You remember capitalism; it says that you are free to enter -- and free to exit -- any business you may want to.

It also says that with reward comes risk.

It will first be noticed on Wall Street. Now that the chasm between commercial and investment banking is all but closed, look for much more of the Street to be subject to tighter controls.

Commercial banks have a conservative business model and are closely regulated, in order to safeguard people's deposits.

When I entered this business back in the prehistoric 1970s, commercial bankers followed the 3-6-3 rule: they paid 3% for deposits, lent them out at 6% and were on the golf course by 3 in the afternoon.

Banks were boring, but they were safe. You didn't have to worry about your money because they made loans only to those who were creditworthy and kept them on their books, so that if a loan did go sour, it would have a direct effect on the bank that made it.

This was an outgrowth of the freewheeling 1920s and the crash of 1929. It led to the Glass-Steagall Act, which separated commercial from investment banking.

Investment banks were only loosely supervised by the Securities and Exchange Commission. They could, and did, take big risks.

They magnified their profits -- and their losses --- by borrowing lots of money from the financial markets. Some made big bucks, while others lost money and had to fold their tents.

Now that the financial markets are wary of lending to these folks, they will need the deep pockets of commercial banks, thus subjecting them to the regulations I referred to above.

Besides the existing regulations, look for a slew of new rules to hit the Street, starting with more transparent accounting.

The regulators will want to see how much leverage these firms employ and their sources of funding, to name two items at the top of their list. Off-balance-sheet activities will come under the regulators' magnifying glasses as well.

Bank regulators may also seek to limit the use of such exotic instruments as credit default swaps, collateralized debt obligations, structured investment vehicles, mortgage-backed securities and other products dreamed up by the Street's financial engineers.

And speaking of mortgage-backed securities, don't be surprised if the government puts limits on how many mortgages a bank can sell. Forcing the banks to keep more of their mortgage loans on their books is a great way to ensure that they lend more carefully, going forward.

Don't be surprised if investment banks return to being agents (executing trades), as opposed to owners. This, of course, will require less capital.

Most commercial banks will have little trouble funding themselves. But the rewards will come down from the stratosphere.

The "Masters of the Universe" will have to be content with two cars, one home and no private jet.

Don't blame me for this. I don't make the rules, I just play the game.