Requiring additional collateral is a perfectly valid idea, but big players (Merrill, Goldman, DeutscheBank, Credit Suisse, Paribas, etc) have historically been WAY behind the curve in doing so, lest they lose business to other less prudent institutions. The archetypical example of this imprudent delaying was, of course, LTCM.
I'm more concerned with the fraud aspect. The only effective counter that I know for fraudsters is to make it very, very painful --financially-- for them. I don't know that this even requires any major changes in regulations, merely in enforcement. SEC could adopt a ''guilty until proven innocent'' stance, for example, which policy would surely curb instantly some of the more egregious abuses.
Good points. Not everyone understands that this really is a "people" business. I remember the whole street slobbering all over themselves to get in bed with John Meriwether, and throwing sound credit analysis out the window. On the other hand, a lot of people don't realize that there in fact was no government bailout of LTCM.