The retreating tide of the financial crisis has already revealed the wreckage of some of the world’s largest banks; now even less appetising debris is being exposed.

The latest writhing creature of the deep to appear is Bernie Madoff, who has allegedly defrauded investors of up to $50bn. How did he get away with running what appears to have been a giant Ponzi scheme for so long? Mr Madoff had credentials and status; there were warnings, but they were ignored; there were rules, but supervision was inadequate.

Mr Madoff is an extreme example of what has gone on throughout the financial system, and his case is worth bearing in mind when the inevitable post-crisis regulatory backlash begins. Rules alone don't stop bad things from happening. New regulations are pointless without better policing. Primarily, supervision is the job of regulators, but whatever resources they are given, regulators will never succeed in stamping out either deliberate wrong-doing or feckless risk-taking - just as, in the civilian world, sensible laws do not eradicate theft or dangerous driving.

And regulators - along with bankers and politicians - have already taken a kicking for their role in the financial crisis, while two other groups - board directors and institutional investors - have got off astonishingly lightly.

They have, for the most part, performed pathetically. Many bank boards failed to provide the checks and balances I thought were the point of their existence. Institutional investors can be more readily excused for not tackling specific problems, I suppose - after all, they often hold shares in hundreds of companies – but their failure didn't end there. In many cases, where they did act, it was to push banks in precisely the wrong direction, demanding higher returns on capital and encouraging greater leverage.

While it is true that no one foresaw the severity of the current crisis, plenty of bankers and regulators were warning about excessive leverage in the system back in 2006 and 2007. It's just that no one did much about it. Least of all these two crucial constituencies.

In July 2007 Chuck Prince, then boss of Citigroup, gave a now famous interview in which he said "as long as the music is playing, you've got to get up and dance. We're still dancing". These days, that quote is routinely cited as evidence of blindness to looming disaster. In fact, Mr Prince's broader analysis was pretty accurate. He went on to say: "The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be. At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way. I don't think we're at that point."

OK, so his timing was a little out – we were actually only a month away from that point - and as chief executive, it was incumbent upon him to do more than carry on dancing. But his comments sound like a cry for help. Were any Citi board members worried? Did investors call up and ask for an explanation

There are similar questions to be asked in this country. What were Royal Bank of Scotland directors thinking when the bank overpaid for ABN Amro at the top of the market? Why did institutional investors, happy to moan about the deal in private, vote overwhelmingly to approve it? There is much talk of overweening, egotistical bosses, but, like spoilt children, they don't get that way unless their behaviour goes unchecked.

I recently heard one bank board director lament that when his board was asked to approve a costly team hire, complete with guaranteed bonuses, there had been no option but to wave it through. Surely the fact that a personnel matter was taken to the board suggests someone, somewhere was worried about it, which should have made the directors sit up and think. They could even - I know this is a bit radical - have said no.

As for those who invest our pension funds, they spent more time complaining that Lloyds TSB was too conservative and worrying about HSBC's management structure than working out which banks were financially sound. And don't get me started on the way both fund managers and board directors chummily approved excessive remuneration packages with the excuse - the flimsiness of which has now been exposed - that executives' interests were aligned with those of investors.

In this sort of environment, regulators have become the social workers of the financial world: they are not perfect but they have impossible jobs, which cannot be done effectively without better support from other groups in the community.

Copyright: The Daily Telegraph 2008