As Barack Obama's administration turns its attention to financial-market regulation from health care, investors would do well to remember the last time the government gave us "the most far-reaching reforms of American business practices since the time of Franklin D Roosevelt" as then-President George W Bush said in 2002.

The Sarbanes-Oxley Act of 2002, passed after a series of accounting fraud scandals including Enron Corp. and WorldCom Inc., was hailed as a great investor-protection achievement. It failed, though, to prevent accounting gimmicks that contributed to the largest bankruptcy in US history six years later: Lehman Brothers Holdings Inc., at $639 billion was more than triple the Enron and WorldCom collapses combined.

History suggests that regulators are fighting a losing battle. Regulations create incentives for people to circumvent the very rules being imposed while creating a false sense of security, its own special form of moral hazard. The public believes it must be safe if the government has sanctioned the product or activity.

Remember, the Securities and Exchange Commission provides an aura of validation for rating companies by allowing financial firms to use their endorsements for regulatory purposes. When Moody's and Standard & Poor's assigned AAA ratings to securities created from sub-prime mortgages, investors took it as the equivalent of an SEC seal of approval.

Moreover, the moral hazard created by the government- engineered takeover of Bear Stearns Cos. by JPMorgan Chase & Co. in March 2008 helped set the stage for the failure six months later of the $62.5 billion Reserve Primary money-market fund, which held Lehman debt.

The SEC's suit against the fund's parent, Reserve Management Corp., cites e-mail from its chief investment officer showing he "believed Lehman would, if necessary, be assisted by the federal government."

History also shows that Wall Street has been adept at getting around the rules and regulations imposed upon corporate behavior and financial instruments, and there is little reason to believe it will be different this time.

For example, Bill Clinton's administration in 1993 tried to rein in executive pay by limiting to $1 million the tax deductibility of their cash compensation. Corporations simply offered stock options to skirt the restriction.

Enron hid debt and losses with off-balance sheet transactions. Lehman used them to hide assets to make it appear less leveraged, according to Anton Valukas, the examiner for Lehman's bankruptcy. Greece used currency swaps to hide some of its debt to gain entry to the European Union.

Some of Senate Banking Committee Chairman Christopher Dodd's remarks on his financial overhaul bill suggest lawmakers may not even grasp the essence of the crisis. "This legislation will bring transparency and accountability to exotic instruments like hedge funds and derivatives that have for far too long lurked in the shadows of our economy," Dodd said.

The problem is that neither the instruments nor hedge funds were catalysts for the financial crisis; regulated banks and securities firms were. The crisis and subsequent recession killed off 2,300 hedge funds in 2008 and 2009, according to Chicago-based Hedge Fund Research Inc. The only people who suffered were investors in these lightly regulated investment pools.

Besides, the major impulses to financial innovations have come from regulations and taxes, according to the late Merton Miller, winner of the 1990 Nobel Prize in economics. Government regulations are to blame for currency swaps in the first place. Capital controls in place from World War II thru the 1980s forced companies into so-called back-to-back loans, reciprocal agreements to lend money to each other's domestic subsidiaries. Currency swaps circumvented that obstacle.

The financial instrument itself is rarely, if ever, the problem. Instead, it's who's using the instrument and for what purpose. A gun in the hands of a police officer is a good thing, but not in the hands of a cop using it to rob people.

After all, the Federal Reserve used currency swaps with European central banks to ease money-market conditions when credit markets froze in 2008.

Derivatives are contracts, and as such are merely potential transactions in the future as opposed to those done at today's price.

Without them, companies wouldn't be able to hedge the risk of prices changing in the future. Granted, people can speculate with derivatives, but that is true with purchases and sales of stocks and bonds as well.

The same is true with accounting tools. The term off- balance sheet and special-purpose entity came into the popular lexicon when Enron went bankrupt in 2001. Ever since, we've been told that special purpose entities are bad. Yet, SPEs are what make possible some of the safest investments in the world, second only to US Treasury securities: Government National Mortgage Association certifications, or Ginny Mae bonds, which are backed by the full faith and credit of the US government.

When announcing his draft bill, Dodd also said, "This legislation will not stop the next crisis from coming.

"No legislation can, of course." Maybe that should be the preamble to every set of regulations Congress passes.

There is a way around any set of rules, as attested to by pyramid schemer Bernie Madoff - who was closely regulated by the SEC - or any of the breaches that come to light once a financial bubble goes bust. But at least the police wouldn't be giving citizens a false sense of security.

Brendan Moynihan, co-author of "What I Learned Losing A Million Dollars", is an editor-at-large at Bloomberg News. The opinions expressed are his own.