As Congress and the mainstream media continue their muddle over the current downturn in financial markets, one of the ubiquitous "solutions" that Washington and the MSM have already decided is needed to prevent another such disruption is more and better governmental regulation of those markets.

Thus, it was with great interest that I read this W$J article today about the meltdown of Bernard Madoff’s apparent Ponzi scheme:

Bernard Madoff is alleged to have pulled off one of the biggest frauds in Wall Street history. But there were multiple red flags along the way, including a series of accusations leveled against Mr. Madoff’s operation. Now some are asking why regulators and investors didn’t pick up on the alleged scheme long ago.

"There were multiple smoking guns of various calibers," says Harry Markopolos, an industry executive who in 1999 first contacted the Securities and Exchange Commission with his suspicions. "People were willfully blinded to the problems, because they wanted to believe in his returns." [.  .  .]

Mr. Markopolos, who years ago worked for a rival firm, researched the strategy and was convinced the results likely weren’t real. "Madoff Securities is the world’s largest Ponzi scheme," Mr. Markopolos wrote in a letter to the SEC. Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the agency, according to documents he sent to the SEC that were reviewed by The Wall Street Journal. An SEC spokesman declined to comment.

In short, the regulatory agency that is supposed to protect investors has been warned about Madoff’s fund since 1999 and has done nothing.

Meanwhile, Marcia Vickers and Roddy Boyd write in this Fortune article about the troubles of Citadel Investment Group, the Chicago-based hedge fund that manages $15 billion and has 1,300 employees worldwide, which announced yesterday that it has frozen withdrawals through March:

The panic that swept through the capital markets after Lehman declared bankruptcy was one form of human frailty that Citadel’s sophisticated mathematical models could never have anticipated. The second and perhaps more devastating one occurred on Wednesday, Sept. 17, when news broke that the Securities and Exchange Commission was considering a temporary ban on short-selling 900 stocks – 799 of them financial stocks.

The proposed ban was good news for the banks and brokers. It meant that Morgan Stanley (MS, Fortune 500), Citigroup (C, Fortune 500), and others didn’t need to worry that hedge funds could drive them to the brink.

Yet the news was horrifying for hedge funds like Citadel. Scores of Citadel’s positions – particularly in convertible arbitrage, which requires shorting – would simply blow up if the ban went into effect.

According to sources, Griffin phoned Christopher Cox, the SEC’s chairman. Griffin pleaded with Cox, telling him the ban could mean certain death to many hedge funds – including Citadel. Cox, according to these sources, was unmoved and merely responded with the party line about how the country was going through a national financial crisis and the SEC needed to do what it had to.

There was nothing Griffin could do or say to sway him, and on Friday, Sept. 19, the ban was made official. (The SEC declined to comment for this story.)

Citadel was now hemorrhaging money. Over the weekend and throughout the following week, Griffin talked with his portfolio managers and told them to dump the dogs and keep the racehorses, meaning preserve the positions that they believed had long-term upside as they engaged in a selloff.

By the end of September, Citadel’s funds were down 20%. In early October, Griffin sent a letter to investors stating that September had been the “single worst month, by far, in the firm’s history. Our performance reflected extraordinary market conditions that I did not fully anticipate, combined with regulatory changes driven more by populism than policy.”

So, let me get this straight. The CEO of a huge hedge fund calls the SEC chairman to protest that responsible businesses that have hedged risk properly are going to suffer huge, unfair financial losses as a result of the SEC’s dubious, knee-jerk temporary ban on short-selling. And the best that the SEC chairman can come up with is that "the SEC needed to do what it had to"?

Go ahead and toss Chairman Cox in with this group.

Finally, almost unnoticed amidst all this turmoil is this piece of news that the Federal Trade Commission is inexplicably continuing to fight Whole Foods’ merger with natural food competitor, Wild Oats, despite the fact that it is now pretty darn clear that Whole Foods overpaid for Wild Oats, that Whole Foods isn’t doing all that well right now, and that the grocery business generally continues to be brutally competitive.

So, in light of all this, even more regulation is the solution?

As Larry Ribstein points out, that "solution" could well make things worse.