Busted trust. (Capitol Ideas).

If we have done anything wrong," J.P. Morgan famously told Theodore Roosevelt during a tense confrontation at the White House in February 1902, "send your man to my man and they can fix it up."

None of the CEOs who have streamed into Washington in recent months, hoping to contain the capitol's sudden passion for corporate reform, were undiplomatic enough to utter words like those, at least in public. But in the century that passed between the private meeting of TR and the aging, cigar-smoking chief who led the country's industrial revolution and the arrival at the Bush White House of younger, Perrier-sipping creators of the information age, less has changed than one might think.

Now, as then, a huge boom has given way to a slowdown, followed by a panic. Public attitudes have shifted: The same executives who were once venerated for their brilliance are now condemned for their excess.

And in early 2002, as surely as in 1902, much of the business world was politically tone-deaf to the consequences of the actions of a few. CEOs missed a change of direction in that constantly-swinging pendulum of power between the private sector and the government. The result was a political backlash they were helpless to halt.

How the sophisticated capitalists of the 21st century--with their armies of high-paid consultants and lobbyists--made such a miscalculation may prove one of the most fascinating questions in the history of the sorry, corrupt end of the '90s boom. It may take years to figure out what went wrong. But the results are undeniable.

In the spring, the country's major business groups thought the answer to the Enron and Arthur Andersen scandal was a few changes within the Securities and Exchange Commission -- worked out quietly with the Bush Administration. It was the modern equivalent of sending their man to meet Bush's man. Then came revelations of far wider fraud, of a system that was routinely manipulated to inflate profits and offload debt. By the end of July, a pro-business Congress overwhelmingly passed a corporate reform bill that was unthinkable a few months before. It was signed, enthusiastically, by a president who had come to office promising a "CEO approach," and who on his trip to Wall Street on July 9 still did not endorse the legislation. By the end of the month, he had no choice, and even decided to seek credit for the arrests of leading corporate transgressors.

"This was one of those moments in American history where everything changed overnight," one senior Administration official said as Congress went home and Bush headed for Texas. "The market forces that we celebrated two years ago suddenly looked corrosive. Then the 'reform' train started gaining speed, and we faced the choice of getting run over or jumping aboard."

History suggests that may have been a good thing: The drive against the House of Morgan created the first real antitrust laws, and the reforms that followed the Crash of '29 resulted in the SEC'S creation. Both changes were reviled at the time. Eventually, they became an accepted part of government to ensure that capitalism didn't turn to cronyism.

But the fact that the government felt forced to intervene in these scandals, to save the reputation of the world's most modern, wired and admired economy, suggests that something went badly wrong with American-style capitalism in the past few years. As success turned to slowdown, desperation set in. In boardrooms across the country, but particularly in the telecommunications world, where billions of dollars had been grossly misallocated, the choice was between admitting the truth or shaving it, in hopes of muddling through. Companies that had lost track of the arms-length relationship between a corporate board and its accountants exploited their new relationship in a series of seemingly minor deceptions.

When it all fell apart. CEOs felt much as J.P. Morgan did in 1902. What have we done wrong? Who changed the rules on us?

The truth is that, like the great industrialists of the late 1800s, today's corporate bosses exploited a system in which the rules had not evolved to match modern reality. That works when the economy is booming. When fortunes reverse, it almost always results in a political uprising--a lesson that CEOs had to learn again, for the first time in generations.

What went wrong?

Top executives forgot that the same forces which provided them with astounding sums of capital in the '90s -- the sudden willingness a/Americans to risk their savings and retirement funds on new technology--had created a new political constituency that could turn on them.

For the past decade we have celebrated how ordinary Americans have become part of the equity markets -- investing their 401(k)'s, mobilizing their capital to help the world's most productive economy become more productive. But few thought about how that change might affect the nation's politics. In retrospect, the answer is obvious: It tightened the link between the mood of the markets and the mood of the voters. So when the bad news turned from a trickle to a torrent, and when those 401(k)'s began hemorrhaging, politicians, particularly those running for re-election, were forced to act with extraordinary speed.

The business community thought the Bush Administration and a Republican-controlled Congress would temper this emotion. For a while, that seemed like a good bet. Vice President Cheney served as the leading skeptic that the boardroom's problems could be solved by legislation. Sarcasm dripping, he told visitors that Congress thinks it can outlaw losing money in the market, and that it would probably try Bush's advisers talked of tinkering with SEC enforcement rules, and leaving it at that.

But the combination of new revelations and the perception that Bush and Cheney had business problems of their own crippled the White House strategy. President Bush called for an end to sweetheart loans to top executives, but it turned out he had received one from Harken Energy. Questions about Cheney's knowledge of Halliburton's own bookkeeping practices forced him to stay out of the limelight.

Arrogance ruled the day--and it led to compensation schemes that not only rewarded top executives outlandishly, hut created an atmosphere in which inflating quarterly results seemed necessary for survival.

This was the arrogance of escalating expectations. The inventors of the "new economy" fostered the myth that their huge annual productivity gains had immunized them from the ordinary market cycles. Worse yet, rising stock prices validated that success.

The deceptions of Enron and WorldCom were all about masking the fact that the successes were far less grand than the world believed. But stock options made the problem far worse. They created a huge additional incentive for senior to keep stock prices inflated--otherwise, the lion's share of their compensation would be worthless. The longer they could keep the myth going, the more time they had to cash out.

In this respect, it was misleading to contend--as many business leaders and President Bush did this spring--that the problem was one of "a few bad apples." Certainly a few executives abused the system far more than the majority. But the system itself needed fixing, so that options could not be exercised for years. That is the only way to avoid the temptation to fiddle with the short-term numbers. The bill that President Bush signed does not directly address the problem, but it creates some mechanisms -- including the independent auditing oversight board--that makes it harder for companies to do what Enron and WorldCom did.

The argument that the government is about to choke America s entrepreneurial spirit may he a fair warning, hut it is usually overblown.

This claim has been heard many times before. Antitrust laws would cripple big enterprise, and make it impossible for American companies to compete around the world. Social security would turn the American economy into a welfare state. Capital gains taxes would make Americans unwilling to invest.

That's always a risk--and sometimes government action has had to be pared back (notably the capital gains tax cut of the '90s). But the risk of underregulating is equally great. The lesson of the 20th century is that, left to their own devices, markets always go to extremes before finding the sensible middle. The more that ordinary Americans become market players, and depend on it for their retirement, the more pressure there will be to restrict the ability of companies to shade their results. Otherwise, we will erode the distinction between the American markets and the markets of the world's crony capitalists. And that would do more harm to the American system than anything Congress could enact.

David E. Sanger covers the White House for The New York Times.