The Securities and Exchange Commission blew a perfect opportunity to redefine its role with its decision last week to accept a $550m settlement with Goldman Sachs over accusations that the bank misled various investors in a subprime mortgage product at the start of the US housing crash. In its founding legislation, Congress empowered the SEC both to protect investors and to ensure a fair and efficient market. The settlement may have accomplished the first goal. But it also showed the SEC's continuing failure to take its wider regulatory role in a more aggressive direction.

The settlement compensated the various investors for their losses, and mandated some remedial training for Goldman mortgage department employees. It also required greater internal monitoring at the bank. It caused Goldman some limited pain, in the light of its significant drop in second-quarter earnings earlier this week. Despite this, the SEC's decision continued a previous pattern of attempting to compromise with Wall Street, one fraud at a time, in times that call for more muscular regulation and clearer public signals.

The SEC has recently seen serious calls for its merger with the Commodities Futures Trading Commission – another body now charged with regulating derivatives – or even its abolition, given the two agencies' overlapping functions and the SEC's failures to act over recent years. Against this background, the SEC's Goldman suit, launched only in April, seemed to signal that the agency was back in the fight. It was hoped that a victory against Goldman would do more than redress a fraud; it would set a wider regulatory precedent that its manner of doing business was socially and economically unacceptable. It would also have held out the possibility of beginning necessary cultural changes on Wall Street that might at least diminish the chances of future crises, while demonstrating that the SEC's concern with market safety and fairness was more important than recouping a few bucks for big boy banks.