One of the details we noticed early on about the NYSE governance scandal was that the new rules which the exchange mandated recently for listed companies did not seem to apply to the exchange. The rule we have particularly in mind is the test regarding independent directors.

The NYSE rules require that listed companies have a board of directors with a majority that are independent. More, for a director to be deemed independent, the board must affirmatively determine that "the director has no material relationship with the listed company."

The remarkable thing about the NYSE board is that virtually all of the directors are Wall Street firms with direct business relationships with the exchange. As the events of the past week seem to confirm, this type of board might be suitable for a private company, but not for a public company or regulator. Perhaps this was an obvious deficiency, but it took the shock of revealing the Grasso pay package to wake up the audience.

Enter John Reed

The selection of John Reed, former chairman and co-chief executive officer of Citigroup, as a director and interim NYSE chairman is an exquisite irony. The career banker saved Citibank from failure in the early 1990s and literally went down to Argentina to collect a decade ago. His reputation was later tarnished by involvement in the Raul Salinas scandal, but Reed is just the man to save the NYSE from its own confused corporate culture. We would like to see Reed, 64, stay on awhile and take charge of the reformation at the Big Board. He can start by asking what the directors had in mind when they authorized $200 million in compensation for Mr. Grasso. The board claims that Mr. Grasso earned the money, but we would like to know: for doing what?

Before Sarbanes-Oxley, risk managers worried most about defaults, downgrades or even an earnings restatement. But today the biggest risk of all may be the day when your CEO walks out to the waiting TV cameras to discuss how his 9-figure compensation plan was duly approved by the independent board of directors.

Last week the House Committee on Financial Services, chaired by Rep. Michael Oxley (R-OH), held a hearing entitled "Accounting under Sarbanes-Oxley: Are financial statements more reliable?" Our correspondent reports that there was little discussion of the topic and the hearing developed into an opportunity for committee members to air their views of the need for additional legislation.

One clear message from the hearing: Congress has a large and growing appetite to impose new regulation on Wall Street. Areas of future legislation could include increased regulation of mutual and hedge funds, and subjecting Freddie Mac and Fannie Mae to all of the reporting requirements for public companies.