The fall of Citigroup is a resonant political event–akin to the Republican Party’s failure to win reform of Social Security–only this time the bell tolls for the Democratic Party. The creation of Citigroup as an all-purpose financial supermarket and too-big-to-fail banking marvel was very much the accomplishment of Clinton Democrats. They enacted the law in the late 1990s that authorized this megabank monstrosity, with coaching from Treasury Secretary Robert Rubin, Fed chairman Alan Greenspan and of course Sanford Weill, the creative genius who built Citi.

Now that this institution has slid into deep trouble and Rubin has been appointed emergency chairman to rescue it, Democrats inherit the stink. They made this mess possible. Will they now accept the meaning of Citigroup gone sour and begin to undo the damage? That is, undertake reform of the financial system in fundamental ways? I doubt it, though the message is obvious.

Just as the GOP dreamed for decades of dismantling Social Security, investment bankers campaigned for thirty years to repeal the Glass-Steagall Act, which separated commercial banking from its investment-house cousins. This was the New Deal achievement enacted in response to the double-dealing banking practices that contributed to the crash of 1929. Bankers pushed their depositors into buying the corporate stocks the bankers were hustling, among other malpractices. Wall Street hated the law but failed year after year to win repeal. The problem was always Democrats (since Republicans were sure supporters).

Bill Clinton delivered his "New Democrat" party, accompanied by lots of happy talk about magic words like "synergy" and how "modernization" would create a more stable (and profitable) financial system. It did the latter, for sure, but not the former.

Actually, the combination of insurance, investment banking and old-line commercial banks multiplied the conflicts of interest within banks, despite so-called "firewalls" supposed to keep these activities separate. Much like Enron, placing some deals in off-balance sheet entities did not insulate Citigroup from the losses in its swollen subprime housing lending. The bank has so far written off something like $15 billion and more to come.

Think of Citigroup’s rise and fall as another high-water mark for the conservative order. Like Social Security reform, it looked like a sure thing in politics. It was accompanied by the usual encouragement of lavish campaign contributions. On the downside, no one will remember having voted for it.

Reforming the deregulated financial system is another test for the new "New Democrats." I expect it will take them a while–maybe years–to face up to the implications. This is a far more daunting challenge–substantively and politically–than reforming healthcare or restoring labor organizing rights. Other megabanks like JP Morgan Chase also exist and will argue they have none of Citigroup’s flaws. As investors (including pension funds) continue to lose billions in the deformed financial system, government will continue to worry more about the survival of these banking institutions that generate the losses. The megabanks are indeed "too big to fail" and, if that seems likely, Washington will come to their rescue in the name of protecting the soundness of the system. What a scam that is.

At least the unambiguous truth about "financial modernization" is now on the table for all to see. That should keep the Wall Street guys from whining for a while about the oppressive nature of bank regulation. The next reform era, when it does finally arrive, will head in the opposite direction–restoring public protections for the little guys against the greedy excesses of big hogs.