(MONEY Magazine) – Investor confidence continues to erode, despite new legislation to restore corporate responsibility and accountability, and the markets appear to be well on their way to a third straight yearly decline--something that hasn't happened in more than 60 years.

But after 2 1/2 years and a market loss of nearly $7 trillion, the White House and Congress still just don't seem to get it. The reforms they've offered to fight corporate abuses don't go anywhere near far enough. Regulators and prosecutors don't seem to get it either. The Enron investigation is nearly a year old, and still not one Enron executive has been sent to jail.

President Bush and members of his administration have been trying their best to "talk up" the markets and the economy, but the fact is that investors won't come back to this market until they see real reforms, real accountability and real earnings.

Now, a rebound in earnings may be frustratingly slow, but it's inevitable. And higher earnings always lead to higher stock prices. This time, the stock market rebound is taking longer than anticipated because we had an atypical recession and recovery. Usually, recessions result from a slowdown in consumer spending and produce at least two consecutive quarters of negative economic growth. This one was sparked by a falloff in business spending and led to negative growth in just one quarter, the third quarter of last year. The ensuing rebound has been marked by low interest rates, low inflation and excess capacity.

In terms of reform, President Bush's corporate governance plan, announced in a major address in July, lacked the substance needed to assure investors that this administration is serious about choking off corporate fraud. For instance, Mr. Bush didn't discuss the need for companies to treat stock options as an expense. Options, which were spread among executives like party favors over the past few years, fueled the emphasis on short-term results that, in turn, tempted many executives to inflate earnings.

Criticism of the president's speech came fast and furious. Senate Majority Leader Tom Daschle and other Democrats came out swinging, ready to fight their way to the right side of what will surely be a leading campaign issue in the 2002 and 2004 elections. Unfortunately, Congress' recent track record on reforms also falls far short of the mark. The bill pushed by Democrat Paul Sarbanes of Maryland, which the Senate passed in July, is a start. But it too fails to tackle options reform. Daschle tried to justify the Senate decision to duck the issue, saying, "It seems to me that it's a reach for us to go that far." Senator, it also seems a reach that such backpedaling will play well with voters this fall.

How important is options reform? According to a recent study by Merrill Lynch, if options had been treated as an expense, total earnings for companies in the S&P 500 in 2001 would have been 21% lower than what was reported. Federal Reserve chairman Alan Greenspan and investment giant Warren Buffett both advocate forcing companies to report options as an expense on their income statements; Buffett says he's disgusted by the current system. According to recent studies by McKinsey, 67% of institutional investors polled support expensing options, while only half of corporate board directors want reform--a gap that shows the dramatic disconnect between executive suites and investors.

And you can expect this issue to get even hotter. Coca-Cola recently announced that it would start counting options as an expense, joining two companies that have been expensing options for years, Boeing and Winn-Dixie. Coke was quickly joined by the Washington Post Co., and many others will surely follow.

Yet it will take a lot longer to win back investor confidence company by company than it would have if a law had been passed requiring reform. The fact is, the White House and Congress missed a critical opportunity to crack down on corporate abuse and force companies to stop treating financial statements like works of fiction. So for now at least, on the issue of options reform, the score stands: 1 for business groups like the Business Roundtable and the politicians beholden to their campaign contributions; 0 for investors.

At this point, the average investor might ask: If we can't get serious reforms passed, can we at least see some of these corporate crooks go to prison? So far, the score on that also seems to favor big business. The investigations into Enron began last October, yet we've seen no charges brought against Enron executives. Dennis Kozlowski, the disgraced ex-head of Tyco who is under investigation for tax evasion, has recently been hanging out around Nantucket, sunning himself aboard his 130-foot yacht, according to the New York Post. No wonder he feels safe enough to flaunt his freedom. History shows that white-collar crooks have little to fear from the legal system. The average jail sentence for corporate criminals in the S&L scandal of the '80s was three years--29 months less than for someone convicted for a first drug offense. And what about the three leading avatars of corporate greed during the '80s--Michael Milken, Ivan Boesky and Charles Keating? Keating spent less than five years in prison. Boesky spent two years behind bars and paid $100 million. Milken was sprung in less than two years, though he paid more than $1 billion in fines and settlements. But that's not to say he's feeling any financial squeeze. Milken today is reportedly worth a cool $800 million. Based in California, he's started a think tank, a charity and an education-investment company. A survivor of prostate cancer, he's also written two health cookbooks and taken up yoga.

Boesky won $20 million, a house worth more than $2 million and nearly $200,000 a year for life in a divorce settlement, according to USA Today. And Keating is "tanned and fit" and "cutting a social swath" in Phoenix, according to U.S. News & World Report. In short, the three leading names in the scandals of the '80s served less than a decade in jail and are all living very comfortable lives. Whoever said that crime doesn't pay obviously never worked in corporate America's top echelon.

If the politicians and the courts finally want to get serious and create a disincentive to white-collar crime, they need to get tough this time around. Here's my suggestion. CEOs now make 500 times what the average worker does--an outrageous disparity. Investigators and judges should go after the personal wealth of those executives found guilty of fraud. Corporate crooks should be stripped of every dime they ever made while cooking the books. After all, we're talking about huge sums of money here. The CEOs from nine of the corporations targeted by recent government investigations earned a combined $2 billion from 1997 through 2001, based on data from the S&P Execucomp database. And that's not counting executive pay at the brokerage houses under investigation for alleged conflicts of interest. The CEOs of the publicly held brokerages included in the probes made $1.5 billion during the period.

Of course, it would be a herculean task to try to return the money in an equitable way to the millions of investors who have been burned. But it's worth a try, and you can bet it would make management think long and hard before fudging financial reports.

Washington has already blinked on passing real reforms. But the administration, lawmakers and regulators can still show investors they're serious about corporate crime by seeing that corporate crooks are stripped of the millions they made ripping off their investors and that they are sent to jail for a very long time.

Lou Dobbs is the anchor and managing editor of CNN's Lou Dobbs Moneyline.