Mike Oxley on Sarbox: His one big regret

It’s a stunning about-face. One of the biggest criticisms of Sarbox is that it initially costs small businesses far more than expected to implement. Newspapers chronicled stories of companies that opted to go private rather than comply with the regulations. One study found that in the first few years after it was enacted, Sarbox jacked up compliance costs for small companies by 130%. But getting an elected official to admit his law had unintended consequences? That’s not something that happens every day. Oxley, who retired from Congress in 2007 and now works at D.C. law firm Baker Hostetler, is not your average Beltway insider, however. I called Oxley after his appearance to follow up on his remarks and wound up getting an earful about the challenges of governing — and monitoring business — in modern Washington. Here are some of the outtakes:

Pity the regulator. “When we passed our bill, the public was furious: You had this white-hot pressure to get something done,” Oxley says. But the real problems, he explains, arise with the next phase, when the rules have to be defined. “The crisis caused the legislation, and then to some extent you dump it on the poor regulators — then everybody blames the regulators for not being on top of everything,” he says. “The same people trying to blame the regulators are the ones who are trying to defund the regulators.”

Barney Frank goes wild. Still, Oxley thinks lawmakers can go overboard. Take Dodd-Frank, the latest effort to rein in the financial sector after the 2008 crisis. “Our bill was something like 400 pages. Theirs is 2,300 pages. Theirs blew ours out of the water,” Oxley says. “Barney always had his wish list when it came to corporate governance. He tried to get it in Sarbox and wasn’t successful.”

Frank wasn’t the only politician who tried to lard up Sarbox with pet measures. “Any senator who thought about running for President had to run an amendment,” Oxley says. Like then-senator Joe Biden, who wanted even nonexecutive board chairs to sign off on internal audits, a measure that passed 98-0 in the Senate. That caused the business community to contact Oxley for the first time with concerns. “Scott McNealy, John Snow, Andy Grove — all said it doesn’t make a lot of sense,” says Oxley, who agreed that a nonexecutive chair wouldn’t be as involved in day-to-day details. The problem was overcome, he says, because of a trust and willingness to work across party lines that is glaringly absent from politics today. “I went to Sarbanes and talked to him, and he agreed to take it out.”

No law is perfect, but Sarbox works. Oxley defends the overall impact of his law, arguing it was needed to restore individual investors’ confidence in the markets. When he went home to his district after the Enron scandal, “I would be besieged by Democrats and Republicans alike about people who had lost their 401(k) or IRA money — everybody. This went to the guts of our whole capitalist system,” Oxley says.

As he sees it, Sarbox brought investors back to the market. “With all the scandals, you lost almost $8 trillion in market capitalization,” Oxley says. “I always tell the business community, ‘Go back and take a look at your market cap on July 30, 2002 [when Sarbox was enacted], and then look at where it is now.'”

And that brings us back to today, when a series of foul-ups, from the Knight Capital algorithm implosion to the Libor rigging scandal to the bungled Facebook IPO (FB), has destroyed investor confidence once again. It’s a lesson to elected officials and regulators that some quick, decisive action — along with a healthy dose of candor — is long overdue.

This story is from the September 3, 2012 issue of Fortune.