ArcticPatriot brought up a good point about how Enron and Worldcom could not have been the fault of a free market simply because they didn't exist in a free market. This is true, however by the definition of "free" as in "unhindered" there is no such thing as a truly free market.
Back deep into the history of humanity the oldest written records are those of agricultural contracts. You can't have contracts without trusting someone at their word. If you trust someone at their word and they break their word, what do you do? Well if you are anything like the ancient Hebrews you plead your case in front of a judge and get a judgement. Ever wonder why large parts of the the Old Testament read like obscure case law? Because it largely is just that.
A market cannot exist without two people. And whenever two people try to do anything financial a lawyer will eventually show up. Enough lawyers and judges and eventually you have an established contract law system. Eventually markets are necessarily "bounded" by law, specifically contract law. In essence the original Judges were the Regulators, and both providers and consumers were the marketplace watchdog agencies. Human nature hasn't changed since humanity began, and we still have judges, consumers, providers and watchdogs...
Now in a market we have "short term" and "long term" strategies. A short term gain can kill your long term prospects, and a long term plan can cause a short term loss. Some strategies are short term gain and long term gain (such as selling seeds then switching to selling fertilizer then switching to selling weed killer). Or selling software, hardware, and upgrades through service packages.
Morality in the marketplace is simply being a man of your word, that you fulfill your contracts. A short term gain can be had by being immoral, either through intentionally not fulfilling a contract (taking the money and running essentially) or trying to deliver a substandard product and hope you win your case in front of the judge.
The point is that both moral and immoral behavior are viable strategies for the short term. For the continuing long term only moral behavior is rewarded by the market, but immoral is a definite choice for the short term.
That Enron and Worldcom were able to act in an immoral manner for their own short term gain is a failure of the market to identify and punish immoral behavior. We know that it wasn't a failure of the bounds of the market (after all, the legal boundaries were effective in sending executives to jail) but a failure of players in the market to choose moral behavior.
And that is what the Free Market cannot do, it cannot impart a morality into humanity. Alan Greenspan said "What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product." But that is very different from actually being an honest dealer with a quality product. And as Greenspan concluded, the financial markets can not effectively regulate themselves because the short term gains brought on by immoral behaviors are too tempting to pass up.
If we take a look at the housing crisis and things like "liar's loans" or "No Income, No Asset" loans we see the financial sector following a case of "everybody else is doing it, and if I don't I will be left behind." And so big banks like Bear Sterns went under, while small town banks that kept high loan standards and didn't try to pass off the debt did well. The whole model was flawed, but everyone was doing it because it was so profitable in the short term.
This is why the free market fails, because a mortgage outfit in Podunk sold a "NINA loan" to a Wall Street Firm who then mish mashed and hashed a bunch of different loans into a "Mortgage Backed Security" and got a triple A credit rating on it to sell to retirement fund managers. Everybody made money in the short term, from the mortgage outfit all the way through to the retirement fund manager.
Now, do I want a centrally planned Marxist economy? Hell no. But I don't want a complete lack of regulation either. A simple law preventing the buying and selling of debt on a secondary market would have prevented the Housing Bubble in the first place. Because if the mortgage outfit had to hold on to that "NINA" loan there is no way they would sign the contract. Unfortunately our "free" market allowed people to pass risk and fraud down the line to eventually collapse the whole system.