The Big Brokers Blew It. They Should Bear the Cost.

But must it always come to this? Must Wall Street's fixation on short-term profits always inflate the bubble to the point that only an explosion can result? At a March 7 hearing on corporate executives' compensation before Rep. Henry Waxman's House Committee on Oversight and Government Reform, nobody on either side of the microphones dared ask or answer these questions, or one about how to return accountability to Wall Street. Nell Minow, the corporate governance watchdog, came the closest. "If you make the compensation all upside and no downside, that will affect the executive's assessment of risk -- or, rather, it will make it clear to him that he can easily offload the risk onto the shareholders without much in the way of adverse consequences to himself," she told the congressmen. "It is heads they win, tails we lose."

Last week, this issue of accountability again failed to come up during hearings on the Bear Stearns bailout before the Senate Banking Committee.

To change this unacceptable calculus -- which seems to be the lone common denominator behind any number of the past decade's financial upheavals -- Wall Street's boards of directors should rapidly adopt new compensation plans that both reward bankers and traders and make them accountable for their actions.

One modest proposal -- a throwback to the partnerships of yore -- would be to keep half the compensation paid to Wall Street's best performers and executives (say those earning more than $500,000 a year) in interest-bearing annual escrow accounts and then use that cash to absorb any ensuing financial losses or to pay any legal judgments or fines that result from the firm's activities that year. At the end of three years, the contents of the escrow accounts -- if any -- could be distributed back to those still at the firm based upon their original contributions. That would get Wall Streeters thinking about their actions.

Of course, I can already hear the reaction from the beneficiaries of the current flawed system: Blasphemy! Unworkable! Insanity! But to the U.S. taxpayers whom the Fed and the Treasury have now put on the hook -- to the potential tune of $29 billion -- for the poor judgments made across Wall Street in the past few years and who, along with shareholders, end up bearing the brunt of the pain for the foibles of the excessively paid bankers and traders, the time has come for serious reform.

Why must everyone else be made to suffer the consequences of a compensation system that encourages extreme behavior and has proved repeatedly in the past 25 years how good it is at inflating a balloon until it explodes? Accountability must be returned to Wall Street now, well before this pathetic vicious cycle gets a chance to get off the ground again.

"Something doesn't smell right," said Rep. Elijah Cummings (D-Md.) at the March 7 hearing on the Hill. He was onto something.

wdcohan@yahoo.com

William D. Cohan, a Wall Street banker for 17 years and the author of "The Last Tycoons: The Secret History of Lazard Frères & Co.," is at work on a book about Bear Stearns.