You've heard a lot about the "savings and loan bailout" -- but that is inaccurate language. It's not the thrifts who have been bailed out with taxpayer money. They have, in fact, failed by the hundreds. Rather it's their depositors who have been rescued, thanks to insurance the government wrote and is now paying.

Fuzzy language impedes sound analysis. It's true that weak laws, lax regulation and political mischief bear major responsibility for the thrift debacle. However, a seriously flawed insurance operation contributed as well. If massive bailouts of depositors are to be avoided in the future, we have to start thinking as private insurers might and indeed bring them into the picture.

In particular, the government's insurance program needs to be overhauled to incorporate the first law of insurance underwriting: rates must be based on risk. To date we've allowed the incompetent, the crook and the optimist to exploit federal insurance at rates identical to those paid by prudent and able managers. If we continue that practice, we're asking for more troubles.

Any remedy must deal with certain special characteristics of deposit insurance. First, it is essential to our financial system: the question is not whether we have it, but what form it takes. Second, the size of our bank and thrift deposits -- a colossal $4 trillion -- demands that government be the main supplier of insurance.

But we should also understand that government is not well-equipped to judge the risk of insuring one institution versus another. Even if the regulators could write rules that would expertly gauge the risk of loss (which I doubt they can do), political realities would prevent their implementation.

What is needed is a system that combines the ability of private insurers to evaluate risk with the ability of government to bear it. Co-insurance arrangements, varying by size of bank, would appear to be the direction to go.

For example, our largest banks and thrifts -- say, those with $10 billion or more of deposits -- might be required to purchase pro-rata insurance covering 3 percent of their deposits from private insurers, with the remaining 97 percent to come from the Federal Deposit Insurance Corp. The government would be paid the same rate per dollar of insurance as the rate charged by the private insurers. If losses occurred, they would be shared in that same proportion: 3 percent for the private insurer, 97 percent for the FDIC.

The arrangements for smaller banks would need to take into account the possible reluctance of private insurers to put time and energy into relatively small transactions. Therefore, banks with deposits of, say, $500 million to $1 billion might be required to buy 10 percent of their coverage from private insurers, with the rest to come from the FDIC.

At our smallest banks and thrifts -- say, those with less than $500 million of deposits -- the FDIC would be the sole insurer, charging a fixed rate of perhaps 0.2 percent of deposits, which is approximately the rate the FDIC has proposed that all banks pay next year.

There would remain the problem of larger institutions that could not, because of their perceived weaknesses, obtain private insurance. They would be placed in an "assigned risk" plan and pay the FDIC a high rate -- say, 0.4 percent initially, rising gradually to 0.6 percent within a few years. That rate would be burdensome but not confiscatory: well-run banks currently earn 1.5 percent to 2 percent pre-tax on deposits while paying 0.12 percent for FDIC insurance. In any case, a 0.6 percent rate would give its victims a powerful incentive to clean up their act so that they could meet the standards of private insurers and obtain lower rates.

A private insurer can quickly adjust rates to new circumstances -- and bankers would be well aware of that. Indeed, insurers dealing with higher-risk institutions might write policies covering only six months. Renewal rates would act as a scorecard on performance.

Private insurers could, in general, attack problems with a flexibility and speed that elude government. For example, they could attach conditions to policies that would restrict brokered deposits or high-risk loans. In some cases they would detect moral risks that government could not see. The very fact that private insurers rejected a particular risk would be an early warning signal that could help the government avoid billions in losses.

For this system to work, private insurers themselves would have to meet some tough standards: a minimum of $500 million of net worth, say, and a limit on the liabilities they could pile on each dollar of their net worth. The secretary of the Treasury should also have the right to disqualify an insurer at his discretion. When losses occur, the FDIC should manage the salvage operation.

Weaker banks will howl over this proposal. Though they regard it as sound practice to require that weak borrowers pay higher interest rates than strong borrowers, they will protest that differentiated insurance rates will make their already tough economics even tougher. Precisely. If an insurance structure doesn't produce pain, it won't produce change.

Society should wish for deposits to flow from the weak to the strong and from the ill-managed to the well-managed. Under the proposed system, banks and thrifts that operate with inadequate capital, impaired judgment or dubious integrity will find their growth inhibited by the higher costs they must bear. Some will seek mergers with institutions that incur lower insurance costs because they are better managed. That's just fine: our goal should be the restoration and preservation of a sound banking system, not the preservation of specific banks.

Overall, I would expect slightly more revenue to be realized by the FDIC from this private-public partnership than from the present system operating at the proposed 1991 rates. Competition among insurers, however, will prevent a ballooning of revenues. In addition, bankers will change their behavior in ways that will cut their rates, which is exactly what we want them to do.

Recently, taxpayers have learned the hard way that there are more banks than bankers. Financial folly will always be with us, but a well-designed insurance system can significantly reduce the costs it inflicts upon society.

The writer is chairman of the board of Berkshire Hathaway Inc., a diversified company with insurance operations.