In February 2008, I wrote a column for the Financial Times in which I questioned publicly the compensation system on Wall Street. Specifically, I thought the time had come to re-align the incentives of bankers and traders away from taking huge risks with their shareholders’ money in order to get a big bonus and that we needed a system of accountability.

I was asked to appear on CNBC to talk about my column, where both Charlie Gasparino and Larry Kudlow – the CNBC on-air commentators – fairly blew my head off for suggesting such a thing. Gasparino went so far as to call me a “crook” twice on national television for making the suggestion. (His logic was severely convoluted.)

Today, fifteen months and one financial crisis later, regulators on both sides of the Atlantic are talking about reforming the compensation system on Wall Street. There is no longer a question of if this will happen, merely when.

Some firms, such as Morgan Stanley, have taken the lead in the debate about how to pay its people and keep them accountable for their behavior. The firm now pays its people with a bunch of stock – and some cash – but reserves the right to claw back any and all of that compensation for a period of three years if the banker’s or trader’s behavior warrants such a move. Morgan Stanley has also decided to increase the salaries of its most senior executives and to lower that portion of their compensation that used to come in the form of a bonus. The idea, it seems, to keep them happy but not give them incentives to take crazy risks with shareholders’ money.

This is fine as far as it goes. But the time has come for what now is called Wall Street to take another step forward to correct the flaws in the compensation system. The time has come to go back to a facsimile of the old Wall Street partnership system where partners of Wall Street firms shared ratably in the both the pre-tax profits of the firm (should there be any) or in the liabilities created by the bad behavior of other partners.

The idea was to keep a few partners from taking crazy risks with the rest of their partners’ money. By and large, the system worked pretty well, which is not the same as saying that firms did not fail. Of course, they did, and on a regular basis.

While there is no unscrambling the egg that is the publicly-traded money center banks — the private partnerships cannot be re-assembled — there can a semblance of the old
partnership created anew. The executives at the top of these big banks should be treated like partners of yore. If the firm takes prudent risks that pay off, this top layer of management should get well compensated. If the risks are not prudent and the losses grave, they should not only lose their jobs but also a significant portion of their net worth as well.

Such a more Draconian-seeming approach to compensation for the top brass on Wall Street will go a long way toward re-aligning the interests of these firms with those of their public shareholders.

Frankly, such accountability is long overdue.