imageThe Times’s Gretchen Morgenson asked in her “Fair Game” column whether making “financial executives personally liable for a portion of any . . . legal settlements” in class actions — regardless of personal fault — would cut down on bad conduct.

I bet it would.

But I have a better idea.

Promise to pay class action lawyers big bonuses for finding the actual bad guys and making them pay.

Bad banks

At my law school reunion in April 2009, Jim Cramer gave a talk on the then-unfolding financial crisis. The Great Recession had already knee-dropped the U.S. economy, making it do the chicken. The mess eventually pushed unemployment above 10 percent.

And the banks did it, Cramer said.

His remedy differed from Morgenson’s in particulars but not in spirit. As I reported:

[Cramer] said a great many things by way of telling us what brought on the current financial crisis. But he offered a single solution: charge the bad guys with crimes and send them to prison.

Going to the brig, he said, “is socially awkward” for these people. Sending white-shoe Wall Street goons there, he said, will teach a lesson. It will also help prevent the next big financial catastrophe, he said.

The Mad Money star even “proposed a special Department of Justice section that would go after the bad guys, on Wall Street and beyond.”

But none of that happened, as Morgenson’s rueful column makes clear.

What about class actions?

Does Morgenson’s personal-liability idea stand a better chance?

You might think so. Class action lawyers who run big cases against banks get nothing unless they produce wins. They have huge incentives to generate enormous recoveries for class members. The bigger the dollars they amass the larger the payday for them. So far so good.

But their incentive to go after individual wrongdoers approaches zero. Why?

Because the personal liability of individual employees almost never increases the funds available for victims. That results partly from the fact that few individuals have a lot of money, partly from the fact that they fight harder to keep what they do have, and partly because institutions (banks) resist giving up the guilty, both out of self-preservation and because of what we’ll call cultural inhibitions.

Under the circumstances, why would the lawyers risk substantial resources to achieve a result (holding individuals personally responsible) that does not appreciably enhance the benefits to class members — or them?

A better way

We can fix the problem by changing incentives (although individual culpability will matter, unlike in the Morgenson scenario).

That would require judges presiding over class action cases to change how they award fees. Instead of basing fee awards almost entirely on the size of the pot, they will have to explicitly tie higher awards to holding individual wrongdoers to account.

Get a Vice President to pay $5 million on top of the $100 million his bank pays? It’s all yours, in addition to an otherwise appropriate percentage of the bank money.

Force an impecunious CEO  to publicly admit her misdeeds? You’ll receive at least a five percent bump (e.g., 30 percent rather than 25 percent).

The important thing? Promise expressly, specifically, and in writing from the outset that snaring culpable individuals will yield concrete benefits to the lawyers.

With sufficiently generous bonuses, the spectacle of multiple individuals confessing their depredations will become occasional if not frequent instead of non-existent.

What do  you think? Will it work?