President Obama has warned Wall Street that it must be a part of the change regime that he inaugurated when he came to office last January. And indeed, some of the big banks are changing — from one dubious operation to another. If sub-prime mortgages won’t work any longer, they seem to be saying, let’s try life settlements instead.

Life settlements involve buying up life insurance policies from people who need cash, and to their credit, bankers are offering more than would be available from insurance companies. But then the lunge to potential trouble begins when they slice up those policies and mix them together into securities for sale. Investors get to split the benefits when the formerly insured person departs this earth. The catch is that premiums still have to be paid, and they can go up, especially if the final journey is delayed longer than actuarial tables have predicted. So success may depend on this chronicle of a death foretold unfolding on schedule.

Many of those who concoct these and other schemes still are paying each other handsome rewards, including bonuses that are guaranteed. But how can that be?  How can a bonus for outstanding performance be awarded by contract before the year even has begun? The answer goes back to the 1990s, when Congress passed a law saying that no salary over $1 million could be deducted by a company as a business expense. However, the law neglected to mention other, performance-related, compensation. Hence was born the big bonus, which really is salary in disguise. That’s why it can be guaranteed.

Now, according to the New York Times, Federal Reserve Chairman Ben Bernanke has proposed a compensation system whereby pay at the biggest bank holding companies would be monitored by regulators to see that it was properly balanced between short-term growth and long-term stability. Smaller banks would receive guiding principles from the Fed that pertain not only to top management but also mid-level traders, mortgage loan officers, and office managers.

That sounds fine, depending on how far it really goes in practice, but the simplest, most effective approach may well be for Congress to close the  loophole that encourages the oxymoron of guaranteed bonuses that really are additional salary. Total compensation that can be deducted as a corporate business expense could be raised above $1 million, if that seems fair and appropriate, and legislation curtailing the deductibility of stock options that’s long been pushed aside in the Senate, could be enacted. Then that would be it.

Companies would be free to pay their people whatever they want, within the guidelines of the Fed, but taxpayers no longer would have to help fund the lion’s share of the largess. This would preserve the freedom of the free market, let taxpayers off the hook for extravagant compensation, and encourage higher pay for those who really work to keep their institutions afloat, not simply enrich themselves. Who could argue with that?