Pundits comment that the present credit crisis was caused by greed; others say it is the result of poor management. Based on almost 50 years on Wall Street, I say it was simply a question of time before a lack of personal liability coupled with access to unlimited capital would lead to disastrous levels of risk.

An experienced banker noted several years ago that he worried about managing colleagues he hardly knew, trading securities he didn’t fully understand, and in time zones he rarely visited. Examining how this condition came about will give insight into the remedies.

Prior to 1969, the New York Stock Exchange required all members to be partnerships. The Exchange, then the most prominent of self-regulators in the securities industry, realized that unlimited liability was a bright line in risk-taking and personal responsibility.

Partners of firms like Goldman Sachs, Bear Stearns, Lehman Brothers, and Morgan Stanley had great wealth outside their firms while the firms themselves were more modestly capitalized.

The partners understood liability and risk, knowing an errant decision could cause personal pain beyond the legal protection of their firms. It was not because of good fellowship alone that the partners of Lehman Brothers shared a common office on the third floor of One William Street, or that some firms daily circulated all the stock trades of their partners to all the firm’s partners.

Donaldson Lufkin and Jenrette, then upstarts, challenged the Stock Exchange and incorporated. The Exchange governors took the fateful step of acquiescing. Soon DLJ went public in its incorporated form. The Street never looked back.

With access to public equity, the firms’ principal activities, like proprietary trading and later principal investing in the focus of leveraged buyouts and real estate funds, grew so large that these investments for the firms’ own accounts and those of the funds they managed dwarfed the traditional agency and advisory transactions.

Wall Street had become a massive hedge fund using debt and the derivative securities to leverage their gains. It competed with clients to acquire assets — “Chinese Walls” disintegrated. Conflicts of interests abounded.

Second-guessing about the wisdom of the Gramm-Leach-Bliley Act, which ended Glass-Steagall and opened competition in the financial arena, isn’t warranted. Congress had to modify the Glass-Steagall Act to reflect the realities of the markets, but it failed to consolidate oversight. This was not an omission.

When Secretary of the Treasury Paulsen proposes combining the SEC and Commodities Futures Trading Commission, for instance, he is asking Senate chairmen to relinquish authority, not easily accomplished in Washington. Previous attempts have, not surprisingly, floundered. Consolidation will only succeed as part of a comprehensive solution.

“Transparency” leads logically to more efficient capital markets — which, is helpful to investors and regulators but not to the profitability of market makers.

The market for derivative securities such as credit default swaps is deliberately opaque. Each contract is different. It is almost impossible to identify and quantify the amount of exposure for an individual financial institution. Few realize the nominal price tag on these instruments is greater than $45 trillion and, more important, the market value is between $1 and $2 trillion.

Proposals for more transparency focus on the clearer writing of documents, itself oxymoronic when government is involved. We propose a more fundamental solution — a central exchange with an attached clearinghouse where all such derivatives would be traded. On-exchange trading would deepen liquidity and provide greater transparency of market size but, more importantly, locating all counterparty risk in a visible and controllable clearinghouse would control risk.

Investment and commercial banks are now “accountable” to boards of directors, shareholders (many of whom are their own shareholders), limited partners, and regulators. Conformity of regulatory oversight will put all players on the same playing field but will it modify behavior?

Despite wailing about “moral hazard” and bailing out villains, it’s a rare public official who will stay aloof from any crisis and chance being decried as a latter day Herbert Hoover. Opening the discount window, as the Fed has done, assures the chief executive officers of banks and securities firms that America’s taxpayers will subsidize them.

The capital markets are the playing fields of capitalism. The participants want all the rewards of winning but jump into the government’s safety net when the going gets tough. We can protect the few innocent bystanders. Rules and regulations are available to improve understanding of the markets and provide a measure of better oversight. But new and better won’t be sufficient. Let the players know they can get wiped out. If we let losers lose, more permanent stable markets will result. The greater good, then, will be served.

Mr. Solomon is founder and chairman of Peter J. Solomon Company, L.P., an investment banking advisory firm, and former counselor to the secretary of the treasury under President Carter, former deputy mayor for Economic Policy and Development under Mayor Koch and former vice chairman of Lehman Brothers.