The 2008 systemic breakdown in the U.S. banking system cannot occur again. We can prevent another meltdown by combining a simple structural change with formal rules and prearranged financing terms that allow regulators to quickly inject capital and take over troubled financial institutions.

This will lead to higher equity capital levels and greater stability and create an incentive for private capital to fund failing institutions, thus reducing the likelihood of government intervention. Lastly, subject to capital market financing, removing the illusory "source of strength" regulatory requirement enables management to boost leverage and maximize returns on equity at the holding company. The net result is a win-win for all parties, including regulators and managers.

The proposal: Existing bank holding companies, the "parent company," must push all operations into "operating subsidiaries" while an "intermediate holding company" is inserted between subs and parent. This intermediate holdco is a pass-through entity with technically no assets or liabilities. It will be available solely for regulators to inject capital and/or seize subs under certain conditions.

If capital is injected, the cost will come as equity in the form of a "Buffett security," a cumulative preferred stock with a coupon equal to LIBOR plus 10%, plus dollar-for-dollar detachable warrants struck at the then-consolidated operating subs' aggregate tangible book value. Dividends to the parent are restricted until consolidated operating capital ratios are restored and the security is repaid. The warrants shall be puttable back to the company at fair market value after five years if not redeemed.

Given these clear rules and prearranged financing steps, failing banks will have every incentive to raise private capital at the parent on advantageous terms, making it unlikely government capital will be necessary. If operating ratios are breached, regulators may dismiss managers and directors with loss of accrued, unpaid bonuses, past stock grants and performance stock bonuses.

Equity and debt at the parent are legally and structurally subordinated to regulators' rights to inject capital or seize the intermediate holdco. All operations must flow through the intermediate holdco to avoid parent activities stripping earnings and weakening subs. If a parent fails, bankruptcy law applies.

The structural change, combined with formal rules and prearranged financing terms, will ensure higher equity levels and a safer, more stable industry. If government capital is required, regulators have a simple way to intervene earlier and liquidate or sell the bank in an orderly fashion. This should preserve value and minimize wind-down costs and losses associated with federal deposit guarantees in the subsidiaries.

Subject to markets providing capital, removing the illusory source of strength enables leverage in the banking system and allows returns on equity to remain at historical levels, a win-win for the economy, equity holders and management. Lastly, this structure all but eliminates "too big to fail," since parent stakeholders, including shareholders, lenders, managers and directors, are all at real risk of being wiped out.

Andrew G. Bluhm is the founder and principal of Delaware Street Capital, a Chicago-based opportunistic hedge fund.