Take that first case. After all that is done and the Board has shown the door to the people responsible for digging them into a hole, they’re still in a hole and need someone to fill it. Now, they track down a fellow with considerable talents to fix the problem and are faced with a dilemma- they’re hiring him to fill a hole. Once that hole is full, he’s out of a job. What’s more, if he happens to get a better offer when the hole is close to full, there’s a good chance that, being somewhat rational about his long term interests, he may well walk away and take his knowledge of what still needs to be done with him.

In this case it makes a lot of sense to say. “We’re going to pay you enough to get by while you work, but if you stay the whole term and finish the job properly, we’ll make it worth your while.”

There’s a fine line between the two, and most of it lies in how concrete the goals are and who is dependent on the other for support. It’s good insurance against loss, but about as good for wish fulfillment as any of the classic wish-granters.

<i>Therefore, the priests began lending money to the farmers so they could farm more land and buy more assurances of rain. Some farmers discovered that by placing themselves into massive debt to the priests, they could produce enough milk, fiber and korn to become incredibly wealthy themselves, which allowed them to pay extra money to the priests to short the other farmers their portions of rain, destroying their farms and driving them out of business. Thus land became cheap. Then the farmers discovered that they could sell their own version of assurances back to the priests, with the guarantee that if in fact it didn\’t rain, contrary to what the priests had assured, they would pay the priests a guaranteed portion of their crop with which to offset the losses on the priest\’s assurances.</i>

It seems that a particularly effective method for focusing the minds of “the powers at be” within corporate organisations is personal liability. Having seen this in action over the years the word “focus” is actually an understatement. When there’s a legal requirement to rollout legislative change with personal accountability attached, “all consuming obsession” is probably more accurate.

I think it would be nice to see this method extended into business areas/models that have the potential to adversely impact financial events outside of an organisation, specifically in the industries noted in the blog text. Thankfully I don’t believe it’s currently possible to insure against personal liability within the corporate world.

A sub-prime mortgage is not a derivative. There’s nothing complicated about it . . . it’s just a egregiously irresponsible financial “product.” Bad for the borrower and for the lender.

The connection with derivatives: For a small, responsibly run bank, a sub-prime loan would be unthinkable. But dishonestly rated bundles of bad loans, insured by derivative-based financial instruments, allowed mortgage salesmen to go crazy.

There’s a benefit to backing agencies like “Freddie” and “Fannie,” but they have to be run as a service, not a business.

What’s worse even than that is that, since I don’t have to care if the company does well, I can use my powers over the operation of the company to manipulate the stock, and get rich betting on it, even if what I do hurts corporate profits.