Most criticisms of banking as a whole are largely about the moral hazard issues. Seeking out and creating lopsided risk that can be partially offloaded onto the public while the rewards to those risks can be captured by the bank.

There is a fantastic web series called the "Gervais Principle: The Office According to The Office.(1)" The central thesis is that organizations have three types of employees: Sociopaths at the top. Clueless in the middle. Losers on the bottom. The defining characteristic of the Sociopaths elite is 'the basic heads-I-win-tails-you-lose pattern behind all Sociopath machinations.'

Strangely, this fun piece changed how I look at moral hazard. Before, I thought of it mostly as an inevitable consequence of badly designed systems. Similar to employee reward schemes that employees learn to manipulate in a way that is detrimental to the business or cobra bounties intended to reduce the number of snakes in a city leading to backyard cobra farms. I thought it was less of a problem in emergent, evolved human systems. After reading this piece, I think of it differently. It's a human psychology thing. Human systems have assumptions about fair play built into them. Psychologically perverse human (sociopaths) can take advantage of these assumptions.

I knew a guy from Uni. He was doing a Research Masters, badly. He failed. Resubmitted. Appealed. Rewrote. Appealed, and eventually got a pass. He wasn't really smart enough and he never understood the subject. But, universities (especially graduate programs) don't really fail students. Students drop out, especially the ones who struggle. Persistence can substitute for smarts and he walked away with Masters from a top uni. I later learned that he got into the Uni in the fist place with some hack. He applied to a second tier uni, and used some clever clauses to transfer to the better one without having to go through the front door admissions process.

We then proceeded to hound every big name in the field for references. None of them wanted to read this pile of crap but again persistence can substitute for quality and he eventually got some nice references and quotes. He used these along with a professionally written resume and application letters ($450) to land a sought after graduate job. Big government body that takes at least 12 months to fire someone. Excellent entry into the world of public policy research. Before that happened, he had found a recruiter who specializes in these guys. He moves jobs every 6-12 months which means a recurring bounty for the recruiter and a raise for the sociopath. On getting a job they immediately started planning for the next one, like a heist. He was so confident. It took a remarkably long time for bosses & coworkers to figure out exactly how completely useless he was. These people are rare. The systems assume they don't exist and sociopaths take advantage of that weakness.

Around the same time I was hearing the story of a largish company (~$0.5b) bought by a hedge fund and placed in the hands of an 'A-Player' team of senior executives. I knew a manager and long term (20yrs) employee there who narrated the story for me over a couple of years. Outsiders to the company and industry, making salaries an order of magnitude higher than the previous executive team. They proceeded to ruin the company. But, they managed to conceal a lot of that. Milking or liquidating assets. SUing something like a leveraged buyout to raise massive funds to acquire companies. The owners eventually figured it out. The abysmal CEO and his team of executives were paid to leave and every one landed a CEO/COO job at an even bigger company. If they had happened on a win, I'm sure they would have done even better.

After reading 'The Gervais Principle' I saw a bunch of examples of these 'sociopathic machinations' that are much more available to the average person. Just about any mid level manager at any company can take big risks. Draw up massive plans for expensive expansions. Pitch advertising campaigns. Offer to take on impossible product development. Propose to open a new office in another country. Promise huge benefits and demand huge resources. Say you are 100% sure it will work. You might get what you ask for. If you get it, it starts. If you don't, whats the worst that can happen? Maybe your proposals get shot down by a sane senior. That might hurt your status marginally. No big deal. You're more likely to walk away with a small win for initiative. If you get the resources and proceed to balls up your project, you can always quit. If you are in a position to find a similar job, thats not a big loss. If you hit the eject button at the appropriate time and still walk away with a win. You can time it so you are negotiating to be poached while running this doomed program. If it all works out, you are the author of a coup.

A normal company is not resilient to this type of attack because its pretty rare and it's not usually identified if it does happen. Companies are based on an assumption that people aren't like that. The normal deal is that the company takes on the relatively small risk of employees being unproductive. In exchange they take all the upside. A sociopath flips it, taking on massive risk the company is on the hook for and capture some of the rewards. They're own risk is capped at a pretty low level so the more reward the better, regardless of risk. In an extreme case they might lose their job and take a reputation hit, but most likely they'll just leave and get a higher salary elsewhere. It's like taking money out of a company account to the casino. If you double it, you keep the profit. The moral hazard is always there. Most people just aren't corrupted by it.

Moral hazard is the right word for this. Morality is what prevents it in normal circumstances. Sociopath is a bad word for it, because it implies some sort of born pathology. That probably exists, but more often it is a learned behavior. Human morality is absorbed from the environment. If you get a bunch of these sociopaths together, they will rub off on other people. That's how sociopaths breed. It's like a cancerous meme.

I don't have suggestions for dealing with it.

(1) http://www.ribbonfarm.com/the-gervais-principle/