A story of two kids-I

Imagine you reside in a country called Capitex. This country is similar to our world in many ways except for one. Here you can enter a contract with a kid to own a part of his future income stream for a price paid today which will help him in his education, development etc. This seeming evolution has something to do with their social structure. Capitex society is a very tightly knit society. Here social approval and sanctions travel far and travel fast. Naturally, an unethical or a doubtful person will not be allowed to sell his stake to any far off person. Perhaps this is a side effect of such an innovation, so that investor risk and information asymmetry is minimized.

Now you have identified a very interesting and talented boy who has certain things going for him. You go ahead and own a part of his future income stream. Now, it so happens that he also has a twin. Their father is more predisposed towards this boy’s twin and unfortunately the father is not a very good man to associate with. Sure he knows how to nurture a talent, he knows how to get things done. But he can also be ruthless in his dealing, disproportionate in his vindictiveness and has a leaning towards bragging.

They grow up and go their own ways. There is seemingly zero connect between the two brothers except  for the father. The two brothers do well in their respective business. Our investment slowly becomes systemically important, has honest advisors to assist him and is subjected to  “sane and effective” behavior oversight. However his twin, well… lets just say he was a man of his own ethics.

One fine morning, the twin gets arrested for perpetrating a big fraud. The economic offenses task force appointed by the government swoop in and conclude that the twin was trading “empty promises”. The father knew about it, and he refused to act. Plus many of the safeguards which was necessary to follow by the twin were either found to be insufficient or just non existent. It’s a huge breach of trust here.

As is wont, the social sanction snowballed into a complete isolation. The brother, your investment, though he has no connect with this bad egg for 3-4 years has also found himself to be vilified, mistrusted and well to say politely tarballed. The father is also facing similar social sanctions. Now our investment, this brother has grown to be systemically important, the advisors and behaviour regulators are opining that the father should sever all his ties with the brother. As investors like you, there are others who fear that the father might pressurize this good son to pay for the faults of his bad egg.

Now there are some questions here:

  1. Is the good son legally mandated to pay for the bad son’s misdeed?
  2. Will the good son be allowed to pay by behaviour regulators?
  3. Will the severing of ties with the father be a good thing for the brother or a bad thing or a neutral thing.
  4. Finally and most importantly, common men like you are panicking regarding the fitness of this brother to respect his obligations, should you or should you not worry about this?
  5. If you should not, what will be your approach? Wait and watch or buy more of his future income stream?

One thought on “A story of two kids-I

  1. Pingback: Lorimer,MCX,Buffett and China | Meditations

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