Darwin’s Law of Maladaptive Corporate Behavior (or, why bailouts are nearly always a terrible idea)

What is more important than survival? 

On planet Earth, nothing. The most basic rule of life is SURVIVE. The Biological imperative of living things is to perpetuate their existence — survive, procreate, further the species. It is hardwired in the DNA of every living organism.

Those that do not succeed in satisfying these imperatives are described as maladaptive — not fit to survive or compete in the natural world. It is the most rudimentary law in biology, applicable from single cell protozoa to human beings.

And, it exists in the world of organizations. Entities that are maladaptive — corporations, nonprofits, governments — eventually succumb to their own mortality and collapse. This is as it should be, as there are no reasons dysfunctional corporations unable to perform their most basic function — survival — should be preserved.

This is especially true when it comes to financial firms — banks, insurers, investment houses — whose prime responsibility is identifying potential reward and managing risk. The failure of survival raises a compelling question: Why should firms that fail their most basic charge — survival — be bailed out? If on their own they are too incompetent to merely continue to exist, what other manner of disasters live within their balance sheets, legal obligations, managerial skill sets?

A firm that is so reckless and irresponsible as to have put its own survival at risk is not only maladaptive — it has failed its most basic duty. If a company’s management demonstrates an inability to perform that most basic of functions, we should not assume they managed to do anything else competently. Indeed, our assumption should be that they likely are unable to perform their other duties competently, and plan accordingly. Our working presumption should be that maladaptive corporations are not very competent at anything.

The events of the past year have demonstrated this to be all too factually correct. The firms that were unable to survive on their own without a government bailout — AIG, Bank of America, Bear Stearns, CitiGroup, etc. — were rife with incompetence. That is precisely what we have learned since the bailouts.

If I informed you that a corporate entity was so reckless and incompetent that they were unable to insure their own survival, would you bet the rest of their behaviors were responsible or reckless? Competent or incompetent? If they put their very survival at risk, why wouldn’t the rest of their behavior on issues that mattered less be performed at a higher standard?

As we have learned, they weren’t. The same managerial incompetency, shorttermism, inappropriate compensations schemes that led to these firms’ downfall was woven throughout their entire companies. From corporate culture to leadership to staffing to organizational procedures, failed companies turn out to fail in many, many other ways.

Below is a short list of colossal failures. Some of these maladaptive corporate behaviors led to their demise; others were inadequacies that were just below the surface, waiting to wreak more havoc following their bailouts. Consider these, and ask yourself if they were discharged in any more competent fashion than the behaviors that led to these firms insolvencies:

Not just bad, but terrible loans: Banks created an assembly line to make substantial numbers of loans to unqualified borrowers. Not a tiny fraction of the trillions in mortgages written, but a number that was 10-20X historical averages. This was systemic failure at the most basic level.

Haphazard Securitization: The process of assembling mortgages in RMBS and CDOs was done in a slipshod fashion as to now be under signficant challenge from major firms such as Blackrock, PIMCO, and even the NY Fed. Buyers of these products are now exercising their legal rights to put them back to the firms that fabricated them. The technical procedural warranties of the structured product are one basis of challenges; so to are the substance of what was sold. Not getting form or substance correct is (to say the least) maladaptive.

False Affidavits, Perjury, Fraud: As the Fraudclosure debacle has unfolded, we have learned that bailed out firms have no respect for the Rule of Law or for fundamental Property Rights. This is as expected, for in managing to get bailed out, they learned that the most fundamental rule of all — the Darwin’s Law of the Survival — does not apply to them. Exempt from that, why would trivialities such as due process or property rights matter if that didn’t?

Hiring Grossly Incompetent or Criminal Third Parties: Same as above. Why should they hire law firms to prosecute foreclosures properly — Hey, that’s expensive! — when they can hire criminal foreclosure mills to do at 10 cents on the dollar. Hire qualified people and train them properly? Not when we can get burger flippers on the cheap! And if a few of the wrong people lose their homes, we will write them checks — its the Ford Pinto approach to foreclosures!

MERS: Fabricating a Shadow Legal System: Even worse then above, an entire group of (subsequently bailed out) banks got together to conspire to circumvent legal protections. To quote U.S. Representative Alan Grayson of Florida “MERS is the central device by which the banks have tried to opt out of the legal system and the real-property record system. They have taken it upon themselves, with the supposed consent of the borrowers, to violate a system of property record-keeping that we’ve had going back centuries.” If you are surprised by this, you have not been paying attention.

God-Awful Acquisitions: In making significant acquisitions, management eschewed full due diligence in order to grab an asset quickly. Some people have defended BofA’s Merrill purchase as patriotic, but how do you explain the Countrywide buy? (If Exxon bought Enron, would we have bailed them out after Enron collapsed also?)

We could continue with this exercise, but the point is clear: When you save a failed institution, when you bail out a bank whose own behavior led to its demise, you are also saving a parade of horribles within that firm. The passage of time merely reveals the rest of the incompetency of these firms that is below the surface.

What is the next bailed out corporate failure to be revealed . . . ?

Originally published at The Big Picture and reproduced here with the author’s permission.
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