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 . . . ?

Category: Bailout Nation, Bailouts, Corporate Management, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

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

  1. ACS says:

    Politics: bad ideas = burgers: fries.

  2. Harney says:

    Barry:

    Keep up the good work.

    As an 80 year-old woman at the grocery store recently told me, “my grandson is in the financial engineering program at Cornell. I don’t get it. The concept financial engineering is an oxymoron.”

  3. chartist says:

    Well, I guess Stan O’Neal, Merrill Lynch’s former chief, was facing Darwinistic extinction even before this mortgage mess because he loaded his company’s balance sheet with $70 billion worth of this toxic crap which wrecked the company. And when the MBSs hit the fan, he was revealed to be completely incompetent. Man, the Peter Principle is alive and well in corporate America.

  4. clipb says:

    barry, you’re on fire. i would include governmental policies/programs in the sense that no matter how incompetent/corrupt/clueless (did i leave anything out?) they are, no one is held responsible in any meaningful way. someone should write a story (book?) about the ots and its amazing “performance”. of course, the head incompetent is leaving, but everybody else is headed to occ en mass. going over congressional testimony related to wamu and his testy interaction with fdic bair, well…

  5. call me ahab says:

    BR-

    my mind is a bit foggy with all the twists and forced marriages- so I am trying to remember- the Merrill Lynch and Countrywide acquisitions-

    at least one of those was a back room forced marriage if not both w/ the government fully complicit-

    am I wrong?

  6. chartist says:

    whoever coined the phrase, you can’t make a silk purse from a sow’s ear, was obviously thinking of a man like Stan O’Neal……GM takes this assembly line worker and sends him to Harvard’s MBA program.
    Grade inflation runs rampant in Harvard’s program. I mean, George Bush went there too.

    One, this smells of affirmative action big time. And two, it further affirms my view that Harvard, more than anything else, inspires crony capitalism.

  7. Tarkus says:

    You forget that organisms can survive well, even thrive, as leeches – even while they debilitate their hosts.

  8. Freestate says:

    Excellent point by Tarkus. The corporate ecosystem becomes damaged when we let predators/prey become parasites. Then there is no chance of useful extinction of maladaptive organisms. That is the simple summary of what BR is saying.

  9. ACS says:

    Tarkus, the only thing a parasite has to remember: do not kill the host.

  10. cherub96 says:

    I’ve thought a lot about Darwinian selection and financial cycles. These are my conclusions:

    Summary:
    The problem is that in the financial sector, the boom-and-bust cycle itself is driven by Darwinian selection. During “normal” times, the aggressive actors grow fast until they dominate the market. When the systemic instability caused by their growth becomes too much, the whole thing melts down spectacularly, leaving the most conservative actors alive. The cycle starts over.
    In this regard, the financial sector is very different from the rest of the economy.

    Long version:
    In a capitalist economy, you can usually get away with very little regulation of any given industry and have the economy growing strongly and producing wealth for society. If a company screws up, it goes bankrupt, its assets and workforce are liquidated and acquired by its stronger and better-organized competitors, making the sector overall stronger. This is creative destruction at work, weeding out the weak competitors which allocate capital inefficiently.
    The only things the state really needs to police here are work safety, product safety (to some degree), anti-competitive abuses and pollution. It does not have to interfere with what risks the companies take – the market takes care of this.

    This is not the case in the financial sector. An unregulated financial system is prone to massive booms and busts, creating cyclical depressions.

    The first reason for this is systemic risk. If a widget manufacturer takes on too much risk, it goes bankrupt. But its competitors get stronger as they acquire its assets and market share. If a bank goes bankrupt, its competitors are imperiled by this bankrupcy, as confidence in the whole of the sector decreases, depositors withdraw their deposits, inter-bank lending contracts and liquidity in the system decreases and assets on the balance sheets of other financial institutions fall in value.
    So financial actors create an externality which does not exist in the rest of the economy. A widget manufacturer can pollute the environment and maybe blow up its plant in a residential area, but that’s about it. A bank can take down the entire banking sector.

    -SNIP-

    That is why in the absence of restrictive regulation the banking/finance sector will ALWAYS evolve towards instability and meltdown. It cannot be any other way.

    There does not appear to be any recognition of this process in economic science, though I’d be glad if anyone could contradict me on that point.

  11. ubnutsagain says:

    BR Wrote: “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.”

    Tarkus observes: “You forget that organisms can survive well, even thrive, as leeches – even while they debilitate their hosts.”

    Those ideas apply equally as well to individuals. Those who fail to assume responsibility for themselves (Think: MY health care, MY social security, MY food stamps, MY unemployment checks, etc ad nauseum) serve only to demand their own personal “bailouts” and ultimately wind up debilitating their hosts, represented by those who DO productively look out for themselves.

    All of which explains the importance of individualism as a triumph over our current leadership’s collective ideology.

  12. Sechel says:

    It’s like a restaurant having a business model which entails buying food from the lowest cost producer with out regards to whether the producer has a history of sick cattle or mad cow disease

  13. To answer an emailer — no, startups are quite different. They are new economic organisms, mutations, if ýou will. We don’t know if their evolutionary adaptation will work.

    What I am referring to above are existing firms that have already shown an ability to thrive.

  14. xatta says:

    But corporations don’t have DNA. They have no survival instinct. There are individual humans who receive sustenance (directly or indirectly) from the corporation. And when the corporation stops providing for them, the living creatures inside simply move on. At least, that’s what I do.

  15. Stirling says:

    Parasitism is adaptive, and continues until the host is dead, or develops a defense.

  16. curbyourrisk says:

    Barry….over the alst 2 weeks I am happy to say I have become a huge fan of yours again. Stay on this stuff!!!!

    Who gets bailed out next??? The States, as they are about to give up a huge amount of rights once the the FEDERAL GOVERNMENT rewrites property laws. It will be an exchange that is hard to swallow for the states, but they are so fucked….it ain’t even funny.

    Again, the real screw job wil go to the American people.

  17. IvoZ says:

    So the zombies finally started to show their true nature and bite everybody in their surroundings…

  18. IvoZ says:

    @ cherub96

    Two points:

    1. There were prolonged periods of progress where banks were not insured against their stupidity and progress was still made. Busts may have been there, but they were deep but short.

    2. Insuring the banks against losses leads to a magnification of their recklessness and even wider boom & busts at least in terms of real capital misallocation / destruction.

    This time the pendulum has sung towards way too much insurance and too much recklessness. Its a legalized theft. Immoral and fraudulent behavior is systematically incentivized. This cannot go on.

  19. wunsacon says:

    >> But corporations don’t have DNA.

    Do groups of people behave differently than individuals? If you think so, then you should think of corporations as having their own DNA.

    If a corporate CEO decided she/he wanted to run the company more ethically despite a probable reduction in profits, would she/he be replaced? If you think so, then you should think of corporations as having their own DNA.

    >> They have no survival instinct.

    They seem to. (Anti-takeover / poison pills. Lobbying to protect/enhance their regulatory environment.)

  20. Sechel says:

    Barry, you bring up a number of very good points, but must point out the following.
    1)The days when the shareholders were personally responsible for bank losses beyond the value of their stock are long gone.
    2)The theory of control fraud throws a huge monkey wrench into this survival theory, and many financial firms were run to enrich the ceo and his top guys more so than the shareholders
    3)Bail-outs, FDIC insurance, The Federal Reserve system and the new corporatoracy mean that risk is now asymetric where the guys in charge have all the upside and the taxpayers and the shareholders all the downside.

  21. Sechel Says: October 20th, 2010 at 9:46 am

    Barry, you bring up a number of very good points, but must point out the following.
    1)The days when the shareholders were personally responsible for bank losses beyond the value of their stock are long gone.
    2)The theory of control fraud throws a huge monkey wrench into this survival theory, and many financial firms were run to enrich the ceo and his top guys more so than the shareholders
    3)Bail-outs, FDIC insurance, The Federal Reserve system and the new corporatoracy mean that risk is now asymetric where the guys in charge have all the upside and the taxpayers and the shareholders all the downside.
    ~~

    some things should be re-read..

  22. rktbrkr says:

    The 306 Billion question.
    Everybody remember the $306 billion CITI real estate guarantee of 11/2008? Is that guarantee perpetual? Wonder what’s the current fair market value of those $306 billion of risky RE loans? Maybe 100 billion of losses on them if they were still doing MTM accounting. Never any public disclosure of the collateral for the guarantee? The values are certainly substantially lower – any additional collateral posted?

    (the US) said that it would cover 90 percent of the losses on those $306 billion in securities after Citigroup suffers the first $29 billion of losses.

    The fact that it was necessary to guarantee so many assets – about a sixth of the $2 trillion in assets that Citigroup reported at the end of September – was another indication of both the complexity and the opacity of many of the securities that were created by financial engineers in the great wave of innovation.

    …The assets in question – described by the government as “loans and securities backed by residential real estate and commercial real estate, and their associated hedges” – must be valued at current market value before the guarantee kicks in, but the government and the bank have yet to agree on those values.

  23. OT:

    By JAY ROOT and RAMIT PLUSHNICK-MASTI
    Associated Press Writer

    (AP:AUSTIN, Texas) Democrat Bill White on Tuesday accused appointees of Gov. Rick Perry of pressuring Texas teacher retirement system managers to make potentially risky investments that gave state business to politically connected companies.

    A 2009 government whistleblower memo released by White’s campaign for governor describes a series of ethical lapses and insider deals at the $100 billion Teacher Retirement System of Texas, where private investment firms whose executives made huge contributions to Perry allegedly got special treatment.

    An external investigation into the allegations found no illegalities. White said at a Tuesday news conference that the dealings still were improper and he called for ethics reform to restrict political dealings and contributions by private fund managers.

    The leaked memo was written by the retirement system’s former director of private market investments. Executives associated with companies mentioned in the memo have given Perry hundreds of thousands of dollars in campaign contributions, records show.

    The retirement system issued a statement Tuesday saying an external party investigated the allegations after the memo was written in spring 2009 and “found no improprieties with respect to how the investment decisions in question were made.” The results of the investigation also were sent to the State Auditor’s Office, the statement said…
    http://news.ino.com/headlines/?newsid=68973867036680

    the ‘Pension-Fund’ (now, non-) Issue needs to be visited by Diogenes..

  24. Expat says:

    These institutions HAVE survived. The issue you raise is deontological, not economic or legal. These banks knew very well that their survival depended on bailouts, backstops, and sweetheart deals, not on traditional, sound management. They operated entirely rationally.

    Welcome to Wall Street and Washington. Please check your morals at the door.

  25. RW says:

    Calculated Risk argues that the economic impact of Foreclosure Gate and other FIRE incompetencies/criminalities is likely to be smaller than expected (http://tinyurl.com/249a3hc). Barring some major shock ahead I bow to his expertise in this area.

    What I am really hoping is that the legal impact of FIRE malfeasance is greater than expected. Not promising so far I know — the extortion of economic rents appears to be one of the few areas where FIRE agents are competent (an environmental control adaptation, reducing competition) — but here as in many other things there is a tipping point somewhere …or perhaps a pony.

  26. ella says:

    Isn’t it time to apply theories of “personal responsibility” to corporate behavior? Where is corporate responsibility? Why is a corporation not held to the same standard as an individual, when comes to responsibility and accountability? Could it be that Congress and states have enacted laws deregulating various industries at the behest of those industries? If there is no law regulating capitalism is anyone surprised when deregulated capitalism becomes predatory capitalism?

    What if we eliminated all criminal law? Does anyone really believe that we would have fewer rapes, murders, thefts, DUIs?

    Anyone serious about dealing with these corporate behaviors when require RICO application and those found guilty would not face a small fine rather, they would be stripped of all assets, imprisoned and the loss of current and future corporate / business status. But we are not serious; today HUD’s S. Donovan was on CNBC calling affidavit perjury and fraud on the court a “process problem”. This is an unimaginable disregard for the fundamentals of the Law of Evidence and the Court Rules. These rules are fundamentally the same in local, state and federal courts. Never mind, like most law it does not apply to the corporate world.

    This is not Darwinism, no natural law working here. This is the result of the class war that has been waged for the last 30 years, deregulation, detaxation, off shoring and convincing the substitution of debt for income publicly and privately. Our political leaders and regulators have been bought and paid for by major corporations who hide behind organizations like the Chamber of Commerce, lobbyists and anonymous tax organizations to lie to the public. Cowards who fail to identify themselves and their true agenda. Why stand up for what you believe when you can manipulate the public with an ad campaign.

    This is the heart of the matter and the matter appears to be back room deals which often lead to fraud, not natural selection.

  27. Petey Wheatstraw says:

    ubnutsagain Says:

    “Those ideas apply equally as well to individuals. Those who fail to assume responsibility for themselves (Think: MY health care, MY social security, MY food stamps, MY unemployment checks, etc ad nauseum) serve only to demand their own personal “bailouts” and ultimately wind up debilitating their hosts, represented by those who DO productively look out for themselves.

    All of which explains the importance of individualism as a triumph over our current leadership’s collective ideology.’
    ______________

    We live as a society — not as individuals. In the biological/Darwinian construct that BR has chosen to analogize this post, you completely discount the facts that: a) organisms are dependent on certain parasites (bacteria in our guts, for example — the analogy being taxes that go to supporting the hive, and not the hoarding of that collected by the individual that collected it), and; b) that the failure of an external relationship (bees pollinating crops that feed us, for example) can also extinguish a organism that, otherwise, has adapted perfectly to its niche; and c) that the individual could survive for one moment absent the structure of the colony.

    You would be a vagrant, or dead, if not for collectivism. Collectivism is as biologically imperative to humans as it is to ants (the proof is that ALL humans live in societies, and that the most successful societies put the survival of the group before the lopsided interests of individuals).

    The most ignorant and intellectually bankrupt part of your comment is that people would RATHER have a subsistence-level being than an opportunity to contribute in a meaningful way and, in the process, better their lot in life. You have abandoned the concept that external forces play the most significant role in the outcome for any individual. Do you think that formerly gainfully employed people were waiting and hoping for the society to collapse, so that they could be impoverished and alive at a subsistence level?

    I’m sure you think you’re self sufficient, and that if left to your own devices, you would do just fine, because you are a superior specimen of humanity. The truth is, you haven’t been left outside the hive, yet (and I must emphasize, YET).

    If there is a parasite in all of this, it’s those who profit from the labor of others without breaking a sweat, themselves. It’s the corporations and their leaders — the sub-hives. As long as you get your drop of nectar, it’s okay with you that these leaches get a gallon, at the expense of the security and health of the hive.

    It is my sincere hope that you are left completely to your own devices and resources to survive — that any and all of your success in the future comes to you without the slightest help from, or interaction with, others.

  28. NotQuiteSo says:

    Brilliant post. Amen.

  29. Patrick Neid says:

    “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 lesson is always conveniently forgotten after every panic when “plans” are submitted along with the excuses why it is different this time. Who can forget Paulson’s shrieking along with most econ pundits screaming, do something, do anything. Nothing is learned. Plans are still being formulated.

    I fear your piece is too late–the damage is done.

  30. Mannwich says:

    Great post, BR. You are on a roll lately as well, Petey.

  31. rktbrkr says:

    Bank of America went on the offensive, vowing to “defend the interests of Bank of America shareholders,” and hire more lawyers.

    “It’s loan by loan, and we have the resources to deploy in that kind of review,” said Brian T. Moynihan,

    “We have thousands of people who are willing to stand and look at these loans,” Mr. Moynihan told analysts. (And thousands more to look at mortgage documentation?)

    It sounds to me like he’s bluffing – talking tough and praying for a not too painful settlement

    http://www.nytimes.com/2010/10/20/business/20bond.html?th&emc=th

  32. Petey Wheatstraw says:

    rktbrkr Says:

    “It’s loan by loan, and we have the resources to deploy in that kind of review,” said Brian T. Moynihan . . .”
    ____________

    And if those reviews are conducted honestly and incriminate you and your cronies, Mr. Moynihan, what then? Will you give back what you have stolen without hesitation and take the punishment for your criminality, or will you shit your diaper and threaten to hold your breath until you get your way?

  33. ToNYC says:

    The Unintended Consequences of Feeding the Birds. There was a reason the Algonquin Nation survived over Centuries. Their elders made decisions to include seven generations. I think with all our digital tools today we can survive and thrive thinking three generations back and three ahead.
    All the words amount to about 7% of what is actually happening; yet for some fatal flaw we invest scads of time thinking somehow the right assemblage of BS mantra will kill the pain for a while.

  34. Petey Wheatstraw says:

    Three generations back, there was no middle class. Looks like three generations forward there won’t be one, either.

  35. AndyC says:

    Incompetent?

    Incompetent like a fox you mean

    When the only consequences were that they just made a shitload of money in record time how can you say they were incompetent.

    Who says they ever cared about their firms.

  36. ToNYC says:

    Can you help Petey? Whining while right is a just a dull party; but then I don’t want to go to the over-crowded ones either…that’s why nobody goes there anymore.

  37. bman says:

    Two out of the first three comments blame the government. I would like to point out that the government is us, the people. If the government is acting badly or not taking action to correct this or worse taking the wrong actions to correct this, there are two possible reasons: 1. We the people approve and are ok with that. 2. We the people do not approve and our government is no longer representing our interests.
    The first means no corrective action is necessary. The second means that corrective action is coming but will be delayed until we the people can regain control of our government. How that comes about and when that comes about depends upon how much cake there is we should be eating…

  38. AndyC says:

    When you see sophisticated financial entities making mistakes that even to a layman seem ridiculous on their face you should not conclude that this is due to incompetence.

    Its nice to say, “hey wow, I knew these guys would blow themselves up due to xyz transaction” and pat yourself on the back but then you have to think further and say “hey if I knew this, how come they did not?”

    The answer is that of course they did know and this is not about incompetence but about control fraud.

  39. ubnutsagain says:

    Thank you, Petey.

    “Three generations back, there was no middle class. Looks like three generations forward there won’t be one, either.”

    You have just unwittingly proven my point.

  40. Petey Wheatstraw says:

    ToNYC:

    Outside this forum, I do try to help (my SO was afraid I’d be gutted in a bait shop when I loudly and aggressively contradicted a very large, very stupid redneck who was loudly spouting bullshit about the economy,“liberals,” and the Muslim in the White House). being in the DC area, I frequent the demonstrations feauring bth sides of the current political debate. To support those I agree with, and to challenge those I don’t. I vote. I’m not shy, and I’m not scared. I will step up, in real terms. You?

    Do you see my comments as “whining?” Personally, I don’t. I might be loud, I might be offensive, my comments might be dull, and I might be wrong, but, in my opinion, accusing me of “whining” isn’t accurate.

    If the party is dull, why are you here? Can YOU help?

  41. bergsten says:

    I think this is more like a cancer than an outside predator or disease.

    What you have here are “cells” that have gone rogue and put their own welfare above the welfare of the entire organism. Huge compensation, etc.

    The difference here is that these cancerous cells can go off and destroy other organisms too.

    Thankfully, real cancer cells don’t have country clubs.

  42. Petey Wheatstraw says:

    ubnutsagain:

    Mine was an observation. If it proved your point, good.

  43. Freestate says:

    Per several comments, perhaps the real parasites are the senior executives who control the host organism (the corporation) for their own purposes. They drive the organism to engage in risky behavior because they personally benefit. They don’t care if the host organism fails because they are permanently enriched and no longer need any host organism. So BR it seems that not only do we need to let the organism fail but we need to make sure that the controlling parasites (senior executives) suffer and are extinguished in the bankruptcy process. Otherwise, the benefits of being a parasitic (extreme risk taking) executive are a very effective evolutionary strategy – at the individual agent level. Of course, this is just another description of the “agency problem.” And it explains why Greenspan was so shell shocked that he was proven wrong for believing that financial organizations would act in their own best interest and limit risky behavior that threatened the survival of the individual financial institution. And it also explains why Buffett was so adamant that the senior executives who created the mess should be made to fee great personal financial pain – and not leave with great wealth as they did.

  44. rktbrkr says:

    If these sleazy mortgage mills had been taken and liquidated by FDIC we would be a lot father along on a path to recovery than we are now.

    Instead thru a combo of coercion by BB, Geither & Paulson and greed the 4 big banks sucked up all the swill in the mortgage mill punchbowl and are about to puke it all over the housing and financial markets- and it’s the taxpayers who will ultimately get a facial.

    Moynihan is betting the BAC ranch on the quality of work done by Countrywide, what an unenviable position!

  45. ubnutsagain:
    Problem with your claim is sometimes people do everything right and still get f-cked over.

  46. Petey Wheatstraw:
    re: your 10:30 AM post. I think we know what the answer to that will be.

  47. Darmah says:

    Petey has it right. There’s way too much focus on the bastardized “survival of the fittest” meme to the detriment of the notion that we live in cooperative societies and that it was more than likely that cooperation insured our success in the “struggle for existence” than any one individual’s survival. Corporations and narcissists use “survival of the fittest” as their excuse to screw anyone and everyone.

    “If the misery of the poor be caused not by the laws of nature, but by our institutions, great is our sin.”
    - Charles Darwin

  48. dss says:

    Great post, Barry.

  49. Tarkus says:

    ACS Says:
    October 20th, 2010 at 9:18 am

    Tarkus, the only thing a parasite has to remember: do not kill the host.

    —————————————-

    The unfortunate result is that the leech need not kill the host – just weaken the host enough so that something else does.

  50. DL says:

    Another problem with bailouts:

    Bailouts beget more bailouts.

    (“We bailed out Wall Street, now we’re going to bail out main street”).

  51. The only Darwinian natural selection taking place in the human race these days is at the organizational level. But it matters which organizational level is considered. For instance, there was virtually nothing in the way of natural selection in the financial system during the crisis. We lost Lehman, but that was about it. But at the higher level of organization–the nation–we have and will suffer for refusing to allow Darwinism to run its course at the lower levels of organization, i.e., the firm. The financial system is like a cancer to the organism that is the US economy. Cancers ultimately kill the host. That’s where we’re now headed. A long, fruitless battle with cancer, with no treatments we are willing, or now able, to endure. If we’d just irradiated the bastards when we had the chance…

  52. formerlawyer says:

    In my last iteration, one of the partners journeyed to Eastern Europe shortly after the fall of communism. His purpose was to assist in drafting bankruptcy laws. This was even before privatization got in full swing. Communist were clever enough to understand that capitalism depended upon creative destruction – that is bankruptcy rules and the respect for the rule of law.

    Of course that was before their politicians and cronies got ahold of the mechanics of bankruptcy proceedings to enrich themselves and their friends.

    Of course the credit card companies in the United States have been doing a “good job” of lobbying to distort even that basic engine of capitalism.

  53. Tom K says:

    Barry, I agree with your post entirely, but I don’t understand how you can hold these beliefs and at the same time not criticize government policies that encourage maladaptive behavior in individuals. The government shouldn’t be bailing out companies or individuals. The government shouldn’t be subsidizing companies or individuals either. Ultimately, the government shouldn’t be providing goods, services, or direct payments to companies, industries, or individuals that haven’t been paid for.

    What am I missing?

    ~~~

    BR: An ability to focus on a single topic without bringing up irrelevant pet peeves or ideological predilections

  54. [...] In retrospect, bailed out firms engaged in all manner of bad behaviors.  (Big Picture) [...]

  55. Andy T says:

    ELEVEN government agencies meet to discuss the Foreclosure problems.

    Not sure what the real bigger problem is: the foreclosure mess or the fact there are ELEVEN agencies who met to discuss it.

    Geez.

  56. san_fran_sam says:

    Barry, The Darwinian “survival of the fittest” model applies in the sense that there are survivors and losers among business in an industry.

    But I think you were wrong from the outset when you said that the banks behaviors were maladaptive.

    The question is to what incentives were the banks behaving. If the answer is Wall Street’s demand for short-term profit growth, then their behavior is perfectly rational. They could not look beyond the next quarter or two or else they would be punished by Wall Street.

    This whole American economy is screwed up by the insistent constant demand for maximizing short-term profits. This is not to say that profits are unimportant and should not be rewarded, but there are other things that need to be taken in account.

    In the quest for profits, high paying middle-class supporting manufacturing jobs have been shipped overseas. When once well-paid manufacturing employees can no longer afford to buy your products whose fault is that? Sure you made your short-term profit goals, now good luck selling your goods.

    Then you complain about all those lazy bums who won’t get a job and sit around collecting unemployment insurance. Well, the jobs are overseas.

    Got to get back to work.

  57. Pocket QQ says:

    Conflicts of interest: If you leave the vault open long enough eventually the patterns of corruption undeniably present themselves in the math. The wheels of justice turn slow. The notice for put-backs essentially put the banks on notice. More of a “show me the math, or you are going to eat this turd” kind of thing. The question at this point is, is it all so pervasive we need Federal Raids and seizure of records? With all the documents in the loan, securitization, transfer, unwind, modify, refi, foreclosure, write-off, etc. processes, it doesn’t seem like they (the banks) would have any hope of washing their hands clean. Further attempts to cover up the turd are just building a bigger turd to swallow. Everyone (tax payers and investors) needs to see the math on a grand scale here. If you don’t trust something, present it with it the opportunity to disappoint. If you already know the answer, give them some rope and watch how they dig their grave. Clean up the mess, and change the structure. Trust with the system and sustainable economic policy are dependent on it.

  58. A says:

    For regular readers of Barry’s site, there is a valuable lesson within J.K. Galbraith’s ‘The Great Crash 1929′.
    Not only does it reveal the corruption of bankers in assisting the crash, but it also provides a stunning quote regarding regulation (pg 166). Mark Twain was right, history may not repeat, but it certainly rhymes. It’s simply incredulous how relevant this book (originally written in 1954) is, given the recent topics on the Big Picture site.

  59. dss says:

    @A,

    Human nature doesn’t change.

  60. DJB says:

    your maladaptive behavior post was fuckin awesome. you should send it to B School professors around the country, should be widely disseminated

  61. wunsacon says:

    >> Not sure what the real bigger problem is: the foreclosure mess or the fact there are ELEVEN agencies who met to discuss it.

    Andy T, good question…

  62. carping demon says:

    Right on! “shorttermism”. Definitely deserves a place in the greater ism pantheon.

  63. mote says:

    Mortgage registry comes under fire in foreclosure crisis

    This article not only contains Rep. Grayson’s quote about MERS, but also gives a good background of the system and the current legal controversy concerning public records doctrine:

    “The problem with MERS is it takes a public function and puts it into a private entity that doesn’t seem to have any clear accountability,” said Alan White, a law professor at Valparaiso University in Indiana. “And it does it on legal grounds that seem tenuous.”

    “MERS probably served a necessary purpose given the volume of securitization that went on,” Talcott Franklin, a lawyer in Dallas who represents investors in mortgage-backed securities, said in a phone interview.

    “A big selling point for the company is its cost savings. It charges $6.95 for every loan registered, Lejarde said. With an average cost of about $40 for filing a mortgage assignment with local counties, MERS has saved the industry about $2.4 billion, Merscorp Chief Executive Officer R.K. Arnold said in a September 2009 deposition in an Alabama suit.”

    “The company is accused in two whistleblower suits filed this year of cheating California and Nevada counties out of millions of dollars in recording fees. In 2006, New York State’s highest court told one county it had to record MERS mortgages against its wishes. The county said MERS cost it $1 million a year.”

    http://www.insidebayarea.com/ci_16377945?source=most_emailed

    The New York case concerned Suffolk County and the County Clerk argued, in part, that MERS mortgages are not valid “conveyances” within the meaning of Real Property Law §§ 290(3) and 291 because they do not convey any interest in real property or the underlying loan to MERS. They contend the MERS system can render the public mortgage recording system inaccurate by falsely identifying MERS as a mortgagee and masking the identity of the current mortgagee, thereby undermining confidence in the official record of title to real property and inhibiting the ability of borrowers to sue predatory lenders under state or federal consumer protection laws. They also argue the MERS system deprives counties and the State of recording fees “established by the Legislature for the benefit of the public.”

  64. carping demon says:

    BR,

    Survival is not a rule. It is not a biological imperative. It is not a rudimentary law in biology. What survival is is pointed to in the first sentence of your third paragraph: “Those that do not succeed in satisfying these imperatives are described as maladaptive.” Success (if defined as not being maladaptive) is what you see, i.e., what you can describe, when you look around you. It’s what is left over to be observed after previous maladaptations have failed. Biologically, in fact, there is no failure to adapt, there is only success. And death, of course. And, in biology, it is the population over generations, not the individual in its lifetime that adapts or dies, though it is cruel to explain that to the individual.

    Another way to say it is, “Past performance is no guarantee of future results.” That is to say, you cannot predict the future from the past.

    Why not?

    Because present events did not follow by rules, laws or imperatives, from past events. Some things changed at one time–others at another. That’s all, really.

    So what?

    So in looking for models of, or a framing for, people’s or firm’s current successes or failures, or the behaviors that it seems led to those successes or failures, the intimation that those behaviors result from basic biological “laws” is simply distracting nonsense. In the current article, it cuts your main presentation, the succinct analysis of events that you have been laying out in “Bail Out Nation” and on TBP for years, off at the knees.

    Take the second sentence in your fourth paragraph, “This is as it should be, as there are no reasons dysfunctional corporations unable to perform their most basic function — survival — should be preserved,” The word “should”, can mean either “to be expected” or “to be prefered”, both of which meanings denote states of mind rather than reality (leaving aside the question of whether or not a state of mind is “reality”). In this sentence “should” serves to reinforce the idea that there are natural laws at work when, in fact, there are not.

    What are at work, as you clearly show in following paragraphs, are duty, responsibility, competence, purpose. These are not biological rules, they are human relationships. It is of no great importance to humans if an species has survived because it is wolf-like or because it is whale-like, they come and they go. But our personal success or failure/death happens on much too small a time scale to be left to biological influences. We can only survive each other’s survival to the extent that we embrace responsibility, purpose, duty and competence.

    If you are old enough to remember Flip Wilson, he made a career out of exclaiming, “The Devil made me do it!” It was funny, and repetition made it funnier (for a while.) It was funny because we, outside the joke, knew it was bullshit. Flamboyant, unselfconscious, outrageous bullshit. We all knew the Devil didn’t make him do it.

    We need to accept that biology doesn’t make the people in these firms do what they do. It is abject, conscious, flagrant abdication of responsibility, purpose, competence and duty. Until we confront that, the failure is ours.

  65. [...] Barry on Darwinism in Corporate America – a great read.  (TBP) [...]

  66. MarkK says:

    Unfortunately I think you have it the wrong way around.

    The corporations you mentioned, and the executives at their respective helms, have performed wonderfully well, exploiting and gaming the system for their maximum benefit, and surviving. Is it a stretch of the imagination to believe that these corporations knew all along that the government would be there to backstop them when things went bad? We all knew about the Greenspan put ever since 1987, reaffirmed with LTCM.

    With these distorted incentives, why would any corporation look beyond the next quarter? They have survived and they have extorted maximum profit and plundered the US tax payer to boot. These corporations are the very definition of Darwinism: do anything to get your individual and your team ahead, including bankrupting the country and bringing the whole system to its knees.

    Citigroup is bankrupt … yes … and yet they are still trading. They have survived.

  67. ToNYC says:

    The Culture of Maximum Consumption has survived quite well; but now that growth is at Stage 4
    with a nasty prognosis. Keep your friends and food local.

  68. [...] – Why bail-outs are (nearly always) a horrible idea. [...]