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Dodo Bird Bankers

Posted By Barry Ritholtz On May 9, 2011 @ 7:25 am In Bailouts,Legal,Regulation | Comments Disabled

The dodo (Raphus cucullatus) was a flightless bird endemic to the Indian Ocean island of Mauritius. Related to pigeons and doves, it stood about a meter (3.3 feet) tall, weighing about 20 kilograms (44 lb), living on fruit, and nesting on the ground.

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In biology, extinction occurs when an organism or species dies off. Through evolution, new species arise and thrive when they are able to find and exploit an ecological niche — while other species become extinct when they are no longer able to survive in changing conditions or against superior competition.

We should have had an extinction event in late 2008, but unnatural forces prevented the natural order of things from coming to pass. One of the most significant downsides to the bank bailouts was that they kept on life support creatures whose failings should have led to their demise. We prevented the normal process of failure to take place.

Thus, the economy is presently saddled with banks so maladapted to their environment, to changing conditions, that, despite the fact they could no longer survive on their own, they are still with us. Rather than allow superior competitors to arise naturally, we artificially prolonged the lifespan of these maladapted banking creatures.

Hence, we created an entire generation of Dodo Bird Bankers.

Their design, development and management was what sent them towards an ignoble end. If you truly believe in Free Market Capitalism, that end would have been a fitting denouement. These banks high leverage and insufficient capital was the equivalent of nesting on the ground when Dogs & Pigs — i.e., SubPrime Securitization and Derivatives — were introduced.

But the Dogs & Pigs merely revealed a host of other errors. From loan origination, to securtitization to loan processing to foreclosing, there has been substantial illegality every step of the way.Why there has not been more prosecutions remains a great mystery of our age.

These were inept firms who, when left to their own devices, would have collapsed under their own weight and disappeared. They needed massive leverage to appear profitable and attract shareholders. They could not maintain sufficient capital ratios for the same reason – they would have appeared less profitable than desired. This same philosophy permeated all of the Dodo Bird Banks’ many divisions. They had to cut corners in order to survive.

There is a famous quote that says words to the effect “Financial panics don’t bankrupt firms — they merely reveal who is already insolvent.” That is especially true when it comes to the Dodo Bird Banks.

Despite their natural evolutionary deaths, these maladaptive corporate behemoths were saved. What we have now is an unnatural, artificial banking ecosystem. Gross failures, incompetence and inadequacies are what we preserved. These dodos cannot operate properly. They engage in misbehaviors because that is what they must to survive. They cut corners, take short cuts, behave illegally. They do this because they must.

Given that their structures, managements and internal processes failed to follow the prime directive — stay alive! — it is fair to assume other important things they do are similarly  suspect. These dying beasts are on the wrong side of the law so often becauase they cannot afford to do things legally.

The surviving Dodo Bird Bankers are an unnatural blasphemy on Capitalism. Their continued existence undermines faith on our laws, institutions, and economy.

This morning, I will be meeting with a group of regulators to discuss why Dodo Bird Bankers must be prosecuted to the fullest extent of the law. Having a background in both Law & Finance, I hope to make a persuasive case as to why not prosecuting criminality will have enormous negative consequences for the economy. I also hope to impress upon them what areas of criminality are ripe for fast and easy convictions.

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Previously:
Darwin’s Law of Maladaptive Corporate Behavior (or, why bailouts are nearly always a terrible idea) [1] (October 20th, 2010)


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URL to article: http://www.ritholtz.com/blog/2011/05/dodo-bird-bankers/

URLs in this post:

[1] Darwin’s Law of Maladaptive Corporate Behavior (or, why bailouts are nearly always a terrible idea): http://www.ritholtz.com/blog/2010/10/darwins-corporate-survival/

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