Survival of the fattest? I don’t think so

October 30th, 2008 at 11:57am Annette LaCross

I watched the Detroit Red Wings advance to the Stanley Cup playoffs this year.

In one of the final games, a furious battle over control of the puck went on for several minutes. It was frenzied, nail-biting, heart-pounding. In sports-time, particularly hockey-time, minutes like those are lifetimes.

Finally, one of the announcers, who had been involved in his own fight to stay on top of the action, took a quick breath.

“Would somebody please call a time out?” he chuckled helplessly before jumping back into the fray.

I’ve been feeling the same way lately.

As the Bush administration scolds banks — it can’t do much more — that accepted federal bailout money but aren’t loaning it to other banks, as once-respected companies teeter on the brink before falling into ignominy, as Wall Street careens recklessly toward scorched earth one day and untold prosperity the next, it’s enough to leave your average business editor breathless.

But I need a time out here. Because I need to revisit something.

Lehman Brothers Holding Co. I almost feel bad about it.

Almost.

The federal government held its breath and rolled the dice on that one, not swooping in at the last minute and bailing out what had been the fourth-largest investment bank on Wall Street.

It allowed the 150-year-old bank to fail. And so far, it’s the only one of the big boys the feds have refused to help, either by throwing money at it outright or giving money to another bank to sweeten its purchase.

Lehman filed the biggest bankruptcy case ever in mid-September.

But what made Lehman so special? Why was this one company allowed to fail when so many others have been propped up by the feds?

Put simply, the feds made the same mistake they always do. They looked at the problem in front of them — the company itself, not the contagion engulfing Wall Street. They figured that the mighty bastions of Wall Street would recover eventually.

They also wanted to set an example — play with fire at your peril — and a loss like Lehman could probably be absorbed.

In other words, they were relying on Charles Darwin’s survival-of-the-fittest theory.

In retrospect, it might have been a little short-sighted on the feds’ part.

Darwin’s theory is a good one only if we assume that cutting the sick wolf from the pack will prevent the demise of the rest.

Thus the government’s assumption: In down times, companies that aren’t strong enough will fail. In fact, they’re supposed to fail.

The Treasury Department assumed that the herd would weed out the weakest and sickest to preserve the health of the many.

Sadly, Wall Street — and, it appears, the folks at the Treasury Department and the Federal Reserve — didn’t read their Darwin. They certainly weren’t reading their balance sheets.

Lehman has too many tentacles. It was one of the biggest dealers in the credit-default swap market, not to mention mortgage-backed securities. And every firm with which it had ever been in cahoots was already looking sickly because of the weakness to which it eventually succumbed.

Darwin applies only when the wolf pack is made up of mostly individual units — like a hockey team. Lose one member and the pack is at a disadvantage, but it won’t fall.

When a company plays fast and loose with its investors and its money, it will fail. It happens every day.

Only the unchecked inbreeding of the world’s financial firms, with the exception of Lehman, is saving them from abiding by the laws of nature.

They may be comforted by this knowledge. I can’t be.

Because of it, companies that should fall will still be alive a year from now, sucking up free money courtesy of the American taxpayer and preoccupied with business as usual.

But “survival of the fattest” is always a doomed proposition. Need proof? Allow me to  present the global economy, which can’t seem to right itself after gorging on the fat of the previous decade.

If they don’t learn, the business practices that brought them low will dominate again. Just before they need another handout from the government.

Entry Filed under: Uncategorized