Government As An Agent of Natural Selection?

Diverging Fortunes of Nat City and AmTrust
Posted by Leo M. Tilman, May 18th, 2009, 8:59pm

Darwin described evolution as a process of natural selection: because of inherent traits, some organisms are better adapted to their environments than others – and will have a better chance to survive and reproduce. In the world of finance the sam

e used to hold true: Some firms were better able to operate in a given environment and adapt to disruptive technologies and other environmental changes.

However, at this time of economic crisis, natural selection in financial institutions has not been entirely “natural” – and not solely from the viewpoint of government bailouts of failed institutions. More generally, governments around the world have assumed the role of “facilitating” evolution, interfering with the historical patterns of institution survival.

Consider the diverging fortunes of two Cleveland banks, as described by David Enrich and Damian Paletta in a recent Wall Street Journal article, “Regulators Fell One Bank, Spare a Rival.” Last fall, National City Bank was forced to sell itself to PNC Financial Services Group, while AmTrust Financial Corp was allowed to survive. Both were banks on the brink of failing due to real-estate loans made before the housing market crashed. Both pleaded for a financial lifeline from the government. But although National City appeared better suited for survival with a stronger balance sheet and better-known brand, it was AmTrust that was allowed to live on. In a seeming contradiction with the quote from an OTS official in the article – that suggested that as long as the banks have liquidity and the capital to work down the risk they have, the government should not have a hand in shutting them down – the government allowed a seemingly weaker bank to survive. Was that a case of picking winners and losers?

We certainly hope not, and the WSJ article provides a supporting hint: apparently during negotiations with the regulators, AmTrust executives articulated a vision for the bank. Nat City executives did not – which apparently was enough to spell the end of a 164-year old franchise. After being handed the gift of survival, AmTrust still had to raise capital through such actions as the sale of some of its branches, and its 2009 first quarter results that were mixed at best. But, unlike Nat City, it will live to fight another day.

Financial Darwinism argues that it is critical for executives to craft a clear strategic vision that integrates business decisions with risk-taking – in pursuit of business survival, economic performance, and growth. Therefore, it would not come as a surprise that in the aftermath of dramatic events of the past two years, financial executives and their advisors are spending an enormous amounts of time, trying to figure out if their organizations have the requisite “selfish genes,” and if they don’t, what kind of financial “gene therapy” may be in order.

We hope that the time when the governments’ interpretation of a firm’s strategic vision determines its survival shall pass. This would allow financial institutions to focus their attention where it belongs: redesigning their business models, revamping their risk management functions, and positioning themselves for benefiting all stakeholders through real value creation – in the new world order.

John M. Patti contributed to this article.

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Financial Darwinism explores the origins, drivers, and implications of the ongoing tectonic financial shift. It then equips executives and investors with actionable approaches to creating lasting economic value amidst complexity and uncertainty.

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