The Guru Is In
Entities Endure (Forever?)
By David A. Smith
6 min read
For God’s sake, let us sit upon the ground/And tell sad stories of the death of kings. – Richard II
Now, after having chronicled how entities endure for better, for a long time, and for worse, we arrive, belatedly, at the nastiest question of them all: When an organization has gone past the tipping point and its consumption of resources exceeds the impact it delivers with those resources, what happens then?
Whether an entity should live forever, whether it does depends on what type of entity it is:
1. The for-profit realm. For-profit companies are founded for one primary purpose: to make money to pay their owners. They are judged by the market – are their products or services sufficiently valuable they sell enough to cover all their costs and keep the profits humming?
If not, and the profitability wanes, disappears, or succumbs to losses, only two doors open:
- The fit buy out the weak, gently (through better market cap/ multiple) or roughly (when the enfeebled stumble into a crisis); or
- The weak exhaust their creditors’ patience and succumb via bankruptcy, which itself has two endgames:
- Chapter 11: Rebooted after organizational liposuction, where assets are preserved for their post-reconstitution earning power, and liabilities are slurped away at best[1] for pennies on the dollar owed; or
- Chapter 7: Dismantled for its constituent parts, which are adjudged more valuable than the assembled whole. That’s the ultimate mark of Cain: your management is so bad that you have made what you own less valuable for your owning it.
Either way, Schumpeter’s ‘creative destruction’ works: market capitalism takes care of the business of disruption.
2. The nonprofit realm. Nonprofit companies are founded for one primary purpose: to make positive social impact for their benefactors. Along the way to impact, they conclude that sustainability depends on having reliable or naturally recurring income streams. Eventually, they are judged by two standards that are always in tension: Do we make an impact, and do we make money? It is often an unequal struggle.
For the sustainable non-profit, recurring grant revenue may come from retail donors who strongly associate with the brand (e.g. CARE) or its charitable purpose (e.g. Habitat for Humanity), from grateful beneficiaries seeking to pay it forward as long as they get naming rights over a piece of the campus (e.g. alumni), or from a carefully nurtured and curated network of sponsors and supporters (e.g. any group that devotes many pages to its annual listing of supporters, ranked by category).
In the realm of affordable housing, the earned revenues are derived from the portfolio of properties that the nonprofit has successfully developed and now owns and often manages. For affordable housing nonprofits, scale itself soon becomes a corporate asset for development (increasingly complicated Qualified Allocation Plans, rising costs of putting together a competitive application, and relentless scavenging for soft capital) and operations (income verification, compliance, and reporting. This makes it costly to be small. Conversely, for an extremely large housing nonprofit, it can become awfully easy to become awfully rich.
In my experience, housing nonprofits that have become unimpactful or ineffectual are undone by lack of scale; by loss of a resource magician (deals or money); by over-extension (pipeline rich, cash poor) or its cousin, over-optimism (relying on verbal funding promises, tsk tsk); or by albatross assets, unfixable, unprofitable, and inescapable (“about our neck is hung”). Whereas for-profits suffering these fates are eaten or dismantled, both such fates are rare in the nonprofit realm – because of their counterparties. Major donors, lenders, regulators, and equity investors will all agree that at all costs the portfolio must be saved, although they will be elbows-up in vying for least individual funding of, and best seating in, the rescue life rafts.
The process is slower, multiplayer, nerve-wracking…but usually successful.
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3. Governments and government entities. Like nonprofits, governments are primarily in the impact business, with revenue a necessary adjunct. But, unlike nonprofits, which must plead for money or sell services or products, governments have a unique business model with guaranteed revenue streams – taxation enforced by law and backed by the full force of the state. Sovereign governments in the business of printing money and making it ‘legal tender, for all debts public and private’ cannot go bankrupt within their own realm.[2] Sub-sovereign governments can go bankrupt, as Detroit experienced and Chicago is about to find out.
Beyond governments themselves are myriad government agencies and quasi-governmental entities that act like private companies, with their own articles of incorporation, bylaws, boards, activities, and business lines. They collaborate and compete like other businesses do (albeit often with proprietary resources bestowed upon them); they sue and can be sued; and as the circumstances suit them, they either are or are not part of the government that created them. Over their decades of existence, some become massively profitable, others massively unmanageable, still others impenetrably unaccountable[3] – with often-unforeseeable consequences.
Nearly seventeen years ago, in the aftermath of the discovery of earnings manipulation and the rolling disasters of the 2007-08 financial crisis, Fannie Mae and Freddie Mac, at the time publicly-traded ‘government sponsored enterprises’ (GSEs) trading trillions of dollars’ worth of securities at spreads scarcely higher than Treasuries themselves, were dramatically placed into federal conservatorship to prevent what was feared to be an imminent global credit shutdown. There, they have operated in an unprecedented limbo, until on May 21, President Trump posted on Truth Social that “I am giving very serious consideration to bringing Fannie Mae and Freddie Mac public,” which was followed by supportive statements from FHFA Director Pulte, Commerce Secretary Lutnick, and Treasury Secretary Bessent.
Can such entities be reborn? We may be about to find out.
[1] The day of liability may be postponed with government forbearance in the institutional limbo of a zombie bank.
[2] With both supply chains and capital markets globally interconnected, nations that are not hermetically sealed economies (basically every country in the world except North Korea) can be bankrupted via hyperinflation.
[3] Perhaps the political cynic Jonathan Swift was foreshadowing the future appearance of such entities when he imagined the struldbruggs of Luggnagg, who could never die: “As soon as they have completed the term of eighty years, they are looked on as dead in law…Otherwise, as avarice is the necessary consequence of old age, those immortals would in time become proprietors of the whole nation, and engross the civil power, which, for want of abilities to manage, must end in the ruin of the public.”
