As regulators, investors, and managers grapple with the deepening economic crisis, the question being asked by everyone is “Who’s next?” Who will join Bear Sterns, Lehman, Merrill Lynch, Fannie Mae, Freddie Mac and AIG on the failure list? We think that’s the wrong question. The strategies that doomed these companies were unleashed years ago, and whether or not others will be destroyed by the rising floodwaters will mostly depend on factors outside of their control. That’s not to say that managers at Washington Mutual and others rumored to be at risk should not bail water as hard as possible. The more important question, however, for those who through good management (or good fortune) managed to stay healthy is what they do now.

For a lesson on what not to do, take a look at the fate of Conseco Financial when it tried to take advantage of a subprime lending fiasco in the late 1990s. Green Tree Financial found itself in a life-threatening credit squeeze because the market has lost faith in its mortgage-backed securities and refused to refinance its short-term debt. The market’s skepticism was justified. Green Tree’s portfolio was generated by offering 30 years mortgages on trailer homes with a 10-year life. Green Tree’s profits were driven by loan origination fees and by selling huge bundles of securitized loans, rather than by the performance of the mortgages. It was a strategy that produced huge profits in the short term but was disastrous as the poor quality of the loans became apparent. (Sound familiar?)

Conseco swooped into the situation, buying Green Tree for $6 billion. The acquisition proved to be so toxic that Conseco soon took billions of dollars in writeoffs and then filed for bankruptcy protection. It was the third largest bankruptcy in US history to that time. In reflecting on the acquisition, one Conseco executive told us that it was like the many acquisitions that Conseco had done except for one notable exception. It was a business that they didn’t really understand. They weren’t able to assess the dangers that came with the acquisition, or deal with them later.

Fast forward to Bank of America’s acquisition of Merrill Lynch. B of A certainly has a strong track record in acquiring other banks and the deal gives it a long-coveted brokerage business. But Merrill Lynch is a business unlike B of A’s previous acquisitions. Questions remain about whether B of A management really understands the problems that it has bought, and how to deal with the continual deterioration due to those problems. (See this post for a longer discussion.) A better model might that of Barclay’s, which walked away from Lehman in the absence of a government guarantee and reemerged to buy part of the Lehman after the bankruptcy. Sure, in waiting until after bankruptcy, Barclay’s lost talent and customers. But it also avoided immense downside.

An even better lesson comes from the disk-drive industry. In 1995 Seagate, the industry leader bought the number three player, Maxtor, for $1.9 billion. It was a pure consolidation play. Seagate kept Maxtor’s brand but almost none of its technology or employees; Seagate moved all manufacturing into its plants. Seagate reckons the takeover a success. While it lost half of Maxtor’s market share, the market share that it kept, combined with the higher pricing for the industry as a whole, left Seagate better off than before the merger. But how much better to be Western Digital, the number two disk-drive maker? It picked up most of the Maxtor market share that Seagate lost. It benefited from the stronger pricing. And it didn’t have to pay $1.9 billion or take on the integration risk for the privilege. In the current environment, there are definitely some advantages to waiting.

Perhaps the most appropriate lesson comes from the ancient Persians. Herodotus, the Greek historian, reported that the ancient Persians always made important decisions twice—first when they were drunk, and then again when they were sober. Only if the Persians reached the same decision, drunk and sober, would they act on that decision. The approach apparently worked—the Persians dominated the much of the Middle East and Central Asia for three centuries.

Our two years of research into major business failures finds that companies could benefit widely from being more like the ancient Persians. Managers scrambling to react to the current crisis, while not drunken, are certainly in a state that psychiatrists call “hot.” “Hot” because, while business is generally thought of as highly rational, there is a lot of emotion involved—especially right now. People feel an urgency to act, so they may gloss over potential problems with major strategy choices. People get intimated by the stakes or by pressure from peers and bosses to proceed with a strategy, based on the idea that “we have to do something.” People may be afraid to voice objections, lest they seem ill-informed. In the current environment, executives won’t need to go drinking to revisit their decisions. They will need a cold, dispassionate environment that will let them reconsider their options carefully.