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Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy by Aaron Task, Barry Ritholtz

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Chapter 16. Dot-Com Penis Envy

 

What you do speaks so loud that I cannot hear what you say.

 
 --Ralph Waldo Emerson

What took down the grand financial icons of Wall Street? Why did a veritable conga line of storied names and legendary firms follow Bear Stearns and go the way of the dodo?

There are no hard-and-fast answers, but if you will indulge me, I have a theory. It may surprise and even shock you, given the stunning irresponsibility involved. But it is the only explanation that makes any logical sense, from either an economic perspective or a behavioral one.

No, it wasn't a conspiracy of short sellers. Mark-to-market accounting rules had nothing to do with it. And in the recent era of radical deregulation, you can be sure that excess supervision and regulatory compliance were not the root cause.

The question before us is simply this: Why did these profitable, well-run companies insist on embracing ever greater amounts of risk? What was it that compelled formerly conservative, low-risk business models to throw caution to the winds, and shoot the moon?

The most cogent explanation is tied to misplaced incentives and the overcompensation of senior executives, especially the C-level execs. Much of it can be traced back to the glory days of the tech boom.

I call it the "dot-com stock option penis envy" theory of financial mismanagement.

Got a better theory? I'm all ears. But before you dismiss this one, let's try it on for size:

In the bull market boom of 1982 to 2000, employees at Silicon ...

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