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Guaranteed to Fail by Lawrence J. White, Viral V. Acharya, Stijn van Nieuwerburgh, Matthew Richardson

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RACE TO THE BOTTOM

“You’re becoming irrelevant,” Mr. Mozilo, CEO of Countrywide told Mr. Mudd, CEO of Fannie Mae, “You need us more than we need you, and if you don’t take these loans, you’ll find you can lose much more.”

—Charles Duhigg, New York Times, October 5, 2008

In their important 1932 book on the American corporation, The Modern Corporation and Private Property, Adolf Berle and Gardiner Means introduce the concept “race to the bottom”: the idea that competition can lead to a reduction of standards. While Berle and Means were referring to regulatory standards and competition among the (then) 48 states, it is not difficult to see how ...

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