Farewell to Wall St.'s decade of hubris

By Michael Brush

As 2009 winds to a close, we bid good riddance to a decade on Wall Street that we can sum up with just one word:

Hubris.

Hubris is defined as haughty behavior by people who are arrogant enough to think they might rank up there with the gods. It's a bad attitude that inevitably leads to a fall.

It's the perfect word for a decade in which Wall Street experts and company chiefs told us they knew what was best for our money while proving they knew very little.

And that's giving the benefit of the doubt to many titans of profitless dot-coms, CEOs of shell companies such as Enron and WorldCom, and the Wall Street geniuses who engineered the credit crunch. No doubt more than a few of them knew exactly what they were doing to us.

The less-than-zero decade

A decade ago, historians debated what to call these years -- the '00s, the Oughts or the Zeros. For investors, it's been the less-than-zero decade.

It kicked off at the most boisterous phase of the tech bubble, just before the Nasdaq Composite Index ($COMPX) reached a dizzying peak of 5,132 in March 2000. In 2002, the index bottomed at 1,114. Nearly a decade later, it still sits almost 3,000 points below the peak.

The Dow Jones Industrial Average ($INDU) and the Standard & Poor's 500 Index ($INX) have done much better comparatively. They're down only about 10% to 20% for the decade.

The Fed responded to the tech washout -- and to the tragedy of Sept. 11, 2001 -- with low interest rates that fueled another bubble, in real estate. That bubble's bursting brought the recession we're living with now.

In between the busts, investors saw a steady stream of collapses and scandals:

• WorldCom, Enron and Adelphia Communications, awash with flat-out fraud, fell apart.
• Allegations of mutual fund misdeeds hit nearly every bank and brokerage on Wall Street.
• The chief of the New York Stock Exchange stepped down amid outrage over his huge pay package.
• Executives steadily lifted paychecks to support lavish lifestyles.
• Insider trading cost investors dearly while rogue traders lost billions.
• Bernard Madoff became buddy and confidant to investors who were actually victims of a huge pyramid scheme.
• And bankers, hedge funds and even countries risked it all on derivatives and other financial "innovations" they didn't really understand.

Here's a recap of the decade of hubris:

Dot-com daring

Remember red-hot stocks such as Pets.com, Global Crossing and fashion retailer Boo.com that hit the market, soared, then crashed? (The Pets.com Web site is now owned by PetSmart (PETM, news, msgs); Global Crossing was reorganized after bankruptcy and now trades as GLBC; and the current Boo.com Web site is an entirely different company.)

All told, more than 2,400 companies went public during the tech mania, writes University of Michigan business professor Gerald Davis in "Managed by the Markets: How Finance Has Reshaped America." Many of them weren't worth the PowerPoint slides their business models were written on.

How did so many get duped? Davis says a big factor was the hubris of Wall Street analysts, who readily slapped "buy" ratings on duds.

Among the most famous: Solomon Smith Barney analyst Jack Grubman, who recommended a company he privately called a "pig," and Merrill Lynch star Internet analyst Henry Blodget, who handed out favorable ratings even as he described Excite@Home as a "piece of crap" and Infoseek.com as a "dog" in private e-mails.

Fraud and collapse

Tech was still crashing in 2002 when a series of high-profile companies fell apart amid allegations of outright fraud.

At WorldCom, Bernie Ebbers presided over a telecom upstart wowing investors with impressive growth. It turned out the company had inflated assets by more than $10 billion.

At Enron, energy traders were caught on tape boasting about "making money hand over fist" by ripping off "poor grandmothers" while accountants were busy overstating profits. CEO Kenneth Lay insisted his company was strong until it dissolved.

Cable company Adelphia and Xerox (XRX, news, msgs) were among the dozens of other companies that admitted to accounting fraud.

"That these guys thought that they could get away with fraud that large was the hubris," says James Angel, an associate professor of finance at Georgetown University's McDonough School of Business.

Tricks of the traders

Hubris didn't live just in CEOs' offices. In 2003, then-New York Attorney General Eliot Spitzer went after Canary Capital Partners for mutual fund trading practices that favored key customers.

By the time the smoke cleared, Spitzer or the Securities and Exchange Commission had linked most every investment bank to questionable trading.

In 2004, Spitzer targeted New York Stock Exchange Chairman Richard Grasso over his $140 million-plus pay package. While far from illegal, it was a landmark of Wall Street hubris -- and Grasso stepped down.

But hubris runs both ways. Spitzer, elected governor in 2006 on a law-and-order platform, stepped down in 2008 when he got caught consorting with a high-priced prostitute.

Executive pay and privilege

Perks and privileges got more than a few CEOs into trouble in the 2000s.

Tyco's (TYC, news, msgs) then-chief, Dennis Kozlowski, famously persuaded his company to foot the $1 million bill for the 40th-birthday party of his second wife. The extravaganza featured an ice sculpture of the statue of David urinating vodka.

In 2005, he was convicted of crimes related to millions in unauthorized bonuses and other largesse and went to prison.

Video: Highlights of the Madoff property auction

Then there was far-more-famous CEO Martha Stewart, who went to trial in 2004 for lying about an inside trade.

The dollars involved amounted to chump change compared with the Kozlowski case. But when sentenced to five months in jail, Stewart compared her plight with that of anti-apartheid hero Nelson Mandela -- which moves her into the hubris category.

Overall, the decade saw pay and privilege pumped up to exorbitant levels.

By 2006, chief executives at the biggest U.S. companies had bumped up their compensation to 364 times that of the average worker, compared with just 40 times the average worker's pay in 1980. (Read "Is a CEO worth 364 times an average Joe?" for more on this.) They also pulled down an ever-growing list of perks.

Perhaps a few performed well enough to deserve it, but in general, the market doesn't suggest their performance improved all that much.

And even in the recession, friendly boards at companies such as Qwest Communications (Q, news, msgs) and homebuilder Ryland Group (RYL, news, msgs) have found ways to keep rich bonuses flowing. (Read "CEOs earn big bonuses for bad year.")

Continued: Insiders and rogues

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