Wednesday, February 27, 2013

Great Stock Market Crashes: Black Monday In 1987

Great Stock Market Crashes: Black Monday In 1987: In early 1987, there was a rash of SEC investigations into insider trading. For the most part, people were aware of the tendency of Wall Street to look out for itself, but the barrage of SEC investigations, rattled investors. By October, investors decided to move out of the crooked game and into the more stable environment offered by bonds or, in some cases, junk bonds.

As people began the mass exodus out of the market, the computer programs began to kick in. The programs put a stop loss on stocks and sent a sell order to DOT (designated order turnaround), the NYSE computer system. The instantaneous transmission of so many sell orders overwhelmed the printers for DOT and caused the whole market system to lag, leaving investors on every level (institutional to individual) effectively blind.

An Iv-B market can become increasingly deceptive so eventually an I-O crackdown makes investors realize how shaky the economy is. It's like shoddy buildings having tenants until building inspectors scare people into moving out. When the market is built on leverage this can cause ceilings and floors,  for example the need for more capital stopped the growth of the US real estate market prior to the GFC so it reached a ceiling. Then the momentum of people buying crashed into this ceiling of no easy finance so prices started to crumble. Then as they fall people can no longer sell their homes and start defaulting causing more credit contraction, to avoid this people sell early increasing the free fall of prices until they smash against the floor of what is considered to be a low enough price. This is like Iv-B weeds growing, they strain to grow faster than others to get to the light before being overshadowed. If resources are scarce then they are starving as they grow until they start to collapse, then they try to divest themselves of unused branches and leaves to survive like people selling investments to stay solvent overall. it is also like in the Roy animal kingdom where Oy hyenas might overeat R gazelles by using the leverage of high spped chasing to catch more than this energy investment in flesh eaten. Then they have more offspring until this leverage causes hyenas to be starving, then some start dying while a core of the fastest ones survive as the R prey are decimated. Then the Oy numbers reach a floor where the R prey left can support them but the momentum of this drop causes another crash, they must change their survival habits to start having offspring again or those that do will have a greater share of the population as the R numbers grow again.

Choose Your Rationalization . . . | The Big Picture

Choose Your Rationalization . . .

By Barry Ritholtz - June 22nd, 2012, 7:53AM
Yesterday’s ugliness has the pundits looking at numerous explanations, correlations and motivations for what was the causation of the 2+% market sublimation.
All those “-ations” leave out the most important one: Rationalization. For that is what all of these tales actually were.
Consider the following “causes” trotted out for the move:
-Federal Reserve failed to deliver QE3
-Global economic slowdown
-Moodys downgrade of banks
-Spain/Greece/Italy (choose up to 3)
-Commodity bear markets
-Euro currency concerns
-Middle Eastern unrest
-US Election jitters
-All of the above
I have a different view:
The day-to-day action is nearly all noise. It contains a surprising degree of randomness, but its not as totally random as some academics would have you believe.

The I-O market is a mixture of Iv chaos and Bi randomness. 

Why? Sometimes we see price continuation, leading to distinct trends. This is often acted on, reflected in the trading behavior of both Momentum traders and Trend followers.

They are the Iv side of the market looking for momentum or energy while the Bi side is looking for positional or time based factors. The trend can then grow to a ceiling and the crash to a floor. 

Occasionally, a move in either direction gets over-extended. Hence, Contrarians and Sentiment watchers try to anticipate the counter-trend reaction move.

Arbitrage can work by the assumption of a normal price and changes from this are improbable aberrations. If the stock goes up they might bet it is not a trend or momentum, instead they short the stock expecting it come back to its normal value. They might also expect this trend to hit a ceiling and then crash back down to the normal price. 

Third, the market internals can shift, become aberrational. Technicians try to discern what this is telegraphing behind the scenes in the activities of the biggest institutions as they impact the stock supply demand battle.
Or not.
All of these cross currents described above are hardly reliable guide posts. They occasionally provide a modicum of insight, but just as often lead to confusion. Typically, they make day-to-day trading exceedingly challenging. The shorter your timeline, and the greater your assumptions, the far less reliable your investment strategies become.
The exception, ironically, are those folks who measure their holding periods in fractions of a second. High Frequency Traders (HFT) — a/k/a “cheaters” — mostly know the outcome of their trades in advance, courtesy of the information provided to them by the exchanges. Their high probability front-running is not available to ordinary investors, from  whom their profits are derived.
What investment decision have you rationalized today?

The Chinese Art Bubble Is Popping - Business Insider

The Chinese Art Bubble Is Popping - Business Insider

The Chinese art bubble seems to be deflating rapidly.
Abigail Esman at Forbes posted ominous comments from a top Chinese auction house:
Three years ago the market was very strong and prices very high, but it has come down because of economic strains and because it has been too high,” notes Wang Yannan,  China Guardian president.  “It would not sustain on that level.”  Further, she adds, the real demand for Chinese Contemporary remains domestic, suggesting that early expectations  for a strong global market in  the material are fading.
James Pomfret at Reuters heard similar talk from a Hong Kong ceramics dealer:
"The Chinese collectors don't have the same energy anymore. There are fewer objects going for over HK$10 million. It was crazy in 2010 and 2011, but it has cooled down," said Joey Low, a ceramics dealer in Hong Kong.
While there are still occasional record-setting sales—like that $27 million Chinese bowl sold in April—the overall market is weak.
Indeed many of the biggest sales at auction never materialized, like that $83 million Chinese vase that turned out to be a hoax or the $44 million bronze Chinese sculptures that were never paid for.

An Iv-B market can be using deception with both buyers and sellers, here auction houses as Iv agents can drive higher prices and commissions with short time high energy hype. Often the art comes from R-B artists as innovators creating a new exponential growth in prices like B roots sprouting into a new plant. The art market can then counter innovate by creating agents to sell and appraise this new art.

The Left Right Paradigm is Over: Its You vs. Corporations | The Big Picture

The Left Right Paradigm is Over: Its You vs. Corporations | The Big Picture

For a long time, American politics has been defined by a Left/Right dynamic. It was Liberals versus Conservatives on a variety of issues. Pro-Life versus Pro-Choice, Tax Cuts vs. More Spending, Pro-War vs Peaceniks, Environmental Protections vs. Economic Growth, Pro-Union vs. Union-Free, Gay Marriage vs. Family Values, School Choice vs. Public Schools, Regulation vs. Free Markets.

There are 4 main left and right wing interactions, V-B, V-Bi, Iv-B, and Iv-Bi. 
The new dynamic, however, has moved past the old Left Right paradigm. We now live in an era defined by increasing Corporate influence and authority over the individual.

Some V influences over B workers are much stronger becaause Bi protections of unionism and community groups have fragmented. 

These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts.

This is like Y lions attacking R gazelles and undercutting the food chain, it can occur with weakened I-O regulating of businesses. 

Where there is massive concentrations of wealth and influence, there will be abuse of power.  The Individual has been supplanted in the political process nearly entirely by corporate money, legislative influence, campaign contributions, even free speech rights.

 Often however R or B can win out because being individuals they have secrecy and deception as tools. 
This may not be a brilliant insight, but it is surely an overlooked one. It is now an Individual vs. Corporate debate – and the Humans are losing.

Some of this is also people losing against AI used by corporations such as financial trading in the stock market.
• Many of the regulations that govern energy and banking sector were written by Corporations;
• The biggest influence on legislative votes is often Corporate Lobbying;
V companies use Iv lobbyists and often have a revolving door where members of their team are in government like with Goldman Sachs and the Treasury.

• Corporate ability to extend copyright far beyond what original protections amounts to a taking of public works for private corporate usage;
Changing G public property into GB private property.

• PAC and campaign finance by Corporations has supplanted individual donations to elections;
• The individuals’ right to seek redress in court has been under attack for decades, limiting their options.
• DRM and content protection undercuts the individual’s ability to use purchased content as they see fit;
V corporations against B music listeners, however they can use piracy which is hidden and deceptive as a response.

• Patent protections are continually weakened. Deep pocketed corporations can usurp inventions almost at will;
• The Supreme Court has ruled that Corporations have Free Speech rights equivalent to people; (So much for original intent!)
None of these are Democrat/Republican conflicts, but rather, are corporate vs. individual issues.

Romney’s Success at Bain Capital: The Business as Scam Model | Op-Eds & Columns

Romney’s Success at Bain Capital: The Business as Scam Model | Op-Eds & Columns

It’s not just the tax code that PE companies game.  By loading the companies they acquire up with debt, PE firms like Bain make them much more vulnerable to bankruptcy. While the creditors who lent the acquired company money presumably understood the risk, there are often many inadvertent creditors such as suppliers, landlords, and even workers through their pension. (The debt is always held by the acquired company not by Bain, which carries no risk beyond its limited investment.) If a Bain-owned company goes under, these inadvertent creditors can take big losses. In the case of pensions, part of the loss will come back to the taxpayer through the Pension Benefit Guarantee Corporation.

This is Iv agents using V loans to raid Bi pension funds for profits like Oy henas attacking a Ro herd of buffalo, then it might have to be repaid by Ro government pension programs. 
PE companies like Bain also profit by breaking implicit promises made by the companies they acquire. There are numerous cases around the country where state and local governments have made concessions to local businesses in the form of tax breaks, land sales, infrastructure improvements and sometimes even industry specific training in public schools in order to keep a firm located in the area. Many small businesses would be reluctant to renege on their side of the bargain and shut down a factory. PE firms like Bain, don’t feel bound in the same way.

Iv agnets compete with each other to use deception and lbuff for profit, those that don't miss out because I-O weakness prevents exposure of this.
Similarly, there is often a sense of reciprocity between workers and employers where workers understand that if they work hard in their younger years and acquire firm-specific skills, their employer will keep them on the payroll in their older years when they may not be as productive. This can be a profitable long-term strategy. However, a PE company like Bain, that doesn’t care about the long-term, can break the second half of this deal for sizable short-term profits. (My colleague Eileen Appelbaum has afuller discussion of the ways in which private equity firms earn above normal profits.)

Iv-B is a short term highly leveraged tactic which gets resources from V-Bi that has a long term low energy strategy.
In short, Bain Capital is not about producing wealth but rather about siphoning off wealth that was produced elsewhere in the economy. There is no doubt that one individual or one company can get enormously wealthy if they are able to do this successfully. However you cannot have an entire economy that is premised on the idea that it will siphon off wealth produced elsewhere. It is not clear that Mitt Romney understands that fact, but certainly the general public should when it goes to vote this fall.

 Sometimes this can still be a positive sum game where all parties benefit, when the economy has plenty of resources this process can be like some trees growing faster by the Iv branches getting more Gb nutrients from the soil. If it becomes G-GB then in a zero sum game there can be winners and losers, if the economy is poor it becomes a Roy negative sum game. Here hedge funds become Oy and might do this to stay solvent with massive debts to Y companies. Whoever wins against these Oy vulture funds might then minimize their costs and losses.

Leverage this

The Epicurean Dealmaker

Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.

This is the nature of an Iv-B economy where Iv agents use deception to lure in B clients and each other. it causes false optimism and growth towards a ceiling and eventual collapse. Weak I-O regulatiors and markets prevent transparency moderating this momentum and deception.

Financial systems help us overcome a collective action problem. In a world of investment projects whose costs and risks are perfectly transparent, most individuals would be frightened. 

This causes V-Bi stagnation, Iv-B bluffing about results often leads to more innovation.

Real enterprise is very risky. Further, the probability of success of any one project depends upon the degree to which other projects are simultaneously underway. 

Like growing seedlings where only one might grow into a tree and overshadow the others.

A budding industrialist in an agrarian society who tries to build a car factory will fail. Her peers will be unable to supply the inputs required to make the thing work. If by some miracle she gets the factory up and running, her customer-base of low capital, low productivity farm workers will be unable to afford the end product. Successful real investment does not occur via isolated projects, but in waves, forward thrusts by cohorts of optimists, most of whom crash and burn, some of whom do great things for the world and make their investors wealthy. 

These are Iv-B waves of momentum that crash and burn when they hit the ceiling like ocean waves hitting a beach.

But the winners depend upon the existence of the losers: In a world where there was no Qwest overbuilding fiber, there would have been no Amazon losing a nickel on every sale and making it up on volume. Even in the context of an astonishing tech boom, Amazon was a pretty iffy investment in 1997. It would have been an absurd investment without the growth and momentum generated by thousands of peers, some of whom fared well but most of whom did not.

The losers become like humus for the newer Iv-B seedlings.

J'accuse, Part Deux

The Epicurean Dealmaker

J'accuse, Part Deux

Damn, now Justin Fox needs to be spanked.
And here we come to the rub. Private equity has boomed in recent years, but not for the tax reasons Mr. Fox claims. It has boomed because it has been successful, thereby attracting all sorts of LPs who want to invest their capital in an asset class (or way of investing) that delivers good returns while offering diversification from other more liquid traded asset classes. It has boomed because there has been a coincident global liquidity glut in the credit markets, which has delivered very low-rate, almost condition-free debt financing to PE firms to grease their acquisition of more and larger companies.

Many economies such as Japan and China with artificially lower interest rates had to lend their money in US dollars, part of their economies were V-Bi savers looking for Iv-B higher interest investments like the V-Bi parts of a tree looking for roots and branches giving growth. This growth in Iv companies was also like Oy predators using leverage to go after companies, often they did this by raiding the Bi pension funds like Ro herds being attacked. This caused the Bi unions to break up into B workers that competed with each other for lower wages, the Iv hedge funds then had a more profitable company from this plunder and sold on leverage for large profits. This was then like the economy cannibalizing itself when deregulation weakened the I-O market, it is like the O middle of the food chain in the Roy animal kingdom weakening allowing Oy predators to decimate Ro herds destabilizing the food chain. 

 And it has boomed—in the face of this massive dual influx of debt and equity capital—because it has continued to be able to find plenty of target companies, both public and private, which it can buy for X and sell for 1.6X. Private equity indeed comprises a larger part of the capital markets and the M&A scene than it ever did, but this is because there continues to be a very large number of underappreciated, undermanaged, and underinvested companies out there in the economy that are ripe for the kind of transformational investment private equity does so well. And it appears that there are a lot more of them now than we ever thought there were in the past.

How 4 companies took over the internet

How four companies took over the Internet - Nov. 12, 2012

Moderator Eric Savitz (left) oversaw a Techonomy panel with Internet analysts Alec Ellison, Steve Hasker and Mark Mahaney.
TUCSON (CNNMoney) -- There are four tech companies controlling the industry's direction: Apple, Google, Amazon and Facebook. Will they still be ruling the tech field in a decade?
"At least three have established very deep moats," meaning that it's almost impossible for newer rivals to overtake them, Internet analyst Mark Mahaney (formerly of Citigroup) said Sunday during a panel discussion at theTechonomy conference in Tucson, Ariz. "Probably Apple, too."

This moat is like V canopies of trees cutting off sunlight to other trees, and these companies cut off opportunities for other Iv companies to grow. 

Google (GOOGFortune 500) and Facebook (FB) have the richest data sets on their users, but Amazon's data graph is probably the most valuable, Mahaney believes, because it tracks where customers are actually spending their money.
Apple (AAPLFortune 500) -- the company with the highest market capitalization in the world -- has the hardest position to defend, several of the panelists said. It can't maintain its stratospheric growth without constantly pulling new rabbits out of its hat, and rivals like Samsung are chipping away at its market.
"Apple to me is the most vulnerable," said Alec Ellison, the head of investment bank Jefferies' technology practice. "It has to maintain this innovation edge."

Apple has increased its V canopy and uses this like its walled garden to keep competitors ot, however it is like a tree that has newly grown and other trees under it still have a chance to get around its canopy and perhaps overshadow it in turn.

Management theory was hijacked in the 80s. We're still suffering the fallout | Simon Caulkin | Comment is free |

Management theory was hijacked in the 80s. We're still suffering the fallout | Simon Caulkin | Comment is free |

The answer is that management in the 1980s was subject to an ideological hijack by Chicago economics that put at the heart of governance a reductive "economic man" view of human nature needing to be bribed or whipped to do their exclusive job of maximising shareholder returns. Embedded in the codes, these assumptions now have the status of unchallenged truths.

Companies are like a tree, they are usually more stable when they have Bi unions like upper root systems and V cooperative management. A strong Iv-B economy from R-B technological revolutions can cause this V-Bi component to shrink with unions being replaced by workers competing with each other lowering wages. It can also cause management to become more Iv competitive and often deceptive, they aim for commissions as stock options and growth rather than a V equilibrium or normal company business. When many companies do this they compete with each other to maximize shareholder returns, this cause people to buy into companies with the most momentum heading towards a ceiling and then crash. 
The consequences of the hijack have been momentous. The first was to align managers' interests not with their own organisations but with financial outsiders – shareholders. That triggered a senior management pay explosion that continues to this day. The second was that managers abandoned their previous policy of retaining and reinvesting profits in favour of large dividend and share buyback payouts to shareholders.

An explosion is a sing of Iv-B growth.
Ironically, the effect of this stealth revolution was to undercut the foundations of the very shareholder value under whose flag the activists had ridden into battle. Along with corporate welfare and customer service, among the functions squeezed in the shareholder bonanza was research and development. Innovation has stalled since the 1980s, prompting some economists to query whether the era of growth itself is over.

A stealth revolution is Iv-B, it is usually hidden and revolutionary with new ideas that often collapse later like growing weeds instead of trees. 
But it's not economics, it's management, stupid. Unsurprisingly, downtrodden and outsourced workers, mis-sold-to customers, exploited suppliers and underpowered innovation cancelled out any gains from ever more ingenious financial engineering – leaving shareholders less well off in the shareholder-value-era since 1980 than in previous decades. The great crash of 2008 stripped away any remaining doubt: the economic progress of the last 30 years was a mirage. As Nassim Nicholas Taleb put it in The Black Swan, the profits were illusory, "simply borrowed against destiny with some random payment time."
Iv-B growth is deceptive like a mirage, it uses too much leverage like trees with roots and branches that are too fine until it becomes easy to knock over.

Over the last decades, misconceived ideologically based governance has recreated management as a new imperium in which shareholders and managers rule and the real world dances to finance's tune. A worthier anniversary to celebrate is the death seven years ago this month, on 11 November, of Peter Drucker, one of the architects of pre-code management, which he insisted was a "liberal art". Austrian by birth, Drucker was a cultured humanist one of whose distinctions was having his books burned by the Nazis. In The Practice of Management in 1954 he wrote: "Free enterprise cannot be justified as being good for business. It can be justified only as being good for society".

The Web’s New Monopolists - Justin Fox - The Atlantic

The Web’s New Monopolists - Justin Fox - The Atlantic

The Web’s New Monopolists

By Justin Fox
Ask Jack Dorsey, the co-founder of the social network Twitter and the mobile-payment start-up Square, what his two companies have in common, and he has a quick answer: “They’re both utilities.” Mark Zuckerberg might agree: he spent years trying to convince people that Facebook is not a social network but a “social utility.”
It’s an intriguing choice of words for such of-the-moment entrepreneurs. Utilities tend to be boring, slow-growing beasts. They also—and this is the more important point—tend to be monopolies that are either regulated heavily by governments or owned outright by them.

Earlier in the Iv-B tech bubble companies mutated and competed, often collapsing the way small tree seedlings try to outgrow each other. Often like seedlings these companies run out of resources before they mature or a mutation of another seed grows better than them in the situation. The next stage of plants is to develop as V monopolies in effect, to overshadow their rivals by cutting off their sun. These V trees in a forest interlock their canopies together in a cooperative way to ensure little sunlight gets under them. In the same way large companies interlock cooperatively to stop competition. Each internet company is different in some way, then they don't compete with each other except in small scale skirmishes on the edges such as Google and Microsoft over search engine market share. Antitrust laws are often used to break up this canopy so smaller companies can again compete, this can increase innovation and mutaton but often at the expense of market stability.  
Indeed, once they get beyond a certain size, technology companies do become wary of the word. Google has been called a utility by lots of people, but you won’t hear the company’s executives using the term (at least, I couldn’t find any examples). And Zuckerberg, when asked in 2010 whether, as a utility, Facebook ought to be regulated, said he hadn’t meant the word that way at all: “Something that’s cool can fade. But something that’s useful won’t. That’s what I meant by utility.”
Yet there are lots of useful things in the world—clothing, breakfast, this issue of The Atlantic—that no one would ever think of calling a utility. Yes, there is an innocuous class of computer software known as utilities. But what companies like Twitter, Square, and Facebook—not to mention Google, Amazon, and Apple—aspire to, and in some cases have achieved, is a status similar to that of traditional utilities like Ma Bell. They attempt to position themselves such that customers can’t get around them, or can’t afford to leave them. And when they succeed, they start appearing to some customers, would-be competitors, and regulators like scary monopolies that somebody needs to do something about.

They in effect block custimers and rivals from getting around them like trees stopping smaller saplings from growing.
The connection between attractive business opportunity and monopoly is not new. Pursuing a “short run” monopoly, the economist Joseph Schumpeter wrote in 1942, is what profit-seeking enterprises do—in the process, driving significant innovation and economic growth. In the 1970s, the business-school discipline of strategy arose as the study of how to build and defend these short-run monopolies—a sort of mirror image of the antitrust classes long found in law schools. “Strategy is antitrust with a minus sign in front of it,” says the Columbia Law School professor Tim Wu, who has taught both subjects. That is, strategy tries to maximize what antitrust tries to minimize.
What is new is that the path from looking for an edge to being attacked as a monopoly has gotten a lot shorter—and that gaining a monopoly seems such a plausible goal within some of the fastest-growing parts of the economy. Standard Oil had been in business for 36 years when the Justice Department sued it for antitrust violations; AT&T for 97. By comparison, Microsoft was just 15 when federal regulators started looking into its business practices, 23 when Justice sued. Google, a mere 14 years old, is already under antitrust investigation.

The Big Idea: The Age of Hyperspecialization - Harvard Business Review

The Big Idea: The Age of Hyperspecialization - Harvard Business Review

Just as people in the early days of industrialization saw single jobs (such as a pin maker’s) transformed into many jobs (Adam Smith observed 18 separate steps in a pin factory), we will now see knowledge-worker jobs—salesperson, secretary, engineer—atomize into complex networks of people all over the world performing highly specialized tasks. Even job titles of recent vintage will soon strike us as quaint. “Software developer,” for example, already obscures the reality that often in a software project, different specialists are responsible for design, coding, and testing. And that is the simplest scenario. When TopCoder, a start-up software firm based in Connecticut, gets involved, the same software may be touched by dozens of contributors.

An Iv-B economy grows much finer roots and branches of specialization, it is also much more vulnerable to booms and busts.
TopCoder chops its clients’ IT projects into bite-size chunks and offers them up to its worldwide community of freelance developers as competitive challenges (opening the possibility of becoming a “top coder”). For instance, a project might begin with a contest to generate the best new software-product idea. A second contest might provide a high-level description of the project’s goals and challenge developers to create the document that best translates them into detailed system requirements. (TopCoder hosts a web forum that allows developers to query the client for more details, and all those questions and answers become visible to all competitors.) The winning specifications document might become the basis for the next contest, in which other developers compete to design the system’s architecture, specifying the required pieces of software and the connections among them. Further contests are launched to develop each of the pieces separately and then to integrate them into a working whole. Finally, still other programmers compete to find and correct bugs in the sundry parts of the system.

At each point people compete in Iv-B rather than cooperate together, the system then buids a high momentum towards prodct innovation that can hit a ceiling and collapse if the market falters. 

Billionaires illustrated

The breakup of the Soviet Union alloed the Y-Oy suppressed businessmen and mafia to be suddenly unleashed causing them to make a lot of money, this is like fenced off  Y lions suddenly being allowed into an Ro-R ecosystem that has evolved to be predator free. The result is people were not used to being tricked by fraud and so many G assets as they were privatized into Gb were taken by Y and later V capitalists. Shock therapy caused the Oy-R part of this system to collapse causing stagnation. 

How Microsoft Lost Its Mojo: Steve Ballmer and Corporate America’s Most Spectacular Decline | Business | Vanity Fair

How Microsoft Lost Its Mojo: Steve Ballmer and Corporate America’s Most Spectacular Decline | Business | Vanity Fair

Microsoft’s managers, intentionally or not, pumped up the volume on the viciousness. What emerged—when combined with the bitterness about financial disparities among employees, the slow pace of development, and the power of the Windows and Office divisions to kill innovation—was a toxic stew of internal antagonism and warfare.
“If you don’t play the politics, it’s management by character assassination,” said Turkel.
At the center of the cultural problems was a management system called “stack ranking.” Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees. The system—also referred to as “the performance model,” “the bell curve,” or just “the employee review”—has, with certain variations over the years, worked like this: every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor.

The overuse of V-Bi systems in an Iv-B environment can cause stagnation as innovation is stifled, this illustrates the problem when distributions of people are not really random but are treated as such.
“If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review,” said a former software developer. “It leads to employees focusing on competing with each other rather than competing with other companies.”

Iv-B employees are highly innovative but also fragile and chaotic, they can easily collapse if the environment doesn't allow them to grow.  This competition can also be destructive and deceptive, people start to drag each other down in a negative sum game where the objective is to lose less than the others. For example half might be aiming to not be on the bottom with a poor grade, to do this they need to manipulate someone else to take the blame for problems.
Supposing Microsoft had managed to hire technology’s top players into a single unit before they made their names elsewhere—Steve Jobs of Apple, Mark Zuckerberg of Facebook, Larry Page of Google, Larry Ellison of Oracle, and Jeff Bezos of Amazon—regardless of performance, under one of the iterations of

The Accounting Trick Behind Thirty Years of Scandal

The Accounting Trick Behind Thirty Years of Scandal | Business |

America has been afflicted with one financial scandal after another over the past generation – culminating in the 2008 financial panic, the effects of which we are still suffering under. It has widely been assumed that each of these scandals have had disparate causes, but in their new paper Bratton and Levitin argue that three of the most notorious scandals of the past generation — Michael Milken’s junk-bond-related securities fraud in the 1980s, the Enron scandal of the early 2000s, and the subprime mortgage meltdown of 2007-08 — are all linked by their use of an esoteric accounting mechanism called a “special purpose entity,” or SPE. When used dishonestly, SPEs are nothing more than financial sleight of hand, the clever shifting around of assets to trick regulators and investors into seeing something that isn’t there.

With weakened I-O regulation the Iv-B economy becomes more deceptive, here it grows exponentially with secret cracks into special purpose vehicles. Because of compeititon those that don't do this fall behind and can be taken over, so honest accounting is driven out of the system.
So what exactly are SPEs? Broadly speaking, they are legal entities that are separate from the firms that have created them. They can hold assets and owe debt, but as Bratton and Levitin write, “they never fully coalesce as independent organizations that take actions in pursuit of business goals.” They are companies running on autopilot that serve one purpose: removing assets and liabilities from the parent company’s balance sheet.
Companies can use SPEs for legitimate purposes. For example, an oil company might want to finance an expensive and risky exploration project without putting the whole firm at risk of its failure. So they’ll set up an SPE with limited resources, put only those resources at risk in pursuance of the new project, and fully disclose the arrangement to potential investors. But as Bratton and Levitin’s paper shows, special purpose entities can be — and frequently are — a recipes for disaster.