The corollary, of course, is that the executives who were most aggressive in pursuing new business contributed the most to profits and thus were anointed as stars, future leaders, and potential heirs apparent. But once the bubble pops, such executives go from being heroes to goats almost overnight. The CEO preservation manual dictates that losses should be recognized forthrightly—and instantly blamed on the guys who minted massive profits the year before. In October, as embarrassing write-downs were announced, Citigroup CEO Chuck Prince pushed outTommy Maheras, co-head of the investment banking unit responsible for capital markets and trading, and Stanley O'Neal ushered the top executives of Merrill's fixed-income unit out the door.

With their pre-emptive write-downs and pre-emptive firings, Prince and O'Neal thought they would put the subprime mess behind them. And they doubtless let out a sigh of relief when the shoe dropped. But popping bubbles unleash an Imelda Marcos-sized collection of stiletto heels onto the heads of executives for a period of several months. When the telecom bubble burst, big suppliers like Cisco, Nortel, and Lucent believed they would bounce back quickly from a bad quarter or two. Instead, their businesses shrank for several years. Notice how the big homebuilders have had to continually reduce earnings and sales projections, only to reduce them again—and again. Having axed the guys responsible for the problem and declaring it quarantined, there was nobody left for Prince and O'Neal to blame when the next round of trouble appeared.

In the wake of bubbles, investors and boards seeking new CEOs naturally look for high-profile internal candidates who weren't complicit in the damaging bubble-era decisions. But outside the building staff, and the first-year analysts fresh out of Wharton, it's hard to find people who meet those criteria. Which is why the boards of both Citigroup and Merrill Lynch are likely reaching out to blue-chip executive-search firms for leads on a new boss.

© 2007