I kept wondering that as well. I'm wondering if this was a different time, or if it's just a fun story

This was a university network in the 80's most likely based on machine model. Assuming the story is true, and not as mentioned elsewhere, a fictionalization of Reflections on Trusting Trust, the person in question most likely didn't have a standalone system that he could wipe, and didn't have copies of the OS media to install. Note the details of an AT&T tech coming in to fix the compiler install. That's quite believable for a university installation like in the story.

When I went to university in '94, if we'd had to deal with the same thing I'd have been in largely the same situation: Sun and SGI workstations that largely booted via NFS (some of the SGI's were exceptions, I think, but most parts of the system were mounted via NFS there too) where anyone trying to re-install the compiler etc. without the approval of the computer department would be in big trouble (and have to hack the system; though the protections were relatively weak).

And while we certainly could install compilers etc. locally in our accounts, getting hold of a cleanly compiled compiler for some of the systems we had would not have been all that trivial, even though the systems we had were all more mainstream than the 3B2 mentioned in the article.

I wouldn't be surprised about an outside contractor having a hard time getting the computing department to believe that this problem was a hacked system. I'd expect the reaction would be to assume that he was just trying to make excuses for why it was taking him so long to find the actual problem.