Welcome back. Everyone, I'm Caspian Sea and I
am here as usual with my partner in crime Bennett Tomlin.
How are you buddy? Rude.
Well, Cass, how are you? I'm doing good, thank you.
And we also have a special guest Chief insights columnist at coin
desk, David Z Morris. How are you?
Hey folks, I'm pretty good. How are y'all today?
We're bringing David on to discuss us Enron and what
happened at Enron at the time and how that relates to what's
going on. Now, in finance and
cryptocurrency Bennett, do you or David for that matter?
Either one of you do you want to go over exactly what happened at
Enron I think David's the best to take that.
Okay? Just to get the big picture and
then we'll get into sort of some nuts and bolts, but the big
picture of Enron is is the largest corporate fraud in
American history. It Energy Trading Company,
basically, founded in 1985 by a guy named Ken Lay and was
headquartered in Houston from most of its run at its peak,
which was in 2000. It had a market cap of about 70
billion. And at that time, you know that
doesn't sound necessarily like a ton these days but it was the
seventh largest publicly traded company in the United States.
And then in 2001 Bethany McLean, a journalist at Fortune where I
used to work, published a story called are titled is Enron
stock. Overpriced.
And that was kind of the break in the damn.
It seems weirdly mild by contemporary standards.
But after that, there was a bunch of questions being asked,
and too many questions were asked and by December of 2001 A
year after its peak stock valuation and Ron had declared
chapter 11 bankruptcy because what was revealed was that there
were a series of shell companies hiding debts off the books and
it was essentially entirely fraud and everybody lost
everything. In the executives, went to jail
and or died, that's Enron in a nutshell.
I had want to also touch on the fact that much of the fraud
related to the accounting firm associated with Enron which was
Arthur Andersen, which is no more, they don't exist.
Any longer largely because of the failures at Enron and Arthur
Andersen and because of their failures with Worldcom as well.
They had a series of failures at the time, they were doing a
really bad job that job of being accountants.
Yes, exactly. They played a big role in This.
And now let's let's see if we can determine why this is still
an important story today. And how there could possibly be
some parallels to the crypto currency markets.
Then, do you want to take a shot at it?
Like what's the, what's the point?
Why are we talking about this? For me and run is such an
interesting story for a few different reasons.
One, you have them basically trying to do something novel and
like a lot of their value starts to come.
The fact that they're doing something that hadn't been seen
before in the case of Enron specifically, they were trying
to make financial instruments out of energy, which is a
difficult test to do. But they were able to start
selling this idea of financial izing energy and because of
that, they kept getting more and more interest and investment in
effectively that idea. And so they were parallels
immediately for me with that to how search and cryptocurrency
companies seem to attract investment purely because
they're trying something novel like before the business Been
validated before. The model is proven out there
attracting investment because they're doing something new.
Then Enron obviously was using some interesting accounting
techniques and the way that they were structuring their income
through these different, subsidiaries these different
groups and trying to flow it to maintain a certain appearance of
growth. Also seemed remarkable to me,
not to interrupt here. I'm sorry Bennett.
I just want to bring this up again because you're touching on
the accounting aspects of this and I know, I'm sure David will
dive into this more. But what you're talking about is
mark-to-market Yeah, it's a style of accounting that it's
still used today. It's not like the style itself
is illegal but the way that Enron was doing it and I'll try
to play it now. Enron did a skit.
It was tongue in cheek but it was a skit saying we can book as
many prophets as we want to. But well we've been working hard
on this and we've really pulled out all the stops.
Look, what we got origination we did 20 million last year, I
think we do 120 million dollars this year.
This is the key. Key.
We're going to move from mark-to-market accounting to
something. I call hfv hypothetical future
value accounting. If we do that, we can add a
kazillion dollars to the bottom line.
The thing about Enron at its core and this is Mark to Market
is the accounting term for it, but it's just this idea that
you're betting on the future and and not just betting on the
future that's in a very definite way, but betting on a future,
that's always a little bit. Further away than you think Mark
to Market is we can sign a contract or otherwise have an
agreement for revenues. Let's say 10 years from now.
And you know, anybody with half a brain knows that the energy
Market ten years from now is not going to be the same as it is
right now yet, that's how Enron operated.
That was one part of the shenanigans going on the other
part was about hiding debts off the books, which we'll talk
about. But in terms of the big picture
just to zoom back out. Out from Mark to Market.
I think that future forward in this is one thing is idea that
we're going to financial eyes, everything and therefore be able
to predict the future. Because we have already put a
price on it and Ron really push that to the absolute limit.
And I wish it had really been like the high Watermark from
which things receive it. But fortunately, it was really
more of a preview of things like the housing crisis.
And the other thing that I think is important to take away from
Enron is the cultural aspect of it, you know, we think about the
regulatory Space and finance has this thing where there are lots
of walls and lots of cops and lots of careful management but
the Enron story really shows that that is just not the case
that if you are somebody who thinks they're doing the right
thing, you can go pretty far over the line.
And that's what's really interesting about Enron is that
everybody thought they were within the letter of the law.
Even though they knew that they were violating the spirit of the
law, they thought that everything that they were doing,
could be defended the culture there.
Are they would like post the stock price stickers everywhere
in the offices. Everybody was obsessed with the
stock price. It was very much a focus on
money above, a lot of other things.
And I think if you're thinking about things as an investor,
that's a red flag that Enron should drive home.
I just want to point out that, that is something that we see to
this day. CZ is a great example of someone
who consistently speaks about the price of the coin that he
started. Probably there's other exchange
owners that do the exact same thing.
I just can't Give them off the top of my head.
Well you know Justin son was Notorious for this back in the
day constantly tweeting about the price of Tron which I
haven't looked but I'm guessing he doesn't do it as much lately
because it's not such good news but another Sterling example of
the correlation between Shenanigans and price Obsession
and it also isn't just I wouldn't suggest it's only in
crypto currency because we see similar Antics go on.
I mean we've seen meme stocks gained a real foothold in the
financial system. It altered the board of
directors for something like GameStop, I mean now Ryan Cohen
is really in control over there and I would suggest that that's
largely a consequence of stock price.
And this is where we get into really sort of almost
philosophical questions about what constitutes fraud, you
know, to take a quote from the documentary that was made out of
the book smartest, guys, in the room about Enron, there's a
talking head in the movie. I forget exactly who, but they
were commenting on skilling's mindset at times a person who I
think knew him. And they said, as long as you
can keep the illusion going, it really isn't a fraud and what
that means. If you unpack, it is even if you
know that you're not telling the truth in the moment.
If you're a person who believes that you're on, like, a
world-changing mission, you can convince yourself that those
lies are not only justified in terms of long-term results, but
are actually helping create those long-term results by
propping up the illusion. So, if he thinks that the hype
actually is the product, this is where you end up.
That brings up something very important that I think Bennett
will know exactly what I'm talking about right now.
Sometime in 2017, 2018, I remember re David Paul
suggesting that if you bootstrap fraud, it is no longer fraud.
I have I have a big problem with that.
It isn't how I think investment should be done and I don't think
that the law reflects on that as being true necessarily.
Knowing re I would be tempted to give him the benefit of the
doubt that he was engaged in a kind of Devil's Advocate thought
experiment there because the thing is unfortunately that
might not be the way things are supposed to work.
But in some cases it does seem increasingly that it's the way
they work out. It's almost built into the
startup mindset right to a certain extent, that some bets
are going to be four things that we're going to try and do by
definition. If you're investing in a startup
that has a proposal, it might not work.
And at that point you start getting increasingly
loosey-goosey in a loose money environment.
Frankly as far as you know what an actual plan is I just wrote a
column today about bullish. The new proposed exchange by
Peter teal and the block one guys which is trying to go
public before its operational at a nine billion dollar valuation.
Is that fraud? I don't think that's the right
word for it, but it certainly is operating on a future forward
basis. That is not about reality at the
present moment. You know, to be clear, the Enron
situation was not that subtle overcomplicated.
It was outright fraud but when you're in a start-up environment
where the future is what you're trading on, then you can
definitely bullshit your way pretty far.
And I think we've seen that. Yeah I mean honestly the example
I thought of wasn't the one guess I did.
I was actually thinking of Tesla and some of Elon musk's promised
like where he thought he was going to have a self-driving car
drive from New York to LA by the end of 2017 and he was able to
fundraise basically on the back of That expectation and it was
during a period when Tesla didn't have a lot of free cash
sitting around. Yeah.
So in effect he made this kind of very future-focused statement
because of that was able to keep the business going in.
Presumably at some point in the future, he may actually achieve
the goal but it's the same kind of thing where your you need to
keep the expectation going. The illusion going for as long
as possible. That the future that all your
current value is derived from is still just around the corner.
Yeah and and I mean obviously the other contrast Maybe example
would be theranos which, you know, they actively pretended
that they had a working thing when they did, which actually
maybe that's a that's a useful distinction, right?
Where if you're saying we're going to do this by X date and
then it doesn't happen. That's where there's a clear
bright line between that and saying.
Yes this thing works right now and we're going to sell it to
you tomorrow and lying about that.
So maybe that's one way to make the distinction in terms of Hope
versus actual deception. Another That I think is very
poignant and related to the cryptocurrency space in
particular, especially right now with a so much going on about by
Nance is that when I was listening to there was a
podcast, I listened to FBI retired case file review and it
featured, someone named Michael Lee Anderson, the FBI agent in
charge, in charge of the Enron case File.
One of the really interesting things that he discusses is
twofold. One that the FBI was not really
looking into Enron. At all until the collapse
happened already. It was not something they
thought necessarily in any way, shape, or form was fraud.
Now, here's the second part that I thought was very fascinating
and that is that it wasn't only the FBI that was looking into
Enron, it was the SEC, it was the FDNY, it was the Houston
jurisdiction. It was the district.
Northern District of California like everyone wanted to claim
jurisdictional rights over Enron.
They all wanted to prosecute the With largest company in the
United States but they all wanted to stake their their flag
is the ones who really nailed this home but this was all I
think after The Whistleblower came forward of course of
course. Yeah Sherron Watkins.
And so it's not like they were really on the watch.
No no not at all but they all wanted a piece of it.
So I think about that and I go man, I wonder how the
jurisdictional issues are going to play out in crypto currency
because it still feels like they don't have any idea.
Who and what? And when prosecutes who and
what? And why.
Yeah, I mean that's an interesting question but I think
that it'll work itself out. I don't think it's going to be
an insoluble situation. It's all going to be about this
to be a lot of extradition going on.
I'll say that but the fraud element because I think from an
accounting perspective which is one of your primary interests,
it's it is worth going into the kind of guts, right?
Yeah, and TM TM J or whatever tjm or whatever it was called
ljm but it gave people TMJ I am sure, so just very, very
broadly. The trick that Enron learn how
to do, I guess. The first thing to be aware of
is that like, they're really padded their actual business.
So they would invest unreasonable amounts of money
into unprofitable energy plants in India, and they could not
build their actual customers effectively in.
Right at one point was spending, I think it was 50 million a year
in float on payments that they were owed by their own
customers. Because they couldn't build them
in a timely manner. So in order to create a
continually upward pointed profit curve, they figured out
how to do basically some hiding of debt and they would create
spin off companies that would by Enron assets that were
underperforming to take them off the books and then you know that
would allow them to book other kinds of Revenue as well.
They did all kinds of moving on and off book.
And we talk about the over fraud part of this, you know, it's
obviously perfectly legitimate for an ization to create a
spin-off company or a shell company.
For financial reasons, there are lots of different purposes that
those can have. But in this case, they were
supposedly independent entities for accounting purposes.
And in order to qualify for accounting purposes as an
independent entity, you had to have and this is hilarious in
itself. But you had to have 3% outside
Equity if you were doing a spin-off from an existing
company. Now, that's nominally because
you want to have some sort of due diligence, from a third
party that actually sets The price of the deal and some kind
of reasonable way. Obviously, you know, whether 3%,
actually accomplishes that goal, it's hard to say.
But what Enron ultimately wound up having to do because they
were unloading such Bad Assets, was to a use a lot of people who
are actually within the Enron organization as the quote
unquote, outside investors on those three percent shares of
the spin-off corporations that were designed to hold debt and
be. They also often either
implicitly or Or explicitly gave outside investors, which did
include major investment Banks. They gave outside investors.
Guarantees of the safety of their investment in these
entities which effectively made the Investments loans.
So those are the two clear. I mean they're not the only
clear ways, but there are two big clear accounting, fraud
practices that we're going on. I need to push back on this a
little bit because I do think that it's easy to assume that
people just won't understand a lot of this.
And really accounting fraud is like incredibly complex.
And what they were doing. Oh, for sure what they were
doing at Enron, you know, it took even the FBI like four
years to unravel. Exactly what the hell was
happening inside this company. I just think it's hard to really
understand how it was fraud. They're moving money, they're
cooking the books, they're moving liabilities to assets,
there's mark-to-market. There's all there's all these
things, but how is it fraud? Yeah, well I think maybe, maybe
what you're getting at is definitely true.
All of this is after the fact discovered, I mean, this was
certainly not public information at the time.
This is what's really amazing about the Bethany McLean peace
in 2001. That kind of LED things to
unravel is that it's super mild. There is no allegation of fraud
there. She at the time had no sense
that there was fraud, the headline is just is Enron stock
overvalued, right? And that was enough, just
breathe hard on it and the House of Cards comes falling over.
And I think it also actually in Ways.
It's an optimistic take because I think the financial press has
gotten way more aggressive over the last 20 years for the
better. So for what that's worth.
But the thing from the trying to look at it from the outside and
see fraud like that, it's a super important question.
And I think that the biggest and clearest sign from Enron was
that, you know, I don't know the specific number but they had
something like four or five years if not more of 100%.
A single quarter, they made their numbers.
Both internally and externally they had profits that went up
every single quarter there was never a disappointing quarter.
Really like that's that's such a huge signal and it's such a hard
signal to really here for somebody who is looking for an
investment, for example, because if you look at something where
you're just like they do nothing but win.
Well how ask yourself that and I think in this case it's you know
in retrospect We're just pulling all this stuff in and out but
from the outside you know if you have a business that never has a
disappointing quarter that never misses, then that's actually
something to take as a potential - it's not always a positive
because you don't know what's going on behind the doors.
Last time, we talked you told us a story about this where you
detailed the California pension and how they ended up invested
in Enron. And I thought that was a good
example of the kind of practices they were using to keep this
thing afloat. Could you walk us?
Through that David. Yeah, well first of all the Jig
Is up. Yes, we recording it's because I
forgot to hit record last time. Yeah.
So so what you're talking about is think Caldwell, kind of two
things, one called Jedi, and one called chuco.
And these were early in the lineage of the spin-off, get
hiding structures that Enron had engaged in to try and Juice
numbers. So Calpers is the big
California, public employees, retirement fund.
And in the early 90s Enron had Gotten them into a joint venture
called Jedi that was an investment fund like the later
versions it invested in some Enron assets.
It did some other things as well but by 1997 Jedi had kind of
made all of its Investments and Enron was looking to do another
outside entity. And the next one was called
chuco. The Hitch, was they wanted to
get calipers involved again. But Calpers had not yet managed
to sell all of its stake in Jedi, the original investment
fund and As I mentioned, and I know it's all very fast and very
complicated, but Enron needed an outside investor, so that it
could create this separate entity.
That would then absorb debt, that would hide stuff that it
didn't want to be seen on its quarterly statements.
But in order to get Calpers to join this next round with Tuco,
it had to get it out of it, spaghett Calpers, out of its
position in the other entity called Jedi.
So Enron actually went and tried to find somebody to buy Calpers
stake in this. Fun.
It had discussed a price with the fund that that would be
acceptable to entice them to get into the next round.
It couldn't find any takers at the price that Calpers needed to
make that next investment happen.
So Enron itself actually wound up buying back the entire stake
in Jedi at what worked out for Calpers to a 22 percent annual
return which is pretty good. So this is I think another
example I'm not going to be able to break down the exact nuances
but you to begin to get a sense of some of the issues because
Enron is buying back assets that were mostly its own at a price
that it is setting to please, one of its investors.
And of course, that ultimately costs shareholders money because
you have executive setting prices for their own projects.
So you have this 22 percent return that Calpers gets it
joins into this thing called chuco.
And chuco is interesting because you get an example of some of
the other levels of self-dealing that are going on within this
organization, So chuco, for example, Enron when it creates
chuco which is again an off-balance sheet and see for
hiding debt in the process of doing that, it also charges
chuco 10 million dollars in a structuring fee.
That becomes revenue for Enron it also ends up making
individuals within in Ron stupid Rich because people who invested
their personal money into these things.
Also got guaranteed returns illegal and this one guy,
Michael copper who was involved chuco Ooh, got five hundred
thousand dollars a year to manage and off-balance-sheet
entity while also keeping his job at Enron, which I don't
think he was. I think he was probably paid
about as much for and as time goes on more and more Enron
employees are either investing in or getting management fees on
a personal basis from the spin-off.
Entity's people were just treating it as a piggy bank,
they're getting all these fees, all these, all these management
fees, and all these insane investment, returns many people
made millions of dollars. On their illegal personal
investments, in these spin-off entities to go a little bit off
of that into the landscape, the Affiliates, who sometimes wind
up making these Investments, we're part of a group called
friends of Enron. So this was a semi-formal list
that the company kept of wealthy affiliate affiliated
individuals, who could be counted on to inject Capital
into these off-balance-sheet books.
They included people like friends of Andy fast housewife,
the CFO And a realtor who had sold houses to a lot of Enron
employees. This is essentially, a hawala is
what you're talking about. I'm not sure.
I'm familiar, with hawala hawala is like, it's an informal method
of moving money that is. I think it's largely practiced
in the Middle East. I might be wrong about that, I
don't know. Oh yeah, yeah yeah.
I'm not super familiar. I do know that system has worked
for a long time. I'm not really familiar with the
parallel to it, but it literally translates to trust.
And what you're what you're talking about is basically He
trusted sources within the family that you're using to move
money around. Yeah.
And meanwhile, you know, they're kind of putting up Capital that
allows you to skirt, certain formal regulations.
And in exchange you're guaranteeing that they're going
to make an exorbitant amount of money off of their smallish
shares. So and you know, that's one part
of the the operation, I think that you guys might be more
familiar with the other big fraud.
Of course is the California energy trading Scandal, my
throat's getting dry. And if one of you guys Wants to
take a shot at that one. I mean I am a Californian so I
can take a shot at that. I remember it distinctly because
what ended up happening, not to spoil the story here, but our
governor ended up being recalled and our governor was when he was
elected, he was wildly popular. His name was Gray Davis.
And what ended up happening that year and I will never forget
this because those Blackout's affected.
Literally, everybody it is not something anyone in California.
At the time will tell you, they weren't affected by.
I was affected by it. My He was affected by it.
So yeah. What Enron basically did is they
started controlling in some sense of the word, the power
grid for California and what they purposely did was stop
giving them electricity and they would do that by just upping the
price, upping the price until people couldn't afford it or
whatever it became this very crazy combination of the Traders
making money off of Californians, not having
electricity but also the Traders being in control of whether or
not those Before nians had electricity.
So we had rolling blackouts throughout the state.
They called them rolling blackouts and they would just
hope. Sorry.
Today, there's going to be six hours without electricity.
I mean, it was literally, like, living in a third world country.
As we used to call it. Yeah.
And I think people even died. I mean, there were like, you
know, hospitals, obviously, we're faced with the same
situation. Yep.
And at the end of this gray, Davis, got recalled.
An Arnold Schwarzenegger became our new governor.
So that that's the, the, long story short.
They're I remember from watching the documentary, they had this
audio. From to of the traders who are
discussing the energy situation in California, one of the
Traders goes, yeah, I can deal 122 and the other Trader
interrupts and goes not steal and the first Trader goes back.
He goes, oh yeah I can Arbitrage 122 million a day off the
California energy market, right? Right.
And runs a striking example of like these Traders whose entire
job is to be solely focused on making as much money as humanly
possible. Yeah.
Being in charge of making decisions that should perhaps
not be exclusively motivated by making as much.
Money as humanly possible and to sort of roll that back to the
broader context, right? It's important understand why
this happened at this particular moment because Enron was founded
in 1985 on a kind of long-term regulatory bet that the energy
markets would become deregulated that the concept of trading
would become a sustainable business, but by the early to
mid 90s, they were really starting to run up against some
hard walls because of the exact thing that I said, which is
people basically understand that energy is essential to Modern
Life and maybe you should just make it boring, but California.
Bye-bye, I think this was was this like 98 99, but they had,
they had decided they were going to go ahead with deregulating
electricity markets and they had actually designed their market
system with a lot of participation from Enron and so
surprise, surprise, it worked out in a way that the Traders
were able to make money. And one of the The, you know,
Cassie mentioned, like they raising the price and they were
raising the price in a really, like crazy way, which is they
would actually, well, there were two things kind of happening and
one was just naked the illegal, but the trading side was, they
would actually export energy to nearby States.
So, Nevada, Oregon. And you know, I'm pretty sure
that this would have been sort of a nominal exportation they
weren't actually moving the energy.
They were just selling blocks of energy to outside customers.
By doing so. They then constrain the supply
with in California and then they would then re-import in a matter
of hours or even less. Re quote-unquote, re-import that
energy to California that they had sold out of state despite
knowing that the demand would be higher.
So this is just a trading maneuver, they were able because
of the way the market was designed to Arbitrage.
But in fact, that resulted in just raising people's rates and
essentially stealing, I mean there were a lot of I think
Enron made nine billion dollars. From California, utility
customers in the space of about a year and a half, which is
Criminal Criminal on its face, right?
The other way. That they raised the prices
though, which, you know, maybe you guys can enlighten me a
little bit here because I maybe missed a step, but it sounded
like they really just had inside relationships with the operators
of power plants who they could call Up On Cue and have them
just shut down for maintenance. So I mean that was one of the
really overt parts of the fraud. Although I Say that it didn't
seem like those operators were necessarily from what I could
tell it didn't seem like those operators were necessarily like
in on the take, you know, it's not like they were making money
off of it. They weren't participating it
other than to think, like, okay, we're going down for
maintenance, like I'm not sure they fully understood what was
going on and that they were yeah, a part of the fraud.
I'm giving them the benefit of the doubt, I have no idea.
Just one other thing that I want to ask you about an, I'm going
to pretty much hand over the reins to Bennett for any other
questions, but this was the seventh largest company in the
US. It's in the energy sector which
you would hope would be regulated to a large extent and
it's on the NYSE. So you also hope that would be
largely regulated. It ended up being the largest
fraud in corporate history. It happened at the exact same
time as Worldcom which one's one of the largest corporate frauds
in US history. We're dealing with markets that
are far more opaque when it comes to cryptocurrency.
I just think they have zero incentive to follow any of the
regulations that Enron was supposed to be following.
Enron ended up blowing up. I'm just wondering if you see
decentralization and cryptocurrency in general as
being a space where that's going to be a problem or if maybe the
that the direction of cryptocurrency will end up being
a net positive. It's interesting because it
really forces you to think about your first principles and
because I'm you know, I'm a relatively Pro regulation guy, I
believe that regulation can can do things when it's, you know,
focused on particular. People who are Bad actors and
particular actions. I am not a fan of restrictions
on choices that people can make but after the fact you need
enforcement and you need some kind of monitoring especially of
large organizations at the same time.
I think the thing that Enron really drives home and
especially for crypto investors, I would almost say it's not
about like regulation literally doesn't matter in the
cryptocurrency space to a huge degree when you're talking about
entities like Finance or B Max and in that kind of space.
I think what Enron drives home is that it really becomes about
character and what is your evaluation of the people who are
in charge. And one of the things that's
really notable about Ken Lay, who's the founder and CEO is
that he had somewhat of a folksy image, but he also was a gambler
and loved risk and talked about risk as a positive.
So, you know, that's again, one of those signals where are
people People encouraging risky behavior of in their customers.
Are they encouraging risky Behavior?
Among their employees? And what do you take away from
that? It's almost like you have to be
if not the regulator, at least the skeptic.
And I think that one of the real truth is that there are people
in crypto who I think you can trust, who I trust.
It's hard to know who those people are, if you're not super
engaged in the market and maybe that's the takeaway for a lot of
people is you can't read a white paper.
You can't hope that a regulator is going to do anything to
protect you. You have to actually learn the
landscape if you want to be engaged in a way that is risk.
Controlled Regulators, especially in the United States
are not cops on the beat really across any industry at this
point. And so, if you're expecting
that, it's always going to be disappointing for you.
One thing I do want to touch on, is you talked about how Enron
was founded, is kind of a bet that in the future.
Energy markets would be deregulated in that would best
benefit and run by think one of the important.
Ancient things is that Enron didn't just make that bet.
They took active steps to try and ensure the right.
People were in power to make that happen.
Do you have any thoughts on the relationship between the Bush
family and Enron? Yeah, you know, I mean, there's
I'm sure miles of deep dark stuff there, but I think my, the
thing that I take away is actually how amazing it is that
this actually happened with Ken Lay's good, buddy, George W,
bush in the White House. They actually got criminally
Cuted people went to jail and that was despite lay having I
mean, as the stuff was unfolding, he was calling Alan
Greenspan talking about how Enron was systemically risky and
you know, to their credit, nobody bailed them out and you
know what, everything was fine, everything California has
electricity. Now despite Enron going bankrupt
and, you know, I think that that's a major takeaway because
the same thing I think would have been the case.
Let's say, in 2008. 8, if the financial system had been
treated a little bit less with less of a Velvet Touch.
Let's say maybe there was so much anger afterwards that they
were kind of, taken aback. I mean, I don't know how many
employees worked around Ron out at its peak, but we're talking
about at least 20 or 30,000 people, I think losing their
jobs and about the loss of their, in the documentary.
They talked to a gentleman in Portland, which has absolutely
nothing to do with Houston, Texas and Enron who lost most of
his life savings because he invested in in Enron I was told
to, yeah, well, he was a I think he was like an employee.
That particular guy was an employee of the city of a
subsidiary and a lot of Enron employees had their 401K is
heavily invested in Enron stock. So not only did they lose their
jobs? In most cases, they lost a huge
chunk, if not all of their retirement savings, and there
are videos that are shown of Enron Executives encouraging
employees to invest 100% of their 401ks into.
And In stock which again, if we're talking about like red
flags, like this is one of the makes my mind melt because on
the one hand, yes, if you're a company, you want to convey that
confidence, but it's the kind of thing that seems insane.
If you know anything at all about finance and you hear
somebody say, put your entire 401K in one stock.
We have this term in crypto, right?
Like hope IAM where people are just high on their own Supply.
And I think that's a, that was a big moment.
If I was looking at that moment of Enron, I would be like In
that position is not going to be like, well we think we're doing
really great but you should maybe diversify your portfolio,
like just throw it out there just say it, once not to draw
too many parallels here. Michael sailor just had that
video come out recently where he's yelling telling people
mortgage, your house, invest in Bitcoin, get rid of the business
that you've had for 25 years and put that money into Bitcoin.
If you have a mortgage already, get another mortgage.
And if, if you if you have a car, sell your car and he's
telling people To do everything. Take all of their assets, get
rid of them and buy Bitcoin and like you're talking about, if
that isn't a red flag. I don't know what is, yeah, I
mean, that's very disappointing to hear.
I haven't seen that video. I mean, sailor is in a
particular position because I mean, he's hitched the stock of
this publicly traded company to the value of Bitcoin.
That's not necessarily 100% coming from his faith in the
asset. Let's put it that way.
Yeah, I was actually going to, I was about to describe the exact
same scenario and how that gave me a similar feeling to watching
the documentary because it's these people who are supposed to
be responsible and who you expect to trust giving this
advice that is extraordinarily dangerous.
Yeah, recommending someone go into debt to purchase. 100.
Volatility asset is absurd. I mean, I'm sure Danny
responsible and I don't know. This is where we get into the
big questions, right? Which is what what's happening,
you know, what's happening in these markets, what's happening
in reality? I mean we, this is a bigger
topic, but we've already seen a pretty significant blip and down
turning Bitcoin. And there's a lot of talk about
a broader correction and and all of these things when a
correction does come are going to be on the table for
discussion because yeah, I mean you have to be a responsible
investor and no one thing is a responsible investment.
By itself, no matter how you feel about Bitcoin or anything
else, Enron included, but none of these prods, whether it's
Worldcom and Ron is that Madoff is another great example, it
takes the bubble popping. So for Enron and Worldcom it was
the Telecom bubble and the internet, bubble popping.
And I just wonder if a lot of these cryptocurrency companies
and for that matter like you're saying traditional Finance other
stuff. If what they need to be exposed
is simply a market correction and that's when you have
Regulators come. In swarms and start being like,
oh, I see a lot of problems here, you know, it's not
necessarily like just to be clear, the correction doesn't
necessarily result in Regulators suddenly like strapping on the
armor and going out to do their digging.
I mean, the correction exposes the structural flaws of the
schemes that are happening. So with Enron and this is
actually really important with a lot of these off-book entities.
The reason that they were able to absorb all of this debt That
was supposed to be on a neurons. Actual accounting books is
because they were hedged against Enron Zone stock which was just
like UPS the ante for the Insanity by the way.
Because it's like here by our Bad Assets, give us cash.
And if anything goes wrong, you can have our stock which by the
way, is going to be collapsing in value, if anything goes
wrong. So that's exactly what happened.
And as soon as Enron stock started going down, a lot of
these off-book entities were basically forced to unwind or,
you know, I mean, in essence, it's a margin call, right?
Your you have a bet that goes wrong and your but you know,
that's what happens. And that's why, you know, Madoff
was able to keep going until he couldn't what's the Buffett
quote, anybody can remember it off the top of their head.
No one knows. You're swimming naked until the
tide goes out. Right?
Exactly. That's the other, you know, big
lesson here for everybody. I mean we've been in a bull
market for everything for two and a half years and arguably
for 10 years. So the water hasn't gone out in
a while if Anything crypto has the advantage of having had a
major major chill in, you know, 2018 2019 when people were
really starving but of course it's not that hard to set up a
fresh scam so it's not like you need a lot of lead time.
When you were talking to a specific story is reminded of
specifically the collateralizing with the stock and like that
being treated as making the deal, okay?
Reminded me of the revolving credit agreement that was
negotiated between B and x and together in March of 2019
because they described it as a secured loan, but it was secured
by shares of iPhone x which was one of the companies, obviously
that runs the bitfenix platform. And so in the case, where
bitfenix had not gotten access to this loan facility or where
they in the future. Needed to have really draw upon
it. Those stocks and up not being
valued enough to actually cover the value of the loan.
Right. Right.
Exactly. It's an exact parallel.
Yes. And so that was just a very
striking thing to me. And it's the same way like with
Hollow being one of the directors of Dell chain
obviously being an offshoot of Delta and then also still being
CTO at bitfenix in tether that just strikes in my head is,
remarkably similar to the Enron Executives.
Well, and the thing that we don't know or, you know, we've
talked a Little bit about this. The thing that we don't know, in
some of the tether at this stations, is this, this question
of related entities as the commercial paper that they're
holding, you know, I went through the the trucco thing
where you have Enron setting its own price for assets that it's
buying back from an outside quote-unquote outside entity
that's not really an outside entity and so you can least
hypothetically imagine a similar situation where you know tether
or any other stable coin who knows, is hypothetical.
I can say this commercial paper from our good friends, over at
this exchange, that we don't have a formal relationship with
is worth X and that's what's backing our asset.
It does ultimately become about Bubbles and their deflation
because you can say that and you're safe until somebody
actually asks to see the receipts.
Yeah. We're right back to the as long
as you can continue the illusion as long as you keep convincing
people, that this is going to exist into the future and be
valuable in the future. You can Jane, the fraud itself.
And so I think that's really good.
Parallel. And a good example of how,
without transparency into how a business is valuing its assets
and it's lines of business. It can be easy to get taken in
by the narrative, they construct around it, Simplicity itself.
I mean, it's just made up, there's, there's nothing to stop
them from Doing It. Ultimately, the illusion versus
character is where I end up. I don't know.
I mean, what do you guys think? Like, in this space, maybe, I
don't know if your total Tactics.
But like, are there, what are your metrics for?
Trying to figure out if something is legit or not?
I can tell you that, I like to look into the corporate
structure. So I like to see how transparent
the corporate structure is who they're registered with.
I like to know who the executive leadership is.
I think the executive leadership is actually quite telling what
we've been talking about here at Enron Jeffrey Skilling, was
tantamount to everything. All of them more.
And ethical issues at Enron Jeffrey Skilling was all of
that. And then you have Ken Lay, who
was like endorsing all of that and then you have Andy fast out,
who was like, I'm just following orders.
I the entire executive leadership there was perfect for
fraud and so I think that's very important that it.
What other what other kind of metrics are good for this?
Well, I think one of the things that can be valuable in the
cryptocurrency space is, I generally tend to have more
trust for the companies that have been around for a while.
Because that means they've been able to survive a couple major
draw Downs at this point. So they weren't like so
structurally insolvent, whenever that the drawdown exposed their
problems. And I think the vast majority of
cryptocurrency businesses have had issues at some point at this
point. So often seeing how they
responded to those can be telling.
And so the ones who are honest and forthright or will detail
what went wrong, and what they had to do to fix, it are
generally going to To Garner more trust from me than other
ones. Yeah, it's really unfortunate.
Its largest crypto company. Coinbase is actually a pretty
bad actor in terms of transparency, but that's a topic
for another day. So are there any parting words
that you would like to leave us with or any issues or concerns
or just contemplations in regard to Enron, I don't have to have
anything extra to add about Enron specifically, but I will
say because I think we touched on it and it Bears repeating
that. You know, there's a lot of scary
stuff out there and there are another Warren Buffett quote.
I mean I hate it's so trite, but it's so true.
Which is be fearful, when others are greedy, they be greedy when
others are fearful and right now, people are greedy and that
makes me fearful so. I mean that would be maybe the
last thing I would say because people at Enron were very greedy
and it ended where it ended and we're in an era where there's a
lot of greed to go around and it's going to end eventually
somehow. Thank you very much.
For coming on David everyone. Make sure you check out David's
book. Bitcoin is Magic internet moist.
Memetic Warfare in the end of me reality and I enjoyed talking
about invented a awesome and I'm on Twitter at just at David's e
Morris so that's going to do it for a conversation on Enron with
David Morris. Hopefully you enjoyed listening
to that as much as we enjoyed discussing it.
I'm looking forward to a couple other interviews that we're
releasing this week. It's going to be a really busy
week. For us next.
We're having Rohan gray. And after that, we're going to
be doing an interview with Preston, burn diametrically
opposed to one another completely different and yet
both appearing on our show. So I'm very, very excited about
this and I hope you guys join us next time.
Thanks.