Similarities between Enron and FTX
1. Both politically connected.
Ken Lay was good friends with W.
SBF was second largest donors to Democrats.
Was this all done to buy favor when the shit hits the fan? Or was it used to inspire trust among lawmakers so they can make regulations that would help their troubles.
2. Both worked on ideas "too complicated to explain"
Enron traded in the brand new esoteric field of natural gas derivatives. But they didn't have cash flows because "their algorithms were too complicated to understand."
Ditto for FTX and crypt. And Madoff and Lehman Brothers.
3. Both created other entities to hide non-performing assets
Enron had 100s of "special purpose vehicles" they would "sell" their non-performing assets to and still mark them at the same value on their balance sheets.
FTX used Alameda to hide and patch up non-performing assets.
4. Both were deep in territories that were unregulated
Nobody has yet figured out how to regulate these natural gas derivatives Enron traded in.
FTX was in unregulated Bahamas.
5. Both had compromised accounting
Enron used the biggest account in the world ...Arthur Anderson. Who, by strange conflict of interest, was also Enron's consultant figuring out how to structure these special purpose entities.
6. Both used very favorable methods to value complicated assets on their books.
Not everything is like a stock. The value of a stock is where it traded at today in the stock market.
But take your house as an example. If you neighbor has a house exactly yours but he has to firesale it 50% down because he needs to sell it quick to pay a house debt then what is your house worth now.
"mark to market" accounting would say your house is worth 50%, the same as the other house. But realistically, ("mark to imagination") it's worth higher than that.
This should, in practice, use fair comment sense. But it can easily be manipulated in many ways.
7. Both used the following strategy:
A) Mark a huge gain that was not quite real.
B) Use that gain to pump up the value of their company.
C) use the new value of the company to raise significant money to patch up the holes when the losses appeared.
D) Declare the loss. But earlier, when you declared it a gain, the gain was a much bigger percentage of the company. And becuase of that gain, the company value rose and now the declared loss is a much smaller parentage of the company,
E) Use inflated assets as collateral to borrow money, which can be used to buy back shares or keep the high value of their company floating.
F) Have only a few executives in the know
8. It falls apart when two things happen.
A) the company is so big they can no longer count on it getting bigger to hide losses
B) the markets are collapsing so it it becomes harder to to keep inflating gains.
9. Contagion
For the entire year after Enron, even the most stolid energy companies spiraled down in share price. 100 year old utility companies like Duke Energy and Con Edison were trading like shitty tech companies. But they were paying 15% dividends because the share price was low but their profits were real
FTX, we'll see.
10. Both had, will have minuscule effects on their industry.
Enron didn't stop the energy business.
Worldcom didn't stop telecommunications
Lehman Brothers didn't stop banking.
And FTX won't stop the fundamental vision of crypto. Crypto is a trillion dollar industry and FTX was $10 billion of that.
Let's see what happens next. There were will be more nervousness. But long-term this will just be a footnote whenever the next big financial innovation happens and the next big fraud.
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