FTX: The Enron case on steroids, fueled by woke capitalism
That John J. Ray, the man charged with overseeing Enron’s denouement, has been appointed as CEO of FTX after its spectacular collapse into Chapter 11 bankruptcy is fitting, given the much-discussed parallels between the two corporate failures and the reigning business and cultural context in which they each occurred.
Ray headed Enron Creditors Recovery Corp. in 2003 and was responsible for liquidating Enron’s remaining assets, distributing proceeds to creditors and resolving outstanding litigation, which included actions against financial institutions accused of abetting Enron’s myriad misdeeds. Like him, I too had a front-row seat to Enron’s implosion, having been part of the restructuring team that advised the company from its 2001 bankruptcy filing through to the confirmation of its Plan of Reorganization in 2003.
A lesson I took from that experience — seemingly echoed in FTX’s disintegration — is that, in the case of financial chicanery, there is little that is new under the sun. Whether one considers Dutch tulips, the South Sea bubble, Charles Ponzi’s eponymous scheme, or Bernie Madoff’s predations, these and other cases share many of the same characteristics: a patina of legitimacy and signs of early promise, followed by breathtaking collapse.
Countless “explainers” about FTX will be published as more comes to light. The definitive story of events behind the FTX debacle will emerge over time, as happened with Enron. Until then, as with Enron, FTX is very much the product of its zeitgeist, and its fall seems to adapt key characteristics of the corporate fraud witnessed in Enron’s downfall to today’s business and cultural moment.
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Enron’s crash was, in many respects, the anti-climax of the financialization of commerce that gathered steam starting in the 1970s and 1980s. This period coincided with the emerging primacy of meritocracy and its step-sibling, credentialism; that Enron CEO Jeff Skilling was a graduate of Harvard Business School and former McKinsey partner contributed to Enron’s “smartest guys in the room” cool-kid mystique.
In perhaps a foreshadowing of the FTX crack-up, Enron sought to differentiate itself from its competition by attaching a high-tech aura — Enron Online, an energy trading platform — to a staid “real economy” business. While energy production (and financial services, as with FTX) are key sectors of any developed economy, tantalizing growth prospects essential to attracting capital are more easily conjured under the guise of advanced proprietary technology. What such “innovation” cloaked with Enron were dodgy accounting practices (mark-to-market accounting, the use of off-balance sheet vehicles, and the like) and related-party self-dealing deployed to abet the fiction of outsized returns, extract rents and keep the wheel spinning.
Another feature of Enron was institutional and regulatory capture, although the latter perhaps to a lesser degree than believed at the time. Enron Chairman Ken Lay had been mooted as a possible Energy Secretary in the Bush administration, and the company successfully advocated for and exploited market deregulation in California, contributing to that state’s 2000-2001 electricity crisis. While hardly dispositive, Enron’s aggressive lobbying and reputational efforts, including a national advertising campaign, were integral to the myth-making required to sustain the fiction of a unique, profitable business model.
Arguably more complicit in the rise and fall of Enron was the self-interested credulity of respected financial intermediaries and the capital markets, critical to inducing investment and maintaining a high share price. Enron’s accountants, consultants and outside counsel should have questioned the company’s aggressive accounting practices and dubious business practices, but instead ran interference for them. The financial incentives for validating these activities ultimately outweighed their professional duty to sound the alarm. Similarly, major financial institutions willfully suspended disbelief about the economic substance of various financial maneuvers in exchange for underwriting and advisory fees. Only when a lonely band of short-sellers and investigative journalists began to poke at inconsistencies in the company’s narrative was its confidence game exposed.
What little we know thus far about FTX suggests an Enron on steroids, fueled by the oxygen of woke capitalism.
While the FTX narrative is similarly tethered in technological innovation — blockchain and cryptocurrency — its business model is even more opaque than Enron’s, which at least had real energy assets at its core. While blockchain represents a bona fide technological advance with meaningful promise, its application to cryptocurrency has opened wide the door to the feloniously inclined. Exploiting many investors’ rudimentary understanding of fiat money, cryptocurrency promoters’ pitch boils down to “So why not crypto?” — eliding the fact that the U.S. government has a monopoly on the police power necessary to enforce the writ of its currency. Crypto only has value if the confidence game is sustained in perpetuity.
In contrast with Enron, FTX appears to have been more methodical in its efforts at influencing (or avoiding) regulation and shaping its reputation. More is expected to emerge in the coming weeks and months about the hands-off approach taken by market regulators and the political contributions made by FTX founder Sam Bankman-Fried, whose studied virtue-signaling may have been designed to deflect scrutiny of his company’s business practices. The puff pieces about FTX and Bankman-Fried in mainstream media outlets reinforced an echo chamber signaling that no incisive questions were to be asked.
And so, FTX is alleged to be our first fully postmodern fraud, well-suited to an era of performative virtue and woke capitalism. We live in a time in which objective reality has only tenuous purchase. The president of the United States can solemnly state that gasoline prices have fallen since he took office. What one identifies as has superseded what one is, and the pseudo-social science associated with anti-racism, social justice, equity and privilege — concepts either without substantive meaning and easily refuted, or exposed as grossly illiberal upon closer examination — are now the coin of the realm in corporate America. In this environment, one shouldn’t be surprised that duped investors are shocked to discover something isn’t worth what they were told.
Alas, in business, as in life, there is always a reckoning. Both Enron and FTX seem to have been marked by a societal failure to challenge that which didn’t add up. In the late 1990s, Enron launched a famous (and subsequently ironic) TV ad campaign with the tagline “Ask Why.” The idea was that progress can be made only if the right questions are posed.
Today, to “ask why” can be difficult when questioning the accepted narrative can result in one’s “cancellation.” Nevertheless, perhaps it is time for the adults to reassert themselves, challenge bogus narratives, and extinguish ruinous business schemes before they start.
Richard J. Shinder is the founder of Theatine Partners, a financial consultancy, and a frequent lecturer, speaker and panelist on business and financial topics. He has written extensively on economic, financial, geopolitical, cultural and corporate governance-related issues. Follow him on Twitter @kbrickhousehardJShinder.