FTX: The Enron case on steroids, fueled by woke capitalism
That John J. Ray, the person charged with overseeing Enron’s denouement, has been appointed as CEO of FTX after its spectacular collapse into Chapter 11 chapter is becoming, given the much-discussed parallels between the 2 company failures and the reigning enterprise and cultural context by which they every occurred.
Ray headed Enron Collectors Restoration Corp. in 2003 and was liable for liquidating Enron’s remaining property, distributing proceeds to collectors and resolving excellent litigation, which included actions towards monetary establishments accused of abetting Enron’s myriad misdeeds. Like him, I too had a front-row seat to Enron’s implosion, having been a part of the restructuring workforce that suggested the corporate from its 2001 chapter submitting by to the affirmation of its Plan of Reorganization in 2003.
A lesson I took from that have — seemingly echoed in FTX’s disintegration — is that, within the case of economic chicanery, there’s little that’s new below the solar. Whether or not one considers Dutch tulips, the South Sea bubble, Charles Ponzi’s eponymous scheme, or Bernie Madoff’s predations, these and different instances share lots of the identical traits: a patina of legitimacy and indicators of early promise, adopted by breathtaking collapse.
Numerous “explainers” about FTX can be printed as extra involves gentle. The definitive story of occasions behind the FTX debacle will emerge over time, as occurred with Enron. Till then, as with Enron, FTX may be very a lot the product of its zeitgeist, and its fall appears to adapt key traits of the company fraud witnessed in Enron’s downfall to right this moment’s enterprise and cultural second.
Enron’s crash was, in lots of respects, the anti-climax of the financialization of commerce that gathered steam beginning within the Nineteen Seventies and Eighties. This era coincided with the rising primacy of meritocracy and its step-sibling, credentialism; that Enron CEO Jeff Skilling was a graduate of Harvard Enterprise College and former McKinsey associate contributed to Enron’s “smartest guys within the room” cool-kid mystique.
In maybe a foreshadowing of the FTX crack-up, Enron sought to distinguish itself from its competitors by attaching a high-tech aura — Enron On-line, an power buying and selling platform — to a staid “actual financial system” enterprise. Whereas power manufacturing (and monetary providers, as with FTX) are key sectors of any developed financial system, tantalizing development prospects important to attracting capital are extra simply conjured below the guise of superior proprietary know-how. What such “innovation” cloaked with Enron had been dodgy accounting practices (mark-to-market accounting, using off-balance sheet automobiles, and the like) and related-party self-dealing deployed to abet the fiction of outsized returns, extract rents and preserve the wheel spinning.
One other function of Enron was institutional and regulatory seize, though the latter maybe to a lesser diploma than believed on the time. Enron Chairman Ken Lay had been mooted as a potential Power Secretary within the Bush administration, and the corporate efficiently advocated for and exploited market deregulation in California, contributing to that state’s 2000-2001 electrical energy disaster. Whereas hardly dispositive, Enron’s aggressive lobbying and reputational efforts, together with a nationwide promoting marketing campaign, had been integral to the myth-making required to maintain the fiction of a singular, worthwhile enterprise mannequin.
Arguably extra complicit within the rise and fall of Enron was the self-interested credulity of revered monetary intermediaries and the capital markets, important to inducing funding and sustaining a excessive share worth. Enron’s accountants, consultants and outdoors counsel ought to have questioned the corporate’s aggressive accounting practices and doubtful enterprise practices, however as an alternative ran interference for them. The monetary incentives for validating these actions finally outweighed their skilled responsibility to sound the alarm. Equally, main monetary establishments willfully suspended disbelief concerning the financial substance of assorted monetary maneuvers in alternate for underwriting and advisory charges. Solely when a lonely band of short-sellers and investigative journalists started to poke at inconsistencies within the firm’s narrative was its confidence sport uncovered.
What little we all know to this point about FTX suggests an Enron on steroids, fueled by the oxygen of woke capitalism.
Whereas the FTX narrative is equally tethered in technological innovation — blockchain and cryptocurrency — its enterprise mannequin is much more opaque than Enron’s, which no less than had actual power property at its core. Whereas blockchain represents a bona fide technological advance with significant promise, its software to cryptocurrency has opened large the door to the feloniously inclined. Exploiting many traders’ rudimentary understanding of fiat cash, cryptocurrency promoters’ pitch boils right down to “So why not crypto?” — eliding the truth that the U.S. authorities has a monopoly on the police energy essential to implement the writ of its forex. Crypto solely has worth if the arrogance sport is sustained in perpetuity.
In distinction with Enron, FTX seems to have been extra methodical in its efforts at influencing (or avoiding) regulation and shaping its fame. Extra is predicted to emerge within the coming weeks and months concerning the hands-off strategy taken by market regulators and the political contributions made by FTX founder Sam Bankman-Fried, whose studied virtue-signaling could have been designed to deflect scrutiny of his firm’s enterprise practices. The puff items about FTX and Bankman-Fried in mainstream media shops strengthened an echo chamber signaling that no incisive questions had been to be requested.
And so, FTX is alleged to be our first absolutely postmodern fraud, well-suited to an period of performative advantage and woke capitalism. We stay in a time by which goal actuality has solely tenuous buy. The president of the USA can solemnly state that gasoline costs have fallen since he took workplace. What one identifies as has outmoded what one is, and the pseudo-social science related to anti-racism, social justice, fairness and privilege — ideas both with out substantive which means and simply refuted, or uncovered as grossly intolerant upon nearer examination — at the moment are the coin of the realm in company America. On this surroundings, one shouldn’t be stunned that duped traders are shocked to find one thing isn’t price what they had been instructed.
Alas, in enterprise, as in life, there’s at all times a reckoning. Each Enron and FTX appear to have been marked by a societal failure to problem that which didn’t add up. Within the late Nineteen Nineties, Enron launched a well-known (and subsequently ironic) TV advert marketing campaign with the tagline “Ask Why.” The thought was that progress might be made provided that the suitable questions are posed.
At the moment, to “ask why” might be tough when questioning the accepted narrative may end up in one’s “cancellation.” Nonetheless, maybe it’s time for the adults to reassert themselves, problem bogus narratives, and extinguish ruinous enterprise schemes earlier than they begin.
Richard J. Shinder is the founding father of Theatine Companions, a monetary consultancy, and a frequent lecturer, speaker and panelist on enterprise and monetary matters. He has written extensively on financial, monetary, geopolitical, cultural and company governance-related points. Observe him on Twitter @kbrickhousehardJShinder.