From: acquiredfm
The story of Enron, a company that once ranked as the seventh largest in America by market capitalization, is being retold in 2022 due to its striking similarities with the collapse of FTX [00:01:19]. While the specific industries and eras differ, the underlying mechanisms of their downfall present uncanny parallels [02:11:15].
Uncanny Parallels
Both Enron and FTX were financial trading companies that became over-leveraged and believed they could do no wrong [02:14:00]. Their operations became entangled in a complex web of self-dealing, designed to conceal burgeoning problems [02:14:00]. In both cases, key individuals enriched themselves significantly, while shareholders and investors remained largely unaware of the true financial state [02:24:00].
Related-Party Transactions and Self-Dealing
Enron utilized Special Purpose Entities (SPEs) and proprietary funds, such as the LJM (Leah, Jeffrey, Matthew) partnerships named after CFO Andy Fastow’s family, to offload toxic assets and hide debt [00:00:05]. Fastow personally profited from these arrangements, demonstrating a clear conflict of interest [01:18:50]. Similarly, FTX’s close relationship with Alameda Research, an affiliated trading firm, allowed it to act as both an exchange and a primary counterparty to trades [01:45:39], giving it beneficial pricing and information advantages [01:45:53]. This structure in Enron, where the company was the counterparty to every trade via Enron Online, mirrors the FTX/Alameda dynamic [01:45:45].
Bull Market Folly and Lack of Scrutiny
Both scandals reached their peak during periods of intense bull markets, where an abundance of capital and a “fear of missing out” (FOMO) incentivized investors to pile into high-risk, low-disclosure assets [00:08:05]. In such environments, the investor community loses the incentive to ask probing questions [00:08:27]. As Warren Buffett or Howard Marks famously stated, “When the tide goes out, you see who’s swimming without their swimming trunks on” [02:00:42]. The dot-com bubble burst revealed Enron’s vulnerabilities [02:01:06], just as the 2022 tech and crypto market downturn exposed FTX’s issues [02:00:00].
Financial Leverage and Correlated Risk
A critical flaw shared by both was excessive financial leverage. Enron heavily relied on complex financial instruments and off-balance sheet entities, which became a massive liability when the market turned [02:03:51]. The use of Enron stock as collateral for hedges through “Raptor” entities ultimately doubled the company’s exposure to a broad market downturn [02:19:10]. Similarly, FTX’s reliance on its native FTT token as collateral created a highly correlated risk, where a drop in the token’s value directly impacted the company’s financial stability [03:05:49].
Delusional Leadership and Lack of Transparency
Enron’s executives, particularly CEO Jeffrey Skilling, exhibited profound cognitive dissonance, believing their innovative accounting practices were legitimate and that the “rug” of concealed problems was “infinitely large” [01:46:53]. Skilling famously called an analyst an “a**hole” on an earnings call for asking about Enron’s incomplete financial reports [01:58:27]. The company intentionally obfuscated its financial statements and segments to hide that most of its “income” came from trading, not its core logistics business [01:57:07]. This parallels the opacity and lack of clear financial reporting at FTX.
Incentives and Compensation
Both companies fostered cultures where incentives dramatically misaligned with long-term stability. Enron heavily tied executive bonuses to stock price performance, rather than intrinsic company metrics, which encouraged risky behavior to “pump the stock” [02:09:08]. This resulted in executives like Ken Lay and Skilling selling hundreds of millions of dollars in stock while encouraging employees to invest their 401(k)s in Enron shares [02:08:44].
Key Differences
While the parallels are striking, the primary difference is that Enron managed to conduct its fraudulent activities as a public company, in “plain daylight,” and with significantly larger dollar amounts [02:29:00]. In contrast, FTX’s collapse occurred within the less regulated private crypto markets [03:59:00].
Regulatory Aftermath
The Enron scandal led to the swift passage of the Sarbanes-Oxley Act of 2002 (SOX) [02:37:51]. SOX introduced strict reforms, including requiring CEOs and CFOs to personally certify financial accuracy, imposing severe penalties for fraud, and mandating auditor independence [02:38:53]. This legislation aimed to protect the investing public in public companies from fraud [03:21:51]. However, it’s been argued that SOX may have inadvertently pushed fraudulent activities into the less regulated private markets, as seen with companies like Uber, Theranos, and FTX [03:59:00].
Scale of the Scandals
While the FTX collapse is significant, its scale pales in comparison to Enron. Enron had 100 billion in revenue in 2000, and left behind claims from 30,000 creditors, with Citibank alone claiming 3.1 billion, and the total hole is estimated at $10 billion [03:16:13].
Conclusion
The stories of Enron and FTX serve as stark reminders that regardless of industry or technological innovation, fundamental economic principles and ethical governance remain paramount. The consequences of financial engineering detached from underlying value, combined with unchecked greed and a lack of transparency, can lead to devastating collapses, regardless of whether they occur in traditional energy markets or the burgeoning world of cryptocurrency.