Enron

The FTX fraud has dominated headlines now for weeks, during which we’ve debated if and how Acquired could uniquely add to the conversation. Then we realized there was an angle so perfect that we had to drop everything and enter Acquired research overdrive: Enron. Travel back with us to the granddaddy fraud of them all, 2001’s then-largest bankruptcy in US history and the impetus for the famous Sarbanes-Oxley Act. So much of Enron’s history parallels FTX that the uncanniness is almost unbelievable — right down to the same CEO running the two bankruptcies. Sit back and enjoy this crazy tale of villainy, greed, and the nature of humans and money. Maybe just don’t take notes on this one… *Links:* - Book Andy Fastow as a speaker for your next corporate event! https://www.bigspeak.com/speakers/andy-fastow/ - Episode sources: https://www.acquired.fm/episodes/enron#sources *Carve Outs:* - Enron: The Musical: https://www.broadway.com/shows/enron/ - Andor: https://disneyplusoriginals.disney.com/show/andor - Brooks Addiction Walkers: https://www.brooksrunning.com/en_us/addiction-walker-suede-mens-walking-shoe/110319.html - Hoka Slides: https://www.hoka.com/en/us/all-gender-footwear/ora-luxe/1134150.html - JCal on the Tim Ferriss Show: https://tim.blog/2022/11/19/jason-calacanis-transcript/ *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  Obviously, the context is we're doing this episode because of FTX.

• 0:02Ben Gilbert?

  Right. It's a related party transaction, one could say.

• 0:05David Rosenthal?

  It's like LJM.

• 0:07Ben Gilbert?

  It's like, you know, the Raptors.

• 0:08David Rosenthal?

  You know what LJM stands for, right?

• 0:10Ben Gilbert?

  It's his kids and his wife, right? What a psychopath. Can't possibly be fraud if it's named after my family.

• 0:18David Rosenthal?

  I feel like this story is like American Psycho in Houston.

• 0:21Ben Gilbert?

  Yes. Oh, my God, yes.

• 0:39Ben Gilbert?

  Welcome to season 11, episode seven of Acquired, the podcast about great technology companies. Well, sometimes not so great companies and the stories and playbooks behind them.

• 0:51David Rosenthal?

  Not so great companies and the stories and cooked books behind them.

• 0:56Ben Gilbert?

  Oh, there you go.

• 0:58David Rosenthal?

  That's a dad joke.

• 0:59Ben Gilbert?

  That is a dad joke. I am Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

• 1:06David Rosenthal?

  And I'm David Rosenthal, and I'm an angel investor based in San Francisco.

• 1:11Ben Gilbert?

  And we are your hosts. Well, listeners, it brings me no joy to do this episode, but it seems all too appropriate in this moment in 2022. Today, we tell the story of Enron. It was the seventh biggest company in America by market cap. It was heralded as the pioneer of a new business model during a new technology era. Executives had endorsements, or at least friendships and public appearances with multiple US presidents. It had the Houston Astros baseball stadium, Enron Field, bearing its name. It was even named Fortune Magazine's Most Innovative Company. Six years in a row.

• 1:52David Rosenthal?

  Including in 2001, the year it went bankrupt.

• 1:56Ben Gilbert?

  Unbelievable. Less than a year after its stock hit an all time high, Enron filed for the largest bankruptcy in American history to that point. This story is every bit as crazy as the FTX story that we are all watching play out in real time. The parallels are totally uncanny. A financial trading company that got over leveraged, thought they could do no wrong, and got tangled up in a web of self dealing to try and paper over their problems. Individuals profited richly while shareholders were none the wiser. The biggest difference really is that somehow Enron managed to do it all as a public company in plain daylight the entire time and with much bigger dollar amounts.

• 2:37David Rosenthal?

  We have a big thank you to say here. The idea for this episode came from our good friend and past acquired guest Andrew Marks. I was in New York on the way back from Lisbon and I had breakfast with Andrew and we were talking about FTX, of course, and everything going on. And I was like, how can acquired add to the conversation right now about FTX? And he was like, I've got a good idea. You guys should do Enron. And I was like, boom, that is what acquired can add to this conversation.

• 3:07Ben Gilbert?

  Well, on the FTX note, suffice to say, we will definitely be appending a new intro to that episode.

• 3:14David Rosenthal?

  Indeed.

• 3:15Ben Gilbert?

  All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:34David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 3:55Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:17David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 4:35Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. After this episode, join the Slack. 13,000 smart, curious, thoughtful, well researched people are in there and will be discussing this episode. Without further ado, David, take us in. Listeners, this is not investment advice. David and I may hold investments in

• 5:18Ben Gilbert?

  the companies we discuss, although I don't think you can invest in any of these companies anymore.

• 5:22David Rosenthal?

  Oh, I've got a fun little thing that I'll bring up right at the end of the episode about investing in Enron that blew my mind when I learned this.

• 5:29Ben Gilbert?

  All right, all right. The show is for informational and entertainment purposes only. David, over to you.

• 5:35David Rosenthal?

  I feel like we also need a disclaimer that this is not accounting advice.

• 5:38Ben Gilbert?

  This is not accounting advice.

• 5:40David Rosenthal?

  This is gonna be fun because this is such history now, Enron, and there are many really good books out there. So you read The Smartest Guys in the Room, right?

• 5:50Ben Gilbert?

  By Bethany McLean, yep.

• 5:52David Rosenthal?

  And I read Conspiracy of Fools by Kurt Eichenwald, both of which I think are really good. Conspiracy of Fools is great. It is a very, very well researched history of Enron. And I thought a good place to start is right at the end of the prologue of Conspiracy of Fools. Kurt Eichenwald writes this, and I just thought it was so perfect to frame the Enron story and the FTX story today. He says, "This then is more than the tale of one company's fall from grace. It is at its base the story of a wrenching period of economic and political times." As revealed through a single corporate scandal. It is a portrait of an America in upheaval.

• 6:35David Rosenthal?

  At the turn of the 21st century, a country torn between its worship of fast money and its zeal for truth, between greed and high mindedness, between Wall Street and Main Street. Ultimately, it is the story of the untold damage wreaked by a nation's folly, a folly that in time we are all but certain to see again.

• 6:57Ben Gilbert?

  It's so literary, my God, those words. After trying to consume an insane amount of Enron stuff over the last couple of weeks, the thing that occurs to me is this is something that can only occur to this height in a bull market, where there's so much capital saturating so many opportunities that people are willing to go way out on the risk curve, looking for returns, where there's so much FOMO playing into it that they sort of have to pile into these low disclosure, super risky type of assets, because everything else is already at all time highs and crazy multiples. And of course, it's the people's fault driving the car that gets us here, but the environment around the car on the road is definitely facilitating it.

• 7:40David Rosenthal?

  Well, the investor community, as we saw happen over the last couple of years here, just loses all incentive and desire to ask questions.

• 7:49Ben Gilbert?

  Yeah.

• 7:50David Rosenthal?

  That is what happened 20 plus years ago. So how did we get there then?

• 7:57Ben Gilbert?

  And where did Enron come from?

• 7:58David Rosenthal?

  Where did Enron come from? We start in the 1970s in the United States, where a series, for those of you who know your American and indeed world history, a series of oil crises and energy crises shock the nation and the world. First, in 1973, when OPEC, the Organization of Petroleum Exporting Countries, starts an oil embargo on the US and other Western nations, and the price of energy triples. Think about this, we're talking about the impact of the Russia-Ukraine war on prices in Europe. This was way worse.

• 8:41David Rosenthal?

  The consequences of that were that the stock market crashed immediately. The economy entered a huge recession. I mean, this was the end. This was the slamming of the door on the post-World War II American economic growth miracle. This killed it. And when, we've talked about this on the show a few times, the 1970s were brutal. We talked about interest rates going so high. It was because of this, this first oil shock in 1973 and the second in 1979. Unemployment hits 10%. CPI and inflation is above 5% for pretty much the entire decade. It hits a high of 12.4% in 1980.

• 9:22Ben Gilbert?

  Wow.

• 9:23David Rosenthal?

  And then famously, when Paul Volcker takes over as chairman of the Fed in 1979.

• 9:29Ben Gilbert?

  Brings the hammer down.

• 9:30David Rosenthal?

  He brings the hammer down. I didn't realize how high this was. He raised the Fed funds rate.

• 9:35Ben Gilbert?

  That was at zero a year ago.

• 9:37David Rosenthal?

  That was at zero a year ago and that everybody's freaking out because it's at, what, like three and a half now? Or something like that? People think it might go to four or five and that's crazy and that's tanking the economy. Do you know how high Volcker raised it in the early 1980s?

• 9:50Ben Gilbert?

  10%?

• 9:51David Rosenthal?

  Above 19%.

• 9:55Ben Gilbert?

  Whoa, I assume it had to be because I had always heard that mortgages hit 18. So I always assumed that the mortgages had to be higher than the Fed funds rate.

• 10:02David Rosenthal?

  Yeah, I don't think it was above 19% for long, but when it was, I mean, that's like the base lowest interest rate possible. So mortgages must have been in the twenties at that point in time.

• 10:12Ben Gilbert?

  Wow, crazy.

• 10:14David Rosenthal?

  My God. And that finally did break the back of inflation, but the cost was immense. Doing this research really helped me understand more about the eighties, you know, in the go-go years of the eighties. It was because coming out of this horrible decade of the 1970s.

• 10:32Ben Gilbert?

  Oh, yeah. Of course, this was the birth of the Wall Street mania because the super high interest rates from the Volcker era would have led to unbelievably low multiples on any asset you could buy. So of course you've got tons of room to run on investing at bargain basement prices for things that are going to go up.

• 10:53David Rosenthal?

  Yep.

• 10:55David Rosenthal?

  What was it that precipitated all this? Like I said, it was the energy crises, oil shocks and the energy shocks. So, starting in the mid 70s, and it takes really 15, 20 years for all this legislation to wind through the government. The US government starts deregulating the energy markets in the US. So if you go back to our episodes on Rockefeller and Standard Oil, the initial energy markets in the US were monopolies, like it was Standard Oil, right? And then when the government brought the hammer down on Standard Oil and the energy monopolies, everything got regulated and utilities, energy producers, all became regulated government entities where prices of energy were set by the government.

• 11:38Ben Gilbert?

  And when you say regulated, you know, there's different flavors of this. There's something where the government could actually own the utility and you pay the government for the services, but there's also sort of a middle ground where something is so important to the public that price controls are put into place, or the free market is not allowed to reign free. The government would do something like grant an exclusive monopoly to a certain company and say, but the prices have to be here, or but you can't make that much margin on it.

• 12:05David Rosenthal?

  You know, this makes sense, especially in the post-World War II American economy and way of life. Power is critically important. Electricity, gasoline for homes, for businesses, for commuting, for factories, all this stuff takes power. Like you want stability and low prices.

• 12:25Ben Gilbert?

  Yep.

• 12:25David Rosenthal?

  But then after the 70s, of course, this all gets shook up. So in 1978, Jimmy Carter signs the National Energy Act, which starts to open back up parts of the energy economy in the US to free market competition. And the first big area of the energy industry that deregulates is the natural gas industry. So, enter one Kenneth Lee Lay.

• 12:53David Rosenthal?

  Lay, like our first protagonist of this season, Sam Walton, Lay was born in rural Missouri in 1942. After Walton, his father was a Baptist preacher who ran a general store out in the Missouri countryside. That ended up failing and Lay grew up very, very poor, but his family believed in education. And when his older sister graduated high school, his family wanted her to go to college. So they moved the whole family to Columbia, Missouri. Wow. It's like literally the same story. It's crazy. Literally, it's the same story so that she could live at home, which was the only way they could afford for her to attend to go to the University of Missouri at Columbia.

• 13:36David Rosenthal?

  Very, very lovely place, which we have now been to multiple times for a capital camp. So she goes to the University of Missouri. Ken would follow in her footsteps, also go to the University of Missouri, where he would discover a lifelong passion for economics. He's a star student in the economics department. He graduates, he goes on to work in the oil industry after he graduates. On the nights and weekends while he's working in the industry, he completes a PhD in economics. And then one day he gets a call in the mid 1970s from his old advisor from Missouri, his old professor, who just got nominated to the Federal Power Commission,

• 14:20David Rosenthal?

  right as all of this deregulation is starting to percolate its way through the government. And so he calls up Lay and says, come join me here in DC and help me work through all this with the government and the industry. So Lay ends up serving as the Deputy Undersecretary of Energy in the Department of the Interior, right as these oil shocks are happening and deregulation is starting to be talked about. After a few years, he goes back into industry at Florida Gas, a pipeline company in Florida, as the president and number two operator within the company.

• 14:55Ben Gilbert?

  So so far in this guy's career, he sounds like the real deal.

• 14:59David Rosenthal?

  He totally is.

• 15:00Ben Gilbert?

  PhD economist, civil servant, working in the government, getting DC exposure, going into industry to actually get some operating experience, grew up in a hard era and sort of like had to fight his way through adversity.

• 15:14David Rosenthal?

  Yep, he's never deployed for combat, but during Vietnam, he ends up going into the Navy. He becomes like a naval intelligence officer. By all outward appearances, he seems like a real good guy at this point in time. He marries his college sweetheart, you know, true American story. So late 70s, early 80s, he's the number two executive at this natural gas pipeline company in Florida. And in 1982, his former boss had moved over to the big leagues in the energy industry. He'd gone to a company called Transco Energy, based in Houston, Texas, which is

• 15:57Ben Gilbert?

  Silicon Valley of the oil and gas sector.

• 16:00David Rosenthal?

  The Silicon Valley of the oil and gas sector, the New York City to the financial industry of the oil and gas sector, everything. If you want to be in energy in America, you want to be in Texas, either in Dallas or Houston. But I think at this point in time,

• 16:14Ben Gilbert?

  Houston.

• 16:15David Rosenthal?

  Probably Houston.

• 16:16Ben Gilbert?

  Yep.

• 16:17David Rosenthal?

  So Lay is now in the big time. And as is fitting for now being in the big time of the era, he leaves his wife behind in Florida and moves to Houston with his new wife, who was his secretary at Florida Gas.

• 16:35Ben Gilbert?

  Unfortunately, classic for this story.

• 16:37David Rosenthal?

  Classic. This is not the last time we're going to hear something to this effect in people's personal lives in the Enron story. So right as he arrives in Houston at Transco.

• 16:49David Rosenthal?

  Two things are happening. One, as I've been talking about all along here, deregulation is finally percolating through to industry. Carter signed the Energy Act. It's in full swing. But two, surprisingly, here in 1982, energy prices fall for the first time in a decade. So as a result, right after Lay shows up, Transco runs into a problem. It's contracted to buy a whole bunch of oil and gas assets from various producers, various drillers around Texas and around the country. And those contracts have Transco buying the assets at an ever-increasing price because the prices of oil and gas have only been going up for the last decade.

• 17:32David Rosenthal?

  But market prices have just fallen. So they're really kind of in the lurch here. People think that Transco might go under. Lay, remember, he's a PhD economist and he's really quite brilliant. He comes up with an idea based on all of the economic theory that he knows. He's like, what if we set up a trading market for this oil and gas that we're contracted to buy? And especially in natural gas, which is now deregulated enough that I think we can do this. And rather than us as the pipeline company buying all of this gas from the producers, we'll just operate the pipelines in the middle and we'll make this market. And we'll let the end consumers of the gas, the factories, the utilities,

• 18:17David Rosenthal?

  consumers aren't buying this directly, but the utility companies are. We'll let them, through us, trade with the producers and we can create a spot market for energy. This becomes a huge success. This is like a massive, massive innovation. And so Transco was doing this. Transco was doing this. So Lay, he becomes like a total industry legend. He pioneers this. So before Transco and Lay, the whole idea of like any form of trading or financialization of energy, of oil and gas, didn't really exist because it was all regulated by the government before then.

• 18:56Ben Gilbert?

  Right. Not to mention, securitization wasn't a trend even in finance yet. Today, you can securitize anything. We had, of course, in 2008, everyone became familiar with the term mortgage-backed securities. But securitization in the 80s and 90s became all the rage in finance to basically get anything off your books. You could increase the velocity at which a financial company could operate by packaging up risk and selling it to someone else so that you could make new loans off your books or something like that. And of course, this was going to come to energy at some point, but it's important to remember that securitization is still a reasonably new concept even on Wall Street.

• 19:31David Rosenthal?

  Yep. So two things. One, this is not yet securitization of energy assets. This is simply just making a market for the first time between producers and consumers of the energy where they can buy and sell on the spot market.

• 19:50Ben Gilbert?

  At a real-time appropriate price.

• 19:51David Rosenthal?

  Real-time price. Like today, I need energy. I'm going to look at the market that Transco is now making. I am going to buy as a consumer of energy at today's market price. Whereas in the past, it was all long-term contracts that the pipelines had entered into with the producers and then the consumers of the energy would buy it from the pipelines.

• 20:12Ben Gilbert?

  I see. Okay. So we're like crawl, walk, run here.

• 20:15David Rosenthal?

  Crawl, walk, run. Yeah. Yeah, this is crawling. But as I said, this is Lay. This is Lay's baby. Literally, this is the opening of the floodgates and he was the very perfect person to do this because he had the industry experience. He's now been close to a decade working in the industry. He had the economics training and he had the government experience. He knew that the deregulation was now at the right point. It had trickled out into industry enough that this is possible. So he really was the perfect person to do this. So on the back of that, in June of 1984, Lay, remember, he's number two at Transco. He gets poached by another big Houston energy company, Houston Natural Gas, to come over as the CEO.

• 20:58David Rosenthal?

  The number one. He's made it to the top. He's made his mark. He is the big shot at this point in Houston.

• 21:05Ben Gilbert?

  Yep.

• 21:06David Rosenthal?

  Yeah, they were a big publicly traded energy company in Houston, probably, I want to say like a billion, billion and a half market cap, call it public company.

• 21:17Ben Gilbert?

  So definitely a great promotion for him, a job to sort of move up in the ranks by joining this other company, but it's not like he's sort of on top of the world yet at this point. He's got bigger competitors that he is dealing with.

• 21:29David Rosenthal?

  He does for the moment. So then the very next year in 1985, he gets a call from the CEO of one of the larger competitors, a company called InterNorth, which was not based in Houston, but rather based in Omaha, Nebraska. You know, a few companies based in Omaha, Nebraska.

• 21:52Ben Gilbert?

  Small head office based in Omaha.

• 21:54David Rosenthal?

  Exactly. Small head office. Despite being based in Omaha, though, InterNorth, at this point in time, no Berkshire Hathaway involvement, is the largest pipeline company in America. And they were relatively conservative, kind of old school in many ways, as we'll see, sort of parochial Nebraska company, despite having the largest pipeline in the country. And they were being pursued by the corporate raider. It's so funny how everything is coming together here in the acquired season. The famed 1980s corporate raider, Erwin Jacobs. But not that Erwin Jacobs.

• 22:29Ben Gilbert?

  I was gonna say, I remember reading this and looking it up and being like, okay, good. Whew, it's not our Qualcomm Erwin.

• 22:34David Rosenthal?

  I first heard about this other bizarro Erwin Jacobs with doing the research for the Qualcomm episode, because every time I type it into Google, I would occasionally get hits for some other famous business person that clearly was not like the hero Erwin Jacobs, but the anti-hero Erwin Jacobs. So 1980s corporate raider Erwin Jacobs is pursuing InterNorth, and the CEO of InterNorth wants to merge with HNG as almost like a kind of poison pill to like, make the combined company too big for Jacobs or any other raider to pursue. So they negotiate a deal. InterNorth ends up buying HNG for $2.3 billion, which was a 40% premium to the stock price.

• 23:16Ben Gilbert?

  Which is big. I mean, usually the floor of what a board will accept is something around 20%, but a 40% premium, they paid a pretty penny to go buy Ken Lay's HNG here.

• 23:26David Rosenthal?

  It wasn't quite the case of minnow swallowing the whale. Like, they were closer in size than the Cap Cities ABC deal, but definitely InterNorth was the bigger company, but it was clear that Lay and the HNG guys were going to be running the show from then on.

• 23:42Ben Gilbert?

  Hmm. Yeah, I think that Bethany McLean sort of puts it in this way, where it's almost like InterNorth got hoodwinked, where they knew they were paying a lot, but they knew it was important to get. But then, once they started looking at the deal with a couple of months of retrospect, they were like, wait a minute, we gave HNG a lot of board seats and their executives are having a lot of influence on the combined company. And wait a minute, we just gave away the company.

• 24:09David Rosenthal?

  Yes. And specifically, this culture clash manifests in the question of where the headquarters for this new company is going to be. The old InterNorth management team and board members, they of course want to keep the company in Omaha. And all the board members are sort of politically connected in Omaha. They're like, we don't want this company moving to the big city of Houston, taking all these jobs out of Omaha. It's important that the company stays here. And Lay, of course, he's very political, he's very diplomatic. He's sort of willing to say the right things to appease the board, but he has no interest in moving to Omaha. Like, he's in the big city in Houston, he's a player in the industry, he's now a Texas oil man, he wants to stay in Houston.

• 24:51Ben Gilbert?

  Yeah. And to be super clear here, InterNorth had a ridiculously valuable hard asset. This is now quoting from Bethany's book. Among its 20,000 miles of pipeline was a genuine prize, Northern Natural, the major north-south line feeding gas from Texas into Iowa, Minnesota, and much of the rest of the Midwest. So this is sort of the first example of someone in Enron land getting the better part of an economic deal, even though on the other side of the deal, there's a real hard asset that has quantifiable value for end users, for customers.

• 25:30Ben Gilbert?

  Yeah.

• 25:30David Rosenthal?

  Eventually, as we'll see, they give up on even caring about that.

• 25:34Ben Gilbert?

  Yes.

• 25:35David Rosenthal?

  So like we're saying, this culture clash between the two companies manifests itself in the headquarters location. So what do they do? They do what any management team at company would do when you're trying to justify your decision to the board. They hire McKinsey and Company.

• 25:51Ben Gilbert?

  I mean, you can't make this stuff up.

• 25:52David Rosenthal?

  You totally can't make this side. This becomes completely freaking key to the story. Like no headquarters study, no Enron.

• 26:01David Rosenthal?

  Because the desk on which this assignment lands is a young, hotshot superstar junior partner at McKinsey in the Houston office, one Jeffrey Skilling, who had joined McKinsey after Harvard Business School, where he was a Baker Scholar, you know, top 5% of the class. And famously, I think he had quite the reputation there. I think he was happy to broadcast this story. He got in because the dean of Harvard Business School interviewed him on a trip to Houston. I think Skilling was working in Houston at the time he'd graduated from SMU.

• 26:41David Rosenthal?

  And the dean interviewed him and asked him if he was smart. And Skilling replied to the dean, I'm effing smart. And he didn't say it in exactly those words.

• 26:51Ben Gilbert?

  It's a family friendly podcast, you know, we're not Jeff Skilling.

• 26:54David Rosenthal?

  Although we will actually say the words of some profanity that Skilling utters later, because it is absolutely key to the story. Skilling shows up in Omaha to present to the board his findings, which is that obviously the company should be in Houston. Even all the political wrangling aside, it makes sense that the largest pipeline company in the world at that point in time should be based in Houston, not in Omaha.

• 27:17Ben Gilbert?

  And we should be clear here, there's this interesting thing going on at the time with natural gas, where it's sort of perceived as the good guy. And you're already starting to see this American ire toward the dirty big oil and coal and natural gas, which is of course, a previously thought to be useless byproduct of extracting crude oil. You know, you can make gasoline out of it. You can make all this great stuff out of crude oil. And then there's this natural gas, which didn't have great use cases until lots of scientific discoveries and reasons why we all use it to heat our homes now, or many people use it to heat their homes. But it was viewed as this sort of like. Next great frontier of pseudo-clean energy.

• 28:01Ben Gilbert?

  And so it was a place where a lot of people in the energy business wanted to be going.

• 28:06David Rosenthal?

  Yes. Oh, such a good point. I'm glad you paused here and we should discuss a little bit. Natural gas had lots of things going for it. One was sort of the environmental, you know, cleaner than oil, you know, all that. Two was that certainly it was the first part of the energy industry to be deregulated enough that you could do interesting things with it. But three, I think probably the biggest tailwind in its favor in America was, you know, you said oil had started to develop this sort of dirty connotation. I think a lot of that was because of OPEC and the oil embargoes. Like, here's this foreign oil that America is dependent on. I mean, even to this day, like, you know, how much are politicians campaigning on reduce our dependence on foreign oil, blah, blah, blah, blah, blah.

• 28:49David Rosenthal?

  You know, yeah, all goes back to the 1970s.

• 28:52Ben Gilbert?

  Yep. Yeah, it's interesting how natural gas was the sort of electric power of its day in terms of perception.

• 29:00David Rosenthal?

  It was the Tesla of the 1980s.

• 29:03Ben Gilbert?

  Not to mention, there's all these just phenomenal other knock-on effects to it. You know, you can pipeline it, you move it all over the place, you can store it really easily. So you can store lots of energy in a super-dense way in case you don't need it in one place, but you do need it in another. It has these great sort of natural properties that make it not only really useful for the end consumer, but as this deregulation is coming in, it makes it a great asset to use in your free-market enterprise. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 29:44David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 29:58Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 30:08David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 30:26Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 30:42David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 30:59Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 31:08David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. Okay, so back to this fateful HNG Inner North Board Meeting in Omaha in, I think this is now 1986, 1985 or 1986. Skilling, the hotshot McKinsey consultant, is sitting there in the waiting room, getting ready to go present to management and the board, when the prior CEO, the number one member, Lay is number two after the merger, walks out and informs Skilling that he's going to keep on going because he has just been fired by the board and Lay

• 31:51David Rosenthal?

  has engineered the coup that Lay is now the CEO of the company. So they don't really have much time for the headquarters discussion in this board meeting. And what time they do have, the board is like, no, obviously, we're keeping it in Omaha. And, you know, Lay's the consummate politician. He knows better than to press his luck. Like, he just got what he wanted. He's not going to fight with his new board at this board meeting.

• 32:13Ben Gilbert?

  To the very end, for Ken Lay, I don't think he ever said anything in a public or pseudo-public context that was confrontational or pissed anybody off.

• 32:23David Rosenthal?

  To the very bitter end. So the headquarters move does not happen at that meeting. It does happen shortly thereafter, but-

• 32:32David Rosenthal?

  This is where Skilling and Lay meet for the first time. And Lay comes out in his very sort of politician manner after the board meeting is over. He apologizes to Skilling for all the drama. He says, you know, look, I've read your work on the study. You really did an excellent, excellent job. Like, I would love to keep the relationship going with you and McKinsey. We're going to have a lot of work to do at this combined company. I want you to be our McKinsey partner back in Houston, who's going to lead a whole bunch of strategic initiatives for us.

• 33:02Ben Gilbert?

  Yes, so it begins.

• 33:04David Rosenthal?

  And so it begins. So Lay's now settled in. He's in charge. He's the chairman. He's the CEO. And he decides that he wants to get a new name for this company. You know, HNG, InterNorth, that it sounds too old and it's reeking of his predecessor.

• 33:22Ben Gilbert?

  And it is true that all these energy companies have just the worst names. I mean, it's all these like completely meaningless prefixes and suffixes like Co. And Corp and Inter. And it's like an office space, Intertech. They're all named something like that.

• 33:38David Rosenthal?

  Yes, well, maybe this is the beginning of the modern era of that, because they go and they hire very expensive naming and branding consultants. The logo would actually come a little later, but including a few years later, Paul Rand would design the Enron logo. This would be the last logo that the legendary Paul Rand designed before he died.

• 33:59Ben Gilbert?

  He, of course, designed the IBM logo, the Next logo, the UPS logo, maybe?

• 34:06David Rosenthal?

  And he very much has his style. Like, you think the IBM logo, or if you know the Next logo, you know, Steve Jobs is next, like at the Enron logo, like, they're all kind of in the same style.

• 34:15Ben Gilbert?

  ABC, Yale Press, Westinghouse.

• 34:19David Rosenthal?

  Oh, Westinghouse.

• 34:21Ben Gilbert?

  Yeah.

• 34:21David Rosenthal?

  My grandfather worked for Westinghouse.

• 34:23Ben Gilbert?

  Really?

• 34:23David Rosenthal?

  Yeah. Legendary. Enron would be the last logo he designed before he died. Oof, what a legacy. So the naming consultants, separate from Paul, they come up with a brilliant new idea for the company. They want to name it Enron.

• 34:41Ben Gilbert?

  Almost, almost.

• 34:42David Rosenthal?

  Lay loves it. The board loves it. Lay loves it. Everybody's so excited. They announce the name. And the name comes from, it's a portmanteau. N E N for energy. T E R as a nod to InterNorth. Get that legacy back in there. And then on at the end, because it sounds cool and modern. Enron. So they announce it. They didn't check, though, in the dictionary because Enron is actually a medical term. It is a word. It is a medical term. It comes from a Greek word, and it means the intestinal digestive tract of a living creature and is particularly used for embryos. So like the digestive tract of embryos is an Enron.

• 35:27David Rosenthal?

  So they kind of get pilloried in the press for this Lay so concerned about appearances. He goes nuts. Lay never loses his cool, as we'll see throughout this story. Like, he loses his cool here. It like goes completely ballistic, yelling at the naming consultants. Everybody demands that they do another study, change it. And so they come back and they're like, what if we just get rid of the ter and we shorten it to Enron, which Lay probably loves because he's like, yeah, you know, I hate those guys. Those are the old guys. Get rid of them. So he ends up getting exactly what he wants. Headquarters moves to Houston. He's the CEO and chairman. Enron, future looking, you know, it's his baby. It's a refounding, you know, new story, new era for the energy industry.

• 36:12Ben Gilbert?

  Yep. So that's sort of the end of chapter one. You get this merger. They're real pipeline companies. They've got hard assets. They have sort of a new corporate culture with a new leader and they're delivering real value to customers.

• 36:25David Rosenthal?

  Yep. And they're running the proto-trading playbook that Lay pioneered back in his early days. And pretty quickly after this, they actually face their first trading scandal. Did you read about this?

• 36:40Ben Gilbert?

  I did. It's such a predecessor. Like, it's such an obvious personality flaw of Ken Lay's to look the other way. And it's like amazing that it happened, what, 10 years before the big scandal?

• 36:52David Rosenthal?

  So two traders at the new Enron, who are actually based in New York, they start embezzling money from the company. They're filing fake trades, they're filing fake tax returns, they're creating false bank accounts. They have a false bank account famously, I think in the name of a Mr. M. Yas, which clearly this will give you a window into the sophomoric nature of traders and trading cultures.

• 37:17Ben Gilbert?

  Just write that out and figure it out for yourself.

• 37:19David Rosenthal?

  So the company picks up on this, it comes to Lay's attention. And, uh, you know, everybody recommends the company's auditors at Arthur Andersen, you know, recommended the board.

• 37:29Ben Gilbert?

  The premier accounting firm of the day.

• 37:31David Rosenthal?

  Premier, big five accounting firm at the time. They recommend that Lay and the company should fire these guys. Obviously, they're stealing from the company, they're falsifying trades. And Lay's like, well, you know, these guys, it's really bad. It's bad what they did. We should censor them for sure. You know, we should set up some controls, make sure this doesn't happen again. But they're really good traders, you know, they've really made a lot of money for the firm. I don't think we should fire them, you know, that feels like a big step. And everybody's like, uh, okay.

• 38:05Ben Gilbert?

  They were funneling money to their own bank accounts.

• 38:07David Rosenthal?

  Yeah.

• 38:10David Rosenthal?

  But Lay lets it slide and he is immediately rewarded for his faith in them and his decision here. Almost immediately, they do what any sophomoric people in a situation like that would do, who just got away with one, they go way risk on. So they go on tilt and they rack up within the next few months, almost a billion dollars, one B, that's a B, a billion dollars. This is in the late eighties of trading losses. Oh, it's, that would be enough to bring down the whole firm at the get go.

• 38:45Ben Gilbert?

  Well, and you got to think the enterprise value of the combined company, I don't have it in front of me, but you had a, I don't know, five-ish billion dollar company by a two and a half-ish billion dollar company. And so, you know, whole enterprise value of the firm can't be more than $10 billion.

• 38:58David Rosenthal?

  And these two bozos just racked up a billion dollars in trading losses. This time, Ley does fire them. And fortunately for young Enron and for Ley, but unfortunately for the rest of the world, this happens early enough in the quarter that the trading floor is able to dig out enough of these losses that they don't have to report the whole billion dollar loss come earnings time and only end up reporting, I think, less than $100 million of losses. So the company miraculously survives. So you would think that Ley would learn his lesson here. But no, this is Kenneth Ley we're dealing with.

• 39:34Ben Gilbert?

  And let's for a moment say, why are there traders? That's sort of an interesting thing that's happening here. I thought this was a pipeline company. I thought this was a logistics company that moved natural gas from one place to another and charged customers for the services associated with that. Well, the traders originally are there, to your point, to sort of help match supply to demand. You know, it's not like everybody's just got a computer in front of them where they can automatically be buying the right products to fit their needs at the right price at this moment in time. You sort of need to interface with people and those people can quote spreads wherever they want. They can say, ah, I got a seller for this price and you're the buyer and I'm sort of sensing that you'll buy for that price. Okay, I'll match make supply to demand. I'll quote a spread where I think I can make

• 40:19Ben Gilbert?

  the most possible money on this trade and we'll go with that. And so this is the beginning of them being both a logistics, energy, transportation company and also a financial organization of sorts, a trading desk.

• 40:32David Rosenthal?

  Yes, a trading desk, a proto-financial institution for the energy industry.

• 40:39Ben Gilbert?

  Yep.

• 40:40David Rosenthal?

  So, speaking of, back to Houston and the promised McKinsey strategic engagement. It's happening. Jeff Skilling is lead hotshot partner to develop a strategic plan for this very thing, the new finance and trading operations of Enron. And one day, Skilling has a absolutely brilliant idea, brilliant by his own estimation, and he proclaims it to everybody how brilliant it is. What if Enron goes one step further from Lei's kind of original innovation of creating a spot market for energy?

• 41:22David Rosenthal?

  And rather than just being sort of the facilitator of the market, being the pipeline in the middle, what if Enron started acting even more like an investment bank in this industry? And the phrase that he uses for this idea is Enron becoming a, quote, "bank for gas." And the idea is that they can go to oil and gas producers, to drillers, and they can buy up a lot of the future production that's going to come out of their wells, kind of almost like the old companies used to do. But rather than Enron then being the customer for what's going to come out of those wells, they repackage everything here. This is the securitization that you were talking about a minute ago, Ben.

• 42:06David Rosenthal?

  They repackage all of these future energy commodities. They slice it and dice it, and then they resell it to buyers, to consumers of energy, on kind of whatever timeline and term length they wanted. So we've gone now the industry from the pipelines, buy the assets from the producers, buy the energy commodities from the producers, and then sell them to customers. Lei's innovation is like, create a market where you let the producers and the customers trade directly today.

• 42:35Ben Gilbert?

  In real-time spot markets where everyone is subject to, I don't know what tomorrow's price is going to be, I'll quote it to you tomorrow, so you have inherent risk that tomorrow's price could be higher, so sorry, but that is what it is.

• 42:47David Rosenthal?

  Yep. So Skilling's innovation here is, let's turn this into a full-fledged kind of financial derivatives market and let buyers and sellers write contracts and buy contracts for any amount of this commodity in the future at a set price. So true futures contracts.

• 43:07Ben Gilbert?

  And the most sort of early legitimate use case for this is imagine you are a local utility who's trying to provide natural gas to your town and you know, you've been using this great spot market that Enron stood up to figure out, you know, what's the price going to be tomorrow? You're pretty worried about it skyrocketing in the event of some unknown black swan event or something like that. So wouldn't it be nice if you could hedge your exposure to that risk by also negotiating a futures contract where you say, well, let me lock in a certain rate. And yeah, I know it's going to be more expensive than it is now, but at least nothing bad can happen. And then I can sort of be predictable in the way that I'm thinking about what my spend's going to be over the next three months. So that's like a super legitimate use case of one of these

• 43:51Ben Gilbert?

  futures contracts that they could trade using Enron.

• 43:54David Rosenthal?

  You can imagine all sorts of utility here.

• 43:56Ben Gilbert?

  Yep.

• 43:57David Rosenthal?

  So Enron does it. They pioneer this market that would come to be known and is, I think it assumes still a very, very large part of the energy market today called energy derivatives. Skilling in Enron, invent it and pioneer it.

• 44:13Ben Gilbert?

  And at this point, the energy is the underlying asset. The derivative itself is not particularly interesting other than its own utility for if you are actually buying or selling the underlying asset. That's like an important thing to note. Everyone will lose their heads later and get excited about the derivative on its own. They don't care what it's a derivative of. It's a tradable thing that numbers go up, numbers go down. It reminds me a lot of some of crypto over the last year. It's like trading Dogecoin.

• 44:43David Rosenthal?

  Right. Does anybody even know what this coin is or is supposed to do? Does anybody care?

• 44:48Ben Gilbert?

  No, but I can speculate on it. And so there is a very interesting, almost innocent early beginning of why you would offer energy derivatives that completely falls apart over time as everyone loses their head. And Skilling's still outside, right? When he pitches this idea.

• 45:06David Rosenthal?

  He's still at McKinsey at this point. Yes, for the moment. And so in this next thing, they realize this is a new concept they need to bring to the market. How are they going to bootstrap up this new derivatives market? Well, they kind of need the producers to get on board. They need to get the supply, the raw supply that they can then financialize, securitize, turn into these derivatives. And the way that they can really convince producers to want to do this is if they fund them. So just like an investment bank, they now start going out and doing these development deals and co-development deals with drillers, saying, hey, we'll fund you. We will finance your exploration, your drilling.

• 45:47David Rosenthal?

  And as part of financing that, Enron is going to lock up the rights to then securitize the future production out of your assets.

• 45:56Ben Gilbert?

  Which, again, on its own, not a malicious strategy. Think about our Qualcomm episode. Hey Sony, will you spin up a new venture that we'll co-invest in to make flip phones that use CDMA so we can prove to everyone else in the market that CDMA is viable technology? We'll invest in it. You just have to provide these strategic assets. You can own half of it, blah, blah, blah. It is a common way to bootstrap an ecosystem to use your dollars to incentivize other participants to bring a thing into your ecosystem.

• 46:24David Rosenthal?

  And, you know, honestly, like, if the story were to stop there, this probably would be a great company. Bringing huge innovation to a commodity market. Yeah, probably this market should work this way. It should be financialized and securitized. Energy assets are commodities.

• 46:40Ben Gilbert?

  Yep.

• 46:41David Rosenthal?

  Unfortunately, that is not where the story ends. Far, far, far from it. So 1990, now we're a couple of years into the Lay-Enron era. And Lay and the vice chairman of the company, a guy named Rich Kinder. Who later would leave Enron before all the dirt hits the fan and start Kinder Morgan.

• 47:00Ben Gilbert?

  You can think of Rich Kinder for now as the hard assets guy. He's the guy that really understands the intrinsic value of delivering hydrocarbons through a pipe to customers and trying to build a company that is just executing really well on doing that.

• 47:16David Rosenthal?

  Yes. So the two of them, they work on convincing Skilling. They think this is a big idea and this is the future of Enron. They work on convincing Skilling to leave McKinsey and come over and join Enron as the full-time CEO of this new gas bank that they're going to call the Enron Finance Division. And in a very telling move, tells you a lot about what you need to know about Jeff Skilling as a person. They're talking about this, they're negotiating. He decides he wants to take them up on the offer. He's going to leave McKinsey. He calls them up to do the final negotiations of the terms of his offer. He calls them up from the hospital where he is with his wife while his wife is in labor. With their, I think, second child.

• 48:00David Rosenthal?

  That tells you where his priorities lie. Obviously, that marriage does not last too much longer.

• 48:06Ben Gilbert?

  Hell, he's obviously there.

• 48:08David Rosenthal?

  Yeah, obviously, obviously. So Skilling comes in, he takes over Enron Finance, starts this new division.

• 48:16Ben Gilbert?

  It is worth pointing out the thing that he made a necessary condition in order for him to join and do this. Do you know what that thing is?

• 48:24David Rosenthal?

  Ooh, I don't.

• 48:26Ben Gilbert?

  It was that Jeff Skilling insisted that in order to join Enron and start this new division, Ken Lay and the board had to agree to use mark-to-market accounting.

• 48:38David Rosenthal?

  I did not realize that Skilling was looking that far ahead and made it a condition of his joining.

• 48:43Ben Gilbert?

  This shows how unbelievably savvy he is. He sort of realized he couldn't build the business.

• 48:48David Rosenthal?

  Well, he is effing smart, according to him.

• 48:51Ben Gilbert?

  Could not build the business that he wanted to without doing this. He literally called it, and this is in the smartest guys in the room, a lay my body across the tracks issue about joining the company.

• 49:01David Rosenthal?

  I wonder if he talked about it from the delivery room.

• 49:05Ben Gilbert?

  Awful. All right. So what is mark to market accounting? It's worth, because we'll get into this a bunch, but let's understand it conceptually.

• 49:11David Rosenthal?

  Yeah, it ends up taking a while for Enron to be able to implement this that we'll get into, but go for it.

• 49:17Ben Gilbert?

  So normally, if you're in the business of delivering gas to customers who will pay for it, you account for the cost that it takes to physically move the gas when you deliver it, at the time you're delivering it, and the cash that your customers pay you, that's your revenue, and you recognize that when they pay you. But imagine you're in a different business, like trading stocks. You probably should be accounting for the market value of everything you buy and sell, whether or not you have actually sold it. Like if you bought Tesla at $20 a share, and it's now worth $200 a share, you should reflect that you have a gain, albeit an unrealized one. This is mark to market accounting.

• 49:56David Rosenthal?

  And famously, all VCs do this, right? You talk about marks of your portfolio.

• 50:01Ben Gilbert?

  Right. Company raises an up round from a third party who's setting a new price. That is what the market is saying this asset is worth. And you get to account for that value, even though you haven't actually received the cash. You know, just because you haven't sold your Tesla shares, it doesn't mean that you don't have an unrealized gain. Or just because the VC hasn't realized liquidity event from that company, it doesn't mean that the company's not worth more. So Skilling obviously really wanted this mark to market treatment. And while you can imagine that it's probably easy to abuse mark to market accounting rules, it is probably okay if you can avoid the temptation. But it is worth pointing out that Enron, when they did adopt this,

• 50:43Ben Gilbert?

  became the very first non-financial company to use this method.

• 50:48David Rosenthal?

  Yeah, well, oh, boy. We're going to talk quite a bit more about mark to market accounting in a minute. But let's just say the potential for a litany of abuses, high. Very, very high, especially for what is an operating company, not actually a financial firm.

• 51:05Ben Gilbert?

  Yeah. Mark to market accounting to me is the epitome of with great power comes great responsibility because it really does open up this question of like, okay, well, what is the market price and how do you discover the true market price of something when someone's not paying you for it and giving you the cash? Doesn't it seem a little squishy to say what the thing is actually worth?

• 51:27David Rosenthal?

  Oh, put a pin in that. We're gonna, we're gonna come back to that. So, um, Skilling, I guess, after this Leia's body on the tracks moment in the delivery room at the hospital, he comes in, he joins Enron, running the new Enron finance division where he's CEO of the division. He gets a big equity stake in the company tied to the performance of his division. Think a lot as we go through this story about incentives and the behavior that they drive. So he models this division just like an investment bank. He starts building out big trading floors in the Enron office in Houston, you know, wants to have this be just like Wall Street, you know, here in Houston, brings on trader type folks. Most

• 52:09David Rosenthal?

  famously, he's a side character here, mostly because nobody could ever actually figure out or from the outside what this guy actually did at Enron. But this guy named Lou Pie, who already was at Enron, but this guy.

• 52:23Ben Gilbert?

  I can't even hear his name without.

• 52:25David Rosenthal?

  Oh my God. Like if you've watched the movie of the smartest guys in the room, it's a really good movie, the movie version of the book. It's so mid 2000s. Like they use all this weird B-roll footage. So Lou, like I said, nobody could ever actually figure out from the outside what he does at Enron. But one thing that he becomes really known for is his love of strippers.

• 52:48Ben Gilbert?

  And not just conceptually, he would eventually leave his wife and marry a stripper.

• 52:52David Rosenthal?

  Yes. In the movie, I think they literally say he was obsessed with strippers. He'd like bring them to the office. He'd leave for hours at a time.

• 52:59Ben Gilbert?

  Every single day after work, go to the strip club. He knew like all the strip clubs around Houston.

• 53:03David Rosenthal?

  So during the movie, they're showing all this B-roll footage. Like this is a documentary about an accounting fraud. And all of a sudden, out of nowhere, there's all this B-roll footage of strip clubs. Don't watch this movie with your kids.

• 53:15Ben Gilbert?

  Yeah, and like, super explicit B-roll footage of strip clubs. You're like, whoa, where did that come from?

• 53:21David Rosenthal?

  Super explicit. And it's not like this was actually footage of Lou in the strip club. It's B-roll footage of strip clubs.

• 53:30Ben Gilbert?

  Lou Pigh. I think the thing that he did, just to like, clarify it a little bit, is he basically herded the traders. Think about traders in the 80s. They hired these people who, uh, one of the quotes is, "If I was on my way to the bathroom and someone said that I could double my pay by stepping on someone's throat, I would absolutely step on his throat." That's the type of people that they're hiring to make money both for Enron and for themselves. And Lou Pigh is sort of the cowboy who's sort of like hurting them all.

• 54:01David Rosenthal?

  So Lou, the other reason we bring him up, I guess because of his obsession with strippers. You know, Ben, you said he leaves his wife that he's been with for 20 years. He runs off with a stripper. Because of that, he gets divorced from his wife. He ends up leaving Enron well before default. And he sells his stock to finance the divorce for a quarter billion dollars. He makes $250 million.

• 54:23Ben Gilbert?

  He sold his stock at the top, I don't think with any notion of what was about to happen.

• 54:28David Rosenthal?

  No, he had to finance the divorce.

• 54:30Ben Gilbert?

  Crazy.

• 54:31David Rosenthal?

  So he ends up becoming the second largest landholder in Colorado. He's still like a multi-hundred millionaire to this day. Crazy.

• 54:39Ben Gilbert?

  Other than a few people who go on to like, build real value after this by creating real businesses, he's the one who economically benefited the most of any of the Enron people.

• 54:48David Rosenthal?

  Unbelievable.

• 54:50Ben Gilbert?

  And he stayed out of jail.

• 54:51David Rosenthal?

  So, the big hire that Skilling makes as he's setting up this division is one, Andrew Fastow, a former banker from Continental Illinois Bank, where he worked in Chicago and he was part of the structured financing division at Continental Illinois. Continental Illinois had the inglorious honor of becoming the largest bank failure in history until Washington Mutual during the financial crisis. This is the sort of cloth that Fastow is cut from. When Skilling is recruiting him to come in and run structured finance at Enron, he talks with him, he hears about his experience and he's like, "You, sir, are the man for the job."

• 55:32Ben Gilbert?

  And you look at Andy Fastow and you hear him talk and you kind of want to trust him. He's the picture of a polished, thoughtful finance executive who's thought this through, who has all the i's dotted and the t's crossed. He's good looking, like he's the picture of the like, successful 80s confident businessman, but with no slime on him. When you hear Skilling talk, you're like, "Oh, I'm not sure this guy has my best interests at heart." The thing with Fastow is you actually do think he has your best interests at heart.

• 56:01David Rosenthal?

  He's like the American Psycho guy. He's like a banker.

• 56:03Ben Gilbert?

  Yes.

• 56:04David Rosenthal?

  He is a banker, except he just comes from the bank that was the largest bank failure in history. So he comes in and Skilling sets him to work doing structured financing. The primary thing that they're doing is they're packaging up these financing deals that Enron had started doing for the producers, for the drillers. Remember, they're trying to kickstart the market, bootstrap supply for this derivatives market. So they're doing all these financings for drillers out there, for oil producers. They don't really want those assets on the Enron books. And so they devise this scheme that they become acquainted with through Arthur Andersen, through the accountants and auditors, of using special purpose entities to

• 56:48David Rosenthal?

  package up these investments that they're making in producers and get them off of the Enron books. And it turns out, they learn through doing this, that at the time, if you set up a separate legal entity from the company, a special purpose entity, this is different than a special purpose vehicle that, you know, people use for investing in startups today, this of a special purpose entity. If you set this up, as long as at least 3%, 3, 1, 2, 3% of the capital in that entity comes from outside investors, you can still have the company itself own 97%.

• 57:28David Rosenthal?

  Of the economics of that entity and you can remove it from your consolidated accounting books. You can just wipe it out of your accounting, say, this is now owned and controlled by an independent third-party entity. And the test for it being independent is that 3%, a minimum of 3% of the capital comes from outside sources.

• 57:54Ben Gilbert?

  We live in a system that enabled this fraud. I want to keep reiterating that over and over and over again, until Sarbanes-Oxley passed in 2002 because of this scandal and some other scandals, but largely because of Enron. We just existed in a system where all of this was exploitable and just waiting for someone who did not have the scruples to just finally come in and exploit all these loopholes.

• 58:23David Rosenthal?

  Totally. There were no lids on the cookie jars.

• 58:25Ben Gilbert?

  There were no lids.

• 58:26David Rosenthal?

  No lids.

• 58:28Ben Gilbert?

  And you might ask, this doesn't seem like that big a deal. Imagine these things are like hugely loss-making, but you're trying to go tell equity investors, people who own the Enron stock, how great your company is. It would be great if all their losses weren't showing up in your financial statements.

• 58:44David Rosenthal?

  Enron doesn't care about the quality of the assets or projects that it's investing in with these producers. It just wants to lock up the contracts for what someone would project the future oil and gas that's going to come out of these wells. Enron doesn't actually care if they're well-run or they're going to make money or the valuations make sense. They just want to lock up the deals. So they do a lot of really bad deals.

• 59:05Ben Gilbert?

  Yep. Massive incentive misalignment. And you said we weren't going to get into mark-to-market accounting yet, but I have to introduce, okay, so I'm Enron. I make a crap investment in your oil production project. And I say, I want you to exclusively trade the financial derivatives around all the natural gas flowing out of your production facility through Enron. And you say, okay. And I say, how much do you think is going to eventually flow out of that? And you tell me a number and I- Say, well, if I take the most aggressive possible circumstance for what the price of that could be over time and the amount of volume that that could produce over time.

• 59:47Ben Gilbert?

  And I take the most aggressive possible stance on the amount of interesting financial instruments that I could make out of that. I think you and I can agree that this deal that we're signing is a ludicrously valuable deal for me and Ron. The right to generate all this revenue from trading the assets that come out of your production facility. Let's write this down. Let's paper this. The discounted future cash flows of all of the money that I'm going to make from your production facility, that's really big.

• 1:00:17David Rosenthal?

  What you're telling me, these numbers that you put on paper that maybe I encouraged you to make them higher.

• 1:00:21Ben Gilbert?

  Right. That's really great. I don't care about my equity investment in your thing. Like, we're going to put that off into a special purpose entity. We're never going to talk about it again. I don't really care if that goes zero. But, hey, I use mark to market accounting. So because I just signed this deal where all of the future cash flows of this thing are looking really good, I'm going to recognize that as revenue today. And I know I'm not getting any cash today, but my income statement? Yep, you better bet that I am generating a ton of income from this deal that we just signed.

• 1:00:50David Rosenthal?

  Okay, so there's a bunch of both story and explanation we got to talk about here. So we've talked a bunch about mark to market accounting. Despite Skilling apparently laying himself on the tracks about this being non-negotiable about coming in, it wasn't like Enron could just say and Skilling could just say, oh, we're doing mark to market accounting. They had to make the case to Arthur Andersen, to the auditors, that Andersen could get comfortable with them doing this. Andersen says like, I don't know, this is really out there, like very borderline that you guys could use mark to market accounting as an operating oil and gas company. I don't know that we feel comfortable with this unless the SEC signs off on it. And so Skilling is like, great, let's take this to the SEC.

• 1:01:33David Rosenthal?

  So Andersen takes it to the SEC. The SEC rejects it. They come back to Skilling and they're like, as expected, the SEC is like, this is crazy. You can't do this. Skilling's like, I want to go talk to the SEC.

• 1:01:46Ben Gilbert?

  And he's a ludicrously compelling character. There is an intellectual purity about him where he can create an argument that sounds really, really compelling. This has worked for him many times in his life. So he's like, sure, I'll just go explain it to the SEC. They'll get it.

• 1:02:01David Rosenthal?

  And he spins this story that amazingly, the SEC somehow becomes convinced that this is a good idea and they sign off on it.

• 1:02:11Ben Gilbert?

  I think this is really an interesting point in the story. This is the only instance where you have someone who is complicit in allowing Enron to run the playbook that they did, who doesn't have a conflict of interest. Anderson Tax was getting paid tons of fees. The lawyers who signed off on lots of stuff over the years were getting paid tons of fees. All the employees had all this stock. They were incentivized for it to go up.

• 1:02:36David Rosenthal?

  Yeah, this is the one really puzzling one.

• 1:02:39Ben Gilbert?

  This is one where like, the person whose job it is at the SEC to approve this or not approve it, they don't have a vested interest.

• 1:02:46David Rosenthal?

  Here's a probably also a good point to bring up the Arthur Anderson conflict. It's not just that Enron is a big audit client for them. At this point in time, pre Sarbanes-Oxley and pre the fall of Arthur Anderson, all the accounting firms had attached consulting arms under the same roof. So Anderson had Anderson Consulting, which would go on to become Accenture after the demise of Anderson.

• 1:03:09Ben Gilbert?

  This is nuts. I don't think I really grasped this.

• 1:03:12David Rosenthal?

  The conflict here is immense.

• 1:03:13Ben Gilbert?

  This whole thing took down Arthur Anderson and what they did for the consulting arm was they rebranded it Accenture and spun it out into its own thing.

• 1:03:23David Rosenthal?

  And at this point in time, all the senior partners at the firm, like it's one and the same. They're all making money from these engagements. Enron became Anderson's biggest client in the world. They were making $50 million a year from Enron, half of which was audit and tax fees and half of which was consulting fees. At any point in time, Enron could just, maybe it'd be hard for them to switch their auditors, but they could switch their consultants at the drop of a hat. There were huge incentives for Anderson to let them get away with what they wanted to keep the client happy. It was their biggest client in the world.

• 1:03:58Ben Gilbert?

  There were no lids on the cookie jars.

• 1:04:00David Rosenthal?

  Okay, so miraculously for the evil guys at Enron, this gets through the SEC. Now, we've explained a little bit thus far about how good mark-to-market accounting can be for Enron. It's so much better than that.

• 1:04:14Ben Gilbert?

  Better. Better for running a pump and dump.

• 1:04:16David Rosenthal?

  This is where the whole thing comes together in just like, an unbelievable way. The parallels to crypto, they're crazy. Once they implement mark-to-market accounting, Ben, you explained a little bit, the deals there a minute ago. You do a deal with a producer and you say, hey, whether or not you're going to be able to execute on these plans, let's pump up these projections, make them look as big as possible, and then I, Enron, will recognize as revenue today, my projected cash flows based on this Excel spreadsheet for the next 20 years. The SEC allowed them to go out to 20 years that they could collapse into today revenue. So 20 years of future cash flows, I'm going to recognize that as revenue today with like, no expenses associated with it.

• 1:05:00Ben Gilbert?

  Here's why you could argue it's sort of fair, because there's at least 20 years of future cash flows baked into the stock price of any asset. So, you know, if I'm buying a stock and holding it on my books, in the enterprise value of that stock, I am accounting for 20-plus years in the future of the cash flows that come out of it then.

• 1:05:21David Rosenthal?

  And you know, one other, you know, maybe sliver of a justification. In our world, talking about this sounds utterly insane. Like, you know, you're talking about like startups, new projects. Who knows if these things are going to work, tech startups or whatnot. This is a different world in oil and gas. You can be pretty sure if you have a site, a geologic site, that you've done enough exploration on the site. You've decided you're going to build a well. You can be pretty sure you're going to get assets out of that site.

• 1:05:49Ben Gilbert?

  Yep.

• 1:05:49David Rosenthal?

  Exactly how much and on what schedule, you don't know. But like, you're going to get useful commodity stuff. And there's going to be a market for that commodity. You will make money out of this site. How much money? That is up for debate and what the price of the commodities will be over the 20 years. That's also fluctuates. That's up for debate, but it's not like you're not going to get anything out of this.

• 1:06:12Ben Gilbert?

  Yep.

• 1:06:13David Rosenthal?

  Okay. So that's part one of why mark to market accounting is just this bonanza for Enron. But it's double that. Remember these special purpose entities that Skilling and Fast Hour now are setting up? And they're offloading, they're selling, quote unquote, selling these assets that Enron doesn't really want on his books. They're selling off to these special purpose entities. Because those are also transactions. Enron now gets to book those essentially phony sales as revenue. So they're double dipping. They do a deal with a developer. They recognize as revenue 20 years of forecasted cash flows out of that asset.

• 1:06:54Ben Gilbert?

  Oh, just from their equity value in the project?

• 1:06:58David Rosenthal?

  Then a week later, they turn around and they sell that project, their equity in that project to a phony special purpose entity for some astronomical price. And then they recognize that value from the transaction as revenue, even though they own 90% of the entity that they just sold it to.

• 1:07:16Ben Gilbert?

  Crazy. And all the while, no cash has actually changed hands.

• 1:07:20David Rosenthal?

  Totally. This is like the ultimate Ponzi scheme.

• 1:07:23Ben Gilbert?

  It's wild.

• 1:07:24David Rosenthal?

  It's totally wild. So all of that is bad enough. Let's make it even worse. If you are trying to create as beautiful and amazing a income statement as possible, obviously, mark-to-market accounting is great for all the reasons we just discussed, and investors will love it. You can inflate your revenues hugely, et cetera, et cetera. There's one problem, and that problem is that it's all one time. This is the opposite of ARR. There is no recurring revenue here. You are taking all the future income, revenue, cash flow. You're collapsing it to a single moment in time. So whatever deals you do in one year, you're starting from zero the next year. You get no future benefit on your income statement from those deals.

• 1:08:04Ben Gilbert?

  You're squeezing every amount of possible upside out of the future and into today. And so you're just constantly making it harder on yourself to achieve anything in the future because you've already recognized it all. And basically, if you don't do more different deals next year, it doesn't matter how good every contract you've already signed is and how amazing all those projects are doing. You have an actual zero in your revenue category without doing more deals.

• 1:08:32David Rosenthal?

  Totally. And so like any house of cards here, this all looks great, but there's literally no way that this doesn't all blow up. It's all just completely inflated. Once they start down this path, there's no scenario where this ends well. It's just a question of how long the fuse is until the bomb blows up.

• 1:08:52Ben Gilbert?

  Yeah, you're borrowing on the future in such a big way.

• 1:08:54David Rosenthal?

  Well, and because there's no underlying reality at a certain point, like the deals, quote unquote, that they're doing on the front end are not good deals because everybody's incentivized to pump the numbers. The producers are incentivized to pump the numbers to get more money. Enron's incentivized to pump the numbers to book more revenue, even though they're paying for the deals. And then the bigger the deal price, the bigger the dollar value that they offload it for to the special purpose entities that they book the revenue again.

• 1:09:24Ben Gilbert?

  Yep. And the most devilishly difficult thing about all this is, once the train gets set in motion, and you start putting up these numbers, and you start reporting them in your financial statements, you massively catch the attention of investors, and you then have to keep it going, because people start to invest, your stock starts to go up, because no one's seen an income statement like this. This is crazy. This is the future. There's lots of reasons to believe that it's going to be nuts. And you start believing the numbers, you start convincing other people to believe the numbers, and then you've got to move mountains every quarter to make the numbers keep going up.

• 1:10:03David Rosenthal?

  So, this whole devilish flywheel really gets put in place by 1996, like it's really humming. And they would have a five-year run from 1996 to 2001, during which revenues grew 7.5x during those five years. They went from 13.3 billion in 1996 to over 100 billion in the year 2000. And every year during that period, from 96 through 2001, the company would go bankrupt at the end of 2001.

• 1:10:36Ben Gilbert?

  Which were the six years that they were Fortune's most innovative company?

• 1:10:39David Rosenthal?

  Yes. Fortune magazine, remember, this is going to come back up with the particular publication, names them America's most innovative company, and in the year 2000 also names them America's best managed company. Unbelievable. So, back to the mid 90s, on the back of all of these huge wins, this transformation of the company, Skilling gets promoted from just being head of the Enron Finance Division, to president and COO of the entire company, number two behind Lay, who's still the chairman and CEO, but he basically just takes on a kind of elder statesman role. He's out there schmoozing politicos. He becomes super close

• 1:11:18David Rosenthal?

  with the Bush family, super, super close. And Fastow, he gets quite the meteoric rise out of this. He goes from being like a jack-of-all-trades, kind of like mid-level executive in the finance division, to the CEO. CFO of the entire company.

• 1:11:36Ben Gilbert?

  And structured finance kind of becomes its own division. They start relying on it as a profit center, not just like a CFO to manage the finances of the business. But they're like, can you come up with new financial products to generate revenue on your own?

• 1:11:53David Rosenthal?

  So when skilling gets elevated to number two and fast out to CFO of the company, they start articulating as the company's strategy that the finance department is going to go from being this shared resource cost center to a profit generating division of the company. The fact that this didn't raise like massive alarm bells throughout the entire investor community is just crazy.

• 1:12:16Ben Gilbert?

  Well, the thing I want to continue to harp on is it would have if the incentives weren't so dramatically misaligned. Everyone benefited from this thing going up, like the ratings agencies benefited from this thing going up. Everybody who ever bought Enron stock saw it going up, so they wanted to continue to see it going up. These deals, you know, the Enron's flying around doing deals. You know who they need for deals? Investment bankers. And you know what investment bankers also have? Analysts. And you know what those analysts are going to say? Buy. It is just like the whole world was making so much money, at least on paper, from this happening that why would you ever want it to stop happening?

• 1:12:57David Rosenthal?

  And like we've been saying, they need to keep doing bigger and bigger deals. So what does Enron do? They start heavily investing in their international division. They've like saturated the US with all the producers in the US. They're like, we can go out to other countries, both developed and developing countries. And especially in developing countries, we can do these massive, massive production deals that just like fuel all of this. So they go to famously India, Brazil, Argentina, and they finance these like multi-billion dollar energy projects. India is the worst of them. This power plant that they finance, it's LNG, liquefied natural gas power plant

• 1:13:42David Rosenthal?

  on the coast of India that they finance, but multi-billion dollars. India doesn't have the technology, the grid, the demand, any way to actually use this. The project just becomes this smoking crater on the Indian coastline.

• 1:13:56Ben Gilbert?

  I think it's still never opened. The half completed building is still just sitting there.

• 1:14:00David Rosenthal?

  At various points in time, I think they have technically turned it on, but not like actually like, yeah, it's still just sitting there. But Enron books billions of dollars of revenue and then they offload the assets, everything we've talked about, like it's just this metastasizing cancer on the world.

• 1:14:17Ben Gilbert?

  Yeah. The one thing that is credible about what they're claiming is the key thing to develop a society is widely available energy. So there is this notion of like, okay, if the way to accelerate a country that is becoming, I don't know if developed country is the correct parlance anymore, but an economy that has high employment, high quality of life, a good mix between information work and physical work, making real things in the real world, growing GDP rapidly, becoming a player on the world stage, whatever you want to call it. Every single thing requires massive amounts of energy as a precondition. One major reason why the US got to be such an incredible superpower

• 1:15:01Ben Gilbert?

  is we burned tons of fossil fuels over the last 80 years in order to accomplish all the things that we have today and achieve the quality of life that most people in the US have today. So there is a real, well-founded argument to be made that it is both good for these countries to come in and do this, and they'll need it anyway. So there's a huge market opportunity that we're sort of pulling forward to now by creating a ton of energy capacity there.

• 1:15:27David Rosenthal?

  Oh, you can really see how the insidious political tendrils of this company. Politically, this looks fantastic. Enron is financing the energy development of India, Brazil, Argentina, like, you know, blah, blah, blah. And the politicians love this. Here's this innovative American company. Whew, man. So as this gets bigger and bigger and bigger, remember the key on the backend to making this work are these special purpose entities. Now, you only need to come up with 3% outside capital, but Enron starts doing so many deals that are so big and they're offloading so many assets.

• 1:16:09David Rosenthal?

  It actually becomes kind of a problem finding enough suckers to pony up even 3% of the capital needed to be offloading these assets.

• 1:16:19Ben Gilbert?

  And by the way, we should say, how does Enron have the capital? Because they're not generating a lot of cash flow. It's worth knowing that on their earnings calls, they are releasing a profit and loss statement and then like a little few weeks later, coming out with a balance sheet and a cash flow statement. So you say, well, how are they financing 97% of these projects? Well, first of all, a lot of times they're doing co-development deals. So they're like getting a government to pony up a bunch of cash and Enron ponies up a bunch of their sort of like development resources and people, which by the way, they're terrible at because actually what they've become good at is a financial burritos trading firm and not actually having the human power to go and execute on building these really complex projects. But they are getting cash from somewhere.

• 1:17:03Ben Gilbert?

  Where are they getting it from? Investors, the American public. So as their stock starts to run, they do more and more issuances of new stock at these new stratospheric prices to bring cash in the door, since the operations are not actually producing a lot of real cash. So the flywheel sort of looks like pump the stock, issue more equity, take the cash from that new public fundraise that you've just done and shaken the American public, the tree of the American public, take that cash and use that as the sort of 97% that you need to stuff into a special purpose entity to go and finance a project.

• 1:17:43David Rosenthal?

  It's actually not that. It's use that cash to finance these crappy development deals they're doing all over the world. On the backend, there's actually no cash because Enron is the buyer and the seller. They're just taking it off the books. They're not actually buying anything. There's no cash changing hands.

• 1:17:58Ben Gilbert?

  Uh, and so you really start to wonder like, I don't think this was the plan the whole time. I think it was the fact that once you started needing to show growth. And you've already pulled forward all the revenue out of next year into last year, then you got to do something and you have to get infinitely creative in your way to show income on the income statement. And so you start spinning up all these divisions to do crazy stuff.

• 1:18:24David Rosenthal?

  So like we're saying, that dynamic gets to the point where it's so big, they can't find enough suckers to even do 3% of the equity and capital in these crappy deals that again, Enron's on both sides of, even though the special purpose entity is independent, quote unquote. So Fastow and Skilling come up with yet another brilliant idea. Rather than going and doing road shows, signing up, you know, other entities to do this, what if they had their own fund? A captive fund, part of the Enron family, but was separate, was independent, that could put up this 3% of the equity needed for every deal.

• 1:19:04Ben Gilbert?

  God, we could call this episode Arms Length, but not really.

• 1:19:07David Rosenthal?

  So they, they go to Anderson and they're like, well, what if we do this? And what if Andy, what if Fastow sets up this fund and is the general partner in it? And we only use it for, you know, stuff that helps Enron. And like, yes, he's the CFO of Enron. He'll also be the general partner of this fund, you know, that's going to do deals with Enron, but it's only deals that are going to be good for Enron. And Anderson's like, that seems really bad. You should probably go to the board and get sign off on this very, very obvious conflict of interest.

• 1:19:38Ben Gilbert?

  Yeah.

• 1:19:39David Rosenthal?

  So they do, they take this to the board and they present it, Fastow presents it to the board as like,

• 1:19:45Ben Gilbert?

  I'm willing to fall on this sword to do this for you guys.

• 1:19:49David Rosenthal?

  I'm taking one for the team, guys.

• 1:19:51Ben Gilbert?

  Never mind the fact that like, he has full private equity economics on this deal. I don't know if it's two and 20 or whatever it is, but there's management fees, there's carry, like he is the general partner of a private equity fund that is only getting good deals because you know that he's going to screw Enron to get the private equity fund to get great terms on these deals. Ugh. So he's pitching the board.

• 1:20:14David Rosenthal?

  He's pitching the board. The board is like, great. Thanks for taking one for the team, Andy. This is going to be great for Enron. Really appreciate your hard work. Basically a bunch of atta boys and slaps on the back. So yeah, as you mentioned, this is a private equity fund that he gets 2% management fees, 20% of the profits, you know, ends up across a series of funds being hundreds and hundreds of millions of dollars that he's managing.

• 1:20:38Ben Gilbert?

  I think Fund One was small-ish, but Fund Two is 200 million.

• 1:20:41David Rosenthal?

  Yeah, we'll get into what it is exactly in a minute here. The management fees of a fund, in theory, are supposed to support the cost of running the fund, you know, like headcount salaries, rent, office space, all the resources you need. He's the CFO of Enron. Everybody who works on the fund is an Enron employee. Enron is paying the salaries of everybody. The office is Enron. There's no headcount. There's no funds, you know, all the Bloomberg terminals, all the legal, all the accounting.

• 1:21:12Ben Gilbert?

  He's pulling someone off their day job every time they need to negotiate a deal between his fund and Enron and saying, okay, you wear the Enron hat on this time and negotiate against me and I'll wear the private equity hat. And they're calling that arms length.

• 1:21:26David Rosenthal?

  So all the management fees, there's no expenses. They're just straight flowing to him. The real kicker, you were joking about this before the episode, and that should have told everybody where his real incentive lies. He decides to name the suite of funds, LJM Capital. What does LJM stand for? It stands for Leah, Jeffrey, and Matthew, which are the names of his wife and kids. So there is no question who is benefiting from what is going on here, and it's not Enron.

• 1:21:54Ben Gilbert?

  Unbelievable. And there's the squirreliest, most circuitous route to trying to find disclosures on this. Whenever it's convenient to say so, there are claims that the board was fully on board with this. Whenever you're looking for the smoking gun, it's really difficult to find anyone's signatures or discussion of this in the board minutes. It's especially difficult to find Jeff Skilling's signature on anything, even though the whole agreement was Skilling will sign off as the final approver on, I think, deals, but definitely Fausto's compensation from this. There are documents that surface that have a variety of signatures on them, but not Skilling's. He very intentionally was like, uh, I'm not actually gonna sign off on this, but it's kind of good for Enron that it happens. So

• 1:22:39Ben Gilbert?

  I'm gonna let it keep happening.

• 1:22:40David Rosenthal?

  Well, it is good because these funds, this vehicle, you know, everything that Fastow is now running, can put up the 3% capital for this special purpose entity. So they don't need to involve any outside people in all of this.

• 1:22:53Ben Gilbert?

  Not to mention, all the people investing capital are these big banks. And so it further entrenches major financial institutions, Merrill Lynch, JP Morgan, all these big people that Enron wants to continue to have incentivized for their success further in owning assets that are associated with Enron.

• 1:23:12David Rosenthal?

  Yes. So everybody in Enron is so hyped up about this that in 1999, Fastow starts a campaign within Enron with Lay and Skilling and the PR people in Enron to get himself nominated for the CFO of the Year in the CFO Magazine annual rankings of CFO. He ends up not winning, but he does get a special award from CFO Magazine for CFO Excellence in the category of Capital Structure Management. So they do, over a few years, tons, tons of these deals. And two things are always true about the deals. One, Fastow is finding a way for Fastow to benefit and get rich. You know, LJM, we know who number one is here.

• 1:23:54David Rosenthal?

  Two, Enron also benefits because it's now just turbocharging this whole flywheel and getting the bad stuff off the balance sheets and booking revenues associated with these deals. Eventually, Enron also makes Fastow the head of corp dev. So he is now the head on all sides of the transactions. He's the CFO. He is the head of corporate development, who would be the person charged with negotiating the Enron side of the table against the outside investors, the LJM. But he runs everything.

• 1:24:27Ben Gilbert?

  It's so, so wild. At the time that they do end up actually disclosing this, which I don't want to flash too far forward, but it's worth showing this detail. They do sort of disclose it. They say, oh, there exists an entity that's managed by a member of the management team that does deals with Enron. It's like one sentence. And then when the shit really- Hits the fan, they say, oh, well, a previously disclosed entity did deals this quarter, but that's been previously disclosed. There ends up being like a billion dollar loss or some crazy, don't quote me on that, but some massive, massive loss. And they're like, oh, we disclosed this whole thing before. And it all ties back to this one

• 1:25:09Ben Gilbert?

  sentence where they're just saying, a member of the management team has a related entity that does transactions with Enron.

• 1:25:15David Rosenthal?

  So this is where everything starts to unravel. Investors and the media start asking around about this. Like by this point in time, we're now in

• 1:25:25Ben Gilbert?

  Early 2001.

• 1:25:26David Rosenthal?

  Yeah. Lay has now stepped back to just be chairman. Skilling has been promoted to be CEO of the whole company. Fastow is still CFO plus head of corp dev plus running these LJM funds, unrelated funds. People are starting to ask around about what's going on at Enron. And people assume when this disclosure comes out that it's Skilling who's running these funds. And they're like, oh, my God, is the CEO doing this? And so I think it's the Wall Street Journal calls up Enron PR and they're like, yo, what's up here? And like, and then Enron PR is like, oh, no, no, no, it's not Skilling. Don't worry. It's Fastow.

• 1:26:06Ben Gilbert?

  Who just immediately threw him under the bus.

• 1:26:07David Rosenthal?

  Throw him under the bus. Everybody hated Fastow in the company, apparently.

• 1:26:12Ben Gilbert?

  Especially late in the game here because people could figure out that he was getting rich on these LJM structures. He actually had, LJM III was in the works to be a billion dollar fund. And if that came together, he was just going to piece out and go do that.

• 1:26:25David Rosenthal?

  You just can't make this stuff up. So as that all starts happening, Fastow and Skilling in the company eventually decide, all right, Andy, you've really taken one for the team here. You can either stay at Enron, be the CFO and head of corp dev, or you can go run these funds. You can no longer do both. People are asking too many questions. And so Fastow asked for some time, the weekend to go think about it, talk to his wife. Comes back to Skilling and he's like, I'm loyal to Enron. I'm staying here. I'm going to give up. I'm going to sell off my interests.

• 1:26:58Ben Gilbert?

  Sell my interests. I'm going to get all my economics out of the interests while they're at an all time high.

• 1:27:03David Rosenthal?

  Here's what he does. Back before the funds, when they were just doing kind of one off deals, Fastow had a direct report in the finance organization, a guy named Michael Copper.

• 1:27:15David Rosenthal?

  And he and Copper came to a understanding.

• 1:27:19Ben Gilbert?

  Lot of understandings around this company.

• 1:27:21David Rosenthal?

  And here's this giant cookie jar of all these deals that Enron's doing and there's no lid on it. And they could kind of work together to skim a few chocolate chips out of the cookie jar. And so they were in cahoots together. And they had done a transaction together where, again, before the funds, one of the investors that had come in on one of the projects was Calpers, the big California state employee pension retirement fund. They had done one of these offloading projects with Enron.

• 1:27:52Ben Gilbert?

  This is with Enron Energy Services. This was the $130 million deal.

• 1:27:57David Rosenthal?

  Jedi?

• 1:27:58Ben Gilbert?

  Yeah. Do you know, speaking of FTX, who the other big investor was along with Calpers?

• 1:28:04David Rosenthal?

  Oh, I don't know. I didn't see this.

• 1:28:05Ben Gilbert?

  You cannot make this stuff up. The Ontario Teachers Pension Plan.

• 1:28:09David Rosenthal?

  Oh, I think I did see that. Who are also, of course, big investors in FTX, right?

• 1:28:15Ben Gilbert?

  Yes.

• 1:28:16David Rosenthal?

  Oh, so this particular entity was called the Jedi entity that Calpers and the Ontario Teachers Fund had invested in. And Enron and Fastow wanted to do an even bigger deal with them. And Calpers said, okay, we're interested in a bigger deal, but we want to get our capital out of Jedi one, get that capital out and put even more capital into Jedi two. And so Fastow's like, aha, I see an opportunity to enrich myself. So he drafts Copper into service here. And they create an entity called Chuko, short for Chewbacca, sticking with the Star Wars theme here. Remember, this has all got to be fully independent. But

• 1:28:58David Rosenthal?

  Fastow and Copper both work at Enron. And why did Fastow target Copper as his accomplice here? Copper was gay. And this is the 1990s in America. Gay marriage is not legal.

• 1:29:13Ben Gilbert?

  In Texas.

• 1:29:14David Rosenthal?

  I don't know if it was legal anywhere. Certainly was not legal in Texas, and it was not legal federally in America at the time. So Copper's domestic partner, a guy named Bill Dodson, he's not legally married to Copper, and he's not part of Enron. So they set up Dodson as the outside investor in Chuco to buy out the Jedi assets from Calpers. And then Fastow and Copper create a secret spreadsheet. This is the beginning of their sort of nefarious deals together.

• 1:29:48Ben Gilbert?

  When the second set of books starts being created, that is a dangerous time.

• 1:29:52David Rosenthal?

  Yes. So on Copper's home laptop, they have this secret spreadsheet where they're keeping track of all the deals where they use Dodson as the front for any time they need to offload from the offload. They use this deal to enrich themselves.

• 1:30:08Ben Gilbert?

  God.

• 1:30:09David Rosenthal?

  Unbelievable.

• 1:30:10Ben Gilbert?

  How did any of these guys plead not guilty?

• 1:30:12David Rosenthal?

  Unbelievable. And so Copper starts cutting checks from all the money they're making, that Dodson is making. Copper starts cutting checks to Leah Fastow, Andy's wife. And so that's how they spread the money around.

• 1:30:25Ben Gilbert?

  Unbelievable.

• 1:30:26David Rosenthal?

  So now, flash forward, back to when Andy is, once again, taking one for the team and selling off his general partner membership in the LJM funds. Who does he sell it to? He sells them to Copper.

• 1:30:41Ben Gilbert?

  Wow.

• 1:30:42David Rosenthal?

  And they use the same scheme for Andy, of course, to still stay involved and be getting a, at least a 50/50, if not more, share of everything.

• 1:30:50Ben Gilbert?

  And this is like, you know, when he's fallen to his knees and told Skilling, "You're the only girl at the dance. You're the only one for me. I'm foregoing this whole grand idea I had around all these economics from the LJM partnerships. Not so much." All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the Agentic operating system that is redefining how the world's best legal teams work.

• 1:31:18David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:31:35Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:31:50David Rosenthal?

  And that's how you get features that customers love, like Tabular Review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:32:14Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:32:33David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:33:03Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. It's probably worth flashing back to like the 1997 timeframe to start talking about what was happening outside the office of the CFO at Enron because they're going nuts. They've realized that they've accounted for all the future points on the board last year, and so they got to do a whole bunch of stuff to show a bunch of growth because

• 1:33:47Ben Gilbert?

  boy is the stock pumping and boy does the stock need to pump in order for them to continue all these new equity issuances to give them the cash to do all this wild stuff. So they've got the pipelines. They're not particularly interested in that very old business that's kind of hard to fake or tinker with or innovate on top of. And so they're like, okay, the trading business, you know, sometimes we take big losses, but sometimes we wild speculation can give us really big profits or at least paper profits. So let's trade more stuff. So they get into the electricity business. So this, for the first time, they move beyond

• 1:34:25Ben Gilbert?

  natural gas. Of course, they find out that trading power is hard because unlike gigantic pipelines and tanks where you can store natural gas, you can't store electrons. Famously, batteries are very inefficient. So it's not like you can charge up batteries and store all the electrons there for a while until you need them somewhere else. You basically need to be producing the electrons at the exact same rate that you are consuming them. So that makes an electricity market interesting, but much harder than what they were doing in natural gas. They also expand into water, especially internationally. That's also very hard because all water droplets are not created equal. There's different impurities, different

• 1:35:06Ben Gilbert?

  salinities that you have to treat. Of course, in the US, there's also no federal order requiring those who own water pipes to let anyone move stuff around inside of them the way that you have in natural gas and electricity. You know, these people who own the water pipes, own the water pipes. And if they want to tell you, you can't put your stuff in here and you can't make money off our asset, they're allowed to do that. So what else happens? They spin up trading teams for pulp and paper, weather derivatives, freight, metals trading, until they finally stumble on the thing that is really going to make them money: bandwidth, fiber optic network.

• 1:35:43David Rosenthal?

  Internet bandwidth.

• 1:35:44Ben Gilbert?

  Enron, the tech company.

• 1:35:46David Rosenthal?

  Enron, the tech company. The stock goes nuts when this gets announced. One quick note that we would be remiss if not talking about on this episode with regard to the power trading that they get into, the electricity trading. They become a key player in the total disaster that is the California blackouts.

• 1:36:06Ben Gilbert?

  It's hard to know if they caused it or if they just profited from it.

• 1:36:10David Rosenthal?

  They certainly profited and they might have helped cause it.

• 1:36:13Ben Gilbert?

  Yes. So what happened here? So this is worth talking about. So the California power markets were being deregulated, much like the natural gas markets, but not fully. The Enron traders, who are these pure capitalists, they're these pure sort of like, if there's a dollar on the table, it is my ethical responsibility to go take it, no matter what the impacts are, because I have an intellectual purity to.

• 1:36:39David Rosenthal?

  I don't think there's a lot of intellectual justification going on. More visceral.

• 1:36:43Ben Gilbert?

  No, I think there is. I think it's a deeply philosophical thing where people believe that free markets are virtuous and the only sort of virtuous thing to do is to have everything be a completely deregulated, open, free market and lay the rules of the game out clearly and then play the game however the rules say that you can play them.

• 1:37:05David Rosenthal?

  Yes, I think there's two classes. I think the skillings and like the Kenneth Lays of the world fit that bill. I think a lot of the actual day-to-day traders are more just like red meat, you know, like trader make money guys.

• 1:37:17Ben Gilbert?

  Yeah. So what happened here? Well, the state of California decided that they didn't want to go full free market. So they put in lots of safety measures that ended up being the opposite of that because usually when you add a new sort of mechanism into a free market, it can be played in a variety of different ways. So on the one hand, it seems reasonable to have controls in place. On the other hand, it entered a lot of new rules onto the playing field for these traders to exploit. So people would run experiments to test. If they were exploitable, they would see the results and then they would go hard and they would be rewarded for going hard. And so. You know, a company is not on the right side of history when memos start circulating

• 1:38:00Ben Gilbert?

  on the floor with names like Death Star, Fat Boy, Get Shorty, and Ricochet.

• 1:38:07David Rosenthal?

  These are various trading strategies in the California energy market?

• 1:38:11Ben Gilbert?

  Yeah, just four of the trading strategies, but it's worth articulating some of the crazy stuff they did. So what is Death Star? Well, it was this experiment where Enron went into the market and filed an imaginary transmission schedule in order to get paid to alleviate congestion that didn't really exist. So this sort of like, can we spike something to watch the impact on something else and then make money from a contract on the impact of it somewhere else? Or Fat Boy was a scheme where Enron would submit a schedule to the marketplace reflecting demand that wasn't actually there and then watching what sort of happened when that demand tried to be fulfilled and there was nowhere to put it. So then there was

• 1:38:54Ben Gilbert?

  a big extra amount of electricity being produced somewhere they could profit from that. Get Shorty, selling power that Enron didn't actually have for use as reserves with the expectation that Enron would never actually be called upon to supply the power, or it could just buy it later at a lower price. Or the worst of them all, Ricochet, where Enron would work with someone who's generating power in California, a utility.

• 1:39:18David Rosenthal?

  Oh, is this where they have them shut it down for maintenance?

• 1:39:20Ben Gilbert?

  No, this was where they would export it out of the state and they had control over the transmission line, so they could do that. And then when California realized, oh crap, we need energy, then they would have a contract in place where Enron would get paid to bring it back in at much, much higher prices, which the industry would start calling this megawatt laundering, because that's really what it was.

• 1:39:42David Rosenthal?

  And I think what they would do as part of it too, is call up generation plants where they had relationships and like encourage them to shut down for maintenance at specific points in time when they knew it would cause blackouts and spike the price.

• 1:39:54Ben Gilbert?

  And it's exactly what it did. So, I mean, I am confident that people died from this. This is one of those things where like if you're randomly depriving huge swaths of California From power, hospitals, schools, people's homes. It's not fun and games. I mean, it is profiting from terrible, harmful activities to people.

• 1:40:13David Rosenthal?

  And this has such far reaching impacts. I mean, this was one of, if not the major reason that California Governor Gray Davis gets recalled.

• 1:40:21Ben Gilbert?

  Yeah.

• 1:40:22David Rosenthal?

  And then Arnold Schwarzenegger gets elected Governator. Like, this was the key issue. And Enron and other trading companies were totally manipulating the market.

• 1:40:32Ben Gilbert?

  Yep. So power trading, this whole thing is going on. That's sort of one corner of Enron. Another corner of Enron is this thing, Enron Energy Services, which this, I believe, is the division that Lou Pae ran.

• 1:40:45David Rosenthal?

  Hmm. Yep.

• 1:40:46Ben Gilbert?

  But in 97, this was the current hotness for what to get investors excited about as the future of Enron. Cause they sort of had done the, you know, were a pure marketplace, then were a financial derivatives. Then they got mark to market accounting and started doing all the international development. They started doing power. Well, Enron Energy Services is this thing that Skilling really wants to sell this story about how it's taking off. And so let me just read this passage from the smartest guys in the room. Cause I think this probably articulates the insidiousness of the Enron culture better than anything else. So analysts come to Houston. They tour the sixth floor of the EES War Room. There, they beheld the very picture of a sophisticated booming business.

• 1:41:29Ben Gilbert?

  A big, open room bustling with people, all busy, working the telephones, hunched over computer terminals, seemingly cutting deals and trading energy. Giant plasma screens displayed electronic maps, which could show sites of EES's many contracts and prospects. Commodity prices danced across an electronic ticker. "It was impressive," recalls John Olson, who at the time covered the company for Merrill Lynch. "It was a veritable beehive of activity. It was also a veritable sham." The War Room had been rapidly fitted out explicitly to impress the analysts. Though EES was just then gearing up, Skilling and Pae had staged it all to convince the visitors that things were really hopping. On the day the analysts arrived, the room was filled with Enron employees. Many of them, though, did not work on the sixth floor at all.

• 1:42:15Ben Gilbert?

  They were secretaries, EES staff from other locations, non EES employees who had been drafted for the occasion, coached on the importance of appearing busy. One administrative assistant named Kim Garcia recalls being told to bring her personal photos to make it look as if she actually worked at the desk where she was sitting. She spent most of the time talking to her girlfriends on the phone. After getting the all-clear signal, Garcia packed up her belongings and returned to her real desk on the ninth floor. The analysts had no clue they'd been hoodwinked.

• 1:42:42David Rosenthal?

  Oh my God, this is like a classic boiler room ruse. This is great.

• 1:42:46Ben Gilbert?

  Unbelievable. And that was 97. That was four years before the fall they were pulling crap like that.

• 1:42:54David Rosenthal?

  Should we talk about the broadband services and internet division?

• 1:42:58Ben Gilbert?

  Absolutely. Enron, the internet company, suddenly, magically. I mean, this company started by merging two pipelines, and here they are, the seventh most valuable company in the world because they're somehow the company that's going to capitalize on this new internet thing?

• 1:43:12David Rosenthal?

  Did you read about how they did a deal with Blockbuster?

• 1:43:17Ben Gilbert?

  Yes.

• 1:43:18David Rosenthal?

  In this new division?

• 1:43:19Ben Gilbert?

  This is the best. I mean, this is like truly, you can't make this stuff up.

• 1:43:21David Rosenthal?

  This is like tailor-made for acquired.

• 1:43:23Ben Gilbert?

  Before the Blockbuster Netflix thing, and before Blockbuster even considered streaming, they offered a video on-demand product that was provided by Enron's fiber. Somehow, Enron was doing the servers and digital delivery.

• 1:43:39David Rosenthal?

  And this was video on-demand being like, if you were like a cable or satellite subscriber on your cable box, you could get video on-demand, right? Like, this wasn't the internet. This isn't internet streaming. This is like on-demand, but via the cable infrastructure, right?

• 1:43:54Ben Gilbert?

  I think that's right. I think they only had bad movies. I don't think they were able to lock up good ones. I don't think, however they ended up delivering it, I don't think the consumer demand was really there.

• 1:44:04David Rosenthal?

  The service never launched. But of course, with Enron's mark-to-market, they booked over $100 million in revenue on day one for it. And then they offloaded the project to a special purpose entity.

• 1:44:14Ben Gilbert?

  $110 million. Even better, David. So they offloaded it to a special purpose entity. At some point, they tore up the contract. I don't know if it was Enron or Blockbuster, but they basically said, this deal sucks. No one wants this. So you know what they did? They created an even bigger

• 1:44:33Ben Gilbert?

  Impact to revenue in the positive direction, like more than $100 million because a new thing had happened. It's not a contract, it's the lack of a contract. So now they have the ability to do deals with everyone. They're not locked into an exclusive deal with Blockbuster. So that creates a huge amount of future value for Enron, the company, their shareholders. And so they literally recognized revenue even bigger than the Blockbuster deal after the lack of Blockbuster.

• 1:44:59David Rosenthal?

  Oh, I didn't see that. That's amazing.

• 1:45:02Ben Gilbert?

  Is wicked stuff. I mean, this is where you're just like, you guys are criminals.

• 1:45:07David Rosenthal?

  Okay, so before we come back to the wheels starting to fall apart in 2001, there's one more piece of the intervening GoGo years we should talk about. You want to talk about Enron Online?

• 1:45:19Ben Gilbert?

  Yes. So of course, we were referring to the bandwidth trading, which also is much more difficult than trading natural gas. I mean, like, how exactly is that all going to work? Trading available bandwidth, especially when there's this like massive last mile problem to everyone's homes? And if someone needs more bandwidth in one place than another, like, how's that going to work? You just physically widen the wires? Or I think people just didn't really understand these concepts yet. And so there's like lots of excitement around what Enron's doing in trading bandwidth, around being an internet company. But they actually do launch an internet product. Now, the internet product is really just to advantage their in-house business. And this one, to me, seems like it's

• 1:46:03Ben Gilbert?

  probably not fraud. It's just an example of like evil, but beneficial for shareholders business strategy. In November of 99, they launched something called Enron Online. And what this is, is it allows all of Enron's counterparties to trade with them electronically. So they stand up an exchange, like an exchange you can access through a web browser, much like FTX. But Enron itself is the counterparty to every trade. They don't even pretend that they're not on the other side of most transactions.

• 1:46:37David Rosenthal?

  Oh, my God. I didn't make the FTX Alameda connection in this. This is too good.

• 1:46:42Ben Gilbert?

  It is just the craziest thing where they're just like, yep, we're the counterparty to every single trade here. So we're going to generate a little bit of spread on the exchange and we're probably going to get beneficial pricing being the counterparty because we have the most information in the market for everything that's being traded on here because it is our marketplace and we're going to use that information. It's a pretty savvy data advantage. Now, unfortunately, what they do with that data advantage is they do manipulate markets and that I believe leads to some part of the downfall case against them where they are controlling commodity prices and stuff like that. But that I thought in 99, that early

• 1:47:23Ben Gilbert?

  is a, is a pretty savvy way to use the internet for evil.

• 1:47:30David Rosenthal?

  You know, a really funny thing, maybe we'll talk about this more in playbook, is at the same time, this is, I think, really best reflected in both Skilling and Fastow. They were all so smart and yet also so stupid. The combination of brilliance and stupidity in one person and one group of people is really something.

• 1:47:51Ben Gilbert?

  It's almost like it was smart, but it was cognitive dissonance where like they just thought the rug was infinitely large that they could just keep sweeping stuff under it and that at some point it would never become an issue for them. And in Skilling, you watch some of his testimony because everyone else pleaded the fifth. Skilling stood trial and tried to defend himself. He really does look like a man who thought he did nothing wrong. It's crazy to me how Skilling, I mean, I think he really was delusional that there was so much innovation here that he thought it was okay. I don't know. There are examples of where you could draw a different conclusion, but you're right, they were smart.

• 1:48:33Ben Gilbert?

  And I don't know that they were all so stupid. I think they also just had a lot of cognitive dissonance that it somehow wouldn't all come tumbling down.

• 1:48:40David Rosenthal?

  I've actually been thinking about this recently, both in the context of FTX and just generally also being a new parent makes you think about some of this stuff. Like, it's probably good to be smart. It's certainly good to be of above average intelligence. Good for you as your success in the world. But there's a certain point, I think, where like increased intelligence either is neutral or negative to your ultimate happiness. And I think it's cases like this, like Enron, like FTX. Like, there's no question that SBF, you know, and a lot of the people involved in FTX and Alameda were brilliant. But like, they're too smart. Like, they end up hurting themselves, you know? And like, the Enron case is the same thing.

• 1:49:22Ben Gilbert?

  And is it the smarts or is it the cockiness? Because clearly what was happening here is they just thought no one would ever catch them. I think that is really what started to come out is, I mean, Fastow went five years without having to disclose how much compensation he was getting from the LJM partnerships. He just thought, I'll just keep self-dealing.

• 1:49:40David Rosenthal?

  But you're right about skilling. It's a little more than that with skilling. He's the only one who doesn't end up pleading the fifth. Like, he defends himself to the end.

• 1:49:48Ben Gilbert?

  Which he later says was stupid, by the way. He's like, I should have listened to my counsel, just like everyone else's counsel.

• 1:49:53David Rosenthal?

  And this is like the smart stupid thing. Like, he, um, I think maybe it's that he just completely fell in love with his own ideas.

• 1:50:00Ben Gilbert?

  Yeah.

• 1:50:01David Rosenthal?

  Because he's always talking about how brilliant he is, how effing smart he is.

• 1:50:04Ben Gilbert?

  And it always worked. I mean, that's the craziest thing is it always worked every time. To bring us back to the story from that 99-2000 period, and this is, I think, rumored, I don't think this was in the court documents, but lots of substantiation around the rumor. He managed to convince Lei that he should get $20 million in cash if he was not made CEO of Enron by the end of 2000. Like, what? I mean, this guy is so good at convincing people to do stuff.

• 1:50:33David Rosenthal?

  He convinced the SEC that mark-to-market accounting would be a good thing.

• 1:50:37Ben Gilbert?

  Right? It's like, oh, if you fire me, you have to pay me $20 million unless you want to make me CEO of the company. And the only negotiating position that he had was otherwise I'll just quit and you'll be screwed without me. I'll just quit right now. And Lay signed that deal. They needed him around so bad.

• 1:50:53David Rosenthal?

  Oh, well, speaking of skilling quitting, let's move the story towards that, shall we?

• 1:50:59Ben Gilbert?

  Yeah. So the first cracks in the armor start in September of 2000. So the stock is still on its way up and hasn't peaked yet. But you have a short seller named Jim Chanos, who for the first time is starting to make noise around just the most basic fundamentals here. Hey, I'm reading your quarterly reports and they're completely imparcible. You're technically disclosing a bunch of stuff. I have no idea what you're disclosing. Can you help me understand the business? How do you make money? And you then start to have reporters getting involved because reporters love getting tips from short sellers because short sellers have a massive financial incentive to go and investigate and figure out what companies are going to fail. And that's a really good where there's smoke, there's

• 1:51:41Ben Gilbert?

  fire for reporters. So, you know, reporters start getting involved. And the big question is sort of like, how does Enron make money? And as people start digging in with skilling and with Lay and with Fastow and granting interviews and doing this sort of stuff.

• 1:51:55David Rosenthal?

  Nobody can figure it out.

• 1:51:56Ben Gilbert?

  No one can figure it out. And you get conflicting statements. Like you hear skilling say, it couldn't be more obvious. You just need to dig and understand our business. We're very clear. We're very communicative. We're not hiding anything. And then two sentences later, you hear something like, well, we don't want to tell our competitors how we make money. So of course, we're not going to share details like that. And you're like, sorry, what?

• 1:52:16David Rosenthal?

  The cognitive dissonance is just.

• 1:52:18Ben Gilbert?

  Crazy.

• 1:52:19David Rosenthal?

  Yep. So one of the reporters that Chanos, I don't know, one of or the only reporter that he goes to is Bethany McLean.

• 1:52:28Ben Gilbert?

  At Fortune.

• 1:52:28David Rosenthal?

  At Fortune, the same publication that names Enron the most innovative and best managed company in America. Amazing.

• 1:52:37Ben Gilbert?

  Yes.

• 1:52:38David Rosenthal?

  So she publishes on March 5, 2001, an article entitled, Is Enron Overpriced?

• 1:52:45Ben Gilbert?

  Which is wonderfully innocuous. Oh, it's merely a price issue.

• 1:52:49David Rosenthal?

  It's not that bad of an article from Enron's perspective. Like, the biggest question it raises is not one of fraud. It's exactly what you said, Ben. It's like, Enron is a black box. Nobody can figure out what's going on here. But there's no accusations of fraud or anything wrong going on, et cetera. There have been some other articles, but this is the first big article, like, kind of questioning what's going on at Enron.

• 1:53:11Ben Gilbert?

  The subhead is, "It's in a bunch of complex businesses. Its financial statements are nearly impenetrable. So why is Enron trading at such a high multiple?" That is the most innocuous and reasonable question to ask. Because when you go and compare it, you actually do industry comparables. Before the fall, it's stocks trading at an all-time high. Everything seems up and to the right. In fact, just in that January, January of '01, they've rebranded from the world's leading energy company to the world's leading company. It's literally the subhead, the tagline for the company.

• 1:53:46David Rosenthal?

  Oh, can we talk about the company slogan that they used in their commercials? Which was "Ask Why"? That's literally the company slogan. And then when people ask them why of like, about how their financials, they can't tell you.

• 1:53:58Ben Gilbert?

  There was discussion of whether they should be the world's coolest company. But literally, the only reason they didn't do that is because it didn't translate well. So they just went with "The World's Leading Company." There is video footage of Jeff Skilling unveiling the new slogan at a shareholder meeting and everyone clapping. It's like, "The world's leading company? That's not a mission. What do we do?"

• 1:54:17David Rosenthal?

  "I want to be the world's leading podcast." What do you think, Ben?

• 1:54:20Ben Gilbert?

  But that's actually a thing.

• 1:54:21David Rosenthal?

  I guess that is a thing.

• 1:54:23Ben Gilbert?

  Anyway, so the financials, it's worth highlighting. The good time to pick is maybe March of 2000. It was trading at 55x trailing earnings, which if you look at, you think it's an energy company. You compete against Duke Energy, which is a reasonable competitor. It's 2.5x the multiple. You're like, hmm, okay, well, maybe it's more than an energy company. Maybe I'm missing something here.

• 1:54:45David Rosenthal?

  It's an internet company.

• 1:54:46Ben Gilbert?

  Yeah, but you're like, okay, well, maybe it's like a trading firm then. Maybe it's like a Goldman Sachs. Well, Goldman Sachs is only trading at this point at 17x earnings. So why is Enron trading at 55x earnings? And you're like, wait a minute. And you start digging in, and you're like, well, when I can see Goldman Sachs's earnings, I can sort of tie it out to the rest of the financial statements and see earnings eventually showing up as cash. But this is a company that's trading 2.5 to 3x higher than any reasonable comp. And if you actually start digging in and looking at their free cash flow, or looking at any return on investment metric that you decide to pick is terrible. There's no cash and there's really no return on invested capital ever showing up.

• 1:55:28Ben Gilbert?

  And sometimes their return on invested capital is actually less than their cost of capital. So when you look at the cash of this business, it's awful.

• 1:55:39David Rosenthal?

  Yes, indeed it is.

• 1:55:41Ben Gilbert?

  And the first part, the high multiple is Enron overpriced question. That's a reasonable conversation to have. And this is a good thing that friend of the show, Andrew Marks pointed out. When you see terrible returns on invested capital and you see no free cash flow showing up ever, or poor free cash flow dynamics, that's probably when there's fraud.

• 1:56:01David Rosenthal?

  If there's very high revenue growth, very high reported earnings and profit on the income statement, and there is low return on invested capital and poor free cash flow dynamics, probably your radar screen should be going off.

• 1:56:17Ben Gilbert?

  Yep. And this, of course, is a thing that short sellers pay a lot of attention to. They look for companies that have all of those metrics that we just described trending in exactly those directions because that's probably where there's a big accounting issue that's about to happen.

• 1:56:30David Rosenthal?

  And the big cognitive dissonance, I think, is the reported profits versus the cash flow. Because you think about like startups, right? Lots of startups, for instance, can be reporting high revenue growth but be burning lots of cash as they're investing in growth and operations and whatnot. In Enron's case, and in the case of a lot of frauds, they're reporting high revenue growth and high profits on the income statement, but also burning cash.

• 1:56:53Ben Gilbert?

  Yep. So people are starting to figure this out. Short sellers, journalists, and eventually, finally, finally, some analysts manage to shake loose of the my job is to say Enron is awesome thing. And they start to ask hard questions on earnings calls. Because for the longest time, it has been that you were rewarded for saying Enron's great because the stock would go up and then you would look like a genius. And anytime anybody said Enron wasn't great, either they were proven wrong by the stock price, or they would get slapped at work because they're saying, hey, this is a huge client of ours. We do lots of business with them because Enron did lots of business with everybody.

• 1:57:33David Rosenthal?

  Kept everybody on the payroll. So are you talking about the April 17th, 2001?

• 1:57:39David Rosenthal?

  Earnings call.

• 1:57:41Ben Gilbert?

  I am.

• 1:57:42David Rosenthal?

  Where one Richard Grubman of Highfields Capital, who's actually a hedge fund and had a short position on Enron, asks Skilling, I think this is Skilling's first earnings call as actual CEO, number one of the company.

• 1:57:56Ben Gilbert?

  Oh, man.

• 1:57:58David Rosenthal?

  It does not go well. Spoiler alert.

• 1:58:00Ben Gilbert?

  Cause he's been running the big profit center forever in trading. And he's been trying to masquerade the business and same with Kedley as we're still a logistics company, but they obfuscated the crap out of their segments and their financial reporting. So you can't tell that all the money is actually being made by trading, money being made, quote unquote, all the income being generated on the income statement comes from trading, which you kind of can't tell. Anyway, so now he finally steps into the CEO role and is responsible for these earnings calls.

• 1:58:26David Rosenthal?

  And here's the question. Tell me if you think this is like overly combative or merits a like nuclear level response. Grubman asks, why Enron, unlike 99% of other companies out there, when they report earnings, why do they only report an income statement? And they don't report their balance sheet or cash flow statement. And those things only get reported, Ben, like you said earlier in the episode, weeks or months later in the SEC official, you know, 10Q and 10K filings. Why don't you report it all at once like everybody else?

• 1:59:00Ben Gilbert?

  And I think his literal words, he says, you seem to be the only financial institution incapable of producing a balance sheet with earnings.

• 1:59:07David Rosenthal?

  Okay. So maybe like a little flip.

• 1:59:09Ben Gilbert?

  Yes.

• 1:59:10David Rosenthal?

  As Skilling responds by, I forget how he starts the answer. He says something like, thank you very much for the question or something like that.

• 1:59:19Ben Gilbert?

  Yes. Here's what he says. He says, well, first of all, thank you very much. We, asshole.

• 1:59:30David Rosenthal?

  And everybody in the room on the call starts looking around and they're like, did the CEO, what just happened? Of the seventh largest company in the world? Just call an analyst an asshole on an earnings call? Yes. Yes, indeed. That is exactly what happened.

• 1:59:51Ben Gilbert?

  He does apologize. He says, I'm sorry. I've been at a real sort of lack of sleep. He's been making noise internally to Ken Lay, even only a few months on the job of saying, I'm not having fun in this job. Of course, Ken Lay is sort of parroting back to him in private closed-door rooms like, this was supposed to be fun. I thought this was something you wanted. I thought you knew how hard this was. And scaling isn't thriving as a CEO.

• 2:00:15David Rosenthal?

  So scaling starts spiraling, more bad news starts coming out. This is after this, when news and speculation about the California power market manipulation starts coming out.

• 2:00:26Ben Gilbert?

  And PG&E files for Chapter 11 bankruptcy in April of 2001, too.

• 2:00:30David Rosenthal?

  Yep. So things are starting to go bad. The tech bubble's starting to burst. That's affecting the market. The Enron stock starts falling from the all-time high in the fall of the previous year, just above $90 a share, falls down into the 40s. So like, pretty bad. It's lost like over half its value.

• 2:00:47Ben Gilbert?

  And just to make an FTX comparison here, I mean, lots of the time you get away with poor accounting and lots of leeway from investors in a bull market. And then when the bubble pops in the equities market, like the dot-com bubble happened, or January of 2022 happened in tech stocks, and you start to see the tide go out, combined with other potentially attractive, lower-risk places to put capital, you start sort of scrutinizing things that were really high-risk places to put capital, or things that were at high multiples, or things that weren't quite connected to intrinsic value, like crypto. Like, a lot of people are looking at crypto, saying, why am I investing in this again? And so

• 2:01:30Ben Gilbert?

  you start to have, and these two things are a little bit different, like the prices of crypto falls, so it causes margin calls for crypto hedge funds, which then sort of unravels the whole beast.

• 2:01:39David Rosenthal?

  But it's the same dynamic of the tide going out, which I think, right, is a Howard Marks quote, right? Of course, guest of the show and dad of Andrew.

• 2:01:47Ben Gilbert?

  Or Buffett. I don't know which one got it from the other.

• 2:01:50David Rosenthal?

  Yeah. When the tide goes out, you see who's swimming without their swimming trunks on.

• 2:01:54Ben Gilbert?

  But it's so true that that's when the stuff actually gets scrutinized. Everybody was just making money all the way up. And so now that there's real shakiness in the equities market in 2001, from the dot-com bubble bursting, everyone's reexamining everything they assumed to be true before. And it's feeling much more reasonable to ask questions like, hey, can you produce a balance sheet?

• 2:02:13David Rosenthal?

  So what happens next? Nobody inside or outside the company could predict. Within a couple of months, by August of 2001, Skilling had just taken over at the beginning of the year as CEO of the company. In the beginning of August, Skilling goes to Lay, who's still the chairman of the board, and says, "I'm quitting. I'm resigning. I'm out. I can't handle this."

• 2:02:37Ben Gilbert?

  And he cites personal reasons. "I don't want to blame this on my family, so I can't in the press release say that I want to spend more time with my family, even though I do. All you can say is personal reasons and I'm out just because..."

• 2:02:48David Rosenthal?

  "My mental health is falling apart. I can't take it."

• 2:02:51Ben Gilbert?

  "I want to spend time teaching. I want to do philanthropic efforts. This isn't what I wanted. This isn't fun. Blah, blah, blah."

• 2:02:57David Rosenthal?

  In Conspiracy of Fools, and it sounds like it was the same in Smartest Guys in the Room, it is sort of painted as like, yeah, he really was having a mental breakdown and that was the motivation here. You have to ask, though. The tide is going out. Skilling is, as much as anybody, everybody's to blame here. Certainly Lay's to blame, Fastow's to blame, but I think you could argue Skilling is like the most to blame.

• 2:03:25Ben Gilbert?

  Skilling was the architect of the demise. Lay, you could make an argument, was out to lunch the whole time. He was a key enabler at the very least.

• 2:03:35David Rosenthal?

  And Fastow certainly was evil, but was acting on direction from Skilling.

• 2:03:41Ben Gilbert?

  Yeah, sometimes. Other times, he saw a cash grab opportunity for himself.

• 2:03:45David Rosenthal?

  Well, he was embezzling for himself, but in terms of like damage to the company and like perpetuating this house of cards, Skilling was the architect of the house of cards. So you gotta ask, does he see that the tide's going out in the market? This house is going to collapse. I need to get out now. And he starts selling stock as he's leaving, and then after he leaves, he sells a lot of Enron stock.

• 2:04:10Ben Gilbert?

  And all the executives were at this point. Ken Lay had been on a selling plan for the last couple of years.

• 2:04:16David Rosenthal?

  Oh, we need to talk about how Ken Lay was selling.

• 2:04:18Ben Gilbert?

  Ken Lay was so over leveraged, he had received advice from his money manager saying, you really should diversify. All of your wealth is tied up in Enron stock. It's all you've had since 1986, and it's really run. And so what he does, and it's so confusing because he's savvy. I don't know why he does this. Instead of diversifying, he like claims he's diversifying, but what he's actually doing is doubling down. So instead of selling his Enron stock, he starts taking margin loans against his Enron stock and using that to invest in other things. Now, Enron stock starts collapsing, he starts getting margin called. And so he's then needing to sell Enron stock in order to service the debt that he used to invest in these other projects.

• 2:05:02David Rosenthal?

  This is my own speculation. This is not alluded to in, certainly not in Conspiracy of Fools. But when I took a step back and looked at what was going on here, you know, Lay is not a bozo. He may have been out to lunch, but he knew what was going on here for sure. And like, he was probably just as evil as any of them.

• 2:05:20Ben Gilbert?

  And when we say out to lunch, physically, what was he doing? He was taking one of the Enron corporate jets around, sometimes to vacation with his family, sometimes to pick his daughter up from France, but often to DC to Hobnob.

• 2:05:32David Rosenthal?

  Yeah, with the Bush family and other people in the Bush administration, and even in between the two Bush administrations with the Clinton administration. He gave a bunch of money there, too, and did meetings with Clinton administration officials. So I think what might have been going on here. Yes, Ken had most of his net worth in Enron stock. And then he started doing margin loans against that stock with banks. And then we'd get the margin calls and he would have to repay them. But the way he repaid them was he took cash loans from Enron. So Enron loaned him

• 2:06:06Ben Gilbert?

  Oh, my God.

• 2:06:06David Rosenthal?

  Cash.

• 2:06:07Ben Gilbert?

  What a merry go round.

• 2:06:09David Rosenthal?

  And Ken Backed his collateral for that cash that he ended up then repaying the loans to Enron with was the Enron stock that he originally had taken the margin loans against. So he got the cash out of Enron, used it to repay the loans that he had gotten the money from the banks, right? And then the repayment mechanism of all this is Ken's equity goes back to the company. So nowhere do sales show up. Nowhere does it show up to any publicly available information that Ken Lay is selling his Enron shares. It just looks like there's anti-dilution happening at the company. The company's repurchasing shares. So I think you could make an argument, and this is all circumstantial, that this is like totally

• 2:06:53David Rosenthal?

  nefarious, a way to get money out without alerting the market that the chairman is selling.

• 2:06:59Ben Gilbert?

  I think you nailed it. I think there's another thing that's in smartest guys in the room where they reference the fact that I don't think for his particular sales, they classified under some weird thing where they didn't have to disclose it till after the fiscal year rather than in quarter. And so he was able to sell an enormous amount before having to report it.

• 2:07:18David Rosenthal?

  Yeah, all told, I think Lay sells about $300 million worth of Enron stock via these transactions. Skilling sells about 200 million and Fastow and a bunch of the other executives sell a whole bunch too.

• 2:07:33Ben Gilbert?

  And Fastow actually makes $60 million from the LJM partnerships, from fees, carry, and selling partnership interest. So he actually makes more from the LJMs than I think he does in total comp at Enron ever.

• 2:07:45David Rosenthal?

  Which the board never knew. And then as everything is really starting to devolve, and we'll get into that now, at one point, the board corners Fastow and they ask him, how much money have you made from these partnerships? And he tells them and they immediately fire him.

• 2:08:01Ben Gilbert?

  So, and here's the one twinge of a smoking gun on Skilling of why he was quitting, that a Wall Street Journal reporter sort of unearthed in a conversation with him. It's a pseudo innocuous conversation. It's like this kind of, I'm leaving for personal reasons, blah, blah, blah. And he drops one line and he goes, and watching the stock price fall is just so depressing. I probably wouldn't have quit if not for that. And then the reporter goes, wait, what? That doesn't sound like a personal reason. That sounds like a business reason.

• 2:08:30David Rosenthal?

  Yeah.

• 2:08:31Ben Gilbert?

  That's when they can really take that ball and run with it and realize all the layers of what's going on here. A big one was, and this is a thing that got way reformed after Enron. All communication from the company to employees, to investors and between the board and executives to set their compensation is about the stock price.

• 2:08:54David Rosenthal?

  Yeah, they're always saying buy the stock.

• 2:08:56Ben Gilbert?

  Yes, not about any intrinsic characteristics. The company's not giving guidance on just, hey, here's what we think revenue is going to be. And they're not telling employees what you should tell employees, which is, I don't really know if this will go up or down, but here's the direction I think the intrinsic measurable parts of the business are going to go. What Enron is telling everyone is, I think the stock will go up. What Ken Lay, what Skilling are telling people is, stock should be 125. What's it doing down at 40? This is terrible.

• 2:09:22David Rosenthal?

  There are these videos you can find of Lay at employee all hands, where he gets a question card of should employees invest, invest in Enron stock in their 401ks? And this is the same time that Lay is doing these structured transactions we were talking about to offload his Enron stock.

• 2:09:43Ben Gilbert?

  Selling his shares.

• 2:09:44David Rosenthal?

  And he says, I think you should put all of your 401k in Enron stock. And I don't see any reason why the stock shouldn't be 2 or 3x what it is now next year.

• 2:09:54Ben Gilbert?

  Oh, it's just brutal.

• 2:09:56David Rosenthal?

  It's brutal.

• 2:09:58Ben Gilbert?

  Now, when you comp all these executives and incentivize their bonuses against the stock price rather than against, again, things in the company's control, like its revenues, like its performance, and you tie it all to stock performance, then it incentivizes everyone to do these crazy things of pump the stock so they get their bonuses.

• 2:10:15David Rosenthal?

  Okay, so Skilling, surprise resigns. Lay comes back in into the operator seat as CEO.

• 2:10:23Ben Gilbert?

  And he surprise resigns same day with no transition.

• 2:10:25David Rosenthal?

  Yeah, no transition, he's just like, I'm out. Gone. So.

• 2:10:30David Rosenthal?

  Lay comes back in and two things happen. One, he asks Fastow, the CFO, he's trying to get a handle on, you know, like what's going on here, you know, again, he's been out to lunch for years at this point, both metaphorically and literally speaking. And he asked Fastow to say like, okay, what's the current debt obligations of Enron? Like, I know what's on our balance sheet, but like, let's add up all the obligations we have with all these special purpose entities that we've done. Fastow's like, huh, I don't know. Let me go work on that and I'll come back to you.

• 2:11:02Ben Gilbert?

  And the answer was literally that they didn't know because they did not keep this stuff in a centralized location. They signed all this paper through all these different entities and there was not a central ledger anywhere with who owes what to who.

• 2:11:15David Rosenthal?

  So he comes back to Lay and the board and says, our actual obligations are $34 billion, which the debt on the balance sheet was $12.8 billion. So everybody is like shocked, like it's become clear, like this is like a major liquidity existential crisis for the company.

• 2:11:35Ben Gilbert?

  And the company has no cash flow. So it's like, oh, well, maybe we can service that debt with next quarter's cap. No, no, no, no, no, there is no cash coming in the door.

• 2:11:44David Rosenthal?

  So then, right around the same time, a VP in corp dev named Sharon Watkins writes first an anonymous memo and then she puts her name on it and asks for a private meeting with Ken Lay about this memo that she writes where she's trying to be a whistleblower here. She's like, look, what's going on has reached such a crazy pitch and all these LJM transactions that are happening and everything finance is doing and all these off books entities. She writes in the memo, quote, "I am incredibly nervous that we will implode in a wave of accounting scandals." And Lay meets with her, reads the memo, but just like back in the day with the rogue traders, he doesn't do anything.

• 2:12:25Ben Gilbert?

  No need for confrontation. I don't think we should do anything about this.

• 2:12:29David Rosenthal?

  No need for action. This is August 2001.

• 2:12:33David Rosenthal?

  Think about that. We are now mere days away from September 11th. September 11th happens terrible, obviously awful, but in a crazy way. This was a reprieve for Enron. Like it took everybody's eye off the ball of the investor community and the press of how bad things were getting at Enron.

• 2:12:53Ben Gilbert?

  It also gave them cover to say, geez, every stock's down right now.

• 2:12:57David Rosenthal?

  Right. And they needed this because partially due to the events of September 11th, but this was a ticking time bomb was going to happen. Anyway, the morning of September 12th, the next day, when the financial markets reopen, Enron's commercial paper, their overnight loans don't turn over. There's no buyers for the overnight Enron commercial paper, which quick primer, we won't get into too many details here because frankly, I don't understand all of them. But for treasury and corporate finance, most large companies and especially trading operations, they have what's called overnight commercial paper, which are very, very short-term loans that they use to finance the daily cash obligations of the company, like paying payroll, you know, paying vendors, that kind of stuff.

• 2:13:42Ben Gilbert?

  Right. If you think about what's a company like Microsoft have 70,000 employees and you think about how much money they need every two weeks to pay all those people. Well, they don't just keep an enormous part of their treasury in cash to pull that off. They effectively have like a margin loan against their treasury that they use that actually finances the sort of short-term cash flow needs of the company.

• 2:14:03David Rosenthal?

  And this is super standard. Every large public company does this and it is shocking if your paper doesn't, what's called turnover, which is get repurchased, you know, every day.

• 2:14:14Ben Gilbert?

  Right. And like if Microsoft asked me, can you loan me some money for the next 24 hours? I promise I'll give it back to you with this tiny amount of interest. And actually, if you're open to it, would you be game to keep agreeing to do that every day for the next five years? Every day they come to me, every day I'm going to be like, sure.

• 2:14:28David Rosenthal?

  On September 12th, Enron's commercial paper doesn't turn over. Nobody's there to buy it. Now, if this were not September 12th, 2001, that would have been game over for Enron, like right there. That would have been the end. But everybody's a little distracted.

• 2:14:43Ben Gilbert?

  Cause they generate cash flow in no other way. So there's no other way to tap any cash.

• 2:14:46David Rosenthal?

  Everybody's a little distracted. They're able to pull through for at least another couple of weeks. Later though, by kind of early October, everybody's recovered enough, and the rest of the financial community from September 11th that they resume. The questioning of Enron, the Wall Street Journal starts running stories about LJM and speculating on how much they think Faustal might have pulled out of these entities and earned for himself at the expense of the company. Arthur Andersen starts getting real nervous about their role in enabling all of this. And then

• 2:15:24Ben Gilbert?

  Arthur Andersen sort of premeditates, there might be an investigation at some point, and we are not allowed to destroy the evidence once there's been an investigation notified to us. So maybe let's get ahead of it and let's shred more documents than we've ever shredded in the entire history of the firm before we get served something by an attorney.

• 2:15:45David Rosenthal?

  So Arthur Andersen Legal on October 12th sends an email to the Houston office.

• 2:15:50Ben Gilbert?

  God, this email.

• 2:15:52David Rosenthal?

  Literally directing them in writing in an email to start destroying any and all non-finalized documents that are related to Enron, either digital or physical. Quote, "in accordance with the firm's document retention policy." They've never sent anything like this or done anything like this for any other client.

• 2:16:13Ben Gilbert?

  And then they followed up with a second sentence that says, "just so that we're in accordance with the policy."

• 2:16:19David Rosenthal?

  Yes, the policy. This is the policy.

• 2:16:22Ben Gilbert?

  This is a regularly scheduled, of course, I'm just reminding you to do the regularly scheduled policy, which this email may set the policy, but you know, do what the policy says.

• 2:16:31David Rosenthal?

  So the Houston office of Arthur Andersen, they go on for weeks, like the volume of evidence destroyed here, tens of thousands of emails deleted. That's like the easy to get your mind around. The amount of physical documents that they shred, they cannot physically shred the paper fast enough. They're shredding one ton of paper every single day. That's the maximum capacity. This goes on for weeks, dozens of tons of paper that they shred of documents related to Enron. My God, if they weren't guilty before, they sure look guilty of something bad now.

• 2:17:12Ben Gilbert?

  And I think you might know more than I do here, but I think Arthur Andersen went under not because they were found guilty of anything, but because when this all started playing out and they went in the news as being Enron's auditors for all this document destruction for being really sloppy, they were complicit and sloppy. Enron needed to do a handful of restatements that were just straight up Arthur Andersen's fault. I think their customers all just left. And so Arthur Andersen basically ran out of business.

• 2:17:45David Rosenthal?

  Well, it's somewhere in between. So Andersen itself, I don't believe ever faces any, certainly no criminal actions for its direct role within Enron, I don't believe. But they do face criminal action from the Department of Justice and the SEC over destroying of documents. And as a result of that, the SEC in 2002, middle of 2002, revokes Andersen's CPA license. So literally bars them from-

• 2:18:18Ben Gilbert?

  Oh, I didn't realize that. Okay.

• 2:18:20David Rosenthal?

  They had already started to lose tons of clients because, shocker, Andersen was also the auditor of WorldCom, which would be an even bigger bankruptcy that would happen shortly after Enron. So they'd already started to lose clients and then the SEC revokes their license and that's the end of the firm. Like it's done. It's over. They employed 85,000 people, gone.

• 2:18:39Ben Gilbert?

  And it really was the most reputable firm in the world.

• 2:18:42David Rosenthal?

  And it was destroyed. It's over. But back to Enron. So it was October 12th that Andersen starts shredding. On October 16th, Ben, like you were saying, Enron reports earnings. They announce $638 million of losses for like the first time on their income statement. And they say they have to do a restatement of shareholder equity and restate $1.2 billion worth of shareholder equity related to improper accounting of off books entities.

• 2:19:13Ben Gilbert?

  And this is the Raptors, right?

• 2:19:15David Rosenthal?

  I think this is the Raptors. It may have been some others too.

• 2:19:18Ben Gilbert?

  I love that it's called the Raptors.

• 2:19:22Ben Gilbert?

  Okay, this is Fastow. There's four entities, Raptor 1, 2, 3, and 4. They also have other names. For some reason, they're like referred to in multiple ways, but they're off balance sheet vehicles that Enron's basically using to hide large debt loads they're carrying and huge losses. In fact, I think the Raptors start cosigning deals, or at least sort of co-mingling, so that if one can't pay something off, then the other one's on the hook for it.

• 2:19:49David Rosenthal?

  Well, I think the Raptors are also like, what's the word, a hypothesis? Is that like the biggest, most grandest example of Enron's just like awfulness in accounting? The Raptors, I believe, were hedges, intended to be hedges on some of Enron's investments, but the actual mechanism and the underlying collateral that they used for the hedge was Enron's stock itself. So they became this like massively toxic, like they didn't actually hedge anything, and all it did was double the exposure to like a broad-based stock market hit.

• 2:20:22Ben Gilbert?

  It kind of feels like even if Enron hadn't started falling apart before September 11th, September 11th would have been the trigger because they had all this correlated risk. So as soon as their stock stopped going up for any reason, then the whole thing would crumble.

• 2:20:38David Rosenthal?

  And indeed, that is what happens. So October 22nd, the SEC announces that they are launching an inquiry into Enron's accounting. The next day, the 23rd, is when the board calls in Fastow and demands to know how much money he's made in the LGM funds. They find out, they fire him. They instate the former company treasurer, Jeff McMahon, who had been the treasurer, but then Fastow had ousted him because he wasn't loyal enough to Fastow. He comes back into the finance department, this time as the CFO. McMahon learns that not only did Fastow not know how much debt Enron as an organization had, He also didn't know how much cash they had and he also didn't know the maturity

• 2:21:21David Rosenthal?

  schedule of the debt. So he didn't know, and thus, nobody in finance knew the company to know when they had to repay the debt.

• 2:21:28Ben Gilbert?

  Which to me, this is the biggest example of they thought the rug that they were sweeping stuff under was infinitely large because they had no plan to service any of this debt or track any of it. There was no plan. They just somehow never thought they would need to or it would catch up to them. I don't know.

• 2:21:44David Rosenthal?

  Well, and I guess to, you know, what you've been saying the whole episode, which is true. If the markets had always been good and the stock price had always gone up, they always could have just issued more equity to cover any cash needs that they had.

• 2:21:55Ben Gilbert?

  Right.

• 2:21:55David Rosenthal?

  But obviously that's not going to happen now. So it takes McMahon and his new team a couple of days to pull all that together. When they do, they figure out the company is basically already insolvent. So they need emergency financing. So they do the only thing that they can do, which is they pull down all the revolving credit lines they have with all of their banks. These are outstanding revolving lines, kind of like credit cards, revolving lines of credit with banks.

• 2:22:23Ben Gilbert?

  They actually went and asked the banks, hey, can we get new debt lines with you? And every single one said no. And so they pulled the credit lines, which the banks have no option. It's already negotiated and signed.

• 2:22:34David Rosenthal?

  Enron drew down the credit lines.

• 2:22:36Ben Gilbert?

  Yes. So Enron draws down those credit lines and then they issue a press release that they've done this in order to A, assure shareholders that, you know, they're under great financial footing. So now they have all this cash and B, show the bank's support and that they stand behind Enron. You're like, no, no, no, no, they had no choice.

• 2:22:52David Rosenthal?

  The banks are fighting them tooth and nail on all this. Yeah. So after they do that, the credit agencies immediately downgrade Enron's credit rating. Finally. It's shocking that they hadn't until then.

• 2:23:04Ben Gilbert?

  Moody's, they've been complicit the whole time in just-

• 2:23:08David Rosenthal?

  Shows you just how much of a racket this thing is.

• 2:23:10Ben Gilbert?

  No one has been actually underwriting this company to decide if they're credit worthy or not.

• 2:23:15David Rosenthal?

  So at this point, it's obvious even to the most fervent believers or head in the sand people at the company, you can make your argument of which category each of the executives and the board stood in with that, but it's obvious and runs in a death spiral. So two things happen. One, Ken Lay starts calling around to all of his political connections in the Bush administration, basically with his hand out looking for a bailout, kind of like, you know, what would happen in 2008 in the financial crisis. The Bush administration does not give Enron a bailout. So there's no dice there. Once that becomes

• 2:23:54David Rosenthal?

  clear, he does the only next thing that is even any remote possible chance of saving the company, which is he reaches out to the CEO of Enron's largest competitor, Dynegy, and tries to broker a deal.

• 2:24:08Ben Gilbert?

  He also tried to line up a bunch of private equity. He was going to go for a take private. They called Warren Buffett. Buffett was completely uninterested. They called 10 other. They're looking for capital sources. Anybody that's got cash or the ability to take us private, let's do it. And no bites. So let's try and get acquired.

• 2:24:25David Rosenthal?

  So they go to the kind of crosstown rivals in Houston, Dynegy.

• 2:24:29Ben Gilbert?

  Who got no press and no fanfare over the last several years, but they're kind of the same thing. I think they're pipeline and trading.

• 2:24:36David Rosenthal?

  In Conspiracy of Fools, I don't know if this is in Smartest Guys in the Room, there's quotes from Enron people talking about Dynegy as the Burger King to Enron's McDonald's.

• 2:24:46Ben Gilbert?

  And, you know, they're trading in a much lower multiple. They have no sort of like big story.

• 2:24:51David Rosenthal?

  So here's what happens. They strike a super fast, you know, 11th hour deal to save Enron, prevent it from filing from bankruptcy. Dynegy's gonna acquire Enron for $8 billion, an all stock deal, no cash. But Enron, of course, needs more cash to survive until the deal can close and Dynegy can complete its due diligence. So Dynegy lends $1.5 billion to Enron in cash to help Enron through the liquidity crisis.

• 2:25:25David Rosenthal?

  And the loan is secured by Enron's core original pipeline assets. So back to the Inner North days, like those valuable, actual operating pipelines. The only thing that is like actually tangible in the company.

• 2:25:40Ben Gilbert?

  And I think JP Morgan comes into the deal too. And JP Morgan mandates that, but they also mandate that all future Enron investment banking business will be handled by JP Morgan over the next 18 months. There's an internal memo at JP Morgan that's like, these guys are going to need a lot of investment banking help and we're going to mandate that we get those fees.

• 2:26:01David Rosenthal?

  So the deal gets signed. It gets announced to the market on November 9th, 2001. In the intervening period, while all the documents are being prepared and DynaG is doing its due diligence on the deal, it comes out. Remember Chuko that we were talking about a while back? The Chewbacca, the Andy Fastow and Michael Copper total front to buy out the toxic waste that they thought they'd sealed up. Well, right at this time, Anderson, who's now fearing for its own skin, they're looking back through all this because everything's going on and they're like, they discover about Copper and Dodson and like this crazy domestic partnership front.

• 2:26:46David Rosenthal?

  They're not married, so technically Dodson isn't a spouse. And they say, this is no good. We can't count that. It's not independent. We're going to have to restate everything, all the assets associated with Chuko and Jedi.

• 2:27:01Ben Gilbert?

  It's like restating years worth of earnings.

• 2:27:03David Rosenthal?

  All the way back to 1997, we're going to have to reconsolidate all of those assets and liabilities back onto Enron's balance sheet, undo the mark to market accounting on the revenue side. This comes out during that period. So there's a further sort of, you know, equivalent of run on the bank with Enron. Liquidity dries up even more. It blows through the $1.5 billion that Dynergy lent it and is out of money again.

• 2:27:33Ben Gilbert?

  I can't let you get away with this, the like run on the bank thing. The context you used it is totally fair. In the context that the Enron executives were using it in this period, it was a completely unfair analogy. They were like, oh, it was merely a run on the bank. If people hadn't gotten spooked from those darn journalists and the short sellers writing that story, we would have been fine. And no, runs on the bank are an issue when the bank is being irresponsible. You can't say, oh, it was just a run on the bank because if the bank is runnable, there's a problem.

• 2:28:00David Rosenthal?

  And specifically, I think where all that money goes and the run on the bank nature of this is, remember, Enron's an active trader in the markets. Well, none of their counterparties are willing to trade with them anymore without like cash guarantees backing up the trades. So they use up all the liquidity, basically cash guaranteeing all the trade settlements that they're doing. So at the end of the month, on November 28th, 2001, Dynergy walks away from the deal. The deal's canceled. The news of this hits the press at 10:30 a.m., I assume Central Time, on November 28th. Amazingly, this is just like

• 2:28:42David Rosenthal?

  an amazing coincidence. Who knows, you know, I'm sure nothing was told or confidential information shared or pre-planned. At 10:20 a.m., 10 minutes before the news comes out, Ken Lay's wife sells 500,000 shares of Enron stock that the Kenan, whatever her name is, that the Lay Family Foundation held.

• 2:29:06Ben Gilbert?

  Unbelievable.

• 2:29:07David Rosenthal?

  You cannot make this stuff up. Once the news comes out, everybody knows Enron is bankrupt. The stock crashes down to 61 cents a share when it becomes obvious.

• 2:29:19Ben Gilbert?

  Down from $82 a share earlier that year and 90 the year before.

• 2:29:24David Rosenthal?

  Okay, so 61 cents. Keep that in mind. That is what the stock is trading at.

• 2:29:28Ben Gilbert?

  By the way, that Ken Lay thing, the like he, the Lay Family Foundation made some money on the way out. Do you know about the other $60 million thing?

• 2:29:35David Rosenthal?

  Ooh, I'm not sure I do.

• 2:29:37Ben Gilbert?

  As a part of the Dynegy term sheet, upon completion of the deal, Ken Lay just got $60 million in cash as like a bonus.

• 2:29:46David Rosenthal?

  It was at Golden Parish, yeah, because he was going to leave as part of the deal.

• 2:29:49Ben Gilbert?

  Exactly. And there was such a revolt among employees who were all like actively losing their life savings in retirement were like, hell no. And so he ended up realizing the optics were bad enough that he actually put that into the company.

• 2:30:03David Rosenthal?

  It ended up not mattering anyway, because the Dynegy deal didn't happen. But yeah, crazy. Okay. So it's clear Enron is going to file for bankruptcy in the coming days. Stock goes down to 61 cents. On December 2nd, indeed, just a few days later, Enron files for Chapter 11 bankruptcy. At the time, the largest bankruptcy in US history. Ben, as you said at the top of the show, it would not be for long, though, because six months later, WorldCom would be larger.

• 2:30:31Ben Gilbert?

  And since then, there have actually been five Chapter 11 bankruptcies that are larger. Isn't that crazy that like this was the largest at the time 20 years ago? But now you've got Lehman, Washington Mutual, WorldCom, GM, like much bigger bankruptcies than Enron since.

• 2:30:46David Rosenthal?

  I think Lehman is the largest, right?

• 2:30:48Ben Gilbert?

  Lehman is the largest. It's the only one in the like high hundreds of billions, whereas Enron had 63 billion in assets before filing.

• 2:30:57David Rosenthal?

  So Enron is over, literally. Given the colorful, is that the right word? Evil? I think we need to say evil cast of characters here. Everything goes just about as you could predict. The Justice Department begins a criminal investigation. Just about everybody except Skilling starts running left and right, trying to cop a plea deal.

• 2:31:18Ben Gilbert?

  It is worth before getting into the sentencing and trials, like what is bankruptcy? And what happens in their bankruptcy proceedings? So I decided this was the time to learn the difference between Chapter 7 and Chapter 11 bankruptcy. Because I never actually thought about it before. It's pretty interesting. Both of them are options that you have when a business can no longer pay its creditors. Chapter 7 is when you just want to liquidate, cease operations. You turn it over to a trustee and say, we are done forever. Chapter 11 is this like interesting temporary thing where you are saying, we would like to reorganize. The debtor stays in control. So by debtor, it's like corporation, the company that owes the money to all the creditors stays in control and the court,

• 2:32:00Ben Gilbert?

  a judge and the debtor basically need to come up with a reorganization plan and agree on that. And then there's execution of the plan.

• 2:32:09David Rosenthal?

  And I think the creditors, the people who the company owes money to.

• 2:32:14Ben Gilbert?

  Also have to agree. So what happens is John Ray gets brought in as the chief administrative officer, who is currently serving the same role over at FTX. And he comes in to basically be the administrator while it's in chapter 11 to come up with a deal. Interestingly enough, there was actually a person who was hired before him, Stephen Cooper, and he came up with a plan and got everyone together in the court to generate 17 cents on the dollar. Well, Cooper worked for a consulting firm that managed to get 60 million out before the board realized that he was not the most economical choice for the creditors. So they

• 2:32:54Ben Gilbert?

  fired him and brought in Ray, who I think was like a board member. They kind of redo the board during chapter 11 also. And Ray came in and he basically figured out a way to get twice as much out to creditors. So creditors love John Ray. He was able to get 13 billion out to creditors, which is about 36 cents on the dollar, much better than the 17 cents that Stephen Cooper, that his plan called for. But I was reading an article in 2007, it had still not yet been fully sorted out by 2007. So six years afterwards.

• 2:33:27David Rosenthal?

  Ah, yes. So I think what you're referring to with the cents on the dollar is dollars to the creditors, to Enron's debt holders.

• 2:33:37Ben Gilbert?

  Yep.

• 2:33:37David Rosenthal?

  Not to equity holders, not to people who held the stock.

• 2:33:41Ben Gilbert?

  Correct. Oh, yeah. Equity holders are wiped.

• 2:33:43David Rosenthal?

  Ah, oh, hang on. We got to get to the end of the episode.

• 2:33:45Ben Gilbert?

  All right. All right.

• 2:33:46David Rosenthal?

  Remember the 61 cents a share. So. One thing, though, that you did just jog my memory on that we missed in the notes, I swear it wasn't intentional, but we will, we don't want to bury it too far in the footnotes like Enron here. I do have an obligation to bring up. You mentioned the board and that reminded me, we got a little bit of a knock against HBS and Harvard Business School earlier with skilling and, you know, being such an illustrious alumni here. We would be remiss, I would be remiss if I didn't also knock my own business school alma mater, the Stanford Business School. Your comment about the board reminded me, do you know who, folks listening, I'm sure very, very few of you know this, but the Chair of the Audit Committee

• 2:34:30David Rosenthal?

  of Enron's board during all the years that all this was going on was the Dean of Stanford Business School, who was an accounting professor, who, kind of hard to argue that he shouldn't have known better.

• 2:34:45Ben Gilbert?

  Kind of hard to argue. Little aside here, do you know what John Ray did before coming into Enron? It's been an important focus of two episodes on Acquired.

• 2:34:55David Rosenthal?

  Ooh, I would guess Blockbuster, but that can't be right because they hadn't gone bankrupt yet.

• 2:34:59Ben Gilbert?

  Yeah, it's not Blockbuster. I'll give you another hint. After bankruptcy, after John Ray restructured and it came out of Chapter 11, it was sold to Berkshire Hathaway.

• 2:35:09David Rosenthal?

  Shoot, I should know, but I don't.

• 2:35:11Ben Gilbert?

  Fruit of the loom.

• 2:35:12David Rosenthal?

  Fruit of the loom. Yes, Brooks.

• 2:35:16Ben Gilbert?

  Yes. So John Ray, sort of unexpected acquired superhero.

• 2:35:21David Rosenthal?

  Wow. That's awesome. We gotta have him on the show. He's a little busy right now.

• 2:35:25Ben Gilbert?

  He is a little busy, charging $1,400 an hour for his services.

• 2:35:29David Rosenthal?

  Wow. Worth it if he can get a good outcome for the creditors.

• 2:35:32Ben Gilbert?

  Yep. So the path from 61 cents a share.

• 2:35:36David Rosenthal?

  Yeah, well, the Justice Department opens up a case. Everybody starts trying to cut plea deals. One of the Enron senior executives who we haven't talked about on this episode, Cliff Baxter, sadly commits suicide. Really sad. He actually had left Enron a good bit before this, sometime in the last year, but felt so sort of depressed and responsible. And I think his note was about not being able to spend time with any of the people that were a part of his community after losing so much for so many people.

• 2:36:06Ben Gilbert?

  Totally.

• 2:36:07David Rosenthal?

  Ken Lay and Skilling, even though Skilling's quit months before, like obviously he's implicated in all this, they lawyer up and fight, which practically they have to because like we said, everybody else starts trying to cut plea deals. Why would the feds cut plea deals with people? It's because they want to get the people at the top and get them to testify against them. So Lay and Skilling know, kind of, there's no way out for them.

• 2:36:33Ben Gilbert?

  It's how you get a mob boss. It's like the classic playbook.

• 2:36:35David Rosenthal?

  Totally. So I think Copper, Michael Copper, I think is the first person to cut a deal. He rats out Fastow and testifies against him. Fastow initially also tries to fight and lawyer up like Lay and Skilling, but the feds ultimately end up getting him to cave when they bust his wife Leah for tax evasion for everything that she was involved in. Oh yeah. Also, she also worked at the company. She was an assistant treasurer at Enron too. Fastow ends up doing six years in prison. Leah does one year.

• 2:37:05Ben Gilbert?

  And we should say Fastow, basically he admitted fault and then would double down on it anytime he's asked for the rest of time in prison, out of prison. He's like, oh yeah, what we did was illegal. What we did was completely wrong. I feel terrible for the people. You can actually hire Fastow as a speaker now to come and talk about corporate responsibility and corporate culture, which is nuts. We'll include a link in the show notes to book him if you would like to have him at your event.

• 2:37:32David Rosenthal?

  News eventually comes out through all of this about Lay's close ties with the Bush family and everybody in the Bush political cabinet in the White House. So President Bush, this is George W. Bush, the son at this point, he calls a press conference and claims in this press conference that like, hey, I barely know this guy. You know, he, you know, he was like, he donated to some of my campaigns, but I can't really remember his name.

• 2:38:01Ben Gilbert?

  He would earlier in the press refer to him as Kenny boy, my friend.

• 2:38:05David Rosenthal?

  Obviously that was completely wrong. The Bush family was very close. So close, in fact, that when W was inaugurated president, George H. W. and Barbara Bush traveled from Houston to Washington for the inauguration with Lay on the Enron corporate jet.

• 2:38:23Ben Gilbert?

  What? Really?

• 2:38:25David Rosenthal?

  Nobody comes out looking good here. We talked about how Arthur Andersen, they're dead, they're over. And then the

• 2:38:36David Rosenthal?

  Culmination, you know, politically and in terms of kind of the impact on the economy and the markets from all this is pretty shockingly quickly. I didn't realize how fast this happened. July 30th, 2002. So just a, you know, what's that? Six plus months after the Enron bankruptcy, President Bush signs into law the Sarbanes-Oxley Act that was pushed very quickly and almost unanimously through both houses of Congress.

• 2:39:07Ben Gilbert?

  I just looked this up. It's crazy. It was approved in the House, 423 in favor, three oppose, eight abstaining, and the Senate was 99 to one. Sarbanes-Oxley, like, everyone lined up for this.

• 2:39:21David Rosenthal?

  Could you imagine anything today getting those kind of votes?

• 2:39:25Ben Gilbert?

  Yeah. And lots of people can be mad about Sarbanes-Oxley because it makes IPO-ing and being a public company really hard. And so that actually kicked off stay private longer, or you could argue that it was a huge impact in the early 2010s of companies staying private forever. So what was in Sarbanes-Oxley is pretty interesting. It's the kitchen sink. It is like, what did Enron do wrong? And they just, piece by piece, went and figured out a way to put a lid on the cookie jar. So the biggest thing is, top management, the CEO, has to certify the accuracy of financial information.

• 2:39:58David Rosenthal?

  Yeah, both the CEO and the CFO.

• 2:40:00Ben Gilbert?

  Yep. So like, huge personal responsibility, more severe penalties for fraud, new restrictions around tampering with or destroying evidence. They make that a felony. They also require outside auditors to be more independent. So every tax firm has to spin off their consulting practice. You can no longer house both under the same house. They increase the required disclosures to be a public company.

• 2:40:24David Rosenthal?

  Including you have to disclose all your off-balance-sheet entities.

• 2:40:27Ben Gilbert?

  And so there's a very interesting question, I think, around Sarbanes-Oxley is like, did it work? We just went through another bull run. And so the question after Sarbanes-Oxley came out is really around, we won't know if this works or not until the next market craziness. And so I think there's this pretty interesting thing around the result of Sarbanes-Oxley being stay private longer, that it's much more likely that fraud now happens in the private market than the public market. And that is basically what we saw with Theranos, with FTX.

• 2:40:57David Rosenthal?

  So much in crypto. Yeah, super, super interesting.

• 2:41:02David Rosenthal?

  Did you see this in the research? I found this from Googling. One of the provisions of Sarbanes-Oxley was actually used in prosecuting

• 2:41:11Ben Gilbert?

  Yes.

• 2:41:11David Rosenthal?

  Capitol rioters for the January 6 riots.

• 2:41:14Ben Gilbert?

  Yep. Really interesting. And what clause was that? That was?

• 2:41:17David Rosenthal?

  Oh, it was that you can't impede an official proceeding.

• 2:41:21Ben Gilbert?

  And that's the like Arthur Andersen can't destroy evidence thing. They were basically like the rioters are impeding an official vote counting proceeding.

• 2:41:28David Rosenthal?

  Yeah, something like that. But yeah, it was back in the news recently.

• 2:41:32Ben Gilbert?

  Fascinating.

• 2:41:34David Rosenthal?

  So as with all huge mega scandal trials like this, like we said, all the underlings, even all the way up to fast out cop plea deals, the actual case that the government wants is to go against Lay and Skilling, go against the top.

• 2:41:47Ben Gilbert?

  Yes, every single one of them, all the way down, cut plea deals. So Ken Rice, who led broadband, did the plea deal, got a 27 month sentence. Rex Shelby was charged with fraud, conspiracy, money laundering. I think the deal was if you plead guilty to one count of insider trading, you get two years of probation. There was a handful of those like wrist slap ones to get Ken Lay and Skilling.

• 2:42:08David Rosenthal?

  Yeah, the quid pro quo one on the deals were all testify against Lay and Skilling.

• 2:42:13Ben Gilbert?

  And fast out, you know, with six years.

• 2:42:15David Rosenthal?

  Given all that he did, that was very light.

• 2:42:18Ben Gilbert?

  It feels weird to sort of judge whether a criminal penalty is harsh or not. Like Acquire doesn't quite feel like the right forum for that because it's, I don't know, without me saying whether I think this is too harsh or not harsh enough because I'm not.

• 2:42:30David Rosenthal?

  Well, just like this is not financial advice, we are also not lawyers.

• 2:42:33Ben Gilbert?

  Right. But it's interesting to me that six years is an amount of time for which you can kind of go back to your life afterwards. Like if you think back to what you were doing six years ago, it's sort of the same chapter of life. Like if you have young kids, they're older, but they're still not out of the house. If you were mid-career, you come out, you're still mid-career. You were in jail for six years, so that's going to mess with your career. But it's different than like a 25 year sentence or something like that where you're like, you're an entirely different human at an entirely different phase of the human existence when you come out.

• 2:43:08David Rosenthal?

  So it takes a very long time for the government to build up all their case against Lay and Skilling. It's not until 2005 that it finally comes to a trial and then the trial takes a year and a half to finish. So in May 2006, which is interesting, both conspiracy of fools and smartest guys in the room came out before the trials even started. I think they felt like we just got to publish, even though the story's not over.

• 2:43:33Ben Gilbert?

  Yep. And the movie did too.

• 2:43:35David Rosenthal?

  That's right. The movie did too. So, May 2006, a jury finally convicts Skilling of 19 out of 28 counts of wire fraud and securities fraud, and Lay gets convicted on six counts of securities fraud. A short while later, on July 5th, 2006, before the sentencing happens, Lay is found dead at his vacation home in Colorado of a massive heart attack. It's interesting. I looked around. I never found any speculation on that.

• 2:44:07Ben Gilbert?

  There's lots of speculation. The cover of the New York Post had some joke about, like, there's a photograph of Ken Lay's casket and it was like, check if he's in there.

• 2:44:15David Rosenthal?

  Yeah, right.

• 2:44:16Ben Gilbert?

  I think there's a website, like kenlaylives.com or dot org or something that popped up. There's a lot of that.

• 2:44:21David Rosenthal?

  Oh, interesting. Whether he actually died or not. I was thinking whether it was suicide or, um, or he actually had a heart attack or, you know, was, who knows?

• 2:44:30Ben Gilbert?

  Yep.

• 2:44:30David Rosenthal?

  Anyway, he's dead. The verdict against him is vacated.

• 2:44:34Ben Gilbert?

  Which is crazy. Not only did he not get sentenced, it means that whatever money he had did not get seized.

• 2:44:40David Rosenthal?

  Oh, interesting.

• 2:44:42Ben Gilbert?

  And he made potentially hundreds of millions of dollars.

• 2:44:44David Rosenthal?

  Oh, but there's no way he died of natural causes then?

• 2:44:47Ben Gilbert?

  Yeah. I think him not getting sentenced saved.

• 2:44:51David Rosenthal?

  His wife and family?

• 2:44:53Ben Gilbert?

  Yeah.

• 2:44:53David Rosenthal?

  Yeah.

• 2:44:54Ben Gilbert?

  Speculation. And I'd welcome any, um, I don't know anything there. I'd welcome any thoughts people have. I tried to find it and it was hard to find information, but in particular, because it's just hard to figure out through all the stock sales over the years, plus all the borrowing that he did, what his personal balance sheet would have looked like at this point in his life anyway.

• 2:45:11David Rosenthal?

  Well, and here's the crazy thing too, like despite all of this, despite all of this, when he dies. Guess who comes to his funeral?

• 2:45:20Ben Gilbert?

  George W. Bush.

• 2:45:21David Rosenthal?

  Not W, but H W.

• 2:45:23Ben Gilbert?

  H W. Wow, because he was closer with H W.

• 2:45:25David Rosenthal?

  Yeah, unfreaking believable.

• 2:45:28Ben Gilbert?

  The preacher at the funeral, I mean, there's a lot of people who were, he's a very God fearing man, who were a part of his community, a part of his church, and felt very strongly that like, this is a good person and everyone who's coming after him is wrong.

• 2:45:40David Rosenthal?

  Get this, here's some excerpts from the obituary, published in the Houston Chronicle when he dies. Quote, "Ken spent 64 years on earth doing God's work, helping others with love. Ken's life exemplified Galatians 5:22, but the fruit of the Spirit is love, joy, peace, patience, kindness, goodness, faithfulness, gentleness, and self-control."

• 2:46:11Ben Gilbert?

  It sounds like the list of values Enron had in the lobby.

• 2:46:13David Rosenthal?

  Yeah, totally. Can you believe that? That's not like what was printed in the church memorial. That was published in the Houston Chronicle.

• 2:46:21Ben Gilbert?

  The ironic thing about the God's work quote is Jeff Skilling said about two years before Enron's collapse, that he felt Enron was doing God's work.

• 2:46:31David Rosenthal?

  Yeah, right.

• 2:46:32Ben Gilbert?

  He also throughout, I mean, I have like a whole list of Skilling quotes here. The one says, what's the difference between California and the Titanic? At least when the Titanic went down, the lights were on.

• 2:46:43David Rosenthal?

  The preamble to that, if you watch the quote where he says it, I can't remember what the venue is. He even says in the preamble, he's like, I probably shouldn't say this, but he's the CEO of the sixth, seventh largest company in the world, and he's saying this stuff. Like, oh my God, this person. So on October 23rd, 2006, Skilling is sentenced to 24 years in prison. I'm shocked it was only 24. He appeals and get this, so he's fighting to the bitter end. The appeal ends up going all the way up to the US Supreme Court, where, I don't know what the right legal term is, but they end up sending it back down to a lower court for resentencing, to redo the sentencing.

• 2:47:27David Rosenthal?

  The sentence gets reduced to 14 years. Skilling ends up serving 12 in total and is released from federal custody in February 2019. So he is back out there. On the streets, apparently trying to do deals, it was reported, but I don't think very successfully.

• 2:47:46Ben Gilbert?

  And in 2020, Jeff Skilling founded a new energy trading company based in Texas called Veld LLC, rumored to be working on the venture with Lu Pi.

• 2:48:01David Rosenthal?

  Oh, I didn't see that. Oh, that's amazing. Oh, my God.

• 2:48:06Ben Gilbert?

  Unbelievable.

• 2:48:08David Rosenthal?

  Listeners, we already cut some Lu Pi stuff from this episode because I was just like, no, we can't talk about this guy anymore, but that we gotta leave in.

• 2:48:15Ben Gilbert?

  Unbelievable. And the website was up and now it's down and no one's returned any press requests for comment on it. And the rumors were like two, two and a half years ago at this point. So maybe it actually didn't end up happening. Who knows?

• 2:48:29David Rosenthal?

  Well, Lu still got some money because he did settle with the government for, I think, $31 million, but he still had plenty of other cash to live on. Two fun little coda moments before we wrap up the story, just to put a bow on things fully before we move into analysis. One, we've talked about Omaha. We've talked about Berkshire Hathaway a lot on this episode, but until this moment, there has been no connection. Warren Buffett, Charlie Munger, Berkshire Hathaway, zero involvement with any of Enron or any of Enron's predecessor companies.

• 2:49:08David Rosenthal?

  However, if you remember from the Dynegy aborted transaction, the assets that secured the $1.5 billion were the pipelines, the original InterNorth Omaha-based company pipeline. Well, when the deal falls apart and Enron burns through the cash, Dynegy seizes the pipelines. They operate them for like a short while, but like, we don't, we don't really want these. We should sell these.

• 2:49:36Ben Gilbert?

  I don't know where this is going, but this.

• 2:49:38David Rosenthal?

  You know exactly where this is.

• 2:49:40Ben Gilbert?

  Exactly the type of thing that Berkshire should pick up.

• 2:49:44David Rosenthal?

  Who ends up buying the pipelines?

• 2:49:47Ben Gilbert?

  Wow.

• 2:49:48David Rosenthal?

  Berkshire Hathaway Energy.

• 2:49:51Ben Gilbert?

  Wow.

• 2:49:51David Rosenthal?

  All comes full circle and the company comes home to Omaha, to Warren Buffett's warm embrace.

• 2:50:00Ben Gilbert?

  It could not be more perfect.

• 2:50:02David Rosenthal?

  It could not be more perfect.

• 2:50:06Ben Gilbert?

  So in the end, I guess InterNorth did have the last laugh.

• 2:50:09David Rosenthal?

  The great city of Omaha wins in the end. Crazy. Okay. One more. I kept harping on the 61 cents earlier and it took, you know, Ben, you read, you read article that is of 2007, things were still going on with the carcass of Enron. Well, let me tell you what happens in September of 2008, of all times. September of 2008, the post bankruptcy shell corporation of Enron finally finishes. They'd already disposed of all the assets, sold them off. They finally finish settling all the lawsuits that were involved, that it was pursuing.

• 2:50:51David Rosenthal?

  It was pursuing various lawsuits of other parties involved to try and recover some funds for equity shareholders who lost all their money. Yep. 99% sure it was equity shareholders at this point in time, because I think the creditors had all already settled, you know, years before. Well, the biggest opportunity to recover dollars for shareholders, they determined over the years, was to sue the banks that participated in all the shenanigans with Enron. And of course, banks have a lot of money. Well, in September 2008, the whole suite of settlements with a whole variety of banks, GP Morgan, Citigroup, various others, come in for a total of $7.2 billion coming into

• 2:51:36David Rosenthal?

  this rotting carcass of Enron, which results in a distribution of $6.79 to every common shareholder.

• 2:51:46Ben Gilbert?

  What?

• 2:51:47David Rosenthal?

  So if you had bought Enron Equity in those days, between the collapsing of the DynaGy merger and the bankruptcy, if you had bought for 61 cents,

• 2:51:56Ben Gilbert?

  Oh my god.

• 2:51:56David Rosenthal?

  You would have had over a 10x return if you were willing to hang on for seven years.

• 2:52:02Ben Gilbert?

  David Rosenthal, you have outdone yourself. Oh my god, imagine that in 2001, 2002. You know what we should go in and buy? Some Enron stock.

• 2:52:11David Rosenthal?

  I think we should find a way to buy some FTX equity right now.

• 2:52:14Ben Gilbert?

  Oh my god. It's kind of incredible that there was enough to pay off any equity holders, that it wouldn't all just go to creditors. So wait, how is it that any remaining dollars that could go to anyone wouldn't have just gone to creditors?

• 2:52:30David Rosenthal?

  I don't know for sure, but I suspect what happened was the bankruptcy had been exited. I don't know for sure, but I'm speculating. Bankruptcy had been exited and the creditors had said like, okay, we're good.

• 2:52:41Ben Gilbert?

  Right. We've got all we think we're gonna get.

• 2:52:43David Rosenthal?

  We've got all we think we're gonna get. The cookie jar is closed.

• 2:52:47David Rosenthal?

  There's so many cookie jars in this episode.

• 2:52:49Ben Gilbert?

  The piggy bank is empty?

• 2:52:50David Rosenthal?

  Piggy bank. Yeah, not a cookie jar, piggy bank. Isn't that unbelievable? A 10x investment to literally buy the dip in Enron?

• 2:53:01David Rosenthal?

  Oh, wow, wow, wow, wow, wow.

• 2:53:03Ben Gilbert?

  Crazy.

• 2:53:04David Rosenthal?

  And that it ends up back in Omaha with Berkshire Hathaway. Like, you're just, oh, so good. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:53:16Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:53:26David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:53:47Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags and product analytics into one unified system. So teams can ship safely, test rigorously and directly link what they changed to how users actually behaved.

• 2:53:59David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:54:10Ben Gilbert?

  All right. So I have two little sort of coda's too. Before we get into analysis.

• 2:54:14David Rosenthal?

  Oh, this is a four coda episode.

• 2:54:17Ben Gilbert?

  Just two people. So I think it's interesting. One is one of the best traders from Enron.

• 2:54:21David Rosenthal?

  I meant that in the very best possible way.

• 2:54:23Ben Gilbert?

  Yes. John Arnold went on to start the firm Centaurus, which is one of the highest performing hedge funds ever. So that's sort of like, I don't know that it's necessarily like he went on to solve world peace or anything, but like a person went on to build something successful after Enron, which is worth calling out.

• 2:54:41David Rosenthal?

  Yeah, I had no idea about this person. I didn't know about this fund. Apparently he was like a super, super young hotshot trader at Enron.

• 2:54:51Ben Gilbert?

  Yeah, he's still only in his 40s today.

• 2:54:53David Rosenthal?

  Yeah, he got the largest cash bonus that Enron ever gave to anybody who wasn't a senior executive of I think $8 million.

• 2:55:01Ben Gilbert?

  Wow.

• 2:55:02David Rosenthal?

  Shortly before the blow up, he was never accused of any wrongdoing. He was, you know, a trader and supposedly was there. Everything he did was above board, but then I think he took that money, used it as the seed money to start the firm. And then it ended up becoming one of the most successful funds of the past 20 years.

• 2:55:19Ben Gilbert?

  Wow. Speaking of a seed to sort of start a firm, we didn't talk a lot in this episode about Richard Kinder and we didn't because while he was as hard driving as the rest of the Enron execs, he was probably the most ethical and the most honest about what really provided value to customers.

• 2:55:42David Rosenthal?

  Well, he was a pipeline guy, right?

• 2:55:43Ben Gilbert?

  He was a pipeline guy. Yeah. A lot of people, I think, including himself, thought he was in line to be the CEO and he was sort of Ken Lay's right-hand man for a while. Upon his exit, when he's finally decided like the direction this is going is really just not for me. This is going in a very skilling direction. There was sort of a sweetheart deal done for him to get a set of assets that he would use to be the sort of foundation for what would become Kinder Morgan. It was an energy pipeline and today Kinder Morgan is a $40 billion company and Kinder is a billionaire. He's worth like $8 billion. You know, he's really good at running and managing a pipeline business. And when he saw that that wasn't the focus at Enron anymore, got out and started his own pipeline business.

• 2:56:26Ben Gilbert?

  And David, do you know what other asset was bought from Enron to become someone else's something business?

• 2:56:32David Rosenthal?

  Well, I know UBS, where my first job was out of college, bought the trading assets out of Enron.

• 2:56:40Ben Gilbert?

  Oh, did they?

• 2:56:41David Rosenthal?

  Yeah. And I think they only lasted like six months or a year and then, um, then it all kind of disintegrated.

• 2:56:46Ben Gilbert?

  Hmm.

• 2:56:47David Rosenthal?

  But obviously that's not what you're talking about.

• 2:56:49Ben Gilbert?

  No. GE bought the wind business from Enron and I believe even today is sort of the cornerstone of their wind energy business.

• 2:56:57David Rosenthal?

  Interesting.

• 2:56:58Ben Gilbert?

  And then the last thing is I'm pretty sure Chevron bought the building.

• 2:57:03David Rosenthal?

  Yes, I think that's one of the big oil companies bought the building.

• 2:57:07Ben Gilbert?

  All right. So let's dive into analysis. Do you want to start with power?

• 2:57:11David Rosenthal?

  Yes. Power. This will be an interesting one.

• 2:57:15Ben Gilbert?

  Okay. So this is normally where we talk about what gives a company the ability to be more profitable than their closest competitor. And it feels silly to even ask the question on this episode because this episode makes so clear the difference between a corporation and a business. And I always thought about this on the other side of the spectrum like, well, a startup is a company, but it's not a business yet. It's not a machine that you can

• 2:57:43David Rosenthal?

  It's a project.

• 2:57:43Ben Gilbert?

  put money into and it burns capital. There's not a business. It's a group of people working on a project, but like a seed stage startup is not a business. At some point, you look at an Apple, a company can become both a company and a business. The company owns the business. The business operates, the company is the structure around it. And Enron makes so clear that even long after you're a startup, it is possible to have all the window dressing around a business, but not a business itself. They are undoubtedly a company, a corporation, lots of structure, lots of people, lots of activities, lots of reporting. But what is the actual business inside of Enron? And of course, this is what every reporter was trying to figure out as the stock was falling. The question is, if you strip away all the

• 2:58:28Ben Gilbert?

  terrible structure and you strip away all the self dealing and you strip away all the overvalued stock, where are the biggest pieces inside the company that are real businesses? Generate real value for customers and the ability to capture some of that value by the company? I suspect the trading business was pretty profitable or had the capability to be pretty profitable.

• 2:58:54David Rosenthal?

  I've thought about this a little bit and we talked about it sort of in the earlier part of the episode where when they have first lay in his original companies and then skilling and lay together with creating the, you know, energy derivatives market, I think there's value to doing that. And had the company stopped there and just been a trading participant in the energy derivatives market, yes, there would have been value there. I think they probably would have ended up like one of the Wall Street banks where, you know, like, look, some banks are stronger than others. The league tables change. It's kind of a commodity. Like, nobody dominates the industry. There's no like monopoly bank,

• 2:59:34David Rosenthal?

  but there's an oligopoly and they all do pretty well. And I think Enron probably would have ended up like that in the trading business. I don't know that there's any real specific power in the way that Hamilton talks about it where you can literally Earn better returns than your competitors, but I think they would have been part of that oligarchical mix, so to speak.

• 2:59:55Ben Gilbert?

  And the argument that they could have actually done better is I think that Enron Online was a real way that they could have gotten real market power. I'm trying to think what that is. It's probably a cornered resource. They would have had better access to information about the market than anyone else. It's almost like the Citadel's business.

• 3:00:15David Rosenthal?

  Yeah, Citadel's or FTX and Alameda, right before it all went wrong, right? But Citadel is a good example.

• 3:00:21Ben Gilbert?

  Yeah, that they would have the most real-time market information at a given point. And there's an open question of like, would people have, in the long run, continued to trade with them as both the exchange and the primary counterparty or the exclusive counterparty? They may have had to, over time, pick whether they want to be a trading partner or own the exchange itself to have that access to information. But that would be a way that they could have sort of generated alpha on top of the rest of their competitors, that they could have been more profitable than other people who are offering energy trading marketplaces or other derivatives marketplaces. You also have to imagine, like, the pipeline business was probably profitable. That's interesting because that's just a pure monopoly.

• 3:01:03David Rosenthal?

  Yeah, that's a cornered resource for sure.

• 3:01:05Ben Gilbert?

  Yeah. You don't build two pipelines between two locations. It just doesn't make a lot of sense. It's a big waste of resources.

• 3:01:11David Rosenthal?

  It's like a highway. You collect the toll on the highway because that's the highway.

• 3:01:16Ben Gilbert?

  So in that case, they're sort of competing against other forms of powering the location that that pipeline dumps out into. So it's, you know, the Midwest using coal instead of using this natural gas. So there isn't like a direct competitor to their pipeline business in all likelihood.

• 3:01:32David Rosenthal?

  But by their very physical and geographic nature, pipelines are limited markets.

• 3:01:39Ben Gilbert?

  Yes.

• 3:01:40David Rosenthal?

  You may have a monopoly over the market you're in, but your market is limited to the physical geographic, you know, reaches of the pipeline.

• 3:01:47Ben Gilbert?

  Right. It's a pretty interesting question because when you analyze Enron through, and even if you had tried to analyze Enron in 99 through a Hamilton-Helmmer lens, you probably would have had a hard time coming up with power, which should have led you to the answer that. This thing is at least overvalued.

• 3:02:07David Rosenthal?

  Something's going on here.

• 3:02:09Ben Gilbert?

  Yeah. Yeah. You know, they don't have a Google on their hands where it's like this just cash gusher that is unbelievably defensible, high margin, durable. It's almost like the company had a lot of things going for it. They had the charisma and the money raising ability and they were making a lot of money for a lot of people. So everyone was incented, but the business didn't have a lot of things going for it.

• 3:02:32David Rosenthal?

  I think you put it so well a minute ago of like, this story illustrates the difference between a company and a business.

• 3:02:41Ben Gilbert?

  Yeah.

• 3:02:41David Rosenthal?

  The company did really, really, really great for a really long time. The business, other than the underlying pipeline and then maybe the trading operations, but the business did not exist at the scale of the company for many years.

• 3:02:58Ben Gilbert?

  Fascinating.

• 3:02:59David Rosenthal?

  Totally fascinating.

• 3:03:01Ben Gilbert?

  Playbook?

• 3:03:02David Rosenthal?

  Well, if you want to cook your books, here are three easy steps to success.

• 3:03:11Ben Gilbert?

  That is unfortunately the playbook. The question is probably how did Enron manage to accomplish what they accomplished? Cause no doubt they accomplished something that is hard to do. I think that's actually an interesting framing is they managed to achieve something that to date, no other humans had been able to do, which is convince the world that something with very little had enterprise value actually had a huge amount of enterprise value.

• 3:03:36David Rosenthal?

  And show it in accounting statements.

• 3:03:39Ben Gilbert?

  In many, many cases, accounting statements that were legal. There's lots of things that they did that were illegal that they got prosecuted for, but there's a lot of things they did that were surprisingly legal. These 3% partnerships and a lot of that stuff.

• 3:03:53David Rosenthal?

  I don't know. I'm conflicted about this. On the one hand, I'm sort of loathe to promote anything from Andy Fastow, just given the story we just told. On the other hand, he did his time. He served his sentence. He's remorseful and making amends, but I think if you look at what's been reported about what he says publicly and what he says in all of his speaking engagements that he does, this is his message, right? Of like, yeah, there was like illegal stuff that happened, but most of what happened, most of the con that happened was through legal means. And we were just like really, really good at finding and exploiting. Legal means through which to perpetrate fraud. And that's wrong.

• 3:04:36Ben Gilbert?

  Right. Isn't that crazy?

• 3:04:38David Rosenthal?

  Right.

• 3:04:39Ben Gilbert?

  Yeah, so, okay, a bunch of playbook items, using off balance sheet partnerships to conceal billions of losses and lots of debt. To my knowledge, Sarbanes-Oxley makes this impossible now. The next one I had is more of an observation, and it's something that I was talking about last time I was in San Francisco and we got together with our friends at Vouch. I was talking with one of the Vouch co-founders about this, the idea of correlated risk. And of course, it's huge in their business since they're in the insurance business. And it's funny because this was before FTX happened. And we were sort of talking about the fact that a lot of the times, people assume when they have like three or four layers of coverage, they're like, well, I'm covered. I'm like really secure because there's a lot of nets below me.

• 3:05:22Ben Gilbert?

  But you have to be really good at figuring out, well, are those actually four layers? Or is that one layer that looks like four? Because oftentimes, when something starts to tank, everything around it starts to tank too. And so when you tie everything to this share price and you tie everything to collateralizing it with your own stock, or in the FTX case, if you collateralize against the FTT token, which is very, very correlated to your company's enterprise value and future prospects, you end up in this correlated risk territory. And I think so many times, we're bad at seeing or don't want to see correlated risk when everything is going up and we view things as having sort of more protection, more safety

• 3:06:07Ben Gilbert?

  net, more separation than they do. But when you do have a bunch of risks that are all correlated together, they fall apart so fast. They unwind in a big hurry.

• 3:06:18David Rosenthal?

  Yeah, totally agree. I have a corollary playbook theme for me coming out of this episode to that correlated risk playbook theme.

• 3:06:26Ben Gilbert?

  What's that?

• 3:06:27David Rosenthal?

  Which I was been thinking about through doing the research. I've kind of always had this as like a part of my financial philosophy. But then like the whole FTX thing and everything has made me think about it even more. For me, not investment advice, and lots of very reasonable, smart people make different decisions, but there's actually some academic literature out there about this. I've decided the correct amount of financial leverage to have on financial assets is zero. The optimal amount of leverage is zero.

• 3:06:56Ben Gilbert?

  So you don't want to carry a mortgage if it were up to you?

• 3:06:57David Rosenthal?

  Well, I view mortgages differently.

• 3:06:59Ben Gilbert?

  Because it's secured?

• 3:07:00David Rosenthal?

  Because it's secured by physical property.

• 3:07:02Ben Gilbert?

  Which can change in value, the same way that a stock can change in value.

• 3:07:05David Rosenthal?

  Totally. So that is definitely a contradiction to the philosophy. I do have a mortgage, but when it comes to leverage in a, other than a residential mortgage, leverage in a financial sense, like trading with leverage specifically, you're always taking a very large risk.

• 3:07:24Ben Gilbert?

  Yep.

• 3:07:24David Rosenthal?

  Even if you think the risk is very small, once you start trading with leverage, you invert the magical property of venture capital, which is the most you can lose is your money and the most you can make is infinite.

• 3:07:36Ben Gilbert?

  Yep.

• 3:07:36David Rosenthal?

  Once you start using leverage, that flips. That is how you get game over.

• 3:07:40Ben Gilbert?

  Or at least it equalizes.

• 3:07:42David Rosenthal?

  At least it equalizes, yeah.

• 3:07:43Ben Gilbert?

  Or there's the like black swan idea that most of the worst things to ever happen never happened before. So they're impossible to predict. I mean, I often think about the fact that like, even if you correctly timed it coming out of the oil crises to put a bunch of money in the stock market, and even if you were able to ride the dot coms all the way up, and even if you would manage to sell before March of 2000, and then there was a big crash and you decided to put money back in, you would have completely gotten washed out by 9/11. Like you would not have forecasted the intense macroeconomic change that that would have brought because there was no ability to predict it. And so there's like so many factors to these things. I mean, this is my like lecture to myself on macro forecasting of there's the like,

• 3:08:27Ben Gilbert?

  you have to be right twice when you're timing the market, when you're coming in and when you're coming out. But often there's like a, a third thing that no one could ever predict that you also have to be right about. Oh, pandemic.

• 3:08:39David Rosenthal?

  Yep.

• 3:08:40Ben Gilbert?

  Well, there's a point that I made earlier, I think is worth trying to put in tighter words, which is Enron's fatal flaw is that they borrowed from the future until there was no future left to borrow from. They squeezed everything by doing mark-to-market accounting out of the next 20 years in any given deal that they did. And then they got into a bunch of markets and they recognized all the potential upside from every deal in every single one of those markets around the world in every category today. And so what that leads to is shouldn't that be like one of the most valuable companies in the world if you're

• 3:09:20Ben Gilbert?

  going to recognize across geographies, across a bunch of markets, across the next 20 years, all the upside of that as revenue today? Like, and then you apply some DCF model to that? Well, yeah, that's why they were the seventh most valuable company in the world because on paper, that's what they were doing. And so what you're basically doing is you're sort of double DCF-ing the value, which it took me a while to figure out like what's going on here. But when you're discounting the future cash flows of something to the present and then recognizing the value today, they were doing that first as revenue, but then when people were trying to apply a multiple to the business, they were doing another,

• 3:10:00Ben Gilbert?

  let's look at the next 20 plus years of this business exercise again on top of it. So it was like an N squared situation.

• 3:10:09David Rosenthal?

  Well, then you throw the special purpose entities into the mix where they're recognizing revenue on the way out, too.

• 3:10:14Ben Gilbert?

  Yeah.

• 3:10:14David Rosenthal?

  They were triple multiplying it.

• 3:10:17Ben Gilbert?

  It's crazy. And so it's like an exercise of the most path-dependent spreadsheet of all time. That there was like zero resiliency in the price of the business because it contemplated the assumptions that were baked into the price were that everything would go right in every situation and every asset, every deal that they did would be the most valuable it could possibly be, and that they would continue to be able to do this number of deals in more geographies and more markets for the next 20 years. And I think pretty quickly, you actually like run out of value to be created in the world. At some point, you're like, you can't have a valuation that big because there's like not that much value to be created. And I don't think they quite bumped up against that, but.

• 3:11:02Ben Gilbert?

  That's sort of the biggest constraint that you hit when you're doing goofy spreadsheeting this way. And then, of course, there was accounting. There's always fraud on top of it. So like, that was gonna kill the whole thing. But assuming that that wasn't the case, and that what's the actual issue with mark-to-market accounting in the situations they were doing mark-to-market accounting, and then applying a more-than-sector multiple on the business, that is the big issue.

• 3:11:25David Rosenthal?

  Yep. Okay, I got one more.

• 3:11:27Ben Gilbert?

  Yeah.

• 3:11:28David Rosenthal?

  Which is in many ways, one of the most obvious smack-you-in-the-head playbook themes from this episode, which is the old Charlie Munger quote, "Show me the incentives, I'll show you the behavior." Like, this is such a clear illustration of incentives and behavior. We could say a bunch of trade-obvious things about it, but what I wanted to talk about for a second here, it's interesting in thinking about assigning blame and intent here, and like, degrees of maliciousness. In retrospect now, having read Conspiracy of Fools, I really, really liked it. It was a great book, incredibly well researched, you know, 660 pages of just,

• 3:12:08David Rosenthal?

  like, very detailed, very well-written, thriller-style, great book, highly recommend it. My biggest criticism of it, though, is that it makes Fastow out to be the primary villain. No doubt, he was a huge villain, incredibly unethical, and on the surface, the worst of the bunch. He was helping Enron perpetuate this incredible fraud, and he was directly embezzling and stealing money through all of the crazy partnerships and like, the copper deals and like, all of that stuff. Like, that's really bad. And Iken Wald makes him out as such to be the primary villain. And it's not that he goes easy on lay and skilling.

• 3:12:50David Rosenthal?

  They come out looking bad, too, but in many ways, not as bad as Fastow. But then I was thinking about it. I don't know if he was in the movie, Smartest Guys in the Room, but Sharon Watkins, the whistleblower, she gets asked at one point, "What do you think of this?" It might have been later, this might have been an interview later. "Do you think Fastow was really the worst person here?" And she was like, "No, it's not just that Fastow is bad." Everybody was complicit, and she didn't say this explicitly, but I thought about it. And I was like, Fastow stole about 40 to 60 million out of and run directly, right? And Lay and Skilling didn't do that, but they made hundreds of millions of dollars on the equity. They didn't need to steal the money.

• 3:13:34Ben Gilbert?

  Fastow was doing it without board approval. Those guys were doing it with board approval.

• 3:13:37David Rosenthal?

  With board approval. They made more from the fraud. They were more incentivized in perpetuating the music going than Fastow was to like directly steal. Right? So in my mind, that actually makes them worse. Like I said, it's not like I, I still feel a little bit icky about like promoting what Fastow is saying now. But I think my conclusion at the end of this is Lay and Skilling truly were the worst. And the government was right to cut plea deals with everybody else to really go after them.

• 3:14:09Ben Gilbert?

  I mean, in a Skilling like way, you just laid that out in a logical path that's hard to argue with.

• 3:14:17David Rosenthal?

  Maybe I'm the worst then.

• 3:14:21Ben Gilbert?

  I think I'm not going to argue with that. It's an interesting line of thinking.

• 3:14:24David Rosenthal?

  What was your impression? I didn't read the smartest guys in the room book. How does that paint the situation?

• 3:14:29Ben Gilbert?

  There's nothing conflicting in the smartest guys in the room. I think this book definitely makes Skilling out to be the bad guy and Ken Lay out to be kind of out to lunch. And he's also kind of a sympathetic figure for the first half of his career because he's like this PhD economist, civil servant, does all the right things. Whereas Skilling, nobody thinks that a management consultant is doing God's work. And so like, Skilling is this perfectly formed character of like HBS gone McKinsey, gone energy executive, gone fraudster, where it's like, it is the most classic path of corporate villain you can imagine. And I think that's the case that the book makes too.

• 3:15:12Ben Gilbert?

  And all this is so narrative driven, like we're sitting here, we've never met any of these people. We've read books about them. We've read, I don't know, 30 or 40 articles, listened to some podcasts, talked to some people who were like around the energy industry or on this kind of time. So, but we've never met any of these people and we are telling a story of a story. And it is worth saying, like, especially now that we're doing some character assassinations, which normally we try not to do unacquired. We are so far from the primary source here that this is like some kind of weird sport pontification that I think we should stop.

• 3:15:43David Rosenthal?

  I totally agree with you and I'm glad we don't do this on acquired normally because this is not what the show is about. But I think it's okay in this case. We're talking about Enron here.

• 3:15:52Ben Gilbert?

  Yeah. And we're trying to contextualize everything that's going on specifically with FTX, but in what feels like a lot of increase in fraudulent activity recently.

• 3:16:02David Rosenthal?

  Yep.

• 3:16:03Ben Gilbert?

  Actually, speaking of FTX, did you know if FTX's 50 largest creditors summed to 3.1 billion? Let's contextualize the numbers. That's what we know today. These numbers are changing in real time. The whole was probably something about 10 billion. The equity investors are probably wiped out to the tune of two-ish billion. At least that's the right order of magnitude. And like, Enron left behind a trillion dollars of claims to 30,000 creditors. Citigroup alone had 5 billion in claims. They're one of five or six big investment banks that work with them.

• 3:16:37David Rosenthal?

  Yep. There were a million and a half shareholders.

• 3:16:38Ben Gilbert?

  I think people forget the Enron scale. FTX is really bad. This is like a terrible bunch of illegal stuff that happened, unethical stuff that happened. But the scale of Enron, I think because it happened 20 years ago, people sort of forget how big it was.

• 3:16:55David Rosenthal?

  I think also on that point, on a reflective note, studying the Enron history, it's crazy seeing the length of time that it took for everything to come out.

• 3:17:07Ben Gilbert?

  Yeah.

• 3:17:07David Rosenthal?

  And for everything to be resolved. So that's a good reminder for now and for FTX. We're not even in inning one yet of figuring out what happened here. Like, you know, it was years and years before all this stuff came out in the Enron case.

• 3:17:20Ben Gilbert?

  Yep. So true. I have one more observation to make and then I'm curious to talk Sarbanes Oxley with you. So the last observation, I first had it reading the book and then I tried to search for any counterexamples and a bunch of articles and couldn't find any. I don't think there's a single interaction between Enron and a human, like mostly employees, where the human didn't make out versus the company like a bandit. Every single time there was any sort of confrontation, and this is probably like the legacy of Ken Lay. This is his non-confrontational thing. Every single person that walked away from, and Ron walked away with some kind of incredible golden parachute or amazing sweetheart deal on an asset that they bought from the company, or sign this paper and stay quiet,

• 3:18:03Ben Gilbert?

  and here's a bunch of money, or here's a bunch of stock. And every person just pulled one over on the company and its shareholders over and over and over again. And I don't think the company ever had a hard line with anyone. I mean, you look at, a person we didn't even talk about is Rebecca Mark, who ran all the international stuff, who ran Azurex, the international water project that both failed but was also never set up to succeed. So it's hard to really blame her.

• 3:18:28David Rosenthal?

  She lost billions of dollars, though. Billions.

• 3:18:31Ben Gilbert?

  Yep. And she sold about $83 million of stock. She actually got out early enough, and she was sort of cast out by the male executives at the top in a way where she was actually never accused of any wrongdoing and never really a part of the prosecution of any of these things. But, you know, she was a part of the gang of people who were, well, at least she massively benefited to the tune of $83 million from something that only ever hurt shareholders. Like, no one was sitting around creating any shareholder value. And so every deal cut with every employee ever who was leaving or staying just bribed them all.

• 3:19:06David Rosenthal?

  Yeah.

• 3:19:08Ben Gilbert?

  All right, let's talk Sarbanes-Oxley. So did it work? Or did it just force fraudsters and...

• 3:19:16David Rosenthal?

  Malfeasance into the private markets?

• 3:19:18Ben Gilbert?

  Malfeasance to exist in the private markets, or like international pseudo-domestic markets, wherever crypto exists. Because like, crypto impacts the US even for companies that aren't domiciled here. So we've done a lot of things to like, push companies either away from going public or away from doing business in the country, still totally affects Americans. And Canadian teachers.

• 3:19:39David Rosenthal?

  FTX being prime example there.

• 3:19:42Ben Gilbert?

  Yeah.

• 3:19:43David Rosenthal?

  This isn't a direct answer to your question, but one thing that I thought about through this whole process about Sarbanes-Oxley and the consequence of stay private longer and whatnot, no doubt Sarbanes-Oxley raised the cost and complexity of being a public company. No doubt.

• 3:20:02David Rosenthal?

  I think, though, probably not as much as the stay private longer proponents were saying. And this might be related to what you're saying. I suspect, again, to the incentives and behaviors. A lot of the companies that stayed private longer weren't doing so for the stated reason that it was too hard and too onerous to be a public company, but they were doing it because there was too much benefit and money to be made by staying private, whether that was secondary sales, whether that was being able to prop up your company better than your business was performing, you know, just the general opacity that the private markets afforded.

• 3:20:47David Rosenthal?

  Even thinking about companies like Uber, the king, the granddaddy of all of the stay private longer.

• 3:20:52Ben Gilbert?

  Yeah, I think that's fair. I also think, what else was Congress going to do? I mean, it's not like they can go create Baha Manian laws. They can make it harder to invest in offshore entities, but I'm not sure that that's necessarily good. That might be a baby bathwater situation. You also can make it harder to be a private company, but we don't want that either. We want to encourage new business creation. We want to encourage a period before companies go public where they can have looser relationships with their private shareholders and communicate information in a less standard way because they're tiny companies. Like, I think that makes a lot of sense. There's always a signal noise thing where you want to make sure that your legislation is directed at quashing only the signal that you want without having the blast radius.

• 3:21:36David Rosenthal?

  Which, I think, with those statements, Sarbanes actually probably has accomplished its goals pretty well, which is protect the broader American public and investing public as shareholders in public companies from fraud.

• 3:21:52Ben Gilbert?

  Yep, totally agree.

• 3:21:55Ben Gilbert?

  All right. Well, we have this section that we've done in the past called "Value Creation and Value Capture." Normally, we talk about, do they create a lot of value? And if so, do they capture a lot of it? The classic example is Google creates a lot of value and captures a lot of it. And Wikipedia creates tons of value, captures very little of it. So where does Enron fall into this? Well, they managed to create very little value and they captured far more value than they created by an order of 100 to 1,000. So it's probably the first time that we've ever, on this show, seen someone capture more value than they created.

• 3:22:30David Rosenthal?

  Yeah, gosh.

• 3:22:32Ben Gilbert?

  By a lot.

• 3:22:33David Rosenthal?

  By a lot.

• 3:22:35Ben Gilbert?

  Pretty fascinating.

• 3:22:36David Rosenthal?

  I don't know enough about the energy industry to say whether the innovations in financialization, securitization, creating energy derivatives, whether the existence of all that and Enron and its principles being highly responsible for creating them, whether that generated enough value to offset the massive value destruction of Enron, the company? Maybe. I just, I'm not equipped to say.

• 3:23:04Ben Gilbert?

  I don't know. That actually is how I want to close the episode, instead of grading, because like, what are we going to do? Give it an F? And the other thing that we've done recently is talk about sort of like forward-looking narratives, but that doesn't exist here either. I think an interesting way to close is by describing what were the activities that they did that were like a legitimate, interesting business, value creative for customers? And what was the illegitimate stuff they did? And I think it kind of does end at like, pipelines were good for customers and the creation of a market. And let's be generous, both the market to buy natural gas at a real-time price and also the ability to use a derivatives market to hedge those prices so businesses could do forecasting.

• 3:23:45Ben Gilbert?

  I think that's probably like where the line ends on good-for-the-world things. And then, once you get into-

• 3:23:51David Rosenthal?

  But what about that Blockbuster Video on demand deal?

• 3:23:55Ben Gilbert?

  I think as soon as the business became the derivatives trading as an end rather than as like a means of hedging or as a means of cash flow stabilization and price predictability. I think that's sort of where basically everything after that was bad.

• 3:24:09David Rosenthal?

  No argument from me there. Makes sense to me.

• 3:24:12Ben Gilbert?

  All right. Well, I know we're four hours in, but you want to do some carve outs?

• 3:24:15David Rosenthal?

  Yeah, we haven't done carve outs in a while.

• 3:24:17Ben Gilbert?

  We haven't.

• 3:24:17David Rosenthal?

  We had something lined up for the Qualcomm episode, but we literally got yanked offstage.

• 3:24:22Ben Gilbert?

  We got offstage two hours, 29 minutes and 30 seconds into the, into the episode.

• 3:24:26David Rosenthal?

  Two and a half hour slot that we had.

• 3:24:29Ben Gilbert?

  Okay. So I have one that I was prepared to give because it's great, but I have a one that's too related to this episode to not do.

• 3:24:38David Rosenthal?

  Oh, I'm in the same boat. I think we can each do two, you know, why not?

• 3:24:41Ben Gilbert?

  So the one that's related to this episode is something that I unfortunately never got a chance to see because it has been over for eight years, but there was a limited run Broadway play called Enron, the musical. And we will put a link in the show notes to the trailer for Enron, the musical. It is spectacular.

• 3:24:59David Rosenthal?

  Oh my God.

• 3:25:01Ben Gilbert?

  There is a moment where there's someone dancing with literal raptors. There is like projections of stock market tickers and traders. The whole thing is, it's an exaggeration.

• 3:25:12David Rosenthal?

  Oh, and the cast of characters, like you could just have so much fun.

• 3:25:15Ben Gilbert?

  It's perfect. It is perfect. And do you watch Billions?

• 3:25:20David Rosenthal?

  I'm sad to admit, I, you know me, I don't really watch TV shows.

• 3:25:25Ben Gilbert?

  Yeah. Well, you would like Billions.

• 3:25:27David Rosenthal?

  I spend my time playing video games.

• 3:25:29Ben Gilbert?

  At least you would really like the first two seasons of Billions. The guy who plays Ari Spiros, who works for the SEC is in Enron, the musical.

• 3:25:39David Rosenthal?

  Oh, that's great. So did it like run on Broadway? Was this like a legit?

• 3:25:44Ben Gilbert?

  I think so. Yeah. Let me see if I can pull it up. Yeah. It's on Broadway.com/shows/Enron.

• 3:25:50David Rosenthal?

  Amazing. Amazing.

• 3:25:52Ben Gilbert?

  So that's my first one.

• 3:25:53David Rosenthal?

  That's so great.

• 3:25:53Ben Gilbert?

  My second one is a Disney plus show called Andor. It is probably the best thing to happen to the Star Wars franchise since Rogue One.

• 3:26:02David Rosenthal?

  Oh, wow.

• 3:26:03Ben Gilbert?

  It is extremely tightly linked to Rogue One and the direction, cinematography, writing, pacing, dialogue, character development. It is all just exceptional. Better than the Mandalorian for sure. It's the best Star Wars Disney plus thing.

• 3:26:18David Rosenthal?

  Oh, that's great because the Star Wars franchise has really, at least in my view, taken a. Big downhill turn.

• 3:26:26Ben Gilbert?

  Yeah, it ain't what Bob Iger originally intended.

• 3:26:28David Rosenthal?

  No. Speaking of.

• 3:26:30Ben Gilbert?

  Speaking of.

• 3:26:31David Rosenthal?

  Man, we gotta figure out something to do on acquired.

• 3:26:33Ben Gilbert?

  What are we gonna do? Disney plus plus? Like, what's the?

• 3:26:36David Rosenthal?

  Plus plus.

• 3:26:38Ben Gilbert?

  We should do an Iger plus episode. But honestly, we've told most of the story. So those are my two. Go watch Andor, whether or not you like Star Wars. I think that's actually the important thing is whether or not you like Star Wars. This is good. And a lot of other things relied on fan service.

• 3:26:51David Rosenthal?

  Yes, that was the problem.

• 3:26:54Ben Gilbert?

  That threw out sort of like nonsensical stuff, but had enough callbacks where you're like, okay, cool. It's cool to see that character again.

• 3:27:01David Rosenthal?

  Yep. That was my biggest beef with episode nine.

• 3:27:05Ben Gilbert?

  Yeah.

• 3:27:05David Rosenthal?

  All right. Well, no Holy Wars here.

• 3:27:07Ben Gilbert?

  No Holy Wars. What are your car rides?

• 3:27:10David Rosenthal?

  My car rides. Okay, so the one that I thought of is only very, very quasi-related to the episode, but as you were saying, you're one of your codas and one of my codas, the Berkshire Hathaway and Fritill Loom and Brooks. So I've now completely worn through two pairs of Brooks Ghosts since our episode with Jim and having Brooks unacquired. They're fantastic. I love them. But now, as a parent, I do far less actual running than I used to and a lot more walking of the stroller. And the ghosts were, they were great as walking shoes, but like they're running shoes. You know, Brooks is a running company. I found out, so I was in the market, I completely destroyed my second pair of ghosts. I was in the market for a

• 3:27:52David Rosenthal?

  new pair of shoes and I was like, should I just bite the bullet and admit what I am and get walking shoes instead of running shoes? And I was like, oh, that probably means I can't go with Brooks. I'll have to find something else. But it turns out, I was so pleasantly surprised, Brooks makes a walking shoe called the Addiction, the Brooks Addiction. I got a pair before our trip to Portugal for Breakpoint. I love these shoes.

• 3:28:21Ben Gilbert?

  Are they just like really cushy? What's good about a walking shoe?

• 3:28:24David Rosenthal?

  Maximum support. You know how like a running shoe, like it's, the soles are very flexible?

• 3:28:29Ben Gilbert?

  Do they offer it in Velcro? Like for when you're 70?

• 3:28:31David Rosenthal?

  They do. They actually do. They actually do. I have not yet made the jump to get the Velcro. Maybe if we have another kid, then I'll just be like, fine, give me the Velcro. I mean, my daughter's shoes are Velcro, so why shouldn't mine be?

• 3:28:45Ben Gilbert?

  Lean on into it, David.

• 3:28:46David Rosenthal?

  Lean into it. But I gotta say, these shoes rock and they don't look like old man shoes. They look like Brooks running shoes.

• 3:28:52Ben Gilbert?

  I bet the Velcro ones do, though.

• 3:28:54David Rosenthal?

  The Velcro ones totally do. They are so good. And I now realize the difference between walking and running shoes, like, you know, running shoes, like, the sole is very flexible. It's like they've got these different cushioned parts of the sole based on where your foot strikes. Walking shoes, one big old slab of like incredibly supportive. It's so good.

• 3:29:15David Rosenthal?

  I'm so old. I love it.

• 3:29:16Ben Gilbert?

  Wait, I gotta interject another carve out then. I'm wearing, and this is gonna be, I'm gonna start a holy war, since this is not Brooks, I'm wearing Hoka slides right now.

• 3:29:24David Rosenthal?

  Oh.

• 3:29:25Ben Gilbert?

  They're my indoor shoes.

• 3:29:27David Rosenthal?

  Oh, nice.

• 3:29:28Ben Gilbert?

  The floors of my house are like really hardwood. And so I was like, my feet hurt from standing on hardwood barefoot for too long. And I was like, I gotta do some form of like indoor shoes. So I'm wearing these Hoka slides. They're very easy to get on and off. They're very cushy. I highly recommend them for anybody who's considering

• 3:29:45David Rosenthal?

  Oh, nice.

• 3:29:46Ben Gilbert?

  indoor shoes as a part of your easing into old age.

• 3:29:50David Rosenthal?

  You're on a slippery slope. Before you know it, you're gonna be on the Velcro walkers with just with me.

• 3:29:54Ben Gilbert?

  Seriously.

• 3:29:56David Rosenthal?

  All right. So that's carve out number one of mine.

• 3:29:58Ben Gilbert?

  It's the Ora Luxe, by the way. O R A L U X E.

• 3:30:01David Rosenthal?

  Nice, nice. My other carve out is our good buddy, acquired Bessie, Jason Calcanis, J Cal, on the Tim Ferriss Show. It's one of the most recent episodes. It's really good. I'd known, I think we'd talked about in some of our episodes with J Cal that he and Tim are buddies. They're like actually really close, longtime friends. And J Cal just went on Tim's show and it's really good.

• 3:30:26Ben Gilbert?

  That's cool. Well, with that, after you finish this episode, come discuss it with the 13,000 other smart, kind, thoughtful people I'm generally very appreciative of for being in the acquired Slack with us. I've asked a few questions recently around just like, hi, I'm a total novice on investing in corporate debt. How does one do that? How should one think about that? Is this an interesting time to do that? And I got like a thousand interesting responses. So thanks to everyone who's just being a part of the community. If you want to get acquired merch, we now have two new shirts in addition to this sweet ACQ shirt that I am wearing, you can get a market size unconstrained shirt

• 3:31:06David Rosenthal?

  Yes.

• 3:31:06Ben Gilbert?

  in two different variations with the original AWS logo inspired design. You can also get a there is always room at the top benchmark inspired shirt at acquired.fm/store. You can view my Photoshop capabilities on full display there.

• 3:31:25David Rosenthal?

  So good. I'm so glad. We've been teasing this for months. I'm so glad we finally made it happen.

• 3:31:31Ben Gilbert?

  I know.

• 3:31:32David Rosenthal?

  I feel like this is our, it's on the office, right? Where it's the Wayne Gretzky quote, right? And it's like, is it the skate where the puck is going? Or whatever it is? And it's like Wayne Gretzky.

• 3:31:42Ben Gilbert?

  Wayne Gretzky, Michael Spot.

• 3:31:43David Rosenthal?

  Michael Scott.

• 3:31:44Ben Gilbert?

  Yeah.

• 3:31:44David Rosenthal?

  We're like, market size unconstrained. Jeff Bezos.

• 3:31:48Ben Gilbert?

  Acquired.

• 3:31:51Ben Gilbert?

  Yes, indeed. We've also had some great LP shows recently, which you can get, I think all the episodes we've recorded are public. We're going to be recording a couple more in the next week that we're very excited about. And you can find episodes of the LP show publicly available in the podcast player of your choice by just searching acquired LP show. And with that, listeners, we'll see you next time.

• 3:32:14David Rosenthal?

  We'll see you next time.