To put it mildly, things aren’t good for Sam Bankman-Fried and his crypto exchange FTX.com, which recently filed for bankruptcy. Reporting on FTX — once viewed as a milestone in securing crypto’s mainstream legitimacy — suggests that Bankman-Fried may have mishandled users’ deposits in a doomed effort to keep his operations afloat. The former Treasury secretary and Harvard economist Larry Summers has likened FTX to Enron — and he’s not alone in seeing echoes of the disgraced Texas energy company, which became synonymous with white-collar crime after its failure in 2001. CNBC’s Brian Sullivan even tweeted that “FTX may be worse than Enron.”
Certainly, FTX’s collapse mirrors Enron’s stunning failure in uncanny ways. Executives at both companies made last-ditch efforts to save them through mergers. When the deals fell apart, Chapter 11 bankruptcy was the next step. In fact, the lawyer now overseeing FTX’s bankruptcy played a similar role in the aftermath of Enron’s demise.
However, the parallels between the two companies go beyond any potential acts of fraud. Enron’s rise and fall at the turn of the century was, in part, the result of the economic fragility at the heart of the information age. The FTX debacle suggests that this problem has only gotten worse in a world with social media.
When Enron crashed, it seemed to symbolize the perils of a new, opaque way of doing business. Over the course of the 1990s, Enron and its leaders became famous for claiming to have discovered a way to dominate the energy business without really getting into the messy, laborious processes that had heretofore been inherent to it. Instead of owning power plants, Enron managers like Jeffrey Skilling insisted that buying and selling energy-related financial derivatives contracts — basically agreements that would help industrial customers lock-in or otherwise manage unpredictable natural gas prices — was the future of the industry.
Skilling, the architect of this “asset-light” strategy, claimed to have cracked the code for making money from just about anything. In 1997, Enron even began offering derivatives contracts connected to the weather. It was audaciously complicated stuff.
Many on Enron’s own leadership team couldn’t explain the company’s operations to reporters and financial analysts, but that didn’t seem to matter. If anything, it was a bonus. The company’s 1999 annual report to investors actually celebrated peoples’ inability to describe the business.
Enron’s apparent success seemed to herald the arrival of exciting new economic possibilities. Businesses no longer need be weighed down by costly physical processes and assets. Skilling, along with the rest of Enron’s management team, was celebrated in management books, business school classes and news stories. Just as importantly, an enviable stock price seemed to vindicate the company’s unorthodox approach to business.
Enron’s marketing team worked hard to reinforce this impression of innovation. In 2000, the company launched an ad campaign imploring business leaders to “Ask Why.” Television commercials with that phrase echoing over and over suggested the dawn of a new economic era. The future had arrived, and it promised to be full of incredible wealth.
However, despite Enron’s seemingly spectacular profits, the company, in reality, had a massive cash-flow problem. Fantastically complex derivatives deals were worth a lot on paper, but the money itself never really found its way into the company’s accounts. Famously, Enron’s finance team hid these problems for years by relying on a grab bag of accounting tricks that made the company look much healthier than it actually was.
When the company’s real financial picture became clear in late 2001, the crash was dramatic. Enron’s stock price and credit rating plunged so fast that by the end of the year, the company filed for bankruptcy — the largest in American history at that point.
Due to advancements in technology, the risks of this sort of balance sheet chicanery have only grown in the two decades since the company crashed. Andrew Fastow, Enron’s chief financial officer, relied on dizzyingly intricate derivatives trades with special-purpose entities (shell companies meant to do business with Enron). By contrast, reporting indicates that Bankman-Fried only needed special software to allegedly secretly move money to his other company, Alameda Research — allegations he denies. Tellingly, both cases also relied on shaky assets — Enron stock and FTX’s own crypto coin (FTT) — as collateral.
But this alleged fraud is just one of the problems exposed by both scandals.
In 2002, a few months after the Texas energy company’s demise, Federal Reserve Chair Alan Greenspan remarked that “the rapidity of Enron’s decline is an effective illustration of the vulnerability of a firm whose market value rests largely on capitalized reputation.” In other words, Enron’s success depended on hype and the impression of incredible success — not doing or producing something tangible that all Americans could see. Enthusiastic stock recommendations and a public intoxicated by soaring stock prices were essential to the company’s existence, and to ensuring other companies felt comfortable entering into deals with Enron. As long as its managers could make the company look good on paper and people believed it, Enron thrived.
Enron’s business was at least nominally connected to things in the real world, but FTX trucked and bartered in crypto currencies and non-fungible tokens (NFTs), which are, in a sense, nothing but “capitalized reputation.” After all, most NFTs are digital images that lack any direct connection to a world beyond a computer screen. Likewise, crypto currencies might be used as units of exchange, but their history of wild price swings and, indeed, FTX’s sudden collapse, suggests that they are just as untethered from reality as Enron’s weather derivatives were.
And FTX’s business relied on many of the same strategies that Enron used to project success. Commercials starring comic Larry David suggested that the company had hit on a new way of doing business — one that could produce massive wealth, but which the public needn’t understand. What’s more, both companies aggressively courted Washington politicians and paid for the naming rights to sports venues, all for the sake of burnishing ultimately undeserved reputations. And it worked.
Today, though, the danger is greater. More than 20 years after Enron’s collapse, crypto businesses like FTX operate in an environment where it is even harder to navigate a haze of information to see what’s really going on. FTX’s history (just three years) is much shorter than Enron’s — and the lightning speed at which it attracted and lost billions sets off alarm bells.
The still-unfolding FTX scandal is spectacular enough that calls for regulation and oversight will surely follow (as they did with Enron). The major piece of regulation that emerged in Enron’s wake, the Sarbanes-Oxley Act (2002), aimed to restore investor confidence by making financial statements more accurate. It was, in other words, a law focused on the quality of information.
This time, however, the discussion cannot be simply about financial reporting. Instead, lawmakers will need to consider the entire information ecosystem. At the start of the 21st century, Greenspan took a comforting lesson from Enron’s demise. Because businesses (and markets more generally) had “large quantities of data available virtually in real time,” it was possible to “address and resolve economic imbalances far more rapidly.”
But Greenspan did not anticipate the ways in which an unruly confusion of information would become a key feature of 21st century life. Crypto companies like FTX market products that are only as valuable as people think they are, incentivizing the sort of outlandish boosterism that kept Enron’s problems hidden for years.
Enron’s crash was ruinous for those who had put their faith in the company by buying up shares. Retirement savings evaporated at the same moment that the company’s workers lost their jobs. How much worse would the damage have been if there were Enron rumors and memes mushrooming on social media platforms like Reddit and Twitter in the late 1990s?
In a world in which real facts mix uneasily with misinformation, fantasy and hearsay, cryptocurrencies are as dangerous as they are enticing to investors and tech enthusiasts. As people begin to sift through the rubble of Bankman-Fried’s shameful end and the financial ruin of crypto traders on FTX, preventing future such cases will depend on asking deeper questions about a media environment hospitable to frauds like Enron and, allegedly, FTX. Otherwise, both episodes will be just two in a long string of crises endemic to business in the 21st century.