Frauds & Visionaries with the reporter who Broke Enron
Interview with Bethany McLean
I have been listening to old episodes of the Dwarkesh Podcast which has been great, it has been a long time since I found a new podcast I liked this much.
This episode with Bethany Mclean, the reporter who wrote The Smartest Guys in the Room and published the first articles about the fraud which eventually took down Enron, was excellent. She has unique insight into corporate fraud and is very humble and thoughtful.
The most interesting parts of the episode:
A horseshoe of visionary geniuses vs. frauds
She posits that leaders of large frauds are not different in kind from genius visionaries. They share many qualities and in some cases luck may be the main differentiator
For example, if the capital markets had seized at a time when Tesla was scaling, it would be viewed as a fraud. If the capital markets had not seized around Enron after 9/11, perhaps it could have recovered in some areas
I wonder the extent to which a near-fraudulent level of certainty in pitching grand visions is necessary for them to be realized
The Role of Self-Deception
She believes that leaders we view as fraudulent like Jeff Skilling of Enron or Elizabeth Holmes of Theranos or SBF of FTX mostly do not think of themselves as frauds. They rationalize their actions and self-delude into thinking things will work out and that their actions are necessary
As a result, she doesn’t think criminal action against corporate fraud works very well as a deterrent because fraudulent leaders don’t consciously think of themselves as such
I believe this is true at the start but I think people start to realize the severity of the situations they’ve created and start to scramble to cover their tracks, and this is where many of the actual crimes are committed
Impact of Regulation on Corporate Behavior
Dwarkesh notes that FTX happened outside of the US and perhaps that indicates that regulation like Sarbanes-Oxley worked. She agrees that it worked narrowly, but bad things like the 2008 financial crisis have still happened even if they weren’t illegal
But, from my uninformed view, it seems like US regulations have done okay with crypto. The big off-shore exchanges like FTX and Binance have had devastating issues with fraud and Coinbase which is HQ’d in the US seems to be resilient to this as it has taken US regulation seriously
I wrote the outline of this post speaking to ChatGPT through my headphones walking home from the gym as I’d just listened to the episode. Its ability to accurately transcribe my thoughts and then put them into bullet form was quite helpful and I think will make it easier for me to write more.
Interesting read. I do wonder what % of people that are looked up to and celebrated in the finance world are just the lucky survivors of perfect conditions, and the general public (including myself) can't tell the difference.
To me, outcome bias was most prevalent in the Crypto trading hype of 2020-2022. People would show you how much money they were making, but either (1) I didn't have the knowledge or ability to understand why they were making money or (2) Their logic and risk management was very poor, and they actually just got lucky. Yet, it's hard to argue that someone is making a "poor decision" when there are big $$$ signs flashing across the screen.