Broker Check

Notes from Enron expert and author Bethany McLean

| March 12, 2019
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Bethany McLean has had a notable career studying and writing about some fascinating topics including:

  • How Wells Fargo’s Cutthroat Corporate Culture Allegedly Drove Bankers to Fraud
  • The Valeant Meltdown and Wall Street’s Major Drug Problem
  • The Hunt for Steve Cohen
  • Warren’s Confession
  • The Bank Job
  • Fannie Mae’s Last Stand
  • Shaky Ground: The Strange Saga of the U.S. Mortgage Giants
  • Saudi America: The Truth About Fracking and How It's Changing the World
  • Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

My rough notes from twitter are below in case interested. 

Thanks for taking a look and have a great day!

Tom

 

She did 3 years in investment banking At Goodman generating what they politely referred to as "GSBS."

Models are garbage in garbage out; the inputs are not facts, you can make a model say anything you want.  A model is just a model, see VAR, Subprime, Long Term Capital Management, etc

We want an answer that spits out certainty, but those don't exist. See JPM whale losses of $6b.

"the only way to solve a problem is to keep working at it" If you aren't curious you'll give up before you should.

She didn't relish confrontation with sources, but when the logic isn't there, she digs in, she’s a math major looking for proofs.

Back in the 1990s the magazines ACTUALLY had fact-checking departments because they were still making money.  She went to @fortune, being a fact checker is a terrible gig.

All the portfolio managers would tell her about their pet stocks for her columns, and inevitably the stocks would then crash.

She had to fact check and find math errors on Intel's numbers and an article about them when the CEO had cancer, he lost his cool but then later thanked her for being right

“Rating agencies are like super glue they'll be around long after we are all gone.”

It's easy to get people to talk when you know enough to be dangerous.  By standards of a physicist, Wall Street was quantitatively illiterate (from Merrill Lynch contact John Bright).  Imposter syndrome at ML pushed the risk managers from $5 to $55b of risk in subprime.

Mid-level risk manager informed the CEO the risk of lose was well over $10b.  They were floored, they had thought it was in the millions.

The financial crisis had nothing to do with home ownership; most were for cash out and investment property.  If limited to first-time borrowers it wouldn't have been a problem.

The worst form of corruption is when everyone thinks the same.

Wall Street didn't set out to destroy the financial system. 

There was simply no challenge, and everyone started doing the same thing.

Be open to what people say, be curious, don't have preconceived notions

Self-delusion, greed in the shape of ego, not bad intent like sometimes people would assume after the fact

 

Try to read as much as you can, be well prepared, know what you are talking about, it's much easier to get information when you have some, plus it's respectful to sources

What is the line between a fraudster and a visionary?  A visionary got away with it and didn't blow up. 

Enron had manipulative accounting and fraud, but it wasn't a matter of an illegitimate business idea. Many successful businesses had periods of rationalizing that worked out.

"making up a couple of pennies on quarterly earnings just to get by.

She just brought up Elon Musk and Tesla.  Talked about the skeptics and superfans of the company.

Saudi America is her new book on fracking, thinks it's more important than silicon valley.

The industry is unstable and doesn't make money, heavily reliant on low-cost debt, could cause issues in the future.  She was obsessed with the CEO of Chesapeake energy while he was alive.

Chesapeake raised 60b and never had positive cash flow in ten years. What happens if the cheap capital goes away someday?

Energy dominance is supposed to come from shale, but what could that do to oil prices?

She warns not to try and predict oil prices however

Fracked wells decline very steeply, so you have to keep expanding rapidly.

See WSJ fracking well piece on how weeks are depleting fatty than estimates.  Tech improvement in extraction can help, but she doesn't think it's working yet.

Nat gas is working much better than oil

Thinks we should focus on natural gas, thinks energy independence is a fraud, the price is now set by national markets with volatile regions

Can't walk away from the Middle East, we are closely tied together. Foolish goal.

Charlie Munger's view on fracking is that there is no substitute for hydrocarbons and fertilizer, we should preserve the dinosaur juice and farmlands for when we really need it, not squander it at below the cost of extraction.

A third of fracking is done by PE firms.

They can make a lot of money packaging up these firms and selling, but skeptics are coming, could hurt pensions that are investing in them.

Is fact checking still relevant these days?  Yes, but much harder these days with polarization.

In the early 1990s, she got sent home from work for wearing pants...

Economic discrimination and sexual harassment have always gone hand in hand; there is a great of mentoring women now that can hurt the cause.

Jokingly "there is no future in journalism."

All people care about is the end product, don't care about who you know, pedigree, etc.  So it's somewhat easier to break into then networking type careers like finance.

She has become skeptical and gets angry at business gone wrong

If only people would think longer term, we'd have a much better business climate.  Enron was short-termism gone wrong. She spent a day with Buffett, after 12 hours with him and it was exhausting bc he was so intense.

She brought up the Gates foundation; I gave away my money bc it's important, but it's not my passion to figure out where it should go.  Never got into minutia, he cared a lot about $BRKA to be around for another hundred years.

If everyone thought that way, we'd have a much better business climate.

Warren is somewhat conflict-averse, not a big firing type.

Culture is such a strong thing, good or bad it’s the culture that rules behavior.

If she worked at Enron, she doesn't know if she'd be a whistleblower or willing participant.

Rationalizing is a slippery slope with these situations like boiling a frog.

Stock option incentives have been an apparent problem, and it didn't help protect the org either, think Lehman

Steve Cohen and the idea of info that is over the line.  We live in a world of info overload, but that doesn't mean the info we have is knowable.  Only a small number of people knew Enron was a fraud.  The markets aren't a level playing field.

If you have resources and study all day, you have a slight edge over someone that has a regular job. The markets will not be perfectly level and fair.

Rules and the are incredibly backward-looking then you create new loopholes. Plus regulators are people too, and they can fall to imagine how bad it could get.  I couldn't imagine these big Wall Street firms could go bankrupt.  No panacea with more regs.

Visionaries and fraudster are a part of the evolution of business, we can't take away all the freedom, or it will stifle innovation.

 

This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.

 

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