FTX’s Bankruptcy Is Strikingly Similar to Enron’s. Have We Learned Nothing Since?

I landed in Houston on Nov. 28, 2001. I switched on my cell and was bombarded with voicemails from co-workers. Each was the same: Our employer, Enron, was all but dead.

Then-competitor Dynegy terminated its agreement to acquire Enron. The energy giant would be forced to file for bankruptcy four days later in what would become the largest US corporate bankruptcy ever.

Fast-forward 21 years, and I’m feeling deja vu. Another conglomerate was set to be acquired — and was subsequently scorned — by a hated rival once the scope of blatant fraud came to light. And the similarities between Enron and FTX don’t stop there.

In 1999, Enron dragged energy traders into the 21st century when it launched an online exchange, which quickly became the dominant platform for the sector.

FTX, too, was revolutionary. The exchange was considered a source of stability in a volatile industry. It was widely viewed as the poster child for crypto’s credibility.

Until both fell apart.

Both FTX and Enron ran into trouble after attempting to use their own “tokens” as collateral.

Enron’s core energy trading operation was solid, but many of its other business lines failed miserably. Enron raised money for such ventures through a series of special-purpose vehicles (SPVs) designed to keep debt off its balance sheet. To make matters worse, Enron used its own stock as collateral. Sound familiar?

The bear market sparked by the burst of the dot-com bubble led to increased calls for collateral that exposed the insurmountable hole in Enron’s finances. Sound familiar now?

Widespread contagion as industry darlings become villains

Lenders, traders, venture capitalists, exchanges and even tokens have all been whipsawed by FTX’s rapid unraveling.

Enron was no different. Countless companies had collateral locked on its platform. While some were able to ride out the storm, major players closed up shopped after their funds and hedges went poof.

Like FTX, Enron had its own charismatic CEO. Before his company went bust, Jeff Skilling hit the front page of all the big business magazines. He took credit for the first true wholesale markets for natural gas and electricity. And, yes, he worked with regulators in Washington to liberalize markets.

Like Sam Bankman-Fried, the revelation of his Skilling’s balance sheet marked his downfall. We know the rest of the story.

And who led Enron through Chapter 11? The same guy now leading FTX – John Jay Ray III.

Takeaways

Sometimes you win by surviving. At Enron’s peak, a competing market maker launched, Intercontinental Exchange (ICE). Its volumes were a distant second, but it was well-positioned to fill the ensuing void. ICE today has a market capitalization of more than $50 billion.
Scared money doesn’t make money. Consider Ken Griffin of Citadel, who saw an opportunity to profit from a market dislocation when most of his peers de-risked. In a short order, he added a energy trading division — which is still minting money for the multi-strategy firm today.
This will not last forever. The bear market contributing to Enron’s collapse broke less than a year later, bottoming out on Oct. 9, 2002. A five-year bull market began. Markets turn once weak hands are flushed out. Once the dust settles on FTX, those left standing will reap the benefits.

Brent Dornier is the Vice President of Trading at Strix Leviathan. In this role, he oversees the firm’s electronic trade execution function. In addition to trade execution, Brent also helps oversee valuations and is responsible for monitoring risk limits and exposure levels across all of the firm’s funds and business lines. Brent joined Strix Leviathan as a senior quantitative trader and engineer in 2021. Previously, he helped build and run trading desks at cryptocurrency trading platform ShapeShift and power generation company Calpine Corporation. Earlier in his career, he served on Citadel Investment Group’s Financial Engineering Technology desk and as an analyst for leading energy trading firms Saracen Energy and Enron.

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