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

Lenders, traders, venture capitalists, exchanges and even tokens have all been whipsawed by FTX’s rapid unraveling — Enron was no different

article-image

Lightspring/Shutterstock.com

share

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

  1. 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.
  2. 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. 
  3. 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.


Don’t miss the next big story – join our free daily newsletter.

Tags

Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

Mon - Wed, March 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience: Attend expert-led panel discussions and fireside chats Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts.

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Top Icon.png

Research

Osmosis thrived in H2 2023 on the back of increased DeFi activity deriving from recently launched Cosmos-related projects and better market conditions. With new value accrual mechanisms for the native token, Osmosis is well-positioned to continue its strong performance in 2024.

/

article-image

Though the opposing flow trend is likely to slow over time, industry watchers note, bitcoin fund assets could one day eclipse the $90 billion gold ETF space

article-image

Celestia had the first mover advantage. EigenDA has staked ether. What sets Avail apart?

article-image

Bitcoin moved 1% higher Monday morning in New York, Matrixport analysts say $62,000 could happen next month

article-image

It’s hard to believe right now that crypto — even with all of its flexibility and massive capabilities — could ever be like cash on the internet

article-image

Michael Saylor announced Monday morning that MicroStrategy bought 3k more bitcoin after the X account was compromised over the weekend

article-image

Plus, Pudgy Penguins grows its brand and a group of Autoglyphs sell for $14.5 million