Brent Dornier

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.&nbsp;



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.&nbsp;



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?



<h3 class="wp-block-heading">Widespread contagion as industry darlings become villains</h3>



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



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.&nbsp;



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.&nbsp; We know the rest of the story.&nbsp;



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



<h3 class="wp-block-heading">Takeaways</h3>



<ol class="wp-block-list"><li>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.</li><li>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.&nbsp;</li><li>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.</li></ol>



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.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/daily">Blockworks Daily</a>: Unpacking crypto and the markets.</li>



<li><a href="https://blockworks.co/newsletter/empire">Empire</a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance">Forward Guidance</a>: The intersection of crypto, macro and policy.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha directly in your inbox.</li>



<li><a href="https://blockworks.co/newsletter/lightspeed">Lightspeed</a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop">The Drop</a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock">Supply Shock</a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>

bankruptcy

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

Ben Strack

FTX is now putting its trust in new CEO John J. Ray III — brought in years ago to oversee the liquidation of collapsed energy company Enron following its accounting scandal — as it seeks next steps following bankruptcy.



The bankruptcy process could take several months, one bankruptcy lawyer said, as the exchange and its affiliates formulate recovery plans. FTX founder Sam Bankman-Fried — who resigned as FTX’s CEO Friday morning — tweeted Friday he would seek to give a user recovery update “ASAP.”&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">5) I&#39;m piecing together all of the details, but I was shocked to see things unravel the way they did earlier this week. I will, soon, write up a more complete post on the play by play, but I want to make sure that I get it right when I do.&mdash; SBF (@SBF_FTX) <a href="https://twitter.com/SBF_FTX/status/1591089330323611648?ref_src=twsrc%5Etfw">November 11, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



About an hour after crypto exchange FTX said it — and roughly 130 affiliated companies — <a href="https://cms.blockworks.co/news/ftx-ceo-bankman-fried-resigns-bankruptcy-proceedings-begin/" target="_blank" rel="noreferrer noopener">had commenced Chapter 11 bankruptcy proceedings</a>, Bankman-Fried apologized in a series of tweets, putting faith behind Ray.



“This doesn&#8217;t necessarily have to mean the end for the companies or their ability to provide value and funds to their customers chiefly, and can be consistent with other routes,” he said. “Ultimately I&#8217;m optimistic that Mr. Ray and others can help provide whatever is best.”



The 134 companies filing for bankruptcy — <a href="https://www.docdroid.net/F0TqEsL/alameda-chapter-11-db-pdf#page=6" target="_blank" rel="noreferrer noopener">included in this filing</a> — exclude subsidiaries Ledger X, FTX Digital Markets, FTX Australia Pty and FTX Express Pay, the company said.&nbsp;&nbsp;



A spokesperson at FTX’s public relations agency told Blockworks it was seeking to get in touch with the company’s new leadership.



Ray was making $1.2 million a year as a full-time Enron director in 2007, <a href="https://www.chicagotribune.com/news/ct-xpm-2007-11-04-0711030650-story.html" target="_blank" rel="noreferrer noopener">the Chicago Tribune reported</a>. At the time, he was “seeking to wipe out the bankruptcy claims of institutions that bought Enron debt from banks that engaged in the alleged misconduct,” according to the publication.



The Chicago Tribune story notes that Ray started working at Chicago law firm Mayer Brown in 1984 before landing at Fruit of the Loom. He was general counsel for the apparel company when it filed for bankruptcy in 1999 and later took post-bankruptcy roles at Burlington Industries and Hayes Lemmerz International.



<h3 class="wp-block-heading">Bankman-Fried promises FTX ‘user recovery’ update post-bankruptcy</h3>



Bankman-Fried tweeted Friday morning that he hoped the bankruptcy process could bring transparency, trust and governance.&nbsp;



FTX users — some of whom said their <a href="https://cms.blockworks.co/news/ftx-users-band-together-had-entire-net-worth-on-there-oops/" target="_blank" rel="noreferrer noopener">entire net worth was tied up on the platform</a> — will be watching the bankruptcy process closely.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“I&#8217;m going to work on giving clarity on where things are in terms of user recovery ASAP,” Bankman-Fried tweeted Friday.&nbsp;</blockquote>



Daniel Besikof, a partner at Loeb &amp; Loeb, told Blockworks that FTX’s bankruptcy means, in the short-term, that its customers likely will continue to be unable to withdraw from their accounts. The exchange halted withdrawals <a href="https://cms.blockworks.co/news/ftx-re-enables-withdrawals-but-only-in-bahamas/" target="_blank" rel="noreferrer noopener">for most users</a> Tuesday.&nbsp;&nbsp;



“Longer term, it will depend on a number of things — most importantly, who owns or has claims against the coins, what coins are missing, and can those missing coins be recovered?” he said.&nbsp;



<a href="https://www.macco.group/pablo-bonjour" target="_blank" rel="noreferrer noopener">Pablo Bonjour</a>, a managing partner at restructuring firm Macco, said in an email that some of FTX’s subunits — such as FTX US — appear to be healthy and could have significant value coming out of restructuring.



“Crypto prices will continue to go lower with another wave of selling, but this opens the opportunity for other big exchanges to swoop in and pick up FTX US and other entities at discounted prices,” he added.&nbsp;



Bonjour said that following the bankruptcy filing, FTX is set to enter survival mode by cutting costs, negotiating extensions, cutting all new projects and getting a handle on their assets.



Besikof called FTX’s collapse “breathtakingly fast,” but noted that the bankruptcy process could take at least several months as the company formulates a plan that maximizes recoveries for its creditors.



FTX’s bankruptcy proceedings are not unique for the industry this year. <a href="https://cms.blockworks.co/news/voyager-files-for-bankruptcy-days-after-freezing-withdrawals/" target="_blank" rel="noreferrer noopener">Voyager Digital</a> filed for bankruptcy in early July, while crypto lender Celsius <a href="https://cms.blockworks.co/news/celsius-to-file-for-bankruptcy-imminently-report/" target="_blank" rel="noreferrer noopener">initiated bankruptcy proceedings</a> about a week later in the aftermath of the collapse of Terra’s algorithmic stablecoin.&nbsp;&nbsp;



“Because of the strain FTX’s bankruptcy will have on a huge number of people, I assume FTX will seek to push the case forward as quickly as possible,” Besikof said. “But as customers have seen from Celsius, which filed in July and is not near conclusion, bankruptcy takes time.”



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/daily">Blockworks Daily</a>: Unpacking crypto and the markets.</li>



<li><a href="https://blockworks.co/newsletter/empire">Empire</a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance">Forward Guidance</a>: The intersection of crypto, macro and policy.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha directly in your inbox.</li>



<li><a href="https://blockworks.co/newsletter/lightspeed">Lightspeed</a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop">The Drop</a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock">Supply Shock</a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>

enron