WEBVTT - Bethany McLean Discusses the Fracking Industry (Podcast) 0:00:02.240 --> 0:00:06.800 This is Master's in Business with Very Riddholts on Bloomberg Radio. 0:00:09.720 --> 0:00:12.520 This week on the podcast, I have an extra special guest. 0:00:12.640 --> 0:00:15.840 Her name is Bethany McClain. She is the author, most 0:00:15.960 --> 0:00:22.079 recently of Saudi America, all about the rise of fracking. 0:00:22.560 --> 0:00:26.239 It's really a fascinating book that brings up all sorts 0:00:26.239 --> 0:00:30.040 of interesting things that I had never considered before about fracking, 0:00:30.480 --> 0:00:34.600 most notably the direct line from the financial crisis and 0:00:34.680 --> 0:00:38.159 the very low rates we've had to the fracking boom 0:00:38.200 --> 0:00:42.919 of the ensuing decade. UM. Bethany is a highly regarded 0:00:42.960 --> 0:00:47.199 author who has written numerous books, many of which UM 0:00:47.360 --> 0:00:50.280 have won awards in our and are highly thought of. 0:00:50.760 --> 0:00:52.839 She's one of my favorite writers. I find her stuff 0:00:53.159 --> 0:00:57.600 absolutely fascinating, and I think you'll find this conversation fascinating 0:00:57.640 --> 0:01:01.640 as well. So, with no further adoo my conversation with 0:01:01.720 --> 0:01:08.560 Bethany McClain. I'm Barry Ritults. You're listening to Master's in 0:01:08.600 --> 0:01:12.039 Business on Bloomberg Radio. My extra special guest this week 0:01:12.200 --> 0:01:16.640 is Bethany McClean. She is a contributing editor at Vanity Fair. 0:01:17.400 --> 0:01:20.720 She also spent three years in the investment banking department 0:01:20.720 --> 0:01:24.840 of Goldman sachs Uh, from which she joined Fortune as 0:01:24.880 --> 0:01:29.720 a reporter. She is known for her books. Probably the 0:01:29.760 --> 0:01:32.679 most famous one is Smartest Guys in the Room, The 0:01:32.760 --> 0:01:37.240 Amazing Rise and Scandalous Fall of Enron. Eventually that became 0:01:37.280 --> 0:01:41.360 an Academy Award nominated documentary. She also wrote the book 0:01:41.400 --> 0:01:45.680 Shaky Grounds, The Strange Saga of the US Mortgage Giants 0:01:45.760 --> 0:01:48.760 and All the Devils Are Here, The Hidden History of 0:01:48.800 --> 0:01:54.240 the Financial Crisis. Her latest book Saudi America, The Truth 0:01:54.240 --> 0:01:58.760 about Fracking and how It's changed the World. Bethany McLean, 0:01:59.120 --> 0:02:01.960 Welcome back to Bloomberg. Thank you so much for having 0:02:02.000 --> 0:02:05.720 me so. I really enjoyed the book Saudi America. And 0:02:05.840 --> 0:02:09.960 let's jump right into that because there's some really fascinating things. 0:02:10.400 --> 0:02:13.640 I have to start with a quote that really stood 0:02:13.639 --> 0:02:17.960 out to me. Quote, the most vital ingredient in fracking 0:02:18.080 --> 0:02:22.560 isn't chemicals, but capital. If it wasn't for historically low 0:02:22.600 --> 0:02:25.760 interest rates, it's not clear there would even have been 0:02:25.800 --> 0:02:28.800 a fracking boom. Now, all this time I've been told 0:02:29.080 --> 0:02:32.560 that it's technology that's driving fracking. You're saying it's not. 0:02:32.639 --> 0:02:36.839 It's ultra low interest rates. It certainly is technology as well. 0:02:36.919 --> 0:02:40.720 Horizontal drilling is a big is a big innovation, So 0:02:40.800 --> 0:02:43.200 I do want to I do want to give credit 0:02:43.200 --> 0:02:45.600 to that. But I think most people when they focus 0:02:45.639 --> 0:02:47.720 on the problems with fracking are the issues. They focus 0:02:47.800 --> 0:02:51.000 on the environmental issues. Very few people focus on the 0:02:51.040 --> 0:02:54.760 shaky financial foundation of of the fracking industry. And this 0:02:54.880 --> 0:02:58.240 is an industry that needs huge amounts of capital. Um 0:02:58.400 --> 0:03:00.799 need huge amounts of capital are require to drill a well. 0:03:00.919 --> 0:03:03.079 And then because the decline rates of the wells are 0:03:03.120 --> 0:03:05.919 so steep, if you are going to maintain production or 0:03:05.960 --> 0:03:08.880 grow your production every year, you get on this treadmill 0:03:08.960 --> 0:03:12.600 of constantly needing more capital. So most shale companies have 0:03:12.600 --> 0:03:15.120 have an a fair amount of debt, and so if 0:03:15.160 --> 0:03:18.120 it weren't for record low interest rates, it's unclear that 0:03:18.160 --> 0:03:20.160 they would have been able to raise all the debt 0:03:20.200 --> 0:03:22.280 that they needed to get this thing going the way 0:03:22.280 --> 0:03:25.840 it did. Let's talk about those decline rates. You cite 0:03:25.840 --> 0:03:28.360 a study in the book you side a study by 0:03:28.360 --> 0:03:32.440 the Kansas City Federal Reserve that showed the average well 0:03:32.520 --> 0:03:37.119 in the Bachan region first year decline of output is six. 0:03:38.680 --> 0:03:42.520 Within three years it's eight. So what do they have 0:03:42.600 --> 0:03:45.560 a very short window to squeeze whatever they can out 0:03:45.600 --> 0:03:48.600 of that well. Yes, and you can make one well 0:03:48.720 --> 0:03:52.160 can be profitable in a simple return on capital analysis. 0:03:52.280 --> 0:03:54.320 But if you're part of a publicly traded company and 0:03:54.360 --> 0:03:57.040 you need to show growth in production every single year, 0:03:57.320 --> 0:04:00.240 you're on this treadmill of constantly needing to raise more 0:04:00.280 --> 0:04:03.160 capital in order to show production growth. And the big 0:04:03.240 --> 0:04:06.280 question overhanging the shale industry is does that ever come 0:04:06.320 --> 0:04:08.320 to an end? Is there a point where this industry 0:04:08.360 --> 0:04:11.560 begins to produce free cash flow? Because right now it doesn't. 0:04:11.800 --> 0:04:14.400 It depends on the large guess of Wall Street um 0:04:14.440 --> 0:04:16.840 being willing to fund it. So so let's talk about 0:04:16.880 --> 0:04:21.760 that a second. You describe how how fracking developed with 0:04:21.880 --> 0:04:25.120 thousands of wildcatters. They would go out, they would get 0:04:25.160 --> 0:04:31.359 these land leases. They were deploying the technology using horizontal drilling, 0:04:31.800 --> 0:04:35.560 lots of Canadian sands, and all sorts of other surprising 0:04:35.560 --> 0:04:39.400 things I had no idea about. You're suggesting that these 0:04:39.440 --> 0:04:43.920 one off drills themselves, these one off wells themselves, they 0:04:43.920 --> 0:04:47.200 were profitable for those wildcatters. A one off well can 0:04:47.279 --> 0:04:51.719 be profitable, yes, not as profitable I think as people 0:04:51.760 --> 0:04:53.920 think it is I got some numbers for the returns 0:04:53.960 --> 0:04:56.400 at the wellheads on a bunch of the wells that 0:04:56.480 --> 0:04:59.640 Aubrey McClendon, who's the most colorful character and this whole 0:04:59.640 --> 0:05:03.120 story the former CEO of Chesapeake had, And even at 0:05:03.160 --> 0:05:05.919 the wellhead those returns were at nine percent. That's before 0:05:05.960 --> 0:05:08.960 the cost of marketing and transporting that the gas. It's 0:05:09.000 --> 0:05:12.039 not clear how profitable, but some wills can be profitable. 0:05:12.120 --> 0:05:14.600 The problem is for publicly traded companies, or for any 0:05:14.600 --> 0:05:17.520 company that needs to show growth um that they get 0:05:17.560 --> 0:05:21.040 on this basically the steamroller of needing to raise more 0:05:21.080 --> 0:05:23.680 capital all the time. So you mentioned Aubrey McLennan. He 0:05:23.880 --> 0:05:27.920 looms large over both fracking. He's the founder of Chesapeake 0:05:28.320 --> 0:05:32.400 and really the father of capital. Reason I had no 0:05:32.520 --> 0:05:35.640 idea who this person was before reading the book. Tell 0:05:35.720 --> 0:05:38.520 us a little bit about him and some of his 0:05:38.839 --> 0:05:43.040 outrageous leverage and some of the things he did. Really 0:05:43.400 --> 0:05:47.920 a colorful and fascinating person in Saudi America. So I've 0:05:47.920 --> 0:05:51.080 been fascinated with Aubrey mcclennon going back to two thousand 0:05:51.040 --> 0:05:52.800 and ten. A guy I talked to a lot used 0:05:52.839 --> 0:05:55.480 to tell me with some degree of hyperbole, that McClendon 0:05:55.520 --> 0:05:58.080 was the most important man in America and really, and 0:05:58.120 --> 0:06:00.880 what he meant by that was that if McClendon was 0:06:01.000 --> 0:06:04.279 right and our country could produce immense amounts of cheap 0:06:04.360 --> 0:06:07.960 natural gas, that really changed the future of of the country. 0:06:08.200 --> 0:06:11.880 It made us an energy rich place where manufacturing of 0:06:11.880 --> 0:06:15.800 all kinds would would relocate if McClendon was wrong and 0:06:15.920 --> 0:06:18.400 this wasn't economic. And this friend of mine and his 0:06:18.440 --> 0:06:20.680 partner used to have this debate all the time. The 0:06:20.720 --> 0:06:23.360 partner would say, the oil and gas were real, and John, 0:06:23.560 --> 0:06:26.600 my friend John, would say, yeah, but the economics don't work. Um. 0:06:26.640 --> 0:06:29.920 Aubrey was the guy that the technological development of shale 0:06:30.000 --> 0:06:32.159 credit goes to somebody else, a guy named George Mitchell, 0:06:32.440 --> 0:06:35.800 But the father of capital raising was Aubrey McClendon. This 0:06:35.839 --> 0:06:38.400 guy was one of the best salesman the world has 0:06:38.480 --> 0:06:41.760 ever seen. He could get anyone to give him money. 0:06:41.960 --> 0:06:44.280 Had this great story in the book from an analyst 0:06:44.360 --> 0:06:46.400 who is at a big investment firm who was very 0:06:46.400 --> 0:06:49.240 skeptical of McClendon and of Chesapeake, and he said, I'd 0:06:49.240 --> 0:06:51.200 never let him in the door to talk to our people, 0:06:51.240 --> 0:06:53.400 because we would have ended up investing, and it wouldn't 0:06:53.400 --> 0:06:56.960 and it wouldn't have ended well. UM and McClendon had 0:06:57.000 --> 0:07:01.400 this larger than larger than life personality and life he 0:07:01.480 --> 0:07:05.560 really sort of remade Oklahoma City. Chesapeake was this extravagant 0:07:05.560 --> 0:07:08.960 company with daycare on premises and a massage studio. I 0:07:08.960 --> 0:07:13.440 mean it was Silicon Valley transported to Oklahoma City. UM 0:07:13.440 --> 0:07:17.400 and McClendon died essentially bankrupt in a fiery car crash 0:07:17.480 --> 0:07:19.800 in the spring of two thousand sixteen, right after he 0:07:19.840 --> 0:07:24.080 had been indicted by the Justice Department, accused of rigging 0:07:24.240 --> 0:07:28.120 rigging deals to buy land. And when he died, American 0:07:28.200 --> 0:07:30.400 shail was flat on its back. It looked like this 0:07:30.520 --> 0:07:33.680 was this was the end. Thanks to UM some of 0:07:33.680 --> 0:07:36.720 the some of the strategy OPEC pursued, and so McClendon's 0:07:36.760 --> 0:07:40.520 death was it was as if it underscored the problems 0:07:40.560 --> 0:07:42.920 with the American shale industry. There's a stat in the 0:07:42.960 --> 0:07:47.000 book that really stunned me. From two thousand and one 0:07:47.040 --> 0:07:51.480 to two thousand and twelve, Chesapeake sold sixteen point four 0:07:51.520 --> 0:07:55.320 billion dollars worth of stock and fifteen point five billion 0:07:55.360 --> 0:07:58.840 dollars worth of debt. It's a nice balanced portfolio there, uh, 0:07:58.880 --> 0:08:01.560 and paid Wall Street more than one point one billion 0:08:01.560 --> 0:08:05.600 in fees. So when you say capital was the key 0:08:05.680 --> 0:08:09.880 driver fracking, at least that at Chesapeake, that seems like 0:08:09.920 --> 0:08:12.680 an awful lot of money. That is an awful lot 0:08:12.720 --> 0:08:14.840 of money. And I'd add that that's not the only 0:08:14.920 --> 0:08:18.720 amount that Chesapeake raised. They raised probably another thirty billion 0:08:18.760 --> 0:08:21.800 dollars in ways that are a bit more subterranean than 0:08:21.840 --> 0:08:24.360 public sales of equity and debt. They did these and 0:08:24.520 --> 0:08:28.160 run esque prepaid deals where they'd sell natural gas forward 0:08:28.480 --> 0:08:31.640 and get the cash now and not book that as alone, 0:08:31.640 --> 0:08:35.040 but it essentially is alone, right, and pulling forward forward 0:08:35.080 --> 0:08:37.880 revenues to encounting it today. Yeah, and they did over 0:08:38.320 --> 0:08:42.000 twenty billion of of those kind of deals, and so 0:08:42.000 --> 0:08:45.840 so even that huge, stunning number actually understates the sheer 0:08:45.880 --> 0:08:48.600 amount of capital they raised. And with all of that, 0:08:48.760 --> 0:08:53.520 Chesapeake never before asset sales to soccers. Essentially, Chesapeake never 0:08:53.679 --> 0:08:56.120 produced free cash flow. And so people would look at 0:08:56.120 --> 0:08:58.720 that and say, well, that's just Chesapeake. Aubrey McClendon is this, 0:08:59.080 --> 0:09:01.680 He's the larger than life character that's not emblematic of 0:09:01.720 --> 0:09:04.480 the rest of the industry. But it actually is. Aubrey 0:09:04.520 --> 0:09:07.760 McClendon is the rest of the industry on steroids much 0:09:07.760 --> 0:09:10.640 more extreme, but the rest of the industry was cash 0:09:10.679 --> 0:09:13.360 flow negative as well. There's a data point from the book, 0:09:13.360 --> 0:09:15.440 and I'm I'm thumbing through my notes to try and 0:09:15.480 --> 0:09:20.160 find it where you said something like the total investment 0:09:20.240 --> 0:09:24.640 dollars that the industry drew in was far, far in 0:09:24.679 --> 0:09:27.160 excess of the total value of the gas they pulled out, 0:09:27.320 --> 0:09:30.120 or or am I misquoting learn No, it's a number 0:09:30.120 --> 0:09:33.320 from David Einhorn. So people you obviously known people on 0:09:33.320 --> 0:09:35.760 this podcast will probably know Einhorn well, But for those 0:09:36.000 --> 0:09:39.160 who don't, he's a very well known hedge fund manager 0:09:39.200 --> 0:09:42.560 who famously called Lehman before the financial crisis of two 0:09:42.600 --> 0:09:45.000 thousand and eight. Relevant again, given given where we are 0:09:45.080 --> 0:09:47.960 right now, we're recording this literally three days before the 0:09:47.960 --> 0:09:53.119 anniversary of Lehman's collapse, exactly, so in early two thousand fifteen, 0:09:53.400 --> 0:09:56.319 David Einhorn, there's a lot of skepticism about SAIL for 0:09:56.360 --> 0:09:58.840 exactly the reasons we're discussing, and Einhorn was the first 0:09:58.840 --> 0:10:02.079 one to really go public and to put put numbers 0:10:02.080 --> 0:10:06.040 to this whole thing, and he calculated that um, the 0:10:06.080 --> 0:10:10.440 shale industry had outspent its outspent its cash flow by 0:10:10.440 --> 0:10:14.520 eighty billion dollars. So that's amazing. It's not that they 0:10:14.559 --> 0:10:16.920 spent eighty and and the time frame for that is 0:10:16.960 --> 0:10:21.199 oh six, It's not that they spent eighty billion. They 0:10:21.200 --> 0:10:24.600 spent eighty billion more than the value of the oil 0:10:24.640 --> 0:10:27.600 and gas they sold. Yes, that's just a start. And 0:10:27.600 --> 0:10:29.400 you have to remember that that was a period when 0:10:29.400 --> 0:10:31.640 oil prices were over a hundred dollars a barrel, and 0:10:31.679 --> 0:10:34.480 it encompasses a period when natural gas prices were over 0:10:34.559 --> 0:10:38.280 ten dollars as well. And so it's what the argument 0:10:38.280 --> 0:10:41.000 of skeptics is that this is an industry that can't 0:10:41.000 --> 0:10:44.320 make money with super high commodity prices. Forget super low 0:10:44.320 --> 0:10:47.280 commodity prices. Right, Let's let's talk a little bit about that, 0:10:47.280 --> 0:10:49.720 because is a quote from an analyst in the book 0:10:50.160 --> 0:10:53.600 that I really liked. With oil, there's a price that 0:10:53.679 --> 0:10:57.240 kills supply and there's a price that kills demands. So 0:10:57.400 --> 0:11:01.360 two questions about that, First x landing exactly what that means, 0:11:01.400 --> 0:11:04.959 and then secondly, where are we in that cycle? Well, 0:11:05.080 --> 0:11:06.880 what he meant by that is that there's a price 0:11:06.960 --> 0:11:10.240 that's so low that nobody can make money, although meaning 0:11:10.240 --> 0:11:12.520 people don't explore, they don't drill, they'd rather just sit 0:11:12.559 --> 0:11:15.800 around away, right, And that actually put that that actually 0:11:15.880 --> 0:11:19.040 pushes us toward lower cost sources of supply, because if 0:11:19.080 --> 0:11:21.319 you think about the world, there are places that can 0:11:21.360 --> 0:11:23.720 get oil out of the ground for a really small 0:11:23.720 --> 0:11:27.679 amount of money, namely Saudi Arabia. Their their immense oil field. 0:11:27.880 --> 0:11:30.719 UM is probably the cheapest place to extract oil in 0:11:30.760 --> 0:11:32.800 the world. I think they've said their cost is about 0:11:32.800 --> 0:11:35.480 ten dollars a barrel, although in the book you describe 0:11:35.600 --> 0:11:40.559 that their own financial situation has changed the world, so 0:11:40.640 --> 0:11:44.480 they they really need seven or eighty dollars to oil 0:11:44.600 --> 0:11:47.400 in order to pretty much be break even versus their 0:11:47.400 --> 0:11:49.760 own infancy. That's because of their public spending on other 0:11:49.840 --> 0:11:53.680 things to keep up populous, a restless populus quiet. So, 0:11:53.880 --> 0:11:56.480 but that's not the actual that's the public spending they've 0:11:56.520 --> 0:11:58.600 layered on top of it, not the actual cost of 0:11:58.600 --> 0:12:01.360 of of of the olive oil. But so it is 0:12:01.400 --> 0:12:03.720 a certain at a certain price, nobody can make money, 0:12:03.720 --> 0:12:06.760 and so exploration stops. And then at a certain price, 0:12:07.040 --> 0:12:09.280 um oil is so high that people start to look 0:12:09.320 --> 0:12:13.120 for substitutes yep. And so that's what this guy meant 0:12:13.160 --> 0:12:14.880 by there's a price that kills supply and a price 0:12:14.880 --> 0:12:17.880 that kills demand. And so the next question is where 0:12:17.920 --> 0:12:20.760 are we in that cycle? Are we about halfway? What 0:12:20.800 --> 0:12:26.319 are we about? Yep. So that's UM much lower than 0:12:26.360 --> 0:12:29.080 people thought oil prices would ever be UM back in 0:12:29.240 --> 0:12:31.760 two thousand and eleven and two thousand and twelve, when 0:12:31.800 --> 0:12:34.600 oil prices were over a hundred dollars a barrel, right, 0:12:34.679 --> 0:12:36.960 and I think it's still not quite high enough for 0:12:36.960 --> 0:12:41.480 Saudi Arabia to be fiscally stable um UM, and whether 0:12:41.559 --> 0:12:43.840 it's a price at which US shale can make money 0:12:43.920 --> 0:12:47.720 or not remains to be seen. People claim. UM proponents 0:12:47.760 --> 0:12:52.520 claim that technological improvements and the beginning of fracking in 0:12:52.559 --> 0:12:54.920 an area of Texas and New Mexico called the Permian 0:12:55.240 --> 0:12:57.760 which has been an oil field for a century but 0:12:57.840 --> 0:13:00.640 has turned out to be really prolific with this new 0:13:00.679 --> 0:13:03.520 technology of fracking, that these things are going to reshape 0:13:03.559 --> 0:13:05.880 the financial firmament of the industry, and so we're going 0:13:05.920 --> 0:13:09.120 to start seeing profits from the from the publicly traded UM, 0:13:09.120 --> 0:13:12.840 from the publicly traded fracking companies. Skeptics say those decline 0:13:12.880 --> 0:13:16.439 rates are still bad. All we're doing by getting more 0:13:16.480 --> 0:13:18.880 oil at the ground more quickly with new technology is 0:13:18.880 --> 0:13:21.680 emptying the well more quickly. We're not increasing the amount 0:13:21.720 --> 0:13:23.640 you can get out over over the life of the well, 0:13:23.920 --> 0:13:26.480 and this still isn't going to work economically. So the 0:13:26.480 --> 0:13:29.600 theory is that within the premium basin, even under seventy 0:13:29.640 --> 0:13:33.199 five dollars a barrel and under five dollars, the linear 0:13:33.200 --> 0:13:37.360 square foot for the um natural natural gas that that's 0:13:37.520 --> 0:13:40.840 or is cubic square FI don't remember the measurement, but 0:13:40.840 --> 0:13:45.199 but it's been three four five dollars recently, premium basin 0:13:45.320 --> 0:13:50.360 can become profitable at those those certain parts of certain 0:13:50.400 --> 0:13:52.240 parts of the premium basin. For sure, it can be 0:13:52.280 --> 0:13:55.400 profitable at those prices. Whether the whole basin can be 0:13:55.520 --> 0:13:58.240 profitable because I profile in the in the book a 0:13:58.280 --> 0:14:00.560 company called eo G that's kind of guarded as the 0:14:00.559 --> 0:14:03.600 Apple of shale if there is a total counterpoint to 0:14:03.640 --> 0:14:08.679 Aubrey McClendon's Chesapeake, it's eo G. Highly efficient, very cost conscious, 0:14:09.040 --> 0:14:12.800 um basically kind of the technocrats of the of of 0:14:12.800 --> 0:14:15.800 of the shale industry, and they say the CEO V 0:14:15.920 --> 0:14:18.720 O G says, all land isn't created equal. The idea 0:14:18.760 --> 0:14:20.360 that you can drill a well in one place in 0:14:20.400 --> 0:14:22.560 the Premian basin, and that means you can drill well 0:14:22.640 --> 0:14:25.280 is everywhere on the Premian basin and produce the same results. 0:14:25.320 --> 0:14:29.200 It's it's crazy. Geology is really complicated, and so he 0:14:29.200 --> 0:14:31.840 he believes that some of what we can extract from 0:14:31.840 --> 0:14:35.600 the Premian basin is at low prices is overstated. Last 0:14:35.640 --> 0:14:38.840 question about Aubrey, because you describe in the book how 0:14:39.360 --> 0:14:42.240 it's not just that he's spending two and five and 0:14:42.280 --> 0:14:46.040 ten x on land leases versus everybody else but his 0:14:46.120 --> 0:14:49.840 own personal life. He's all in on everything. There's no 0:14:50.160 --> 0:14:53.440 safe money, there's no will let me buy my He's 0:14:53.520 --> 0:14:57.560 just fully leveraged, constantly in every segment of his life. Right. 0:14:57.840 --> 0:15:00.280 He struck me as a fascinating character because he wasn't 0:15:00.320 --> 0:15:02.600 just willing to risk other people's money. He was willing 0:15:02.640 --> 0:15:04.840 to risk his own money. He risked every bit of 0:15:04.840 --> 0:15:07.080 money he ever he ever got. There's this great quote 0:15:07.120 --> 0:15:09.040 from him when an analyst on a conference call said, 0:15:09.080 --> 0:15:11.680 at one point, when is enough enough? And he said, 0:15:11.720 --> 0:15:14.440 I can't get enough, and I think that sums up 0:15:14.480 --> 0:15:17.440 the man. But yeah, he bought the Seattle Sonics, moved 0:15:17.480 --> 0:15:20.400 them to Oklahoma City renamed them the Thunder. He had 0:15:20.480 --> 0:15:23.960 mansions around the country, including around the world, including this 0:15:24.080 --> 0:15:27.200 extravagant place on Lake Michigani at an antique map collection. 0:15:27.240 --> 0:15:29.800 And he was best known you'll appreciate this for an 0:15:29.800 --> 0:15:32.520 incredible collection of wine. Um. Someone who knew him told 0:15:32.520 --> 0:15:34.160 me that his collection of wine at one point was 0:15:34.160 --> 0:15:36.400 actually the best in the in the world. Um. He 0:15:36.440 --> 0:15:38.840 had a special love for the really big bottles what 0:15:38.880 --> 0:15:43.760 are those things called the jere boems and the yeah yeah, yeah, 0:15:43.840 --> 0:15:46.160 so the really rare jarrab bones. I mean, he was 0:15:46.240 --> 0:15:50.680 a character fascinating. Let's talk a little bit about your 0:15:50.720 --> 0:15:54.960 writing process and and let me go back to that 0:15:55.200 --> 0:15:59.360 UM column about and Run, the first piece that was 0:15:59.360 --> 0:16:04.640 pretty much the first major mainstream piece that called out 0:16:04.800 --> 0:16:07.920 and Ron for Hey, maybe things are not quite as 0:16:08.040 --> 0:16:11.680 rosy there as the company is claiming. Tell us a 0:16:11.720 --> 0:16:14.760 little bit about that piece and what motivated you to 0:16:14.800 --> 0:16:17.920 turn it into a book. Well, so that piece actually 0:16:17.960 --> 0:16:21.440 came about because when I started working at Fortune, I'll 0:16:21.480 --> 0:16:22.800 give you a little bit of back story. I did 0:16:22.800 --> 0:16:24.920 a column called companies to watch where I was supposed 0:16:24.960 --> 0:16:27.040 to pick stocks every week that we're gonna, you know, 0:16:27.040 --> 0:16:32.320 appreciate thanks task. Well, it was remarkably easy because there 0:16:32.320 --> 0:16:35.239 were no shortage of people coming by fortune, from portfolio 0:16:35.280 --> 0:16:37.840 managers who owned the stock to a company. Management would 0:16:37.920 --> 0:16:40.080 lay out these great little stories from me, and I'd 0:16:40.080 --> 0:16:43.080 write them up because I believed I didn't why would you? 0:16:43.280 --> 0:16:45.520 Why would I doubt them? And I'd watch in horrors. 0:16:45.520 --> 0:16:48.360 The stock promptly went in the opposite direction. So I 0:16:48.400 --> 0:16:50.880 started at a pretty early age trying to get to 0:16:50.960 --> 0:16:53.600 know short sellers because I was just tired of being wrong. 0:16:53.680 --> 0:16:56.160 It wasn't I just I was tired tired of being 0:16:56.160 --> 0:16:58.400 wrong and tired of having people call me up after 0:16:58.440 --> 0:17:01.000 a piece ran and basically saying you idiot, like how 0:17:01.040 --> 0:17:03.160 could you, How could you be writing a puff piece 0:17:03.160 --> 0:17:07.240 about this insane fraud and so anyway, So through that 0:17:07.280 --> 0:17:10.359 I got to know Jim Chainos, and Jim I think 0:17:10.400 --> 0:17:13.520 in the fall of two thousand a fall of two thousand, 0:17:13.840 --> 0:17:15.760 UM said why don't you take a closer look at Enron? 0:17:15.840 --> 0:17:17.359 And it happened to be. It's one of those interesting 0:17:17.400 --> 0:17:19.760 things in life because I have a weird background. I 0:17:19.800 --> 0:17:21.920 was a math major um and I went to work 0:17:21.960 --> 0:17:24.199 at Goldman as an analyst out of college, and so 0:17:24.520 --> 0:17:26.640 I didn't have a writing background at all, And so 0:17:26.680 --> 0:17:30.880 it was kind of serendipity of my weird background actually 0:17:30.920 --> 0:17:34.040 being incredibly helpful, because certainly, at that stage, I still 0:17:34.119 --> 0:17:36.440 knew how to put together, you know, elaborate spreadsheets on 0:17:36.480 --> 0:17:38.800 a company's financials. I was pretty fresh out of out 0:17:38.800 --> 0:17:41.840 of doing that. Eical and and their their financials were 0:17:41.880 --> 0:17:44.800 as transparent and easy don't understand as any on the street. Right, 0:17:45.280 --> 0:17:47.840 So I'd say, over my years in journalism, what's changed 0:17:47.880 --> 0:17:50.680 as I've become far more obsessed with characters, far more 0:17:50.760 --> 0:17:53.560 interested in the human story. But I'm still a numbers 0:17:53.560 --> 0:17:56.840 girl at heart. And so when numbers are contrary and 0:17:57.200 --> 0:17:59.879 don't make sense and aren't what everybody else thinks, or 0:18:00.000 --> 0:18:02.040 how a different picture than what the world thinks is 0:18:02.080 --> 0:18:05.000 going on, Like with shale, most people think what must 0:18:05.000 --> 0:18:08.440 be immensely profitable making gobs of money, and no, actually 0:18:08.440 --> 0:18:11.200 it's not. And so I'm really interested always in those 0:18:11.240 --> 0:18:14.119 disconnects that numbers can show you. How quickly did you 0:18:14.200 --> 0:18:17.920 realize something was afoot at en Ron? When you started 0:18:18.119 --> 0:18:22.320 delving into the numbers. So I would say I was skeptical, 0:18:22.440 --> 0:18:25.680 but not skeptical enough. My original piece, I actually think 0:18:25.720 --> 0:18:28.479 should have won awards for the meekest headline in history 0:18:28.560 --> 0:18:31.960 because the title was his end Run over priced. Um, yeah, 0:18:32.800 --> 0:18:36.000 that turned out to be true. Um anything over zero? 0:18:38.400 --> 0:18:40.720 I just I never would have guessed. Um, I was 0:18:40.840 --> 0:18:42.840 naive then. I never would have guessed that a company 0:18:42.880 --> 0:18:47.160 could be so riddled with over statements and outright fraud 0:18:47.240 --> 0:18:50.040 as as as en Run was. So the piece was skeptical. 0:18:50.080 --> 0:18:52.439 It pointed out problems in en Ron's business. Speaking of 0:18:52.480 --> 0:18:54.560 cash flow, it pointed out en Roun's lack of cash 0:18:54.560 --> 0:18:57.080 flow and it's burgeoning debtload, and the fact that nobody 0:18:57.160 --> 0:19:00.320 understood how this company actually made made its money. But 0:19:00.359 --> 0:19:02.640 if you had asked me at that time that I 0:19:02.680 --> 0:19:05.400 would end Ron be bankrupt in six months or nine months, 0:19:05.440 --> 0:19:07.840 I would have said what now? So you were looking 0:19:07.840 --> 0:19:11.920 at this as an expensive company, not a fraudulent correct, right? 0:19:12.160 --> 0:19:14.439 And how soon was it clear that it was the 0:19:14.520 --> 0:19:18.200 latter and not the former. I think the Enron tail 0:19:18.560 --> 0:19:21.959 unspoiled in an interesting fashion. In August of two thousand 0:19:22.000 --> 0:19:25.200 and one, Jeff Skilling abruptly quit is the company's CEO, 0:19:25.320 --> 0:19:29.560 citing personal reasons, as everybody does. But the idea that 0:19:29.600 --> 0:19:32.560 the mastermind behind this company, who once that I am 0:19:32.640 --> 0:19:35.720 en Ron, was suddenly just stepping down was a real 0:19:35.760 --> 0:19:38.080 sign to people that there were that there were problems. 0:19:38.240 --> 0:19:40.280 And then the Wall Street Journal did some great work 0:19:40.359 --> 0:19:43.280 pointing out these off balance sheet partnerships that the then 0:19:43.359 --> 0:19:45.960 CFO Andy Fasta was running, and the whole thing began 0:19:46.000 --> 0:19:48.280 to create her pretty quickly. So let's talk a little 0:19:48.280 --> 0:19:51.800 bit about your writing process. At what point, obviously, is 0:19:51.960 --> 0:19:55.200 n one blows up, It's clear, Wow, there's a book here. 0:19:55.720 --> 0:19:57.840 But some of the other books you've written, you've co 0:19:58.080 --> 0:20:01.679 authored with various people. Uh, the en Ron book, the 0:20:01.800 --> 0:20:04.480 all the all the devils are here. What makes you 0:20:04.600 --> 0:20:07.360 decide to work with someone else on a book when 0:20:07.359 --> 0:20:09.840 you've been so successful writing on your own. Well, so 0:20:09.920 --> 0:20:12.879 the first two books I did were both big books. Um, 0:20:13.000 --> 0:20:15.879 the en Roun book was I was How old was 0:20:15.880 --> 0:20:17.560 I when I started that? I don't know, thirty one 0:20:17.840 --> 0:20:19.679 and I'd been a journalist for a few years. But 0:20:19.720 --> 0:20:21.920 the longest piece I'd ever written was you know, three 0:20:21.920 --> 0:20:24.399 thousand words and Fortune magazine. I've never even written a 0:20:24.440 --> 0:20:27.440 really long story, let alone written a book. And actually 0:20:27.480 --> 0:20:30.840 collaborating with Peter el Kind and having my old pal 0:20:30.920 --> 0:20:33.119 Jonah Sarah edit it was was the best decision. I mean, 0:20:33.160 --> 0:20:35.600 it's a far better book because of their input and help. 0:20:35.640 --> 0:20:39.160 I learned a lot about um investigative reporting from Peter, 0:20:39.320 --> 0:20:41.600 and I learned a lot about writing from from Joe. 0:20:42.280 --> 0:20:44.800 Joe and I actually co authored All the Devils Are Here, 0:20:44.840 --> 0:20:47.440 and it was, you know, ten years ago about this day. 0:20:47.440 --> 0:20:49.720 We were sitting in my house in Chicago just watching 0:20:49.720 --> 0:20:52.399 the world go up, and in the financial world go up, 0:20:52.480 --> 0:20:54.480 go up, in flames, and we were both we both 0:20:54.520 --> 0:20:56.359 said we have to do a book, and so it 0:20:56.400 --> 0:20:59.080 really just came about organically. It wasn't any kind of 0:20:59.280 --> 0:21:02.000 um stra g on on my part. But again, it's 0:21:02.000 --> 0:21:04.840 a much better book because of because of Joe's collaboration. 0:21:05.400 --> 0:21:07.400 The other two books I've done have been these mini 0:21:07.400 --> 0:21:09.720 books for Columbia and this book's Audi America. As a 0:21:09.760 --> 0:21:14.000 mini books, that's only words. It's a short, quick read. Yeah, 0:21:14.119 --> 0:21:16.760 they're They're meant to be quick takes or a slice 0:21:16.800 --> 0:21:19.800 of a topic, so they're not as all encompassing or 0:21:19.880 --> 0:21:23.080 as demand. They don't take a commitment of your entire 0:21:23.160 --> 0:21:26.159 life the way the way these these bigger books on 0:21:26.200 --> 0:21:32.040