WEBVTT - Part Two: NVIDIA Isn't Enron - So What Is It? 0:00:02.400 --> 0:00:07.320 Zone Media. Hello on welcomes a better offline. I'm at Zeitron, 0:00:07.360 --> 0:00:21.840 and I'm nothing like Enron. Now. This is the second 0:00:21.880 --> 0:00:24.479 episode in the Nvidia Enron series. And to give you 0:00:24.520 --> 0:00:27.000 a recap, a few weeks ago a document from Nvidia 0:00:27.120 --> 0:00:29.319 leaked where the company denied that it was anything like 0:00:29.480 --> 0:00:34.400 Enron at all. But what was Enron? Now? Some of 0:00:34.440 --> 0:00:36.600 you might know this, some of you might not, but 0:00:36.680 --> 0:00:39.239 I think it's time to remind everyone what Enron was 0:00:39.280 --> 0:00:43.040 and what Enron did and why Enron was So I 0:00:43.080 --> 0:00:46.680 don't know if we should say special, but it sure 0:00:46.800 --> 0:00:50.040 was Enron. Now, the collapse of Enron wasn't just in retrospect, 0:00:50.040 --> 0:00:53.199 a large business that ultimately failed. If that's all it was, 0:00:53.240 --> 0:00:55.080 it wouldn't come on the same space in our heads 0:00:55.120 --> 0:00:58.240 as other failures like WorldCom or Nortel, which I'll actually 0:00:58.240 --> 0:01:01.279 get to later talked about WorldCom line episode, both of 0:01:01.320 --> 0:01:04.000 whom were similarly considered giants in their fields. By the way, 0:01:04.800 --> 0:01:07.200 it's also not just about the fact that Enron failed 0:01:07.200 --> 0:01:10.480 because had proven business and accounting fraud. World comm entered 0:01:10.480 --> 0:01:14.039 bankruptcy due to similar circumstances, though, rather than being liquidated, 0:01:14.319 --> 0:01:16.200 and this is kind of a mind fuck, so forgive me. 0:01:16.480 --> 0:01:19.360 It was the quietest part of Verizon's acquisition of MCI, 0:01:19.560 --> 0:01:22.400 the name of a company that had previously merged with WorldCom, 0:01:22.480 --> 0:01:26.840 that WorldCom renamed itself to after bankruptcy. This era sucked, 0:01:27.760 --> 0:01:30.880 and unlike Enron, WorldCom isn't the subject of multiple films 0:01:30.880 --> 0:01:34.120 and even a Broadway production. And my editor saw the 0:01:34.240 --> 0:01:36.520 UK tour of that and apparently it was pretty good, 0:01:36.640 --> 0:01:38.360 you asked Matt Hughes, if you want to know more. 0:01:38.760 --> 0:01:41.039 And it's also not the size of Enron that made 0:01:41.080 --> 0:01:43.959 its downfall so intriguing, nor, for that matter, is it 0:01:44.000 --> 0:01:45.880 the fact that Enron did a lot of legally and 0:01:45.880 --> 0:01:49.320 ethically dubious stuff to bring about its downfall. No, what 0:01:49.360 --> 0:01:52.560 makes Enron special is the sheer gravity of its fuckery, 0:01:52.800 --> 0:01:54.680 the rotten culture at the heart of the company that 0:01:54.800 --> 0:01:58.280 encouraged said malfeasance, and the creative ways Enron's leaders crafted 0:01:58.320 --> 0:02:00.960 an image of success around what was at its heart 0:02:01.160 --> 0:02:04.440 a big, fat dog of a company. Enron was born 0:02:04.480 --> 0:02:07.080 in nineteen eighty five out on the foundations of two older, 0:02:07.200 --> 0:02:11.440 much less interesting businesses. The first, Houston Natural Gas HG, 0:02:11.960 --> 0:02:15.120 started life as a utility provider bumping natural gas from 0:02:15.160 --> 0:02:17.800 the oil fields of Texas to customers throughout the region, 0:02:18.040 --> 0:02:21.239 before later exiting the industry to focus on other opportunities. 0:02:21.600 --> 0:02:24.240 The other Inter North, was based in Omaha, Nebraska, and 0:02:24.320 --> 0:02:28.120 was in the same business pipelines. In the mid nineteen eighties, 0:02:28.440 --> 0:02:30.799 H ANDNG was the subject of a hostile takeoff from 0:02:30.880 --> 0:02:34.440 Coastal Corporation, which until two thousand and one operated a 0:02:34.520 --> 0:02:36.800 chain of refineries and gas stations throughout much of the 0:02:36.880 --> 0:02:40.560 US mainland. Unable to fend it off by itself, h 0:02:40.639 --> 0:02:44.880 ANDNG merged with inter North, with the combined corporation renamed Enron. 0:02:45.120 --> 0:02:47.519 The CEO of this new entity was called Ken Lay, 0:02:47.760 --> 0:02:50.040 an economist by trade who spent most of his career 0:02:50.040 --> 0:02:53.240 in the energy sector, who also enjoyed deep political connections 0:02:53.240 --> 0:02:55.880 with the Bush family. He co chaired George H. W. 0:02:56.080 --> 0:02:59.280 Bush's failed nineteen ninety two re election campaign and allowed 0:02:59.360 --> 0:03:02.080 Enron's corporate jet to Ferry Bush Senior and Barbara Bush 0:03:02.120 --> 0:03:05.600 back and forth. To Washington Center for Public Integrity director 0:03:05.639 --> 0:03:08.280 Charles Lewis said that there was and I quote no 0:03:08.440 --> 0:03:11.800 company in America closer to George W. Bush than Enron. 0:03:12.960 --> 0:03:15.600 George W. Bush, and I mean the second one even 0:03:15.639 --> 0:03:19.400 had a nickname for Lay Kenny Boy. Anyway, in nineteen 0:03:19.400 --> 0:03:22.840 eighty seven, Enron hired McKinsey, the world's most evil management 0:03:22.919 --> 0:03:25.880 consultancy firm, to help the company create a futures market 0:03:25.880 --> 0:03:28.799 for natural gas. Well that means isn't particularly important to 0:03:28.840 --> 0:03:31.160 the story, but essentially, a futures contract is where a 0:03:31.200 --> 0:03:33.480 company agrees to buy or sell an assair in the 0:03:33.520 --> 0:03:36.560 future at a fixed price. It's a way of hedging 0:03:36.640 --> 0:03:39.360 against risk, whether that be from something like price or 0:03:39.400 --> 0:03:43.360 currency fluctuations, or from default. If you're buying oil in dollars, 0:03:43.400 --> 0:03:46.000 for example, buying a futures contract for oil to be 0:03:46.040 --> 0:03:48.840 delivered in six months time at a predetermined price means 0:03:48.880 --> 0:03:51.040 that if your currency weakens against the dollar, your costs 0:03:51.080 --> 0:03:54.920 won't spiral. That bit isn't terribly important. What does matter 0:03:54.960 --> 0:03:58.360 is while working with McKinsey, Lay met someone named Jess Skilling, 0:03:58.480 --> 0:04:01.840 a young engineer turned consultant who impressed the company's CEO deeply, 0:04:02.240 --> 0:04:04.320 so much so that Ley decided to poach him from 0:04:04.360 --> 0:04:06.600 McKinsey in nineteen ninety and give him the role of 0:04:06.680 --> 0:04:10.880 chairman and CEO of Enron. Finance Group. Oh. By the way, 0:04:11.000 --> 0:04:13.520 Enron had a bunch of subsidiaries and some had their 0:04:13.520 --> 0:04:15.880 own CEOs and boards. I mentioned this because he may 0:04:15.920 --> 0:04:18.120 be a bit confused, as Lay was CEO of Nron 0:04:18.160 --> 0:04:22.039 and Skilling was CEO of Nron Finance Group. In essence, 0:04:22.080 --> 0:04:24.159 it's a bit like how Sam Altman is CEO of 0:04:24.200 --> 0:04:27.599 open Ai and Fijisimo as the CEO of Applications. That 0:04:27.680 --> 0:04:29.520 bit isn't important, but I just want to be as 0:04:29.560 --> 0:04:32.760 explicit as possible. I don't think open Ai is Enron either, 0:04:33.160 --> 0:04:36.560 at least I hope. Anyway, Skilling continued to impress Lay, 0:04:36.560 --> 0:04:40.320 who gave him greater and greater responsibility, eventually crowning him 0:04:40.480 --> 0:04:44.200 chief operating Officer of Enron itself. With Skilling in a 0:04:44.279 --> 0:04:47.600 key leadership position who was able to shape the organization's culture, 0:04:47.880 --> 0:04:50.840 He appreciated those who took risks, even if those risks, 0:04:50.880 --> 0:04:54.440 when viewed with impartialized were deemed reckless or even criminal. 0:04:54.880 --> 0:04:57.359 He introduced the practice of stack ranking, also known as 0:04:57.480 --> 0:04:59.960 rank and yank, to Enron, which had previously been pioneer 0:05:00.200 --> 0:05:03.240 by Jack Welcher General Electric. And you should listen to 0:05:03.279 --> 0:05:05.760 the shareholder supremacy from last year. If you want to 0:05:05.800 --> 0:05:10.120 hear what I think about that redacted guy here. Employees 0:05:10.120 --> 0:05:12.080 were graded on a scale, and those at the bottom 0:05:12.120 --> 0:05:14.400 of the scale were terminated. Managers had to place at 0:05:14.440 --> 0:05:17.119 least ten percent. Other reports stay closer to fifteen percent 0:05:17.120 --> 0:05:19.760 of employees in the lowest bracket, which created an almost 0:05:19.800 --> 0:05:23.320 Darwinian culture and a drive to succeed that matched him. 0:05:23.800 --> 0:05:26.800 Staffers were brutal hours, they cut corners, They did some 0:05:26.920 --> 0:05:30.760 really really dodgy shit. None of this bothered skilling in 0:05:30.800 --> 0:05:34.120 the slightest. Now you might be asking how dodgy ed well. 0:05:34.160 --> 0:05:36.480 In two thousand and two thousand and one, California suffered 0:05:36.480 --> 0:05:39.839 a series of electricity blackouts. This shouldn't have happened. California's 0:05:39.880 --> 0:05:42.080 total energy demand at the time was twenty eight gigawats 0:05:42.080 --> 0:05:45.679 and its production capacity was forty five gigawats. California also 0:05:45.680 --> 0:05:48.080 shares a transmission grid with other states and for what 0:05:48.120 --> 0:05:51.279 it's worth, the Canadian provinces of Alberta and British Columbia, 0:05:51.360 --> 0:05:54.400 as well as part of Baja California in Mexico, meaning 0:05:54.400 --> 0:05:56.640 that in the event of a shortage, it could simply 0:05:56.720 --> 0:05:59.960 draw capacity from elsewhere. There's plenty to go around. Did 0:06:00.120 --> 0:06:04.640 that happen? Well? Remember, Enron traded electricity like a commodity, 0:06:04.680 --> 0:06:06.520 and as a result, it was incentivized to get the 0:06:06.560 --> 0:06:09.479 highest possible price for that commodity, so it took power 0:06:09.480 --> 0:06:12.560 plants offline during peak hours and exported power to other 0:06:12.600 --> 0:06:16.400 states where there was real domestic demand. But how does 0:06:16.440 --> 0:06:20.680 a company like Enron shut down a power station? Simple, 0:06:20.760 --> 0:06:24.599 it just asked. In one taped phone conversation released after 0:06:24.640 --> 0:06:27.680 the company's collapse, an Enron employee called Bill called an 0:06:27.680 --> 0:06:30.520 official at a Las Vegas power company California shares the 0:06:30.560 --> 0:06:33.240 same grip with Nevada, and asked him to and I quote, 0:06:33.400 --> 0:06:35.479 get a little creative and come up with a reason 0:06:35.520 --> 0:06:38.360 to go down. Anything you want to do over there, 0:06:38.520 --> 0:06:43.159 any cleaning, anything like that. Very cool. The power crisis 0:06:43.160 --> 0:06:46.280 had dramatic consequences for the people of California, who faced 0:06:46.320 --> 0:06:49.240 power outages and price hikes, for Governor Gray Davis, who 0:06:49.240 --> 0:06:52.240 was recalled by voters and later replaced by Arnold Schwarzenegger, 0:06:52.520 --> 0:06:55.719 for PG and E, which entered Chapter eleven bankruptcy that year, 0:06:55.839 --> 0:06:58.800 and for Southern California Edison, which was pushed at the 0:06:58.800 --> 0:07:02.440 brink of bankkruptcies result. This kind of stuff could only 0:07:02.440 --> 0:07:05.560 happen in an organization whose culture actively rewarded being a 0:07:05.600 --> 0:07:09.880 fucking asshole. In fact, Skilling was seemingly determined to elevate 0:07:09.880 --> 0:07:12.880 the dodgiest of characters to the highest positions within the company, 0:07:13.080 --> 0:07:16.400 and few more more ethically dubious than Andy Fastau, who's 0:07:16.400 --> 0:07:19.240 Skilling mentored like a protege, and who would later become 0:07:19.440 --> 0:07:23.560 Enron's chief financial officer. And you gotta wonder how did 0:07:23.640 --> 0:07:28.360 the CFO hired by Jeff Skilling do well? Even before 0:07:28.400 --> 0:07:31.000 vaulting to the top of Enron's nasty little empire, fast 0:07:31.040 --> 0:07:33.600 I was able to shape its accounting practices, with the 0:07:33.600 --> 0:07:37.960 company adopting mark to market accounting practices in nineteen ninety one. Now, 0:07:38.000 --> 0:07:41.080 mark to market sounds complicated, but it's actually real simple. 0:07:41.360 --> 0:07:43.640 When listing assets on a balance sheet, you don't use 0:07:43.680 --> 0:07:46.400 the acquisition cost like how you paid for him, but 0:07:46.520 --> 0:07:49.880 rather the fair market value of an asset. So if 0:07:49.920 --> 0:07:52.000 I buy a baseball card for a dollar and I 0:07:52.040 --> 0:07:54.280 see that it's currently selling for ten bucks on eBay, 0:07:54.400 --> 0:07:56.240 I'd say that asset is worth ten bucks, not the 0:07:56.240 --> 0:07:58.239 dollar I paid for him, even though I haven't actually 0:07:58.320 --> 0:08:01.800 sold it yet, nor do I not if anyone's interested. Now, 0:08:01.800 --> 0:08:05.280 this sounds simple, maybe even reasonable, But the problem is 0:08:05.280 --> 0:08:07.920 that the way you determine the value of an asset matters, 0:08:07.960 --> 0:08:10.920 and marked to market accounting allows companies and individuals to 0:08:11.000 --> 0:08:16.400 exercise some what's the word creativity. Sure, for publicly traded companies, 0:08:16.440 --> 0:08:19.040 where the price of a share is verifiable and open knowledge, 0:08:19.040 --> 0:08:21.800 it's not too bad. But for assets with limited liquidity, 0:08:22.000 --> 0:08:25.280 limited buyers, or where the process to be engineered somehow, 0:08:25.520 --> 0:08:28.640 you have a lot of latitude for fraud. Now, let's 0:08:28.640 --> 0:08:31.400 go back to that baseball card example. How do you 0:08:31.400 --> 0:08:33.400 know it's actually worth ten bucks and not one dollar? 0:08:33.679 --> 0:08:37.120 What is the fair value of something you can't check 0:08:37.120 --> 0:08:40.720 on any babe, what somebody told me in person it's worth. 0:08:40.920 --> 0:08:42.800 What's to stop me from lying in saying that the 0:08:42.840 --> 0:08:45.839 card is worth a one hundred dollars or one thousand dollars, Well, 0:08:46.880 --> 0:08:49.800 other than the fact that I'd be committing fraud. Now, 0:08:49.840 --> 0:08:52.640 what if I have ten one dollar baseball cards and 0:08:52.880 --> 0:08:55.080 I give my friend ten dollars, and I tell him 0:08:55.160 --> 0:08:57.640 by one of my baseball cards using that ten dollar 0:08:57.640 --> 0:09:00.640 bill that I just handed him, and allows me to 0:09:00.640 --> 0:09:03.120 say that I've now realized a nine dollar profit on 0:09:03.120 --> 0:09:05.240 one of my one dollar baseball cards, and my other 0:09:05.320 --> 0:09:08.400 cards are now because I just did that worth ninety 0:09:08.440 --> 0:09:11.439 dollars and not nine dollars. Now, what if I use 0:09:11.520 --> 0:09:14.880 that valuation, that phone evaluation of my remaining cards to 0:09:14.880 --> 0:09:17.679 get a fifty dollar loan using those cards as collateral, 0:09:18.160 --> 0:09:21.199 even though the collateral itself isn't worth even one fifth 0:09:21.240 --> 0:09:37.400 of the value of the loan. You get the idea. Well, 0:09:37.440 --> 0:09:39.520 A lot of things people can do to alter the 0:09:39.520 --> 0:09:42.000 marked to market value of an asset ah illegal and 0:09:42.040 --> 0:09:44.959 would be covered under generic fraud laws. It doesn't change 0:09:45.000 --> 0:09:47.240 the fact that marked to market accounting allows for some 0:09:47.280 --> 0:09:51.400 shenanigans to take place. Another trait of marked to market accounting, 0:09:51.400 --> 0:09:53.719 as employed by Enron is that it would count all 0:09:53.760 --> 0:09:56.920 the long term potential revenue for a deal as quarterly revenue, 0:09:57.000 --> 0:09:58.960 even if that revenue would be delivered over the course 0:09:58.960 --> 0:10:02.240 of a decades long contra or if the contract would 0:10:02.280 --> 0:10:06.440 be terminated before its intended expiration DAME. It would also 0:10:06.600 --> 0:10:09.880 realize potential revenue as actual revenue even before money changed 0:10:09.880 --> 0:10:13.559 hands and when the conclusion of the deal wasn't a certainty. 0:10:13.600 --> 0:10:16.080 For example, in nineteen ninety nine, Enron sold a stake 0:10:16.120 --> 0:10:20.079 in four different electricity generating barges in Nigeria. They're basically 0:10:20.080 --> 0:10:23.520 floating power stations, sold and sold it to Merrill Lynch, 0:10:23.559 --> 0:10:26.320 which allowed the company to register twelve million dollars in profit. 0:10:27.120 --> 0:10:30.280 One little problem that sale didn't actually happen, though that 0:10:30.360 --> 0:10:33.360 didn't stop Enron from selling pieces to Meyal Lynch, which 0:10:33.400 --> 0:10:36.600 I'm not kidding. Merril Lynch then sold to a special 0:10:36.600 --> 0:10:41.160 purpose vehicle called LJM two. You'll never guess who owned that. 0:10:41.520 --> 0:10:44.720 It was controlled by Andrew Fastau. Yep, remember that guy. 0:10:44.720 --> 0:10:47.800 You're gonna hear that name again. Although the Meryl Lynch 0:10:47.840 --> 0:10:50.960 bankers who participated in the deal were eventually convicted of 0:10:51.000 --> 0:10:54.360 fraud and conspiracy charges long after the collapse of Enron. 0:10:54.400 --> 0:10:57.680 Of course, the convictions were later questioned on appeal, Thank 0:10:57.760 --> 0:11:00.600 you government, but still, for a moment, gave a jolt 0:11:00.640 --> 0:11:04.800 to Enron's quarterly earnings. Anyway, Enron was incredibly creative when 0:11:04.840 --> 0:11:07.440 it came to how it valued assets. Take, for example, 0:11:07.600 --> 0:11:11.280 fiber optic cables. As the dot com bubble swelled, Enron 0:11:11.320 --> 0:11:13.600 saw an opportunity and wanted to be able to trade 0:11:13.640 --> 0:11:15.960 and control the supply of bandwidth, just like it did 0:11:15.960 --> 0:11:19.840 with other more conventional commodities like oil and gas. It built, bought, 0:11:19.920 --> 0:11:22.520 and leased fiber optic cables throughout the country, and then, 0:11:22.840 --> 0:11:26.280 using exaggerated estimates of their value and potential long term revenue, 0:11:26.480 --> 0:11:29.280 released glowing financial reports that made the company look a 0:11:29.280 --> 0:11:31.800 lot more healthy and successful than it actually was. Whatever 0:11:31.840 --> 0:11:35.760 would be quick digression here. One of the funniest ironies 0:11:35.760 --> 0:11:37.880 of Enron is that it was in many ways ahead 0:11:37.880 --> 0:11:40.120 of its time, when most people were still connecting to 0:11:40.200 --> 0:11:42.960 the Internet through screeching fifty six K dial up modems. 0:11:42.960 --> 0:11:45.480 It saw a future in edge and cloud computing, even 0:11:45.520 --> 0:11:48.440 if said terms didn't exist at the time, and streaming 0:11:48.520 --> 0:11:51.680 video here's a funny one. In two thousand, it entered 0:11:51.679 --> 0:11:54.080 into a twenty year deal with Blockbuster Video to allow 0:11:54.160 --> 0:11:57.680 customers to stream films and TV shows through Enron's fiber network, 0:11:58.000 --> 0:12:00.520 something that would take at Netflix and other decade to 0:12:00.559 --> 0:12:03.760 realize as a product now. There wasn't really much of 0:12:03.760 --> 0:12:06.199 a market for at the time because broadbam was pretty 0:12:06.320 --> 0:12:10.200 rare back then, nor was it necessarily technologically possible. But 0:12:10.240 --> 0:12:13.040 it was such a fun idea. People really liked it. 0:12:13.040 --> 0:12:15.360 It was a good idea. Everyone wanted it to happen. 0:12:15.440 --> 0:12:18.360 Not really though, Anyway. The deal collapsed after a year, 0:12:18.840 --> 0:12:21.440 but that didn't stop Enron's creative accountants from booking the 0:12:21.440 --> 0:12:24.280 deal based on its projective future revenue as a profitable 0:12:24.400 --> 0:12:27.640 venture mark to market accounting. Baby, you gotta love it. 0:12:27.679 --> 0:12:30.000 We love it, don't we, folks? All right, I'll stop 0:12:30.000 --> 0:12:32.680 doing the impression. Still, it's hilarious to think about a 0:12:32.679 --> 0:12:35.160 future world in which Blockbuster and Enron stuck it out 0:12:35.200 --> 0:12:36.959 and the former didn't collapse. Around the time of the 0:12:36.960 --> 0:12:42.040 global financial crisis, Enron also loved making special purpose vehicles 0:12:42.040 --> 0:12:45.000 that existed either to generate revenue that didn't exist or 0:12:45.040 --> 0:12:47.680 to hold toxic assets that would otherwise need to be disclosed, 0:12:47.720 --> 0:12:50.720 with Enron then using its holdings insid entities to boost 0:12:50.720 --> 0:12:54.480 its balance sheet. One White Wing was created and capitalized 0:12:54.480 --> 0:12:57.680 by Enron hand an outside investor, and pretty much exclusively 0:12:57.720 --> 0:13:00.520 bought assets from Enron, which allowed the company to recognized 0:13:00.520 --> 0:13:02.640 sales and profits on its balance sheets even when they 0:13:02.679 --> 0:13:07.160 were fundamentally contrived. Another set of entities known as LJM, 0:13:07.280 --> 0:13:09.760 named after the first initial of Andy Fasthou's wife and 0:13:09.800 --> 0:13:12.840 two children, which I mentioned earlier, did the same thing, 0:13:13.160 --> 0:13:16.040 allowing the company to hide risky or failing investments, to 0:13:16.120 --> 0:13:20.439 limit its perceived debt, and to generate artificial profits and revenues. 0:13:20.800 --> 0:13:23.920 LJM two was creatively the second version of this idea. 0:13:24.559 --> 0:13:28.000 Even though the assets that LJM held were ultimately dog shared, 0:13:28.080 --> 0:13:31.640 the distance that LJM provided, combined with Enron's use of 0:13:31.679 --> 0:13:34.040 marked to market accounting, allowed the company to turn a 0:13:34.120 --> 0:13:37.040 multi billion collective failure into a resounding and on paper 0:13:37.080 --> 0:13:40.640 profitable triumph. So how did this happen? How did it 0:13:40.640 --> 0:13:43.840 go on for so long? Well? First, Enron was that 0:13:43.880 --> 0:13:46.680 it is peak worth seventy billion dollars. Its fail would 0:13:46.679 --> 0:13:49.240 be a failure for its investors in shareholders and nobody 0:13:49.360 --> 0:13:52.120 besides the press that is wanted to ask tough questions 0:13:52.520 --> 0:13:55.560 remember when they did that. Anyway, he had auditors, but 0:13:55.559 --> 0:13:57.559 they were paid handsomely, turning a blind eye to the 0:13:57.600 --> 0:14:01.120 criminal malfeasans at the heart of Enron to Arthur Anderson 0:14:01.200 --> 0:14:03.880 surrendered its license in two thousand and two, bringing an 0:14:03.960 --> 0:14:06.480 end to the company and resulting in eighty five thousand 0:14:06.480 --> 0:14:12.560 employees losing their jobs. Well, look, it's not so much. 0:14:12.600 --> 0:14:15.440 It only turned a blind eye as much as it 0:14:15.480 --> 0:14:19.440 turned on a big paper shredder treading tons. And I'm 0:14:19.560 --> 0:14:22.880 actually being literal. That's a measure of weight and not 0:14:23.080 --> 0:14:26.440 figuratively of documents as Enron started to implode, a crime 0:14:26.440 --> 0:14:29.920 for which it was later convicted of obstruction of justice. 0:14:29.960 --> 0:14:33.000 But I've already talked about Enron's culture. But I'd be 0:14:33.080 --> 0:14:35.520 remiss if I didn't mention that Enron's highest performers and 0:14:35.560 --> 0:14:39.520 its leadership received hefty bonuses in company equity, motivating them 0:14:39.520 --> 0:14:42.680 to keep the charade going. Mron's pension scheme I had 0:14:42.760 --> 0:14:46.440 was basically entirely Enron stock, and employees were regularly encouraged 0:14:46.480 --> 0:14:48.960 to buy more, with Kenneth Lay telling employees weeks before 0:14:48.960 --> 0:14:53.120 the company's collapse that and I quote the company is 0:14:53.200 --> 0:14:56.960 fundamentally sound and that they should hang on to their stock. 0:14:58.240 --> 0:15:01.160 VIDID did use the word fundamentally. They used that, but 0:15:01.280 --> 0:15:04.480 it's not in videos, not Enron. It's not. It's really different. 0:15:04.480 --> 0:15:06.400 They're not doing this. I swear to God, I just 0:15:06.680 --> 0:15:11.560 don't love the language anyway. Additionally, by the terms of 0:15:11.560 --> 0:15:14.320 the Enron pension plan, employees were prevented from shifting their 0:15:14.320 --> 0:15:17.200 holdings into other pension funds or other investments until they 0:15:17.200 --> 0:15:21.000 turned fifty. When the company collapsed, those people lost everything, 0:15:21.080 --> 0:15:24.480 even those who didn't know about Enron's criminality. George Maddock's, 0:15:24.520 --> 0:15:27.760 a retired former Enron employee, had his entire retirement tied 0:15:27.800 --> 0:15:30.160 up in fourteen thousand Enron shares, worth at the time 0:15:30.200 --> 0:15:33.240 more than one point three million dollars. He was forced 0:15:33.280 --> 0:15:35.520 to spend his golden years making ends meet by bowing 0:15:35.560 --> 0:15:38.160 pastures and living in a run down East Texas farmhouse. 0:15:39.080 --> 0:15:42.800 The US government brought criminal charges against Enron's top leadership. 0:15:43.280 --> 0:15:45.440 Ken Lay was convicted of four counts of fraud and 0:15:45.480 --> 0:15:48.200 making false statements, but died on a skiing vacation to 0:15:48.280 --> 0:15:52.240 Aspen before sentencing. May he burn in Hell? Maybe Ronald 0:15:52.280 --> 0:15:54.080 Reagan and him could get in the hot tub together, 0:15:54.200 --> 0:15:56.520 the hot tub scot lava in him not feeling particularly 0:15:56.520 --> 0:15:59.480 creative on that one anyway. Jeff Skilling was convicted of 0:15:59.480 --> 0:16:02.240 twenty four n fraud and conspiracy and sentenced to twenty 0:16:02.240 --> 0:16:05.160 four years in jail. This was of course reduced in 0:16:05.200 --> 0:16:07.720 twenty thirteen on appeal to fourteen years, and he was 0:16:07.760 --> 0:16:09.760 released to a half way house in twenty eighteen and 0:16:09.800 --> 0:16:13.400 then freed in twenty nineteen. He's since then tried to 0:16:13.560 --> 0:16:16.680 re enter the energy sector with one venture combining energy 0:16:16.680 --> 0:16:20.240 trading and I kid you not blockchain technology, although nothing 0:16:20.280 --> 0:16:23.480 really came of him. I want to take this moment 0:16:23.840 --> 0:16:26.200 to give a big shout out to Quartz, which, when 0:16:26.240 --> 0:16:29.240 covering Skillings attempt to come back, had this opening line 0:16:29.280 --> 0:16:31.680 and I quote Jeffrey Skilling, those are a thing or 0:16:31.720 --> 0:16:34.960 two of our blocks and chains. Woo get his ass. 0:16:36.040 --> 0:16:39.000 Andy Fastau pled guilty to two counts, one of manipulation 0:16:39.080 --> 0:16:41.880 of financial statements and one of self dealing, and received 0:16:41.920 --> 0:16:45.600 ten years in prison. This was has ever later reduced 0:16:45.600 --> 0:16:47.840 to six years, including two years of probation, in part 0:16:47.840 --> 0:16:52.240 Becsey cooperated with the investigations against other Enron executives. He's 0:16:52.280 --> 0:16:54.320 now a public speaker and a tech investor in a 0:16:54.400 --> 0:16:59.080 company and AI company called Keene Corp. His wife, Leah, 0:16:59.080 --> 0:17:01.440 who also worked at en On, received twelve months for 0:17:01.480 --> 0:17:03.960 conspiracy to commit wire fraud and money laundering and for 0:17:04.000 --> 0:17:07.200 submitting false tax returns. She was released from custody in 0:17:07.240 --> 0:17:11.240 two thousand and five. Enron's implosion was entirely self inflicted 0:17:11.280 --> 0:17:15.400 and horrifyingly painfully criminal. Yet it had plenty of collateral 0:17:15.440 --> 0:17:18.159 damage to the US economy, to those companies that lent 0:17:18.280 --> 0:17:20.359 him money, to its employees who lost their jobs and 0:17:20.400 --> 0:17:23.120 their life savings and their retirements, and to those employees 0:17:23.119 --> 0:17:25.320 that the companies most intangled with Enron, like those that 0:17:25.400 --> 0:17:29.880 ausering firm Arthur Anderson. This isn't unique among corporate failures. 0:17:30.000 --> 0:17:33.959 WelCom had some dodgy accounting practices. Nortel too. Both companies failed, 0:17:34.000 --> 0:17:36.480 Both companies wrecked the lives of their employees, and these 0:17:36.480 --> 0:17:41.000 failures had systemic economic consequences, especially in Canada, where Nortel 0:17:41.080 --> 0:17:43.159 had its peak accounted for one third of the market 0:17:43.160 --> 0:17:46.359 cap of all companies in the Toronto Stock Exchange. The 0:17:46.400 --> 0:17:49.440 reason why Enron remains captured in our imagination and why 0:17:49.560 --> 0:17:52.760 Nvidia is so vociferously opposed to being compared to him, 0:17:53.119 --> 0:17:55.520 is the extent to which Enron and manipulated reality to 0:17:55.520 --> 0:17:57.840 appear stronger and more successful than it was, and how 0:17:57.840 --> 0:17:59.879 long it was able to get away with him. We 0:18:00.119 --> 0:18:02.320 may have forgotten the memory of Enron. It happened over 0:18:02.359 --> 0:18:05.400 two decades ago. After all, we haven't forgotten the instincts 0:18:05.400 --> 0:18:07.240 that it gave us. It's why on those is twitch 0:18:07.280 --> 0:18:10.159 when we see special purpose vehicles being used to buy GPUs, 0:18:10.280 --> 0:18:13.280 and while we gag when we see mark to market accounting. 0:18:14.280 --> 0:18:17.520 It's entirely possible. I genuinely believe this, that everything in 0:18:17.640 --> 0:18:22.760 Video is doing is above board. Really it's great. Doesn't 0:18:22.760 --> 0:18:24.879 do anything to help the deep pit of dread in 0:18:24.960 --> 0:18:43.720 my stomach, though. Now let's remind ourselves of watching video 0:18:43.880 --> 0:18:46.600 Is It's a company that previously focused on gaming or 0:18:46.680 --> 0:18:50.040 into GPUs graphics processing units, but thanks to a stroke 0:18:50.119 --> 0:18:52.359 of forethought, managed to be the company that sells the 0:18:52.359 --> 0:18:56.000 shovels for the current AI bubble. It's data center. GPUs 0:18:56.040 --> 0:18:58.639 are expensive. They all rely on a technology that in 0:18:58.720 --> 0:19:01.760 Video created two decades ago called Kuda, which no other 0:19:01.800 --> 0:19:04.080 competitor has an alternative to, or at least one with 0:19:04.160 --> 0:19:07.600 the maturity and depth and functionality, and no other company 0:19:07.600 --> 0:19:10.200 shares its focus on this arena, at least not one 0:19:10.200 --> 0:19:13.280 with its history. These gps are expensive, and thanks to 0:19:13.359 --> 0:19:16.640 Nvidia's near monopoly status, it's seen its share price growth 0:19:16.640 --> 0:19:19.639 by over three hundred and fifty percent at the time 0:19:19.720 --> 0:19:22.199 of writing in the past five years. It's now the 0:19:22.200 --> 0:19:24.960 most valuable company in the world by market capitalization, and 0:19:25.000 --> 0:19:28.760 it's insanely, insanely profitable. If you're looking at this through 0:19:28.800 --> 0:19:31.879 the cold, unthinking lens of late stage capitalism, this all 0:19:31.920 --> 0:19:34.919 sounds really good. I've basically described a company that has 0:19:34.920 --> 0:19:37.080 an essential monopoly and the one thing required for a 0:19:37.200 --> 0:19:40.840 high growth if we're talking exclusively about capex spending industry 0:19:40.840 --> 0:19:44.320 to ever exist. Moreover, that monopoly is all but assured 0:19:44.359 --> 0:19:47.560 thanks to Invidia's Kuda mote, its first move for advantage, 0:19:47.560 --> 0:19:51.160 and its actual capacities and capabilities of the products itself, 0:19:51.280 --> 0:19:54.120 on top of the massive shipping and hardware operation at Bill, 0:19:54.400 --> 0:19:56.639 thereby allowing the company to charge a pretty penny to 0:19:56.680 --> 0:20:01.040 its customers. And those customers, well, if we've temporarily forget 0:20:01.040 --> 0:20:03.240 about the likes of Nebuus and Core, we even how 0:20:03.320 --> 0:20:05.880 I wish I could forget about Core, we've permanently we're 0:20:05.880 --> 0:20:08.119 talking about the biggest companies on the planet, ones that 0:20:08.359 --> 0:20:11.520 surely will have no problems paying their bills. But my 0:20:11.640 --> 0:20:17.320 worry is a little simpler and more direct, because I'm 0:20:17.359 --> 0:20:21.560 worried about the certainty that these purchases are being made 0:20:21.600 --> 0:20:24.800 for the right or most prudent of reasons. Back in 0:20:24.840 --> 0:20:27.560 February twenty twenty three, I put out the rot economy 0:20:27.600 --> 0:20:30.359 and how everything in tech has become oriented around growth 0:20:30.400 --> 0:20:33.720 at all cost, even if it meant making products harder 0:20:33.760 --> 0:20:36.240 to use as a means of increasing user engagement or 0:20:36.280 --> 0:20:39.320 funneling them towards more profitable parts of an app. Back 0:20:39.320 --> 0:20:41.280 in June twenty twenty four, I wrote and did an 0:20:41.320 --> 0:20:43.800 episode about the rock Com bubble and my greater theory 0:20:43.840 --> 0:20:46.640 that the tech industry has run out of hypergrowth ideas. 0:20:47.080 --> 0:20:50.480 In simple terms, big Tech, Amazon, Google, Microsoft, and Meta, 0:20:50.640 --> 0:20:53.159 but also a number of other companies no longer have 0:20:53.280 --> 0:20:55.919 a next big thing and jumped on AI out of 0:20:55.920 --> 0:20:59.800 an abundance of desperation. Shit. Look at Oracle. This company's 0:20:59.800 --> 0:21:03.000 start off by selling databases and ERP systems to big 0:21:03.040 --> 0:21:05.760 companies and then trapping said companies by making it really 0:21:05.760 --> 0:21:08.119 really difficult to migrate to cheaper and better solutions, and 0:21:08.119 --> 0:21:11.159 then bleeding said companies with ownerous licensing terms, including some 0:21:11.240 --> 0:21:13.439 where you're paid by the number of CPU cours that 0:21:13.440 --> 0:21:16.719 you use the application. Fucking Oracle. It doesn't do anything 0:21:16.760 --> 0:21:20.240 new or exciting or impressive, and even with when presented 0:21:20.280 --> 0:21:22.719 with the opportunity to do things that are useful or 0:21:22.160 --> 0:21:25.640 in innovative, like when it bought some microsystems, it turns away. 0:21:25.880 --> 0:21:28.840 I imagine that deep down Oracle recognizes that its current 0:21:29.000 --> 0:21:32.280