Part Two: NVIDIA Isn't Enron - So What Is It?

0:00This is an iHeart Podcast. Guaranteed Human. This is Sophie Cunningham from Show Me Something. Do you know the symptoms of moderate to severe obstructive sleep apnea or OSA in adults with obesity? They may be happening to you without you knowing. If anyone has ever said you snored loudly or if you spend your days fighting off excessive tiredness, irritability, and concentration issues, it may be due to OSA. OSA is a serious condition where your airway partially or completely collapses during sleep, which may cause breathing interruptions and oxygen deprivation. Learn more at don'tsleep on osa.com.

0:39This information is provided by Lilly, a medicine company. Running a business is hard enough. Don't make it harder with a dozen apps that don't talk to each other. One for sales, another for inventory, a separate one for accounting. That's software overload. Odo is the all-in-one platform that replaces them all. CRM, accounting, inventory, e-commerce, HR. Fully integrated, easy to use, and built to grow with your business. Thousands have already made the switch. Why not you? Try Odo for free at O-D-O-O dot com. That's Odo dot com. Support for the show comes from Public, the investing platform for those who take it seriously.

1:17On public, you can build a multi-asset portfolio of stocks, bonds, options, crypto, and now generated assets, which allow you to turn any idea into an investable index with AI. It all starts with your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20 % year over year, you can literally type any prompt and put the AI to work. It screens thousands of stocks, builds a one-of-a-kind index, and lets you backtest it against the S &P 500. Then you can invest in a few clicks. Generated assets are like EFTs with infinite possibilities, completely customizable and based on your thesis, not someone else's.

1:55Go to public.com slash podcast and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash podcast. Paid for by Public Investing. Brokerage services by Open to the Public Investing, Inc. Member FINRA, SIPC. Advisory services by Public Advisors, LLC. SEC Registered Advisor. Generated assets is an interactive analysis tool. Output is for informational purposes only and is not investment recommendation or advice. Complete disclosures available at public.com slash disclosures. Wells Fargo announced a new$20 million program in 2025, teaming up with nonprofits to support small business owners.

2:30That's how Wells Fargo is helping strengthen small businesses and communities. Wells Fargo, the bank of doing. Learn more at wellsfargo.com slash say do. Call Zone Media. Hello and welcome to Better Offline, I'm Ed Zitron and I'm nothing like Enron.

3:01Now this is the second episode in the Nvidia Enron series and to give you a recap, a few weeks ago a document from Nvidia leaked where the company denied that it was anything like Enron at all. but what was Enron now some of you might know this some of you might not but I think it's time to remind everyone what Enron was and what Enron did and why Enron was so I don't know if we should say special but it sure was Enron now the collapse of Enron wasn't just in retrospect a large business that ultimately failed if that's all it was it wouldn't come on the same space in our heads as other failures like WorldCom or Nortel which I'll actually get to later I talked about WorldCom last episode, both of whom were similarly considered giants in their fields, by the way.

3:45It's also not just about the fact that Enron failed because of proven business and accounting fraud. WorldCom entered bankruptcy due to similar circumstances, though, rather than being liquidated. And this is kind of a mindfuck, so forgive me. It was acquired as part of Verizon's acquisition of MCI, the name of a company that had previously merged with WorldCom that WorldCom renamed itself to after bankruptcy. This era sucked. And unlike Enron, WorldCom isn't the subject of multiple films and even a Broadway production. And my editor saw the UK tour of that, and apparently it was pretty good. You ask Matt Hughes if you want to know more.

4:19And it's also not the size of Enron that made its downfall so intriguing. Nor, for that matter, is it the fact that Enron did a lot of legally and ethically dubious stuff to bring about its downfall. No, what makes Enron special is the sheer gravity of its fuckery, the rotten culture at the heart of the company that encouraged said malfeasance and the creative ways Enron's leaders crafted an image of success around what was, at its heart, a big fat dog of a company. Enron was born in 1985 out on the foundations of two older, much less interesting businesses. The first, Houston Natural Gas, HNG, started life as a utility provider, pumping natural gas from the oil fields of Texas to customers throughout the region, before later exiting the industry to focus on other opportunities.

5:02The other, InterNorth, was based in Omaha, Nebraska, and was in the same business, Pipelines. In the mid-1980s, H &G was the subject of a hostile takeover from Coastal Corporation, which until 2001, operated a chain of refineries and gas stations throughout much of the US mainland. Unable to fend it off by itself, H &G merged with InterNorth, with the combined corporation renamed Enron. The CEO of this new entity was called Ken Lay, an economist by trade who spent most of his career in the energy sector, who also enjoyed deep political connections with the Bush family. He co-chaired George H.W.

5:37Bush's failed 1992 re-election campaign and allowed Enron's corporate jet to ferry Bush Sr. and Barbara Bush back and forth to Washington. Center for Public Integrity Director Charles Lewis said that there was, and I quote, no company in America closer to George W. Bush, then Enron. George W. Bush, and I mean the second one, even had a nickname for Leigh, Kenny Boy. Anyway, in 1987, Enron hired McKinsey, the world's most evil management consultancy firm, to help the company create a futures market for natural gas. What that means isn't particularly important to the story, but essentially a futures contract is where a company agrees to buy or sell an asset in the future at a fixed price.

6:16It's a way of hedging against risk, whether that be from something like price or currency fluctuations or from default. If you're buying oil in dollars, for example, buying a futures contract for oil to be delivered in six months' time at a predetermined price means that if your currency weakens against the dollar, your costs won't spiral. That bit isn't terribly important. What does matter is while working with McKinsey, Lay met someone named Jeff Skilling, a young engineer turned consultant who impressed the company's CEO deeply. So much so that Lay decided to poach him from McKinsey in 1990 and give him the role of chairman and CEO of Enron Finance Group.

6:51Oh, by the way, Enron had a bunch of subsidiaries and some had their own CEOs and boards. I mention this because you may be a bit confused as Lei was CEO of Enron and Skilling was CEO of Enron Finance Group. In essence, it's a bit like how Sam Altman is CEO of OpenAI and Fiji Simo is the CEO of Applications. That bit isn't important, but I just want to be as explicit as possible. I don't think OpenAI as Enron either. At least I hope. Anyway, Skilling continued to impress Lay, who gave him greater and greater responsibility, eventually crowning him chief operating officer of Enron itself. With Skilling in a key leadership position, he was able to shape the organization's culture.

7:29He appreciated those who took risks, even if those risks, when viewed with impartial eyes, were deemed reckless or even criminal. He introduced the practice of stack ranking, also known as Rankin Yang, to Enron, which had previously been pioneered by Jack Welch, a general electric, and you should listen to the shareholder supremacy from last year if you want to hear what I think about that redacted guy. Here, employees were graded on a scale, and those at the bottom of the scale were terminated. Managers had to place at least 10%, other reports say closer to 15 % of employees in the lowest bracket, which created an almost Darwinian culture and a drive to succeed that matched him.

8:05Staffers worked brutal hours. They cut corners. they did some really, really dodgy shit. None of this bothered skilling in the slightest. Now, you might be asking, how dodgy, Ed? Well, in 2000 and 2001, California suffered a series of electricity blackouts. This shouldn't have happened. California's total energy demand at the time was 28 gigawatts, and its production capacity was 45 gigawatts. California also shares a transmission grid with other states, and for what it's worth, the Canadian provinces of Alberta and British Columbia, as well as part of Baja California and Mexico, meaning that in the event of a shortage, it could simply draw capacity from elsewhere.

8:39There's plenty to go around. So how did that happen? Well, remember, Enron traded electricity like a commodity, and as a result, it was incentivized to get the highest possible price for that commodity. So it took power plants offline during peak hours and exported power to other states where there was real domestic demand. But how does a company like Enron shut down a power station? Simple, it just asked. In one taped phone conversation released after the company's collapse, an Enron employee called Bill called an official at a Las Vegas power company, California shares the same grid with Nevada, and asked him to, and I quote, get a little creative and come up with a reason to go down.

9:18Anything you want to do over there? Any cleaning? Anything like that? Very cool. The power crisis had dramatic consequences for the people of California who faced power outages and price hikes, for Governor Gray Davis, who was recalled by voters and later replaced by Arnold Schwarzenegger, for PG &E, which entered Chapter 11 bankruptcy that year, and for Southern California Edison, which was pushed to the brink of bankruptcy as a result. This kind of stuff could only happen in an organization whose culture actively rewarded being a fucking arsehole. In fact, Skilling was seemingly determined to elevate the dodgiest of characters to the highest positions within the company, and few were more ethically dubious than Andy Fastow, who Skilling mentored like a protege, who would later become Enron's chief financial officer.

10:02And you gotta wonder, how did the CFO hired by Jeff Skilling do? Well, even before vaulting to the top of Enron's nasty little empire, Fastha was able to shape its accounting practices, with the company adopting mark-to-market accounting practices in 1991. Now, mark-to-market sounds complicated, but it's actually real simple. When listing assets on a balance sheet, you don't use the acquisition cost, like how you paid for it, but rather the fair market value of an asset. So if I buy a baseball card for a dollar and I see that it's currently selling for 10 bucks on eBay, I'd say that asset is worth 10 bucks, not the dollar I paid for it, even though I haven't actually sold it yet.

10:40Nor do I know if anyone's interested. Now, this sounds simple, maybe even reasonable, but the problem is that the way you determine the value of an asset matters. And mark-to-market accounting allows companies and individuals to exercise some, what's the word, creativity. Sure, for publicly traded companies where the price of a share is verifiable and open knowledge, it's not too bad. But for assets with limited liquidity, limited buyers, or where the price has to be engineered somehow, you have a lot of latitude for fraud. Now let's go back to that baseball card example. How do you know it's actually worth$10 and not$1?

11:14What is the fair value of something you can't check on eBay, but what somebody told me in person it's worth? What's to stop me from lying and saying that the card is worth a hundred dollars or a thousand dollars well other than the fact that i'd be committing fraud now what if i have 10 one dollar baseball cards and i give my friend ten dollars and i tell him buy one of my baseball cards using that ten dollar bill that i just handed him and this allows me to say that i've now realized a nine dollar profit on one of my one dollar baseball cards and my other cards are now because i just did that worth$90 and not$9.

11:51Now, what if I use that valuation, that phony valuation of my remaining cards to get a$50 loan using those cards as collateral, even though the collateral itself isn't worth even one-fifth of the value of the loan? You get the idea.

12:19One for sales, another for inventory, a separate one for accounting. Before you know it, you are drowning in software instead of growing your business. This is where Odoo comes in. Odoo is the only business software you'll ever need. It's an all-in-one, fully integrated platform that handles everything. CRM, accounting, inventory, e-commerce, HR, and more. No more app overload. No more juggling logins. Just one seamless system that makes work easier. And the best part? Odoo replaces multiple expensive platforms for a fraction of the cost. It's built to grow with your business, whether you are just starting out or already scaling up.

12:56Plus, it's easy to use, customizable, and designed to streamline every process, so you can focus on what really matters, running your business. Thousands of businesses have made the switch, so why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. Support for the show comes from Public, the investing platform for those who take it seriously. On Public, you can build a multi-asset portfolio of stocks, bonds, options, crypto, and now generated assets, which allow you to turn any idea into an investable index with AI. It all starts with your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20 % year over year, you can literally type any prompt and put the AI to work.

13:41It screens thousands of stocks, builds a one-of-a-kind index, and lets you backtest it against the S &P 500. Then, you can invest in a few clicks. Generated assets are like EFTs with infinite possibilities. Completely customizable and based on your thesis, not someone else's. Go to public.com slash podcast and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash podcast. Paid for by Public Investing. Brokerage services by Open to the Public Investing, Inc. Member FINRA SIPC. Advisory services by Public Advisors, LLC. SEC registered advisor. Generated assets is an interactive analysis tool.

14:17Output is for informational purposes only and is not investment recommendation or advice. Complete disclosures available at public.com slash disclosures. Hey, audiobook lovers. This week on the podcast, I'm sitting down with musician, producer, and walking encyclopedia, Questlove. We're talking about Mark Ronson's memoir, Night People, How to Be a DJ in 90s New York City. All right, like we talked about before, Mark Ronson found sanctuary in the DJ booth. What's a tool or piece of equipment in the studio or on stage that gives you the most control? So I have two microphones on stage. We have the microphone that you hear as the audience.

14:54Then we have a second microphone in which we communicate with each other. I feel like that second microphone kind of saved all of our friendships. No band likes each other after 20 years or 25 years. The Beatles broke up in seven and a half years, and we're going on 35. Listen to Earsay, the Audible and iHeart Audiobook Club on the iHeartRadio app or wherever you get your podcasts.

15:49Ulta Beauty. Gifting happens here.

16:01While a lot of things people can do to alter the mark-to-market value of an asset are illegal and would be covered under generic fraud laws, it doesn't change the fact that mark-to-market accounting allows for some shenanigans to take place. Another trait of mark-to-market accounting, as employed by Enron is that it would count all the long-term potential revenue from a deal as quarterly revenue, even if that revenue would be delivered over the course of a decades-long contract, or if the contract would be terminated before its intended expiration date. It would also realize potential revenue as actual revenue, even before money changed hands and when the conclusion of the deal wasn't a certainty.

16:38For example, in 1999, Enron sold a stake in four different electricity-generating barges in Nigeria. They're basically floating power stations. and sold it to Merrill Lynch, which allowed the company to register$12 million in profit. One little problem. That sale didn't actually happen, though that didn't stop Enron from selling pieces to Merrill Lynch, which I'm not kidding. Merrill Lynch then sold to a special purpose vehicle called LJM2. You'll never guess who owned that. It was controlled by Andrew Fastow. Yep, remember that guy? You're going to hear that name again. Although the Merrill Lynch bankers who participated in the deal were eventually convicted of fraud and conspiracy charges, long after the collapse of Enron, of course.

17:19Their convictions were later quashed on appeal. Thank you, government. But still, for a moment, it gave a jolt to Enron's quarterly earnings. Anyway, Enron was incredibly creative when it came to how it valued assets. Take, for example, fiber optic cables. As the dot-com bubble swelled, Enron saw an opportunity and wanted to be able to trade and control the supply of bandwidth, just like it did with other more conventional commodities like oil and gas. It built, bought, and leased fiber optic cables throughout the country, and then, using exaggerated estimates of their value and potential long-term revenue, released glowing financial reports that made the company look a lot more healthy and successful than it actually was or ever would be.

17:57Quick digression here. One of the funniest ironies of Enron is that it was, in many ways, ahead of its time. When most people were still connecting to the internet through screeching 56k dial-up modems, it saw a future in edge and cloud computing, even if said terms didn't exist at the time, and streaming video. Here's a funny one. In 2000, it entered into a 20-year deal with Blockbuster Video to allow customers to stream films and TV shows through Enron's Fiber Network, something that would take Netflix another decade to realize it's a product. Now, there wasn't really much of a market for it at the time, because broadband was pretty rare back then, nor was it necessarily technologically possible, but it was such a fun idea.

18:36People really liked it. It was a good idea. Everyone wanted it to happen. Not really, though. Anyway, the deal collapsed after a year, but that didn't stop Enron's creative accountants from booking the deal based on its projected future revenue as a profitable venture. Mark-to-market accounting, baby. You gotta love it. We love it, don't we, folks? All right, I'll stop doing the impression. Still, it's hilarious to think about a future world in which Blockbuster and Enron stuck it out and the former didn't collapse around the time of the global financial crisis. Enron also loved making special purpose vehicles that existed either to generate revenue that didn't exist or to hold toxic assets that would otherwise need to be disclosed, with Enron then using its holdings in said entities to boost its balance sheet.

19:17One, Whitewing, was created and capitalized by Enron and an outside investor and pretty much exclusively bought assets from Enron, which allowed the company to recognize sales and profits on its balance sheets even when they were fundamentally contrived. Another set of entities known as LJM, named after the first initial of Andy Fastow's wife and two children, which I mentioned earlier, did the same thing, allowing the company to hide risky or failing investments, to limit its perceived debt, and to generate artificial profits and revenues. LJM, too, was creatively the second version of this idea.

19:49Even though the assets that LJM held were ultimately dogshit, the distance that LJM provided, combined with Enron's use of mark-to-market accounting, allowed the company to turn a multi-billion collective failure into a resounding and on-paper profitable triumph. So how did this happen? How did it go on for so long? Well, first, Enron was at its peak worth$70 billion. Its fail would be a failure for its investors and shareholders, and nobody, besides the press that is, wanted to ask tough questions. Remember when they did that? Anyway, it had auditors, but they were paid handsomely, turning a blind eye to the criminal malfeasance at the heart of Enron.

20:24Auditor Arthur Anderson surrendered its license in 2002, bringing an end to the company, and resulting in 85 ,000 employees losing their jobs. Well, look, it's not so much it only turned a blind eye as much as it turned on a big paper shredder. Shredding tons, and I'm actually being literal, that's a measure of weight and not figuratively, of documents as Enron started to implode, a crime for which it was later convicted of obstruction of justice. But I've already talked about Enron's culture, but I'd be remiss if I didn't mention that Enron's highest performers and its leadership received hefty bonuses in company equity, motivating them to keep the charade going.

21:06Enron's pension scheme, I add, was basically entirely Enron stock, and employees were regularly encouraged to buy more, with Kenneth Lay telling employees weeks before the company's collapse that, and I quote, the company is fundamentally sound and that they should hang on to their stock. NVIDIA did use the word fundamentally. They use that, but it's not, NVIDIA is not Enron. It's not, it's really different. They're not doing this. I swear to God, I just don't love the language. Anyway, additionally, per the terms of the Enron pension plan, employees were prevented from shifting their holdings into other pension funds or other investments until they turned 50.

21:43When the company collapsed, those people lost everything, even those who didn't know about Enron's criminality. George Maddox, a retired former Enron employee, had his entire retirement tied up in 14 ,000 Enron shares worth at the time more than$1.3 million. He was forced to spend his golden years making ends meet by mowing pastures and living in a run-down East Texas farmhouse. The US government brought criminal charges against Enron's top leadership. Ken Lay was convicted of four counts of fraud and making false statements, but died on a skiing vacation to Aspen before sentencing. May he burn in hell.

22:16Maybe Ronald Reagan and him could get in the hot tub together. The hot tub's got lava in him. Not feeling particularly creative on that one. Anyway, Jeff Skilling was convicted of 24 counts of fraud and conspiracy and sentenced to 24 years in jail. This was, of course, reduced in 2013 on appeal to 14 years, and he was released to a halfway house in 2018 and then freed in 2019. He's since then tried to re-enter the energy sector, with one venture combining energy trading and, I kid you not blockchain technology although nothing really came of him i want to take this moment to give a big shout out to quartz which when covering skilling's attempted comeback had this opening line and i quote jeffrey skilling knows a thing or two about blocks and chains get his ass andy fastell pled guilty to two counts one of manipulation of financial statements and one of self-dealing and received 10 years in prison this was as ever later reduced to six years including two years of probation in part because he cooperated with the investigations against other Enron executives.

23:16He's now a public speaker and a tech investor in a company, an AI company, called Keen Corp. His wife, Leah, who also worked at Enron, received 12 months for conspiracy to commit wire fraud and money laundering and for submitting false tax returns. She was released from custody in 2005. Enron's implosion was entirely self-inflicted and horrifyingly, painfully criminal. Yet, it had plenty of collateral damage to the US economy, to those companies that lent it money, to its employees who lost their jobs and their life savings and their retirements, and to those employees at the companies most entangled with Enron, like those at auditing firm Arthur Anderson.

23:52This isn't unique among corporate failures. Wellcom had some dodgy accounting practices. Nortel too. Both companies failed, both companies wrecked the lives of their employees, and these failures had systemic economic consequences, especially in Canada, where Nortel, at its peak, accounted for one-third of the market cap of all companies on the Toronto Stock Exchange. The reason why Enron remains captured in our imagination, and why NVIDIA is so vociferously opposed to being compared to it, is the extent to which Enron manipulated reality to appear stronger and more successful than it was, and how long it was able to get away with it.

24:24While we may have forgotten the memory of Enron, it happened over two decades ago after all, we haven't forgotten the instincts that it gave us. It's why our noses Twitch when we see special purpose vehicles being used to buy GPUs, and while we gag when we see mark-to-market accounting. It's entirely possible, I genuinely believe this, that everything in video is doing is above board. Really, it's great. That doesn't do anything to help the deep bit of dread in my stomach, though.