Bethany McLean — Enron, FTX, 2008, Musk, frauds, & visionaries

1. 0:00 – 4:37

   Intro

   1. BMBethany McLean0:00

      ... this line between a visionary and a fraudster. You know, you think that they are two opposite ends of the spectrum, but in reality, they're where the ends of the circle meet. But if somebody has the ability to put a vision forward, like Jeff Skilling did at Enron, like Elizabeth Holmes did at Theranos, like SBF did, then you're particularly susceptible. Self-delusion is such a strong component of all of these stories of business gone wrong. The line between what happened at Enron and, and, and what happened in the global financial crisis, it's not a matter of black and white. Well, do you believe in the efficient market hypothesis?

   2. DPDwarkesh Patel0:34

      The rapid implosion of a company worth tens of billions of dollars, insider dealing and romantic entanglements between sister companies, a politically generous CEO who is well-connected in Washington, the use of a company's own stock as its collateral, the attempt, the short-lived attempt to get bought out by a previous competitor, and the fraudulent abuse of mark-to-market accounting. We are not talking about FTX, we are talking about Enron, which my guest today, Bethany McLean, uh, first broke the story of, and has written an amazing and detailed book about, uh, called The Smartest Guys in the Room. And she has also written, uh, a book about the housing crisis, All the Devils Are Here, a book about Fannie and Freddie, Shaky Ground, and a book about fracking, Saudi America, all of which we'll get into. She is, in my opinion, the best finance non-fiction writer out there, and I'm really, really excited to have this conversation now. So, Bethany, thank you so much for coming on the podcast.

   3. BMBethany McLean1:33

      Thank you so much for the probably undeserved compliment.

   4. DPDwarkesh Patel1:37

      (laughs)

   5. BMBethany McLean1:37

      (laughs) Thank you for having me on the show.

   6. DPDwarkesh Patel1:40

      But my first question, what are the odds that SBF read The Smartest Guys in the Room and just followed it as a playbook, given the similarities there?

   7. BMBethany McLean1:48

      Y- you know, I, I love that idea. I have to, I have to admit-

   8. DPDwarkesh Patel1:52

      (laughs)

   9. BMBethany McLean1:52

      ... I guess I love that idea. I don't know, that would make me responsible for what, for what happens.

   10. DPDwarkesh Patel1:56

       (laughs)

   11. BMBethany McLean1:56

       So, maybe I don't love that idea. L- let me take that back. (laughs)

   12. DPDwarkesh Patel2:00

       (laughs)

   13. BMBethany McLean2:00

       Anyway, but I, I, I actually think that, that, that even if he had read the book, it would never have occurred to him that, that there was a similarity, because self-delusion is such a strong component of all of these stories of business gone wrong. It's very rare that you have one of the characters at the heart of this who actually understands what they're doing and understands that they're moving over into the dark side, and thinks about the potential repercussions of this and chooses this path anyway. That's usually not the way these stories go. So, it's entirely possible that SBF has studied Enron, knew all about it, and never envisioned that there were any similarities between that and what he was doing.

   14. DPDwarkesh Patel2:42

       Oh, that's so fascinating, um, which I guess raises the question of what are we doing when we're documenting and trying to learn from books like yours if somebody who is a- about to commit the same exact kind of thing can read that book and not realize that he's doing the same exact thing? Is there something that just prevents us from learning the lessons of history, that we, we can never just, uh, get the analogy right and we're just guided by our own delusions?

   15. BMBethany McLean3:07

       Well, isn't there the great quote that history rhymes but it doesn't repeat? I'm-

   16. DPDwarkesh Patel3:11

       Yeah.

   17. BMBethany McLean3:11

       ... blanking on who it is who said that, but I think that's, that's absolutely true. So, I think it's important for all of us, those of us who are not gonna find ourselves at the center of a giant fraud, or so I hope. I think my time for that has passed. Maybe not you, but-

   18. DPDwarkesh Patel3:25

       (laughs)

   19. BMBethany McLean3:25

       ... um, I think it's important for all of us to understand what went wrong. And I, I do think these, I do think just there, there's a great value and greater understanding of the world without necessarily a practical payoff for it. So, I think when something goes wrong on a massive societal level, it's really important to try to, to try to explain it. Human beings have needed narrative since the dawn of time, and we need narrative all, all, all the more now. We need, we need to make sense of the world. So, I like to believe that that process of making, trying to make sense (laughs) of the world, um, has a value in, in and of itself. Maybe there is small, some small deterrence aspect to it, in that I often think that if people understand more the process by which things go, go wrong, that it isn't deliberate, that it's not bad people setting out to do bad things, it's human beings, um, at first convincing themselves e- even that they're doing the right thing, and then ending up in a situation that they, they never meant to be in. And maybe on the margin, that does, maybe on the margin, that does, that does help, because maybe it has deterred some people who, who would have started down that path but for

2. 4:37 – 11:22

   Is Fraud Over?

   1. BMBethany McLean4:37

      the fact that they now see that that's the, that's the usual (...)

   2. DPDwarkesh Patel4:41

      Yeah, yeah. That actually raises the next question I wanted to ask you. Bird Hobart, uh, he's a finance writer as well, he wrote a blog post, um, about, uh, I mean, this was before FTX obviously, and he was talking about Enron and he said, "In the end, it actually looks like we fixed the precise problem Enron represented. Nobody I know solely looks at GAAP financials. Everybody ultimately models based on free cash flow. We're much more averse to companies that set up a deliberate conflict of interest between management and shareholders." And I guess there's a way in which you can read that and say, "Oh, doesn't FTX prove him wrong?" But, you know, there's another way you can look at it is that FTX deliberately set up outside the US, so there's a story to be told that actually we learned the lessons of Enron. And, you know, uh, Sarbanes-Oxley worked, uh, that's why, you know, th- they were in the Bahamas and we haven't seen that scale, a fraud of that scale in, you know, the continental United States. Um, I, do, do you think that the FTX saga, and I guess the absence of other frauds of that scale in America shows that the regulations and this changed business and investment practices in the aftermath of Enron have actually worked?

   3. BMBethany McLean5:45

      Well, I think they probably worked, uh, narrowly writ in, in the way in which the writer you quoted articulated. I think it would be very hard for the CFO of a publicly traded company who set up other private equity firms that he ran that did all their business with his company, because everybody would say, "That's Enron," and it would be completely on, on the nose.And so, and Sarbanes-Oxley, in the sense of per- i- in the sense of helping to rein in corporate fraud of the sort that was practiced by Enron, which was this abuse of very specific accounting rules, um, I think, I, I, I think that works. But, you know, you say there hasn't been fraud on a scale like Enron up until perhaps F- FTX, but you're forgetting the global financial crisis.

   4. DPDwarkesh Patel6:30

      Yeah. (laughs)

   5. BMBethany McLean6:31

      And then the end, the line between what happened at Enron and, and, and what happened in the global financial crisis, it's not a matter of black and white, it's not a matter of one thing was clear-cut fraud and one thing, "Great, we love these practices. Isn't this fantastic? This is the way we want business to operate." They're both somewhere in the murky middle. You know, a lot of what happened at Enron wasn't actually outright fraud. I've coined this phrase legal fraud to describe, um, to describe what it is that, that, that, that happened at Enron, and a lot of what happened in the global financial crisis was legal, hence the lack of prosecutions. But it's also not behavior that, that leads to a healthy market or-

   6. DPDwarkesh Patel7:10

      Mm-hmm.

   7. BMBethany McLean7:10

      ... for that matter a, a, a healthy society. And so there's a reason that you had Sarbanes-Oxley, and what was it? Eight short, short years later, you had Dodd-Frank?

   8. DPDwarkesh Patel7:20

      Yeah. (laughs)

   9. BMBethany McLean7:20

      And so, and it re- read broadly, um, I'm not sure Sarbanes-Oxley did that much good. And what I mean by that is, when President George Bush signed it into, uh, law in the Rose Garden, he gave this speech about how investors were now protected and everything was great, and your, your ordinary investors could take comfort that the laws were meant to protect them from wrongdoing. And you compare that to the speech that President Barack Obama gave eight years later when he signed Dodd-Frank into law in the Rose Garden, and it's remarkably similar, that now ordinary investors can count on the rules and regulations keeping themselves from people who are preying on their financial well-being. And I don't think it was, it's, it's true in either case because our markets, particularly modern markets, move and evolve so quickly that the thing that's coming out of left field to get you is never gonna be the thing you were protecting against.

   10. DPDwarkesh Patel8:12

       Mm-hmm. But given the fact that Enron, as you say, was committing legal fraud, is it possible that the government, um, when they prosecuted Skilling and Fastow and Lay, they in fact were not, uh, th- they prosecuted them to a greater extent than the law as written at the time would have warranted? In other words, were, th- uh, wha- uh, wha- was there something legally invalid in the, in the s- in the quantity of sentence that they got? Is that possible?

   11. BMBethany McLean8:38

       So that's a re- it's, it's, it's a, I, I get what you're asking. I think it's a really tricky question because I think in absolute terms, um, Enron needed to be prosecuted and needed to be prosecuted aggressively. And while I say it was legal fraud, that is for the most part, there was actually real fraud around, around, uh, but it's on the margin. It doesn't entire- it doesn't explain the entirety of Enron's collapse. Much of what they did was using and abusing the accounting rules in order to create an appearance of economic reality that had nothing to do with actual, with actual reality. But then there was actual fraud in the sense that Andy Fastow was stealing money from these partnerships to benefit himself, and they were, if you believe the core tenet of the prosecution which was there's this agreement called Global Galactic that was signed by, that was between Andy Fastow and Jeff Skilling where Jeff agreed that Andy's partnerships would never lose money, then that invalidated all of the, all of the accounting. And that's the chief reason that, that, that, that Skilling was, was, was convicted, um, was that the jury believed the existence of this, of this, of this agreement that and, um, one set of insider stock sales, which, which we can talk about, which was also a really key moment. Relative to the, so in absolute terms, I don't know, it's, it's hard for me to, to say. There was such, Enron was such a, to a degree that is still surprising to me, such a, a watershed moment in our, in our country far beyond business itself. But it, it, it, it caused so much insecurity, that, about our retirements, are our retirement assets safe? Can you trust the company where you work? That I think the government did, did have to prosecute aggressively. But relative to the financial crisis where a lot of people made off with a lot of money and never had to give any of it back, does it seem fair that, that, that Jeff Skilling went to jail for over a decade and no one involved in a major way in the financial crisis paid any price what, however? People didn't even really have to give up that much of the money they made. Then, then it seems a little bit unfair, yes. So I think it's, it's an absolute versus a relative question.

   12. DPDwarkesh Patel10:50

       Yeah. Yeah. By the way, who do you think made more money, um, the investment banks, uh, like, uh, Goldman Sachs and Morgan Stanley, um, from doing, providing their services to Enron as the stock was going up or Jim Chanos from shorting the stock? In absolute terms, who made more money?

   13. BMBethany McLean11:07

       Oh, I think the investment banks for sure.

   14. DPDwarkesh Patel11:09

       (laughs)

   15. BMBethany McLean11:09

       I mean, they made, they made so much money in investment banking fees from, from, from Enron. But, you know, it's a good question. Good.

   16. DPDwarkesh Patel11:16

       (laughs)

   17. BMBethany McLean11:17

       It's a good question actually, because I think Jim made a lot of money too, so.

3. 11:22 – 19:03

   Shortage of Shortsellers

   1. DPDwarkesh Patel11:22

      Yeah, yeah. I mean, uh, y- you've spoken about, I guess, the usefulness and the shortage of s- short sellers, d- as a sort of, uh, corrective on irrational exuberance. And I'm curious why you think that shortage exists in the first place. Like if you believe in the efficient market hypothesis, you should think that, you know, if some company has terrible financials and implausible numbers, then people would be lining up to short it and then you would never have a phenomenon like Enron. Uh, and, um, so it's, it's, you know, it's so odd that you can have, you know, reporters who are kind o- basically ahead of the market in terms of predicting what's gonna happen. Uh, wh- what, uh, ho- how do you square that with like the efficient market hypothesis?

   2. BMBethany McLean12:01

      Well, do you believe in the efficient market hypothesis?

   3. DPDwarkesh Patel12:04

      Uh, I, I'd like to but I'm like trying to, (laughs) trying to wrap my head around Enron.

   4. BMBethany McLean12:07

      I, I'm, I'm, I'm not sure how you can unless you, unless you adopt Warren Buffett's point of view and I'm gonna mangle the quote because-... uh, ve- but it's that the market in the short term is a voting machine and in the long term it's a weighing machine, right?

   5. DPDwarkesh Patel12:21

      Mm-hmm.

   6. BMBethany McLean12:22

      Or is it the other way around? (laughs)

   7. DPDwarkesh Patel12:23

      (laughs)

   8. BMBethany McLean12:23

      Anyway, but the idea is that the market may be very efficient for a long... very inefficient for a long period of time, but, but it does actually, rationality does actually work in, in, in the end. And I think I might believe that. But isn't it John Maynard Keynes who said, "The market can remain irrational for a lot longer than you can remain solvent"? And so, I think that's true too. I think believing that the market is efficient and rational in the short term is just obviously wrong. (laughs)

   9. DPDwarkesh Patel12:50

      (laughs)

   10. BMBethany McLean12:51

       Um, but back to your question about short sellers which is, which is interesting. You know, I think part of it is that there is still this, um... There certainly was a couple of decades ago and I think it still exists, this idea that owning stocks is mom American and apple pie-

   11. DPDwarkesh Patel13:07

       Hmm.

   12. BMBethany McLean13:07

       ... and shorting stocks somehow is bad and evil and rooting, rooting against America. And I remember going back to the Enron days and when people criticizing me, even other people in the press saying that, "You took a tip from a short seller, they're biased." And I, I would say, "But, but, but wait, the analysts who have buy ratings on stocks and the portfolio managers who own those stocks-"

   13. DPDwarkesh Patel13:28

       Right.

   14. BMBethany McLean13:28

       "... are biased too. They want stocks to go up. Everybody's biased." So the trick as a journalist is getting information from all sides and figuring out who you think is right and what makes sense, but it's not avoiding anybody with any bias. But it was really interesting that people saw the bias on the part of short sellers and did not see it on the part of, of, of longs, and I think there is that preconception that exists broadly that somehow you are doing something wrong and you're somehow rooting for a company's failure and that this is, I don't know, anti-American if you, if, if you short a stock. And so I think that's part of why there's, there's, there's a shortage, a shortage of, of-

   15. DPDwarkesh Patel14:05

       Mm-hmm.

   16. BMBethany McLean14:06

       ... of short sellers. Um, I think also... Well, I mean, we've had a incredible, unprecedented bull market for the last-

   17. DPDwarkesh Patel14:12

       Mm-hmm.

   18. BMBethany McLean14:12

       ... four decades as a result of falling interest rates, and especially in the decade before the pandemic hit, it was very, very difficult to make money shorting anything because everything went to the moon. Didn't matter if its numbers were good, if it was eventually unmasked to be somewhat fraudulent. It, uh, stocks just went to the moon anyway, the riskier the better. And so, it is only die-hard short sellers that have managed to stick it out. And I think-

   19. DPDwarkesh Patel14:40

       Yeah.

   20. BMBethany McLean14:40

       ... I think lastly, Jim Chanos said this to me once and I, I think it's true, that he could find dozens of people who were skilled enough to come, smart enough to come work for him, there's no shortage of that, people who are technically skilled and really smart. But being able to be contrarian for a long period of time, especially when the market is going against you, is a different sort of person. It, that it requires a completely different mindset to have everybody in the world saying you're wrong, to be losing money because the stock is continuing to go up, and to be able to hold fast to your conviction. And I think that's another, uh, part of the explanation for why there are fewer short sellers.

   21. DPDwarkesh Patel15:18

       Yeah. And that raises an interesting question about, uh, venture capital for example where, or private markets in general, um, at least in the public markets, there's shorting maybe in shortage but it, it is a possible mechanism, whereas, uh, I'm a programmer so, you know, if, if like, uh, one guy thinks the company is worth 100 million dollars and everybody else thinks it's not, you know, the company will still be s- uh, the price will still be set by the, um, you know, the person who is a believer. Um, does that increase the risk of some sort of bubble in venture capital and in technology, um, and I guess in private markets generally if they're, they're not public? I- is that something you worry about that there, there could be incredible bubbles built up if there's a lot of money that's floating around in these circles?

   22. BMBethany McLean15:58

       Well, I think we're seeing that now, right? (laughs) And I don't think it's a coincidence that FTX and Theranos were not publicly traded companies, right? (laughs)

   23. DPDwarkesh Patel16:07

       Mm-hmm.

   24. BMBethany McLean16:07

       Um, there's a certain sort of, uh, black box quality to these companies because people aren't shorting them and aren't, aren't, and aren't, you know, whispering to journalists about th- that, that there's something wrong here and there aren't publicly available financials for people to dig through and look, loo- and look at the numbers. So no, I don't think that's a coincidence and I do think this gigantic move into private assets has been, um, probably not great for the, for the, for the, for the, for the, for the safety of the system and you'd say, well, it's just institutional investors who can afford to lose money who are losing money, but it's really not because institutional investors are just pension fund money-

   25. DPDwarkesh Patel16:46

       Mm-hmm.

   26. BMBethany McLean16:47

       ... and in some cases now mutual fund money, so that distinction that the people who are investing in this stuff can afford to lose it is not really true. Um, so I don't, I don't like that rationalization. I think we're gonna see how that plays out. There was just a really good piece in The Economist about private equity marks on their portfolio companies and how they are still looked to be much higher than what you would think they should be given the carnage in the market. And so, all of, uh, what, what actually things are really worth in private markets both for venture capital firms and for private equity firms is absent an- another, another bubble starting, (laughs) starting in the markets. I think we're gonna see how that plays out over, o- over the next year and it might be a wake-up call for, for a lot of people. Uh, you know, all that, all that said, it's an interesting thing because investors have been very complicit in this, right? In the sense that a lot of investors are absolutely delighted to have pri- to have their, their private, um, their private investments marked at a high level. They don't have to go to the committee overseeing th- the investments and say, "Look, I lost 20% of your money," the way they might, um, if, if the numbers were public. And so that, the ability of these, uh, private investors to smooth, as they call it, the, the, the returns is, is it's been, it's been part of the appeal. It hasn't been a negative. It's been a positive. And so, I would say that investors who wanted the smoothing are, are, are... might be getting what they deserve except for-

   27. DPDwarkesh Patel18:10

       (laughs)

   28. BMBethany McLean18:10

       ... the point I made earlier that it isn't, it isn't-

   29. DPDwarkesh Patel18:12

       Yeah.

   30. BMBethany McLean18:13

       ... their money. It's, it's the money of, of teachers and firefighters and-
4. 19:03 – 23:00

   Elon Musk - Fraud or Visionary?

   1. DPDwarkesh Patel19:03

      when speaking of short sellers and speaking of private equity, um, I think it'd be interesting to talk about Musk. So, you know, your 2018 Vanity Fair article, I thought was really interesting about, you know, Musk's factory in Buffalo. H- h- how do you think back on Tesla and Musk now given the fact that this dog did continue to rise afterwards? And the factory, I believe was completed and it's... I hired the 1,500 or so people that it promised in New York State. Uh, w- what... I- i- is Musk just a fraud who can pull it off and so he's a visionary? H- how do you think about Musk in the aftermath?

   2. BMBethany McLean19:35

      So I don't think that's right about Buffalo, and I have to look, but I don't think they ended up... I mean, the SolarCity business at Tesla has pretty much collapsed. I don't think... People haven't gotten their roofs. There was just a piece about how they're canceling some of their roof installations, so Musk has repeatedly made grand visions about that business that haven't played out. And I will check this for you post the podcast, but I don't think-

   3. DPDwarkesh Patel19:59

      (laughs)

   4. BMBethany McLean20:00

      ... if there is employment at that factory in, in Buffalo, it's not because they're churning out solar, solar, s- solar products-

   5. DPDwarkesh Patel20:06

      (laughs)

   6. BMBethany McLean20:07

      ... that are, that are, that are doing what was, what was originally promised. So I guess, I, I think about that story in a, in a couple of ways. It definitely, um... It was not meant to be a piece about Tesla. It was meant to be a piece that shone a little bit of light on how Musk operates and his willingness to flout the rules and his reliance on government subsidies despite the fact that he, um, presents himself as this libertarian free, free, free market, free marketeer, and his willingness to lie to, to, to on some level enrich himself, which also runs counter to the Elon Musk narrative that he doesn't care about making money for, for himself. Because the main reason for Tesla to buy SolarCity was that SolarCity had... Uh, main reason was that Tesla... Was that SolarCity had... Th- th- that Musk and his, and his, and his relatives had extended the- these loans to SolarCity that were gonna go bank, th- that were gonna be lo-... All the money was gonna be lost if SolarCity went bankrupt. And by having Tesla buy it, Musk was able to bail himself out, um, as, as, as well. And I also think a good w- reason for that, for that, for... And it brings us to the present time, but the reason for the acquisition was that Musk knows that this image of himself as the invincible, invulnerable who can always raise money and whose companies always work out in the end was really important. And if SolarCity had gone bankrupt, it would have cast a big question mark over, over Musk, over, over the Musk narrative. And so on think he c- literally couldn't afford to let SolarCity go bankrupt. Um, all of that said, I have, I have been and was... I, I was quite skeptical of Tesla, and I thought about it in, in, in, in... And I always believed that the product was great. I just-

   7. DPDwarkesh Patel21:48

      Mm-hmm.

   8. BMBethany McLean21:48

      ... wasn't sure about the company's money-making potential. And I think that that... It's something I started thinking about, um, back around the SolarCity time, maybe earlier, but this li-... And something I've talked about before, but this line between a visionary and a fraudster. You know, you think that they're on two opposite ends of the spectrum, but in reality, they're where the ends of the circle meet. The characteristics of one, one has but many of the characteristics of the other. And sometimes I think the only thing that really separates the two is that the fraudster is able to keep getting mon-... Ra- raising money in order to get through the really difficult time where he or she isn't telling the truth, and then they... That person goes down in history as a visionary, um, but because no one ever looks back to the moment in time when they were lying. The fraudster gets caught in the middle. Um, so Enron's lo- lost access to, to the capital markets, lost a- access to funding. As the market collapsed after the dot-com boom and people began to wonder whether Skilling was telling the truth about Enron's broadband business and then there were all the disclosures about Andy Fastow's partnerships. If Enron had been able to continue raising money, this business of Enron's called Enron Broadband might well have been Netflix. It was Netflix ahead of its time. So Enron just got caught in the middle and all the

5. 23:00 – 33:40

   Intelligence, Fake Deals, & Culture

   1. BMBethany McLean23:00

      fraud, all the fraud got exposed. (laughs) But that's not because Jeff Skilling wasn't a visionary who had really grand plans for, for, for, for the future. So I think Musk falls somewhere in that spectrum of, of, of fraudster and visionary, and what's gonna be really interesting, why I said that, that w- we bring it to the present time about what happens to the Musk narrative if something fails is what happens-

   2. DPDwarkesh Patel23:21

      Yeah.

   3. BMBethany McLean23:21

      ... as, as the world watch, watches Twitter implode. Um, what does that mean then for the Elon Musk narrative overall?

   4. DPDwarkesh Patel23:29

      Yeah, yeah. Um, going back to The Smartest Guys in the Room, the title obviously suggests something about the, I guess, in general, the ability and the likelihood of very smart people committing fraud or things of that sort. Um, but, you know... But Garrett Jones has this book called Hive Mind where he talks about how the, uh, sm- smarter people are more likely to cooperate in prisoner's dilemma type situations. They have longer time preference, and one of the things you've written about is the problem in corporate America is people having shorter, um, uh, you know, doing too, too big time discounting. So, uh, given that trend we see in general of greater cooperativeness, um, and, uh, y- other kinds of traits of more intelligent people, do you think the reason we often find people like SBF and Skilling running big frauds despite being very intelligent? Is it just that on, on average smarter people are maybe less likely to commit fraud, but when they do commit fraud they do it at such gargantuan scales and they're able to do it at such gargantuan scales that it just brings down entire empires? How, how, how do you think about the relationship between intelligence and fraud?

   5. BMBethany McLean24:30

      That's interesting. Um, I'm not sure I know a coherent answer to that. Um, Smartest Guys in the Room as a title was a little bit tongue-in-cheek. It wasn't meant to say these guys actually are the smartest guys in the room. It was, it, it was a little bit, it was a little bit ironic, but that doesn't take away from the really good question that you asked, which is, "What, what, what is that relationship?" I, I mean, I think if you look at the history of corporate fraud, you are not going to find unintelligent people having been the masterminds behind this. You're gonna find really, really, really smart, even brilliant people having, having, having been, been behind it. Maybe some, uh, part of that is this linkage between the visionary and the fraudster that so many of these, of these corporate frauds are people who have qualities of the visionary, and to have the qualities of, of a visionary, you have to have a pretty, pretty, pretty, pretty high intelligence. Um, and I do think so many of these stories are, are about then self-delusion. So, I don't think smart people are any less likely to suffer from self-delusion than dumb people, and they're probably more likely to because-

   6. DPDwarkesh Patel25:37

      Mm-hmm.

   7. BMBethany McLean25:37

      ... you can rationalize, you know? The smart person's ability to rationalize just about anything they wanna rational- rationalize is pretty profound, whereas perhaps someone who doesn't have quite the same, the same brain power isn't gonna be able to create a narrative under which their actions are blameless and they're doing the right thing. So, I think sometimes, s- so maybe there is some sort of relationship there that somebody more qualified than I am would have to study between smart people's ability to, to, to rationalize just about anything as a way of, as part of the path to self-delusion and part of the path by which these things happen.

   8. DPDwarkesh Patel26:15

      Yeah. Yep.

   9. BMBethany McLean26:15

      But that's completely, that's completely-

   10. DPDwarkesh Patel26:17

       (laughs)

   11. BMBethany McLean26:17

       ... that's, that's an ethany theory. There's absolutely nothing to back that (laughs) -

   12. DPDwarkesh Patel26:21

       Well, well-

   13. BMBethany McLean26:22

       ... up to be pretty clear.

   14. DPDwarkesh Patel26:23

       ... uh, le- let's do some more speculation. So, um, one of the things, uh, John Ray talked about in his testimony, um, was it two days ago?

   15. BMBethany McLean26:30

       Yeah.

   16. DPDwarkesh Patel26:31

       Where he said that, you know, FTX had g- done $5 billion of investments and deals in the last year, and most of those investments were worth a fraction of the value that FTX paid for them. And we see this also in, obviously in Enron, right, with, uh, Broadband and with, um, DAPL, is that how to pronounce it? But basically their international department.

   17. BMBethany McLean26:50

       Yeah.

   18. DPDwarkesh Patel26:50

       Um, what is this, uh, th- this obsession with deal-making for its own sake? Is that to appease investors and make them think a lot's going on? Is that because of the hubris of the founder of just wanting to set up a big empire as fast as possible, even if you're getting a bad sticker price? What, what, w- why do we see this pattern of just, you know, excessive deal-making for its own sake?

   19. BMBethany McLean27:11

       That's an interesting question, too. I'm not sure that that's, um, limited to companies that go splat dramatically. There's a lot of, a lot of deal-making in, in corporate America has that same frenzied quality. Um, I haven't seen an updated study on, on this in a, in a long time, but I began my career working as an analyst in an M&A department at, at, at Goldman Sachs, and i- definitely deals are done for the sake of doing deals, and I once joked that synergies are kind of like UFOs. A lot of people claim to have seen them, but there's no proof that they actually exist.

   20. DPDwarkesh Patel27:45

       (laughs)

   21. BMBethany McLean27:46

       And the, again, I haven't seen an updated study on, on, on this, but there was one years back that showed that most M&A transactions don't result in increased value for shareholders and most synergies, most promised synergies never materialize. Just getting bigger for the sake of getting bigger, and doing deals for the short-term value of showing Wall Street a projection that earnings are gonna be so much higher even after the cost of the debt that you've taken on, and that there are these great synergies that are gonna come about from, from combining businesses. So, I don't know that either the frenzy deal doing or deal doing, deals gone wrong is, um, solely limited to people who are committing fraud. I do think it's kind of across the spectrum.

   22. DPDwarkesh Patel28:28

       (laughs) Um, um, well, one, one thing I find interesting about your books is how you detail that, and correct me if this is the wrong way to read them, but that, uh, i- incentives are not the only thing that matter. You know, there, there's this perception that, you know, we set up bad incentives for these actors and that's why they did bad things, but also, um, the power of one individual to shape a c- co- company's culture and the power of that culture to enable bad behavior, uh, whether it's skilling at Enron or with Clarkson, right, at Moody's?

   23. BMBethany McLean28:55

       Yeah.

   24. DPDwarkesh Patel28:56

       Um, i- is that a g- good way of reading your books? Or h- how do you think about the relative importance of culture and incentives?

   25. BMBethany McLean29:03

       I think that's really fair. The incentives are part of culture, right? If, if you've set up a culture where, where how you're valued is what you get paid, I think it's a little qu- it's a little difficult to separate those two things out because, because the, the incentives do help make the culture. But for sure, culture is incredibly, um, incredibly compelling. I've often thought that, and said that if I had, when I was leaving my short-lived career in investment banking, if I had, if I had gotten in some of the head hunters I was talking to, if one of them had said, "There's this great, really energetic, interesting energy company down in Houston."

   26. DPDwarkesh Patel29:39

       (laughs)

   27. BMBethany McLean29:39

       "Why don't we interview there?" If I had gone there, would I have been a whistleblower or would I have been a believer?

   28. DPDwarkesh Patel29:45

       Mm...

   29. BMBethany McLean29:45

       And I'd like to believe I would've been a whistleblower, but I think it's equally likely that I would've been a believer. Culture is so strong. I- it creates this, what's the right... Maybe a miasma that you can't see outside. I remember a guy I talked to who was a trader at Enron, really smart guy, and he was like, after the, after the bankruptcy he said, "Of course, if we're all getting paid based on creating reported earnings, and there's all this cash going out the door in order to do these deals that are creating reported earnings, and that's the culture of the entire firm, of course it's not gonna work economically." He said, "I never thought about it. It just didn't, it didn't, it didn't occur to me." And I think the more compelling the CEO, the more likely you are to have that kind of mass delusion. I mean, there is a reason cults exist, right? (laughs)

   30. DPDwarkesh Patel30:29

       (laughs)
6. 33:40 – 37:00

   Rewarding Leaders for Long Term Thinking

   1. DPDwarkesh Patel33:40

      stock options, uh, you've just spoken about how that creates short-term incentives for the executives who are making decisions. If you wanted to set up an instrument that aligned an executive or a leader's compensation with the long-term performance of a company, what would that look like? W- would you have the option to invest in 10 years instead of a year? H- how would you design it? How would you design a compensation scheme to award long-term thinking?

   2. BMBethany McLean34:04

      If I could do that, I should r- rule the world, I think.

   3. DPDwarkesh Patel34:07

      (laughs)

   4. BMBethany McLean34:08

      (laughs) Seriously, I think that is one of the really tough, um, problems confronting boards or anybody who is determining, anybody who's determining stock options and that almost, uh, anybody who's determining compensation, in that most compensation schemes seem to have really terrible unintended consequences. They look really good on paper, and then as they're implemented, it turns out that there was a way in which they accomplished exactly the opposite of what the thing, the people who were designing them wanted- wanted them to accomplish. I mean, if you think back to the advent of stock options, what could sound better, right? Giving management a share of the company such that if the- if- if shareholders did well, th- they'd do well. Nobody envisions the ways in which stock options could be repriced, the ways in which meeting earnings targets could lead to gaming, the ways in which the incentive of stock-based compensation could lead to people trying to get anything they could in order to get the stock price higher and cash out when their, as soon as their stock option's vested. So, and even, there was, there was... The whole Valeant saga was fascinating on this front because the people who designed Mike Pearson's compensation package, the CEO of Valeant, they were convinced that this was absolutely the way to do it, and he got bigger and bigger, um, stock option incentives for hitting certain, for having the stock achieve certain levels. But of course, that creates this incredible bias to just get the stock to go up no matter, no matter what else you do. Um, it does seem to me that vesting over the long term is- is- is a much better way to go about things, but then do you create incentives for people to play games in order to get the stock lower at- at various points where there's about to be a stock option award-

   5. DPDwarkesh Patel35:49

      (laughs)

   6. BMBethany McLean35:49

      ... so they can have a better chance of having their options be- be wor- be worth something over the long term? And, you know, particularly on Wall Street, there is this, or in firms where this sort of stuff matters the most, there is this, there was this clearing out of dead wood that happened where people got paid and they got out of the way and made way for younger people.

   7. DPDwarkesh Patel36:08

      Mm-hmm.

   8. BMBethany McLean36:08

      And I don't know, it was a harsh culture, but maybe it made sense on some level.

   9. DPDwarkesh Patel36:12

      Mm-hmm.

   10. BMBethany McLean36:12

       And now, at least I've been told, with much longer vesting periods, you have people who don't want to let go. And so you have-

   11. DPDwarkesh Patel36:18

       Hm.

   12. BMBethany McLean36:18

       ... more of a problem with people who should have retired stick- sticking around instead of in- in- instead of clearing out. And then it also becomes a question of how much money is- is enough? So if somebody is getting millions of dollars in short-term compensation and they have a whole bunch more money tied up in long-term compensation, do the long-term numbers matter? At what point do they, do they, do they really matter? I mean, if you gave me $5 million today, I'm not so sure I'd really care if I were getting another $5 million in 10 years, right?

   13. DPDwarkesh Patel36:48

       Yeah.

   14. BMBethany McLean36:49

       So, I think all of that is, is, um, it- it's- I'm not, I'm not sure there's a perfect compensation system. All things considered though, I think longer term is, is probably better,

7. 37:00 – 40:17

   FTX Mafia?

   1. BMBethany McLean37:00

      but...

   2. DPDwarkesh Patel37:01

      Yeah, I didn't think about that downside, of the long investing periods. That's so interesting. There, I guess there is no free lunch. Uh, so, uh, you, w- w- w- with Enron, um, it, it was clear that there was a lot of talent at the firm and that you had these companies and these trading firms launch in the aftermath by people who left Enron, Kinder Morgan and John Arnold's, um, uh-

   3. BMBethany McLean37:21

      Yeah.

   4. DPDwarkesh Patel37:21

      ... Centaurus, uh, that were wildly profitable and did well. Do you think we'll see the same thing with FTX, that while SBF himself and maybe the, his close cadre were frauds, there actually was a lot of great trading and engineering talent there that are gonna start these very successful firms in the aftermath?

   5. BMBethany McLean37:37

      That's, that's interesting, and just, just for the sake of clarification, Kinder Morgan was actually started years before Enron's-

   6. DPDwarkesh Patel37:43

      Hmm.

   7. BMBethany McLean37:43

      ... collapse, when Rich Kinder, who was vying with Jeff Skilling in a sense to become chief operating officer, um... Ken Lay picked Jeff Skilling, and Kinder left-

   8. DPDwarkesh Patel37:52

      Mm-hmm.

   9. BMBethany McLean37:52

      ... and took a few assets and went to create Kinder, Kinder Morgan. But your overall point, um, just clarifying your overall point holds. There were a lot of people who left Enron and went on to do, to have pretty, pretty remarkable careers. I think the answer with FTX, I bet there will be some, for sure, but whether they will be in the crypto space, I guess depends on your views on the long-term viability-

   10. DPDwarkesh Patel38:14

       (laughs)

   11. BMBethany McLean38:14

       ... of, of, of the crypto space. And I have never... (laughs) It's funny, as crypto exploded over the last couple o' years, I was, I've been working on this book about the pandemic and it's been busy and difficult enough that I have not lifted my head to, to think about my chances. And I always thought, "I don't get it. I don't understand."

   12. DPDwarkesh Patel38:31

       (laughs)

   13. BMBethany McLean38:31

       I mean, I understand the whole argument about the blockchain being valuable for a lot of transactions, and I, I, I get that, but I never understood crypto itself, and I thought, "Well, I just need to, as soon as this book is done, I just need to put a month into understanding this, because it's obviously an impor- important enough part of our world that I need to figure it out." But now I think, "Oh, betcha."

   14. DPDwarkesh Patel38:52

       (laughs)

   15. BMBethany McLean38:52

       "Maybe I didn't understand it for a reason and maybe, um, maybe there isn't anything to understand, and I've just saved myself-"

   16. DPDwarkesh Patel38:57

       (laughs)

   17. BMBethany McLean38:57

       "... tons of time because it's all gone." And you have people like Larry Fink at BlackRock saying, "The whole industry's gonna implode, it's done," and certainly with the news today, this morning, of Binance's auditor basically saying, "We're out," um, I d- I don't, I don't know how much of it was, how much of it was, is, was a Ponzi scheme. You might know better than I do. And so, I don't know what's left after this whole thing implodes. It's a little bit like, there is an analogy here that when Enron imploded, yes, a lot of people went on to start other successful businesses, but the whole energy trading business as practiced by kind of under-capitalized, um, um, energy firms went away, and that-

   18. DPDwarkesh Patel39:35

       Yeah.

   19. BMBethany McLean39:35

       ... never came back. And so, I, I, I don't, I don't know. I'm, it'll be, I, I don't know. What do you think?

   20. DPDwarkesh Patel39:43

       Um, the time to be worried will be when Bethany McLean writes an article titled, "Is Bitcoin Overvalued?" Uh... (laughs) For, for the audience-

   21. BMBethany McLean39:50

       (laughs) ? my moment on that.

   22. DPDwarkesh Patel39:51

       (laughs) Yeah, but for the audience, that, that was the, uh, I believe, the first skeptical article about Enron's, um, stock price.

   23. BMBethany McLean39:58

       Yeah.

   24. DPDwarkesh Patel39:59

       Uh, and it was titled, "Is Enron Overvalued?" Uh, in the aftermath, uh, understated the title.

   25. BMBethany McLean40:03

       (gasps) Yeah.

   26. DPDwarkesh Patel40:05

       But, uh, (laughs)

   27. BMBethany McLean40:05

       I joked that that story should have won, won, won awards for the meekest title in business journalism history-

   28. DPDwarkesh Patel40:10

       (laughs)

   29. BMBethany McLean40:10

       ... given that the company was bankrupt six months later.

   30. DPDwarkesh Patel40:13

       (laughs)
8. 40:17 – 44:09

   Is Finance Too Big?

   1. DPDwarkesh Patel40:17

      let me ask you, like, a bigger question about finance in general. So, finance is 9% of GDP, I believe.

   2. BMBethany McLean40:22

      Mm-hmm.

   3. DPDwarkesh Patel40:23

      How much of that is the productive use and thinking and allocation of th- uh, the, the capital towards their most productive ends, and how much of that is just zero sum or negative sum games, um, if, if you had to break that down? Like, h- is, is 9% too high do you think, or is it just right?

   4. BMBethany McLean40:42

      I think it's too high. I have no idea how to think about breaking it down to what the proper level should be, but I think there are other ways to think about how you can see that in past decades it hasn't been at the right level, when you've had all sorts of smart kids, um, leaving, leaving business school and leaving college and heading into finance and hedge funds and private equity as their career choice. I think that's a sign that, that finance is too big, when it's sucking up too much of, of, of the talent of the country, um, and when the rewards for doing it are so disproportionate relative to the rewards of, of, of doing other things. Um, the counter to that is that there have also been a lot of rewards for starting businesses, and that's probably, I think, how you want it to be- (laughs)

   5. DPDwarkesh Patel41:25

      (laughs)

   6. BMBethany McLean41:25

      ... uh, in a productive, in a productive economy. So, I think the number is, is too high. I don't know how to think about what it should be other than what a... Actually, a former Goldman Sachs partner said this to me when I was working on All the Devils Are Here, and she said that finance is supposed to be like the, the substrata of our world. It's supposed to be the thing that enables other things to happen. It's not-

   7. DPDwarkesh Patel41:44

      Mm-hmm.

   8. BMBethany McLean41:44

      ... supposed to be the world itself. So, the, the role of a financial system is to enable businesses to get started, to provide capital. That's what it's supposed to be. It's the lubricant that enables business. But it's not supposed to be the thing itself.

   9. DPDwarkesh Patel41:58

      Right.

   10. BMBethany McLean41:58

       And when it's become the thing itself, you've, you've, you've, you've, you've got a problem. Um, um, and I, I think the other-

   11. DPDwarkesh Patel42:04

       Th- by the way, there, there, there's your article about crypto. (laughs) That paragraph right there. (laughs)

   12. BMBethany McLean42:08

       There you go. That's, that's a good... Uh, and I think, I think the other way you, you, you can say it, perhaps this is way too simplistic, but the other way I've thought about it is that how can it be... If you can run a hedge fund and make billions of dollars from, uh, and have five people, ten people, whatever it is, versus starting a company that employs people and changes-

   13. DPDwarkesh Patel42:30

       Mm-hmm.

   14. BMBethany McLean42:30

       ... the neighborhood and provides jobs and, you know, provides a product that, that, that, that, that improves people's lives, it, it is a shame that too much of the talent and such a huge share of the financial rewards are going to the former rather than the latter, and that just can't mean good things for the future.

   15. DPDwarkesh Patel42:48

       Yeah. Yeah. And I... You know, when people criticize technology, for example, for the idea that, you know, these people who would've been, I don't know, otherwise, r- re- teachers or something, their...... you know, making half a million dollars at Google. Um, and I think, like, when I was in India, people were using Google Maps to get through the streets in Mumbai, which is, which is unimaginable to me before going there that, you know, you would be able to do that with, um, a service built out of Silicon Valley. And so, yeah, I think that actually is a good allocation of capital and talent. I, I'm not, I'm not sure about finance, um.

   16. BMBethany McLean43:16

       Yeah. I think, I, I-

   17. DPDwarkesh Patel43:17

       Yeah.

   18. BMBethany McLean43:17

       ... I agree with you. I think there are other problems with Google and with the, the social media giants but, but they are real businesses that employ people that make products that have had a huge, uh, impact on, on, on people's, on people's lives. So in, in that sense, it's very different than a private equity firm, for instance.

   19. DPDwarkesh Patel43:37

       Yeah.

   20. BMBethany McLean43:37

       And especially private equity even more so than hedge funds draws my ire because-

   21. DPDwarkesh Patel43:41

       Mm-hmm.

   22. BMBethany McLean43:41

       ... I think one of the reasons they, that it, I, they've been able to make ... Part of the financialization of our economy has been due to super, super low interest rates, and low interest rates that have enabled so many people to make so much money in finance are not, they're just a gift. It wasn't because these people were uniquely smart, they just found themselves-

   23. DPDwarkesh Patel44:00

       Mm-hmm.

   24. BMBethany McLean44:01

       ... at a great moment in time. And the fact that they now think they're really smart because (laughs)

   25. NANarrator44:05

       (laughs)

   26. BMBethany McLean44:05

       ... they're crazy.

   27. DPDwarkesh Patel44:07

       (laughs) Um, are Fannie

9. 44:09 – 49:25

   2008 Collapse, Fannie & Freddie

   1. DPDwarkesh Patel44:09

      and Freddie America special purpose entities? Are they our Alameda? Is this the way we hide our debt and, uh ...

   2. BMBethany McLean44:15

      Interesting.

   3. DPDwarkesh Patel44:16

      Yeah.

   4. BMBethany McLean44:17

      Well, I guess we, you know, I don't know anymore because ... So I last wrote about them, when was it? In 2016, and I don't know now. No, you're right. Their, the, their debt is still off, off, off balance sheet. So yeah, in a lot of ways they, they were. I would argue though that the old Fannie and Freddie were structured more honestly than, than the new Fannie and Freddie, that it really is conservatorships that have made them, um, that have made them America's off-balance sheet entities. Because at least when they were their own independent entities, yes, there was this odd thing known as the implicit guarantee, which is when you think about ... (laughs) Back to your point about efficient markets, how can you possibly believe there-

   5. DPDwarkesh Patel44:57

      (laughs)

   6. BMBethany McLean44:57

      ... that there actually is a thing as an efficient market when, you know, Fannie and Freddie had an implicit guarantee? Meaning it wasn't real. There was no place where it was written down that the US government would bail Fannie and Freddie out in a crisis, and everybody denied that it existed, and yet it did exist. (laughs)

   7. DPDwarkesh Patel45:13

      Yeah, no, but w- w- wait, I, I feel like that confirms the efficient market hypothesis, right? Because the, the market correctly th- thought that mortgages backed by Fannie and Freddie would have government's, uh-

   8. BMBethany McLean45:22

      Okay. Okay, you might be-

   9. DPDwarkesh Patel45:22

      ... f- f- father, and they did. (laughs)

   10. BMBethany McLean45:24

       You might be right. I, I, I think what I was getting at, may- ... You might be right. I think what I-

   11. DPDwarkesh Patel45:28

       (laughs)

   12. BMBethany McLean45:28

       ... was getting at is that it is such a screwed up concept.

   13. DPDwarkesh Patel45:30

       (laughs)

   14. BMBethany McLean45:31

       I mean, how, how can you possibly ... When I first ... When people were first explaining this to me when I first wrote about Fannie and Freddie, I was like, "No, no, wait, this is American capitalism."

   15. DPDwarkesh Patel45:40

       (laughs)

   16. BMBethany McLean45:40

       We're, we're ... No, when you ... What? I'm (laughs)

   17. DPDwarkesh Patel45:42

       (laughs)

   18. BMBethany McLean45:43

       Um, um, so yeah, but I, I, I, I think that Fannie and Freddie at least with shareholders that were forced to bear some level of, of the risks were actually a more honest way of going about this whole screwed up American way of financing mortgages than, than the current setup is.

   19. DPDwarkesh Patel45:59

       What is the future of these firms? A- are they just gonna stay in conservator, conservatorship forever or a- a ... Is there any developments there? Or what's gonna happen to them?

   20. BMBethany McLean46:07

       The lawsuit, the latest lawsuit that could've answered that in some ways ended in a mistrial. Um, I don't think, I don't, I don't think, unfortunately, anybody in government sees any currency, and, and I mean currency in the broad sense, not in the literal sense of money, in, in taking this on. And unfortunately, what someone once said to me about it I think remains true and it's really depressing, but is that various lawmakers get interested in Fannie and Freddie, they engage with it only to figure out it's really, really goddamn complicated-

   21. DPDwarkesh Patel46:40

       Mm-hmm.

   22. BMBethany McLean46:40

       ... and that, and that any kind of solution is gonna involve angering people on one side of the aisle or another, and potentially angering their contitu- constituents, and they slowly back away, um, from doing anything that could, that, that could effect change. So I think we have a really unhealthy situation. I don't think it's great for these two entities to be in conservatorship, but at this point, I'm not sure it's gonna change.

   23. DPDwarkesh Patel47:05

       Yeah. Speaking of debt and mortgages, um, so total h- household debt in the United States has been, uh, climbing recently after it's, it's, like, slightly declined after 2008. But I think c- in quarter three alone, it increased to $350 billion and now it's at $16.5 trillion, uh, the total US household debt. Should we be worried about this? Are, are, are we gonna see another sort of collapse because of this or w- what should we think about this number?

   24. BMBethany McLean47:31

       I don't know. I, I don't know how to think about that because it's too tied up in other things that no one knows. Are we going to have a recession? How severe is the recession going to be? What is the max unemployment rate that we're gonna hit if we do, if we do have a recession? And all of those things dictate how to, how to think about that number. I don't think consumer debt is embedded in the bowels of the financial system in the same way mortgages were. And in the end, the, the, the problem with the financial crisis of 2008, it wasn't the losses on the mortgages themselves, it was the way in which they were embedded in the plumbing of the financial system-

   25. DPDwarkesh Patel48:09

       Mm-hmm.

   26. BMBethany McLean48:09

       ... in ways that nobody understood, and then the resulting loss of confidence from the fact that nobody had understood that/lies had been told about a- about that. And that's what caused th- that's what caused everything to, to collapse. Consumer debt is a little more visible and seeable and I, I don't think that it has that same, um, that same opaque quality to it that, that mortgage-backed securities did. I could be wrong. I could be wrong. I haven't, I haven't, I haven't dug into it enough, enough to understand, enough to understand that, but you can see the delinquencies starting to climb. Um, I mean, I guess you could on, on, on mortgages as well. But there is this, there is this profound belief with mortgages that since home prices would never decline, there would never be losses on these instruments because you could always sell the underlying property for more than you had paid for it, and therefore, everything would be fine.... and that's what led to a lot of the bad practices in the industry, is that lenders didn't think they had to care if they were screwing the home buyer because they always thought they could take the home back and, and, and, and make more money on it. And consumer debt is, is unsecured and so it's, it's, it's different. I think people think about it differently. But I'd have to, I'd have to, I'd have to do some more homework to understand where consumer

10. 49:25 – 1:00:12

    The Big Picture

    1. BMBethany McLean49:25

       debt sits in the overall architecture of this financial industry.

    2. DPDwarkesh Patel49:29

       I, I, I'm really glad you brought up this theme about w- what does the overall big picture look like. I feel like this is the theme of all your books, that people will be so obsessed with their subsection of their job o- or that a- area that they won't notice that, um, y- w- w- w- what broader trends like the ones you're talking about w- w- and, uh, y- in Enron, it's like why, why, why do we have all these special purpose entities, what is the total debt load of Enron, um, or w- with, you know, mortgage-backed securities is a similar kind of thing, right? What, what it, w- uh, w- maybe they weren't correlated in the past, but what's that did, uh, uh, hey, do we really think that there's really no correlation, um, uh, between the delinquencies across a country? Um, s- so that, that kind of big picture thinking, whose job is that today? I- i- is it journalists? Is it short sellers? Is it people writing on Substack? Who is doing that? A- and is it anybody's job to, is, is it just, like, uh, an important role with nobody assigned to it? W- whoa.

    3. BMBethany McLean50:21

       I think it's the latter. I think it's an important role with nobody, with nobody assigned to it, and there, there is a limit. I mean, (laughs) I hate to say this, it is not, uh, um, it is not an accident that many of my books have been written... That's probably not fair. It's not true of my book on fracking, but that some of my books have been written after the calamity happened, so they weren't so much foretelling the calamity as they were unpacking the calamity after it happened, which was a different role. And as I said at the start of our conversation, I think an important one to explain to people why this big bad thing took, took place, but it's not prediction. I don't know as people that we're very good at, at prediction. Um, they tried to set up, what was it called? In the wake of the global financial crisis, they established this thing called FSOC, and now I'm forgetting what the acronym stands for, Financial Security Oversight Committee, and it's supposed to be this, this body that does think about these big picture risks, that thinks about the ways, e- the ways, an exam- for example, in which mortgage-backed securities were, um, were, were, were, were, were, were, were repopulating through the entire financial system in ways that would be, cause a loss to be much more than a loss, that it wouldn't just be the loss of money and net security. It would echo and magnify. And so th- there are people who are supposed to be thinking about it, but I think it, I think it's, it's, it's really hard to see that. And in a increasingly complex world, it's even, it's even harder than it was before because the reverberations from things are really hard to map out in, in, in advance. And especially when some part of those reverberations are a loss of confidence, then all bets are off, because when confidence cracks, lots of things fall apart. But how do you possibly analyze in any quantitative way the, the risk that that confidence will collapse?

    4. DPDwarkesh Patel52:11

       Mm-hmm. Yeah.

    5. BMBethany McLean52:12

       So I think it's, I think, I think, I think it's difficult. That said, and of course I am talking my own book here, I don't think that the lack of th- the increased financial problems of journalism really help matters in that respect, because in an ideal world, you want a lot of people out there writing and thinking about various pieces of this and then maybe somebody can come along and see the various pieces and say, "Oh, my God, there's this big picture thing here that we all need to be thinking about." But there's, there's a kind of serendipity in the ability to do that, one th- one that the chances... I guess the best way to say that is that the chances of that serendipity are dramatically increased by having a lot of people out there doing homework, um, on the various pieces of the puzzle. And so I think in a world particularly where local news has been decimated, um-

    6. DPDwarkesh Patel52:59

       Mm-hmm.

    7. BMBethany McLean52:59

       ... the chances of that sort of serendipity are, are definitely lower. And people may think, "Oh, it doesn't matter. We've still got national news. We've got The Washington Post, we've got The Wall Street Journal, we've got The New York Times." Um, I would love to have somebody do a piece of analysis and go back through The New York Times stories and see how many were sparked by o- p- a piece in the local paper that maybe you wouldn't even notice from reading The New York Times piece because it'd be in, like, the sixth paragraph that, "Oh, yeah, credit should go to this person at this local paper who started writing about this." But if you no longer have the person at the local paper who started writing about this, you know, it's, it's, it's, it's less likely that the big national piece gets written, and I think that's a part of the implosion of local news that people, a, a part of the cost of the implosion of local news that people don't really understand. The idea that the national press functions at, at the same level, um, without local news is just not true.

    8. DPDwarkesh Patel53:49

       Yeah. A- and, but even if you have the local news, and I, that's a really important point, but even if you had that local news, there still has to be somebody whose job it is to synthesize this all together, and I'm curious, w- what is the training that it requires? So you, I mean, you, your training is, you know, math and English major and then working at, uh, working in investment banking. Um, i- is that the, uh, I mean, obviously, the, uh, i- i- the anecdotal experience n equals one seems like that, that's great training for synthesizing all these pieces together, but what is the right sort of education for somebody who is thinking about the big picture?

    9. BMBethany McLean54:22

       I, I don't, I don't know, and there may be, there may be, there are probably multiple answers to that question, right? There's probably no one, one right answer. For me, in, in the end, my, my math major has proven to be pivotal, even... (laughs) My mother dug up these, um... My, my parents were moving and so my mother was going through all their stuff and she dug up these pr- my math work from, from college, and literally if it weren't for the fact that I recognize my own handwriting, I would not recognize-

    10. DPDwarkesh Patel54:49

        (laughs)

    11. BMBethany McLean54:49

        ... page after pages of math formulas and proofs, and they're, like, git gibberish to me now. So-

    12. DPDwarkesh Patel54:54

        (laughs)

    13. BMBethany McLean54:54

        ... but I, but I still think that math has... So wh- I do not want to exaggerate my mathematical ability at this stage of the game. It's basically nil. But I do think that doing math proofs, uh, any kind of formal, any kind of training in logic is really, really important, because the more you've been formally trained in logic, the more you realize when there are pieces missing and when something isn't quite, isn't quite adding up. It just forces you to think in, in a way that is, that, in a way that connects the dots.... um, because you know if you're moving from A to B and B doesn't follow A, you, you understand that B doesn't follow A. And I think that, that, that, that kind of training is, is really, really important. It's what's given me whatever kind of backbone I have as a journalist. It's not because I like to create controversy and like to make people mad. I actually don't. It's just because something doesn't make sense to me. And so, maybe it doesn't make sense to me because I'm not getting it (laughs) or it doesn't make sense to me because B doesn't actually follow, follow A, and you're just being told that it does. And so-

    14. DPDwarkesh Patel55:53

        Mm-hmm.

    15. BMBethany McLean55:53

        ... I think that, I think that training is, is really, really important. Um, I also ha- have often thought that another part of training is realizing that basic rule that you learned in kindergarten, which is, um, you know, f- believe your imagination or, you know, your im- follow your imagination, because the truth is anything can happen. And I think if you look at business history over the last couple of decades, it will be the improbable becoming probable becoming truth over and over and over again. I mean, the idea that Enron could implode, one of the biggest, supposedly most successful companies in corporate America could be bankrupt within six months, the from its, uh, year, from its stock price high. The idea that the biggest, most successful, um, financial institutions on Wall Tr- on, on Wall Street could all be crumbling into bankruptcy without the aid of the US government. The idea that a young woman with no college degree and no real experience in engineering could create a, a, um, could create a machine that was going to revolutionize blood testing and land on the cover of every-

    16. DPDwarkesh Patel56:58

        (laughs)

    17. BMBethany McLean56:58

        ... business magazine and that this whole thing could turn out to be pretty much a fraud, the entire idea of FTX. I mean, over and over again, these things have happened. Forget Bernie Madoff. If you told people a year ago that FTX was gonna implode six months ago, three months ago, people would've been like, "No. No. No. No. No. No." And so I think just that, that, that, that knowledge that the improbable happens over and over again is also a really fundamental, fundamentally important.

    18. DPDwarkesh Patel57:24

        Continuing on the theme of FTX, uh, I interviewed him about four or five months ago.

    19. BMBethany McLean57:30

        Wow.

    20. DPDwarkesh Patel57:30

        And this is one of these interviews that I'm really, I'm, uh, uh, I don't know if embarrassed is the right word, but I knew things then that I could've, like, asked, poked harder about, but it's also the kind of thing where you look back in retrospect and you're like, if it had turned out well, it, it, it, it's, it's not obvious what the red flags are, um, while you're in the moment. There's things you can look back at the story of Facebook and how, you know, Mark Zuckerberg acted in the early days of Facebook and you could say if the thing fell apart that this is why or, you know, this was a red flag. So I have a hard time thinking about how I should've done that interview.

    21. BMBethany McLean58:02

        Clichés are often clichés for a reason, and the one about hindsight being 20/20 is, is, is one of the best clichés ever. And I am so fundamentally annoyed by stories that say, "Here were all the red flags. Why didn't anybody see it?" Well, oftentimes the person writing that story didn't see the red flags either. And it's really easy in retrospect to pick up all the signs that there wa- that there was a problem, and it's really hard in the moment. Uh, there's, there's a little bit of, uh, of, uh, of, I think, in all of us, a subconscious sense that this doesn't sound quite right, but getting the subconscious suspicion to rise to the level of conscious thought is, is also really difficult. So I think, I think, again, there is, there is... It is one value of... And I hope we're coming back to a world that appreciates old people, because I'm getting older, but, um-

    22. DPDwarkesh Patel58:50

        (laughs)

    23. BMBethany McLean58:50

        ... there is, there is some value in having, having seen it before, that I think the red flags do maybe tend to rise to the level of conscious, uh, conscious thought. That said, if I had gotten interested in crypto a year ago, would I have seen the problems with FTX? Doubtful. I, I don't know.

    24. DPDwarkesh Patel59:06

        Mm-hmm.

    25. BMBethany McLean59:07

        You just, you just, you just can never know. Sometimes these things also depend on the way in which they're presented to you and by whom. And I think that shouldn't be. I think it's not, not intellectually honest. But if somebody you really respect comes to you and tells you, "This business is the next greatest thing, and this person is brilliant," chances are that preconception is gonna be lodged in your mind in a way that's gonna make it really hard for you to see the red flags. Whereas if the first you heard of this company was somebody coming to you, somebody really smart you like coming to you and saying, "Hey, I don't, I don't think this makes sense. These, these are my problems with this," you're gonna be far more apt to see-

    26. DPDwarkesh Patel59:42

        Mm-hmm.

    27. BMBethany McLean59:42

        ... the red flags. And I say it's not in... That's not the right way, not the right phrase. I say it's not intellectually honest or not smart because really you kind of want to strip that away. You wanna strip those biases away, because even really smart people make mistakes all the time. And so you want, to the extent possible, to think for yourself. But, but, of course, or- it's, it goes back to math, right? Order of operations? (laughs)

    28. DPDwarkesh Patel1:00:04

        (laughs)

    29. BMBethany McLean1:00:04

        And so the order, the order in which information is presented to you, unfortunately, is gonna have an effect on how you see that, how you see that in- information.

11. 1:00:12 – 1:03:40

    Frackers Vindicated?

    1. BMBethany McLean1:00:12

    2. DPDwarkesh Patel1:00:12

       Mm-hmm. Yeah. Um, let's talk about fracking. So in... This year, uh, I think, uh, Quarter 2 was it, the first time that fracking and shale, uh, sh- shale finally became profitable. Um, w- were, were the fracking investors right that, that there would be an oil, uh, oil shock and now it is actually profitable? Or, uh, h- how do you think about Saudi America in the aftermath of the events this year?

    3. BMBethany McLean1:00:37

       Well, I, at least from my understanding of it, and again, because I have been, um, out to lunch on this difficult book I'm writing-

    4. DPDwarkesh Patel1:00:45

       (laughs)

    5. BMBethany McLean1:00:45

       ... I haven't actually... I'm not as up-to-date on this as I should be, so take what I'm saying with, with a grain of salt. Um, but I think actually it proves the underlying thesis, because fracking is profitable but at a much smaller scale than it was when people were saying this is, this is gonna change the world. So it hasn't... The idea that US shale oil was the swing factor in world oil prices, I don't think anybody believes that anymore, because it can't profitably produce the amount of oil required-

    6. DPDwarkesh Patel1:01:14

       Mm-hmm.

    7. BMBethany McLean1:01:15

       ... for it to be the major force that it was, that it was supposed to be. So I think what has happened actually proves the point instead of negating the point. And, uh, for-For how long it could be profitable, um, um, and at what level of oil prices is also, was also part of the under, the under, the underlying thesis, which is how much oil is there actually that can be extracted at, at, at this price? And so, the fact that very high oil prices, there is a certain amount that can be extracted profitably. Um, that's, that's not, that's not surprising. I think the way in which the Buck's thesis would be wrong is if it turned out US shale oil, oil could be the, the, the, the swing producer for the world, and we could be the world's largest oil producer and there, could, the Permian could continue to grow at whatever it was, 20% a year, and grow profitably. And then I would have to say I, yeah, the, the, the investors were right, um, or the people who believed in this were right. So-

    8. DPDwarkesh Patel1:02:12

       Yeah. Yep. Um, if you could have a Robert Caro-like biography of anybody in finance in the last 100 years, especially somebody who you feel hasn't been talked about or covered enough, who would it be? Who do we need a thousand pages about?

    9. BMBethany McLean1:02:25

       A thousand pages. I don't know that we need a thousand pages about anybody. (laughs)

    10. DPDwarkesh Patel1:02:28

        (laughs) Yep.

    11. BMBethany McLean1:02:30

        Um, um, who would I like to write about? Um, let me think about that. There are, there are some books I've been mulling over that I'd like to do, but I'm not sure I, (laughs) I think I might prefer to keep those to, to myself for, for-

    12. DPDwarkesh Patel1:02:44

        (laughs)

    13. BMBethany McLean1:02:44

        ... for, for a little while. I don't know. I'm also always gonna be, at least... I, I'm trying to change my orientation, but I'm always gonna be biased toward the, the thing that went badly wrong rather than the thing that, that, that worked out. I don't know, maybe that betrays some underlying-

    14. DPDwarkesh Patel1:02:57

        (laughs)

    15. BMBethany McLean1:02:58

        ... darkness in my personality. But I always find that more fun. So, I'm, I'm probably not the right person to ask about, uh, uh, a, a glowing biography. I don't, you know, I don't, I don't know. You could say, you could say Warren Buffett, but plenty has been written about Buffett. I don't know that there's anything to be added to that. So, le- let me think. If I come up, if I come up with a great answer that I'm prepared to share, I will, I will tell you. I don't know that... Maybe it goes back to your question about how big a role that finance should play in our economy overall too. Maybe I just don't think that anybody in finance is necessarily worthy of that-

    16. DPDwarkesh Patel1:03:35

        Mm-hmm.

    17. BMBethany McLean1:03:35

        ... of, of that kind of, of that kind of, um, that kind of sustained

12. 1:03:40 – 1:07:05

    Rating Agencies

    1. BMBethany McLean1:03:40

       focus.

    2. DPDwarkesh Patel1:03:41

       Yep. Yeah. Um, I, I wanna talk about the rating agencies because they have featured heavily in both the story about the housing crisis and Enron. And as a libertarian-leaning person, th- that's really been, um, th- th- that, that, that's been kind of devastating in the sense that, you know, there's a hope that you can maybe replace things like the FDA, or at least functions of it, um, with agencies, private agencies that are tasked with, like, rating how good is this food or, uh-

    3. BMBethany McLean1:04:09

       Yeah.

    4. DPDwarkesh Patel1:04:09

       ... you know, how safe is this airplane? Things like that. And I, I, I'm curious if you think that there is any possibility of having any private agency that is being paid by the person they are evaluating being able to give fair evaluations. And this even brings us, it doesn't even have to be, um, rating agencies. It can be things like, you know, now we have the big four accounting firms. I'm curious how much trust you put in them in terms of being able to do evaluations fairly. Do we think, do, have we passed through the Ar- Arthur Anderson, Anderson days? Um, how, how credible-

    5. BMBethany McLean1:04:39

       Mm.

    6. DPDwarkesh Patel1:04:39

       ... are these institutions?

    7. BMBethany McLean1:04:40

       Look at EY's role in Wirecard, right? (laughs)

    8. DPDwarkesh Patel1:04:42

       Mm-hmm.

    9. BMBethany McLean1:04:42

       And then I, and, uh, and, and the scandals PwC has been involved in over the last bunch of years. I, mm, yeah. Um, um, it is, it is a really good question. I thought you were gonna go somewhere different with the rating agencies, which is why in a supposedly free market, you have so many investors-

    10. DPDwarkesh Patel1:04:58

        Yeah.

    11. BMBethany McLean1:04:59

        ... who rely on credit ratings. And-

    12. DPDwarkesh Patel1:05:01

        That's a good question, yeah.

    13. BMBethany McLean1:05:02

        ... and I, and I do think that there's, uh, this is another perhaps counter to your efficient market theory or maybe counter to a libertarian view of the world, but, you know, a lot of big investors r- who complain about the rating agencies after there, there's been a disaster really want the cover provided by the rating agencies because they can say, "Well, you told me this was AAA. I bought it, therefore I can't be blamed." And so, once the crisis has passed, the appetite of big investors to reform the rating agencies or do away with them, meaning then they would have to do their own work and not just say, "Well, I bought a AAA-rated security," is really next to nil. And that's a good part of the reason why reform doesn't, doesn't happen. I mean, remember, the credit rating agencies were reformed in 2006 in the wake of Enron. The Credit Rating Agency Reform Act was passed, and yet the rating agencies sat at the center of the global financial crisis just a few years later. They, they, I'm not sure they, I'm not sure they really, they, they, they can be reformed, but I'm also not sure there is a perfect, um... Maybe it goes back to your question about the ability to, to see the big picture and foresee a problem. I'm not sure there is a perfect regulator who-

    14. DPDwarkesh Patel1:06:13

        Mm-hmm.

    15. BMBethany McLean1:06:13

        ... wasn't being paid by companies who could then do a better job. You'd like to believe that's true, that if there were a government agency in charge of credit rating and they weren't paid by the companies and the securities, they, they weren't, they weren't, they, they, and they weren't paid by, by the companies, that that would lead to better ratings. Would it? (laughs) I, I-

    16. DPDwarkesh Patel1:06:34

        It's an interesting-

    17. BMBethany McLean1:06:34

        ... don't, I don't know, right? (laughs) So I, I'm not, I'm, I'm not sure there's... I guess another way of saying this is very easy to criticize the current system as really problematic, and it's certainly the fact that credit rating agencies were making so much money by rating subprime mortgage-backed securities for sure played an enormous role in, in, in what happened. But then if you ask the next question, "Well, what's the alternative?" (laughs) That's when it starts-

    18. DPDwarkesh Patel1:07:00

        (laughs)

    19. BMBethany McLean1:07:00

        That's when it starts to get, to get pretty complicated.

    20. DPDwarkesh Patel1:07:04

        Yeah. Yeah.

13. 1:07:05 – 1:15:09

    Lawyers Getting Rich Off Fraud

    1. DPDwarkesh Patel1:07:05

       Um, uh, n- now that we're going to have this long proceeding on FTX in terms of compensating the people who were harmed, looking back at Enron, I mean, that was a long process and I think you said in the book that a billion dollars of the remaining sum that should have been doled out to the victims was actually spent in legal fees and the procedures, uh, if that, uh, uh, uh, if I'm correct about that number?

    2. BMBethany McLean1:07:27

       I think so. I'm not sure.

    3. DPDwarkesh Patel1:07:29

       Yeah.

    4. BMBethany McLean1:07:29

       I, I have to admit I don't remember, but it was some enormous sum.

    5. DPDwarkesh Patel1:07:31

       Yeah.

    6. BMBethany McLean1:07:32

       Yeah.

    7. DPDwarkesh Patel1:07:33

       S- so-Wha- what should be the procedure when an implosion like this happens? Because it seems suboptimal that so much ... I mean, it goes back to their finance discussion, right? Like, so much of the capital that these people are supposed to be doling out is just going to themselves. Um-

    8. BMBethany McLean1:07:46

       Right.

    9. DPDwarkesh Patel1:07:46

       ... do we need something like, uh, uh, the FAA when the pri- plane crashes, they have a body of experts that kind of figures out what happened. Do we need a completely non-legalistic or different, uh, sort of procedure in s- these kinds of situations? How should the FTX, um, uh, the, the, the dis- disbursement of the remaining assets and so forth, how should that be done?

    10. BMBethany McLean1:08:04

        It's a really interesting question and a really interesting analogy, and something people have brought up to me that I've never really dug into, which is the incredible success of the FAA in cutting down on problems with planes because of the incredibly thorough job they do in investigating the cause of a cras- crash afterwards. And so, maybe somebody's written about this, but to really get inside that process and the incredibly powerful and profound role it's played might provide an interesting road map for, for corporate America and, and, and how to do this sort of thing and how to, how to prevent it in the future. Maybe. Maybe the analogy doesn't hold up in some kind of, in some kind of subtle way. But for sure that's, that's, that's, that's a really, that's a really interesting question because you do, you, you need this to happen, right? You need the bankruptcy. You, you, you need the, you need the excavation and even if it costs a great deal of money to just, for all of us, the worst possible outcome would be for everybody to throw their hands up and say, "Okay! It's done."

    11. DPDwarkesh Patel1:09:01

        (laughs)

    12. BMBethany McLean1:09:01

        Nobody ... No, no-

    13. DPDwarkesh Patel1:09:02

        (laughs)

    14. BMBethany McLean1:09:03

        Because, because the truth of the matter is even journalists who excavate, who try to excavate this stuff, we depend on the work done by, by others. I mean, I could not have written my Enron book if it weren't for the Justice Department investigating and their indictments, for the role of Congress in getting all these documents from, fro- all these internal documents from Enron, including, by the way, the list of executives and their cellphone numbers which turned out to be incredibly valuable. Um, um-

    15. DPDwarkesh Patel1:09:30

        (laughs)

    16. BMBethany McLean1:09:31

        ... um, but you can't ... You ... The, the role of the bankruptcy examiner in getting in there and really uncovering, um, all of what Enron was doing in order to manipulate its, its earnings. There's no way that a journalist ... you could do that without, without all of that data provided by all of these entities that are doing their own investigation because as a journalist, you don't have subpoena power. You can't, you literally can't do this, and it becomes an incredibly important part of, of, of telling the overall story. So it's hard for me to say when it's a calamity like this that those dollars are wasted, but is there a better way to go about it? Maybe. Maybe.

    17. DPDwarkesh Patel1:10:06

        Yeah. Uh, uh, uh, another similarity between Enron and FTX is that the bankruptcy is being overseen by John Ray, and this is a rather mysterious person. I, I believe, uh, the, one of the first times we've seen a photo of him is when he appeared in front of Congress (laughs) a few days ago. Um, and I checked the index of the smartest guys in the room, um, and I, I don't think he was mentioned in the book. Who is this guy? (laughs) What, what's his deal?

    18. BMBethany McLean1:10:35

        I don't, I don't actually really know. I feel like people-

    19. DPDwarkesh Patel1:10:37

        (laughs)

    20. BMBethany McLean1:10:38

        ... have made a really big deal over the bankruptcy administrator being the same person, and I'm not really sure how much that, that matters.

    21. DPDwarkesh Patel1:10:44

        Okay.

    22. BMBethany McLean1:10:45

        I feel like the bankruptcy administrator, when people ... It was all over the press, you know? He says this is a bigger disaster than, than whatever it was. I can't remember the exact quote. But that's his incentive to say that, because then any money that he can recoup looks like due to his genius in administrating this thing in bankruptcy. If you say-

    23. DPDwarkesh Patel1:11:01

        Uh-huh.

    24. BMBethany McLean1:11:01

        ... "Oh, this wasn't that big a deal. Everybody's gonna get their money back," and then they don't, then you've got a huge problem, right?

    25. DPDwarkesh Patel1:11:06

        (laughs)

    26. BMBethany McLean1:11:06

        If you say, "This is the ... This is, this is terrible and it's awful and there will be no money left," because well, th- then any money you get back, people are like, "Look what a great job he did." So I, I-

    27. DPDwarkesh Patel1:11:15

        Yeah.

    28. BMBethany McLean1:11:16

        ... I, I, I don't know. I don't know. I don't remember him being a really pivotal figure in the, in, in, in, in the Unre- in the excavation of Enron.

    29. DPDwarkesh Patel1:11:27

        Yeah. Yeah. Um, I, I, I wanna ask you a bit about your writing process. Do you go into the book with some sort of thesis about the actors? And if so, is it often that you realize that somebody you thought was a bad actor is actually one, one of the good guys and ... or could ... the g- the other way around? Uh, or is basically the, your initial picture confirmed by further investigation?

    30. BMBethany McLean1:11:50

        Well, I guess that's a tough question about the books I've done because the books I have done, especially the two big ones, were after the fact, and it was pretty clear, A, that something went badly wrong-

Episode duration: 1:25:57