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

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 talked about WorldCom line episode, both of whom were similarly considered giants in their fields. By the way, it's also not just about the fact that Enron failed

because had proven business and accounting fraud. World comm entered bankruptcy due to similar circumstances, though, rather than being liquidated, and this is kind of a mind fuck, so forgive me. It was the quietest 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 asked Matt Hughes, if you want to know more. And 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 nineteen eighty five out on the foundations of two older,

much less interesting businesses. The first, Houston Natural Gas HG, started life as a utility provider bumping natural gas from the oil fields of Texas to customers throughout the region, before later exiting the industry to focus on other opportunities. The other Inter North, was based in Omaha, Nebraska, and

was in the same business pipelines. In the mid nineteen eighties, H ANDNG was the subject of a hostile takeoff from Coastal Corporation, which until two thousand and one operated a chain of refineries and gas stations throughout much of the US mainland. Unable to fend it off by itself, h ANDNG merged with inter North, 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. Bush's failed nineteen ninety two re election campaign and allowed Enron's corporate jet to Ferry Bush Senior 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 than Enron. George W. Bush, and I mean the second one even had a nickname for Lay Kenny Boy. Anyway, in nineteen eighty seven, Enron hired McKinsey, the world's most evil management consultancy firm, to help the company create a futures market

for natural gas. Well that means isn't particularly important to the story, but essentially, a futures contract is where a company agrees to buy or sell an assair in the future at a fixed price. It'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 Jess Skilling, a young engineer turned consultant who impressed the company's CEO deeply, so much so that Ley decided to poach him from McKinsey in nineteen ninety and give him the role of chairman and CEO of Enron. Finance Group. Oh. By the way, Enron had a bunch of subsidiaries and some had their

own CEOs and boards. I mentioned this because he may be a bit confused, as Lay was CEO of Nron and Skilling was CEO of Nron Finance Group. In essence, it's a bit like how Sam Altman is CEO of open Ai and Fijisimo as the CEO of Applications. That bit isn't important, but I just want to be as explicit as possible. I don't think open Ai is 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 who was able to shape the organization's culture, He appreciated those who took risks, even if those risks, when viewed with impartialized were deemed reckless or even criminal. He introduced the practice of stack ranking, also known as rank and yank, to Enron, which had previously been pioneer by Jack Welcher 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 ten percent. Other reports stay closer to fifteen percent of employees in the lowest bracket, which created an almost Darwinian culture and a drive to succeed that matched him. Staffers were 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 two thousand and two thousand and one, California suffered a series of electricity blackouts. This shouldn't have happened. California's total energy demand at the time was twenty eight gigawats

and its production capacity was forty five gigawats. 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 in Mexico, meaning that in the event of a shortage, it could simply draw capacity from elsewhere. There's plenty to go around. 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 grip with Nevada, and asked him to and I quote, get a little creative and come up with a reason to go down. Anything 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 and E, which entered Chapter eleven bankruptcy that year, and for Southern California Edison, which was pushed at the

brink of bankkruptcies result. This kind of stuff could only happen in an organization whose culture actively rewarded being a fucking asshole. In fact, Skilling was seemingly determined to elevate the dodgiest of characters to the highest positions within the company, and few more more ethically dubious than Andy Fastau, who's Skilling mentored like a protege, and who would later become Enron's chief financial officer. And 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, fast I was able to shape its accounting practices, with the company adopting mark to market accounting practices in nineteen ninety one. 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 him, 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 ten bucks on eBay, I'd say that asset is worth ten bucks, not the dollar I paid for him, even though I haven't actually sold it yet, nor do I not 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 marked 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 process 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 ten bucks and not one dollar?

What is the fair value of something you can't check on any babe, what somebody told me in person it's worth. What's to stop me from lying in saying that the card is worth a one hundred dollars or one thousand dollars, Well,

other than the fact that I'd be committing fraud. Now, what if I have ten one dollar baseball cards and I give my friend ten dollars, and I tell him by one of my baseball cards using that ten dollar bill that I just handed him, and 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 ninety

dollars and not nine dollars. Now, what if I use that valuation, that phone evaluation of my remaining cards to get a fifty dollar 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. Well, A lot of things people can do to alter the marked to market value of an asset ah illegal and would be covered under generic fraud laws. It doesn't change the fact that marked to market accounting allows for some

shenanigans to take place. Another trait of marked to market accounting, as employed by Enron is that it would count all the long term potential revenue for a deal as quarterly revenue, even if that revenue would be delivered over the course of a decades long contra or if the contract would be terminated before its intended expiration DAME. 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.

For example, in nineteen ninety nine, Enron sold a stake in four different electricity generating barges in Nigeria. They're basically floating power stations, sold and sold it to Merrill Lynch, which allowed the company to register twelve million dollars in profit. One little problem that sale didn't actually happen, though that didn't stop Enron from selling pieces to Meyal Lynch, which I'm not kidding. Merril Lynch then sold to a special

purpose vehicle called LJM two. You'll never guess who owned that. It was controlled by Andrew Fastau. Yep, remember that guy. You're gonna hear that name again. Although the Meryl Lynch bankers who participated in the deal were eventually convicted of fraud and conspiracy charges long after the collapse of Enron. Of course, the convictions were later questioned on appeal, Thank you government, but still, for a moment, 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. Whatever

would be quick 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 fifty six K 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 two thousand, it entered into a twenty year deal with Blockbuster Video to allow customers to stream films and TV shows through Enron's fiber network, something that would take at Netflix and other decade to realize as a product now. There wasn't really much of a market for at the time because broadbam was pretty rare back then, nor was it necessarily technologically possible. But it was such a fun idea. People 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 projective 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 insid entities to boost

its balance sheet. One White Wing was created and capitalized by Enron hand an outside investor, and pretty much exclusively bought assets from Enron, which allowed the company to recognized 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 Fasthou'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 two was creatively the second version of this idea.

Even though the assets that LJM held were ultimately dog shared, the distance that LJM provided, combined with Enron's use of marked 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 that

it is peak worth seventy billion dollars. Its fail would be a failure for its investors in shareholders and nobody besides the press that is wanted to ask tough questions remember when they did that. Anyway, he had auditors, but they were paid handsomely, turning a blind eye to the criminal malfeasans at the heart of Enron to Arthur Anderson surrendered its license in two thousand and two, bringing an end to the company and resulting in eighty five thousand

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 treading 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. Mron's pension scheme I had 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. VIDID did use the word fundamentally. They used that, but it's not in videos, 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, by the terms of the Enron pension plan, employees were prevented from shifting their holdings into other pension funds or other investments until they turned fifty. When the company collapsed, those people lost everything, even those who didn't know about Enron's criminality. George Maddock's, a retired former Enron employee, had his entire retirement tied up in fourteen thousand Enron shares, worth at the time

more than one point three million dollars. He was forced to spend his golden years making ends meet by bowing 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? Maybe Ronald Reagan and him could get in the hot tub together, the hot tub scot lava in him not feeling particularly creative on that one anyway. Jeff Skilling was convicted of twenty four n fraud and conspiracy and sentenced to twenty four years in jail. This was of course reduced in twenty thirteen on appeal to fourteen years, and he was released to a half way house in twenty eighteen and

then freed in twenty nineteen. 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 Skillings attempt to come back, had this opening line and I quote Jeffrey Skilling, those are a thing or two of our blocks and chains. Woo get his ass.

Andy Fastau pled guilty to two counts, one of manipulation of financial statements and one of self dealing, and received ten years in prison. This was has ever later reduced to six years, including two years of probation, in part

Becsey cooperated with the investigations against other Enron executives. He's now a public speaker and a tech investor in a company and AI company called Keene Corp. His wife, Leah, who also worked at en On, received twelve months for conspiracy to commit wire fraud and money laundering and for submitting false tax returns. She was released from custody in two thousand and five. 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 him money, to its employees who lost their jobs and their life savings and their retirements, and to those employees that the companies most intangled with Enron, like those that ausering firm Arthur Anderson. This isn't unique among corporate failures.

WelCom 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 had its peak accounted for one third of the market

cap of all companies in the Toronto Stock Exchange. The reason why Enron remains captured in our imagination and why Nvidia is so vociferously opposed to being compared to him, is the extent to which Enron and manipulated reality to appear stronger and more successful than it was, and how long it was able to get away with him. 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 on those is 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. Doesn't do anything to help the deep pit of dread in

my stomach, though. Now let's remind ourselves of watching video Is It's a company that previously focused on gaming or into GPUs graphics processing units, but thanks to a stroke of forethought, managed to be the company that sells the shovels for the current AI bubble. It's data center. GPUs

are expensive. They all rely on a technology that in Video created two decades ago called Kuda, which no other competitor has an alternative to, or at least one with the maturity and depth and functionality, and no other company shares its focus on this arena, at least not one with its history. These gps are expensive, and thanks to Nvidia's near monopoly status, it's seen its share price growth by over three hundred and fifty percent at the time

of writing in the past five years. It's now the most valuable company in the world by market capitalization, and it's insanely, insanely profitable. If you're looking at this through the cold, unthinking lens of late stage capitalism, this all sounds really good. I've basically described a company that has an essential monopoly and the one thing required for a high growth if we're talking exclusively about capex spending industry

to ever exist. Moreover, that monopoly is all but assured thanks to Invidia's Kuda mote, its first move for advantage, and its actual capacities and capabilities of the products itself, on top of the massive shipping and hardware operation at Bill, thereby allowing the company to charge a pretty penny to

its customers. And those customers, well, if we've temporarily forget about the likes of Nebuus and Core, we even how I wish I could forget about Core, we've permanently we're talking about the biggest companies on the planet, ones that surely will have no problems paying their bills. But my worry is a little simpler and more direct, because I'm worried about the certainty that these purchases are being made

for the right or most prudent of reasons. Back in February twenty twenty three, I put out the rot economy and how everything in tech has become oriented around growth at all cost, even if it meant making products harder to use as a means of increasing user engagement or funneling them towards more profitable parts of an app. Back in June twenty twenty four, I wrote and did an episode about the rock Com bubble and my greater theory that the tech industry has run out of hypergrowth ideas.

In simple terms, big Tech, Amazon, Google, Microsoft, and Meta, but also a number of other companies no longer have a next big thing and jumped on AI out of

an abundance of desperation. Shit. Look at Oracle. This company's start off by selling databases and ERP systems to big companies and then trapping said companies by making it really really difficult to migrate to cheaper and better solutions, and then bleeding said companies with ownerous licensing terms, including some where you're paid by the number of CPU cours that

you use the application. Fucking Oracle. It doesn't do anything new or exciting or impressive, and even with when presented with the opportunity to do things that are useful or in innovative, like when it bought some microsystems, it turns away. I imagine that deep down Oracle recognizes that its current model just isn't viable long term, and so it needed

something else. When you haven't thought about innovation, ever, it's kind of hard to start, and thus generative AI probably seemed like a godsend to Larry Ellison, who founded Oracle and despite not being CEO, still creeps around the building like the Grinch. I'll get to Oracle in a bit.

But we also live in an era where nobody knows what big tech CEOs actually do other than make nearly one hundred million dollars a year, meaning that somebody like Satching the Dell can get called a thoughtful leader with striking humility for pushing co pilot AI up every asshole in Microsoft's product experience, even notepad a place that no human being would want it and accelerating capital expenditures and twenty eight billion dollars across the entirety of fiscal year

twenty twenty three to thirty four point nine billion dollars in its last quarter in simpler terms, spending money makes the CEO look busy, and at a time when there were no other potential growth avenues left, AI was a convenient way to make everybody look busy. Every department can have an AI strategy, and every useless fucking manager and executive can yell a service. Now CEO Bill McDermott did back in twenty twenty two. Let me make it clear

to everybody here, everything you do AIAIAIAI AI. That's a real goddamn quote. I should also add that chat GPT was the first real meaningful hit that the American tech industry has produced in a long long time, the last being if I'm honest, Uber, and that's if we allow successful yet not particularly good businesses into the pile. I guess you could say Instagram Stories, but that was ripped off from TikTok. No sorry, Snapchat Christ they nicked reels

from TikTok. I hate this fucking industry. Now. Look, if we're assholes about it and we insist on things like profitability and sustainability, US tech hasn't done so great. Snowflake runs at a loss, Snap runs at a loss, and while Uber's turned things around, somewhat. It hardly created the

next cloud computing or smartphone industry. Putting aside finances, the last major hit was probably Vemo or zell and maybe if I'm feeling generous, smart speakers like Amazon Echo or Apple home Pod, but those I think, I think Echo and Alexa has lost Amazon billions much like Uber. None of these were the next big thing, which would be fine except big tech needs more growth forever right now,

you pig. To be clear, I'm not saying there's been no innovation, just nothing at the scale of smartphones and cloud computing. This is why Google, Amazon, and Meta all do twenty different things, although rarely for any length of time, with these things often having a shelf life shorter than strawberries left on your counter. Because the rot economy's growth at all costs mindset exists only to please the markets

and the market's demand growth. Chat GBT was different. Not only did it do something new, it also did it in a way that was relatively easy to get people to try and see the potential of. It was also really easy to convince people that would become something bigger and better, because that's what tech does. To quote Bender and Hannah Ai, is a marketing term, a squishy way of evoking futuristic visions of autonomous computers that could do

anything and everything for us. And because both customers and analysts have been primed to believe in trust the tech industry, everybody believed that whatever chat GBT was would be the next big thing, and said next big thing was powered by large language models which required GPU sold by one goddamn company in video. AI became a very useful thing to do. If a company wanted to seem futuristic and

attract investors, it could now integrate AI. If a hyperscaler wanted to seem enterprising and lae it was building the future, it could buy a bunch of GPUs or invest in its own silicone, as Google, Microsoft, Amazon and Meta have done, though Meta to only some extent, and of course shove AI in every imaginable crevice of an app. Investors could invest in AI companies, Retail investors, regular people could invest AAI stocks. Tech reporters could write about something new and

do access journalism. Even harder LinkedIn perverts could write long screens about AI. The markets could become obsessed with AI, and yeah, you can kind of see how things got out of control. Everybody now had something to do, an excuse to do an AI thing, regardless of whether it made sense. Because everybody else was doing it, you didn't

need to justify it anymore. Everybody was doing AI chat GPT quickly became one of the most popular websites on the Internet, all while open AI burned billions of dollars, and because the media effectively published every single thought that Sam Mortman had, such as that GPT four would automate away some jobs and create others, and that he was

a little bit scared of him. AI as a tech knowlogy and an idea and a symbolic stock trope and a marketing tool and a myth became so powerful that it could do anything, replace anyone, be worth anything, even the future of your company. Amongst the hype, there was an assumption related to scaling laws, summarized well by Charlie Meyer, who was on the podcast a few months ago. You

should go listen to his episode. In twenty twenty, one of the most important papers in the development of AI was published, Scaling Laws for Neural Language Models, which came from a group a OpenAI. The papers showed with just a few charts incredibly compelling evidence that increasing the size of large language models would increase their performance. This paper was a large driver in the creation of GPD three and today's L ANDM revolution, of course, the movements of

trillions of dollars in the stock market. In simple terms, the paper suggested that shoving more training data and using more compute power would exponentially increase the ability of a model to do stuff. And to make a model that did more stuff, you needed more GPUs and more data centers. Did it matter that there was compelling evidence in twenty twenty two and god to say it, Gary Marcus was right that there were limits to galing laws and that

they would hit the point of diminishing returns. Nah amidst all of this and video has sold over two hundred billion dollars of GPU since the beginning of twenty twenty three, becoming the largest company on the stock market and trading over one hundred and seventy dollars as of writing this sentence, only a few years after being worth less than twenty

dollars a share. You see meta, Google, Amazon, Microsoft all wanted to be part of the future, so they sunk a lot of money into in video, making up forty two percent of its revenue in its fiscal year twenty twenty five. Though there are some arguments about how much exactly big text billowing capital expenditures are spent on GPUs. Some estimate somewhere between forty one percent and more than fifty percent of a data center's capex is spent on GPUs.

If you're wondering what the payoff is, well, you're in good company. I estimate that there's only around sixty one billion dollars in total genera of AI revenue, and that includes every HYPERSCALA and neocloud. Large language models are limited, AI agents are a pipe dreene and simply do not work. AI powered products are unreliable, and coding l make developers slower, and the cost of influence the way in which a

model produces its output keeps going up. The thing is, what comes up tends to have a habit of coming down. And I'm increasingly if the opinion that a return to a terror firmer is coming sooner rather than later. But that's for the next episode. Join me, then, thank you for listening to Better Offline, The editor and composer of the Better Offline theme song is Matasowski. You can check out more of his music and audio projects at Mattasowski dot com m A T T O. S O w

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