Enron, Crypto and Avoiding Your Parents Footsteps
Footsteps
When I was a kid, my dad drove 18-wheelers to haul petroleum, water and hydrochloric acid to and from oil rigs and refineries in rural New Mexico. The job paid well, and for a father of four with only a high school diploma, making close to 100k pays the bills. But, the physical toll of 12 hour shifts, terrible roads and bad weather conditions left him unable to drive trucks by the time he had turned 60.
My wife had this saying, “You either become just like your parents or the total opposite of them” and it rang so damn true for me. I didn’t want to be stuck in rural New Mexico or rural anywhere else. It’s hard to describe the gravity of shitty small towns, but a lot of people just never leave.
Besides, I wanted to make money by using my smarts, not draining the utility out of my body. Like Apollo said “Be a thinker, not a stinker”…
During the boom years in the oil field, everyone seemed to make good money. But thats money was easy come easy go. Dad was no exception to that. Money came in and went straight out the door without much thought to investing or saving for the future. The mindset was always bills and fun now, figure the rest out later.
Like most other “smart” I thought I was too clever for all that. But it became fairly clear to me these last few months - even though I didn’t walk in dad’s footsteps, I’ve got the same map and these footsteps next to mine seem eerily familiar.
Enron
Dad started hauling oil for an Enron subsidiary called EOTT in the early 2000s. Most trucking jobs pay similarly with small fringe benefits that separate them. But Enron was the darling of all energy producers at that time, and dad got some equity in the company.
Long story short, as Enron imploded from fraud, his shares became worthless and the money he had put into their retirement plan was also wiped out. When he told me about it much later, I was shocked that companies could be set up in a way where blue collar workers could lose thousands of dollars set aside for retirement.
He shrugged it off, but here’s the catch: after that point he was completely jaded. He never really invested in retirement funds after that, and it’s hard to calculate how much money he might have been able to put away. Instead, he’s now completely dependent on odd jobs and social security and disability paychecks.
2020 and Crypto
I’ve written about this before, but my career boils down to three milestones:
I taught math for a few years after undergrad
I wanted to make more money when I found out my wife was pregnant
I transitioned to working for tech companies
About five years ago, I started learning about Bitcoin in an obsessive way. The appeal for me was setting up a monetary system that was separate from the state - rules without rulers. It still sounds pretty preposterous when I talk about it to my friends… these days, I only share my thoughts if someone asks (which is rare (and fair)).
In the year of our lord 2020, we all got a little crazy. There was a renaissance in personal, (very) active investing in unusual companies like Blockbuster or Gamestop. Interest in crypto also spiked that year for reasons that I’m still not clear on. Egotistically, I thought to myself - this is great, all my interest in Bitcoin is somehow validated because now others are seeing the light.
I thought the newfound interest in crypto would be permanent - a new industry being created in the same way that social media was in the mid-200s. In 2021, I felt more and more pulled to shift my career to working on crypto projects full time, so I shot my shot and got a job at crypto company called BlockFi.
BlockFi had a simple proposition:
Deposit money/crypto with us
We’ll lend that money out and earn interest on it
We pass some of that interest over to you
This process is called rehypothecation. It sounds similar to what a bank is set up to do, but they have two key differences: they paid higher interest than banks and they were more risky as they weren’t FDIC insured. BlockFi had a few other products, but their main value driver was getting customer deposits and lending them to other companies.
About six months into my time there, we were hit with a lawsuit from the Attorney General of New Jersey along with a few other states. Their case was that BlockFi was not properly informing customers of the risk of what they were doing with their funds. After some back and forth, BlockFi agreed to pay a fine of $100 million.
Looking back, the size of the fine is absurd. BlockFi was a company that was a five year old unprofitable company and somehow was able to agree to paying a fine roughly the size of the GDP of a small country.
For perspective, a fine of that size would pay for the salaries of about 2,000 teachers. But if you watched the Superbowl in early 2022, you saw multiple commercials for crypto products. A bouncing QR code redirected us to Coinbase. Matt Damon boldly went into crypto, never to be heard of again. Larry David warned us and we foolishly did not heed his cries.
The 2022 Downturn
As post-pandemic life began going back to normal, all of the interest that had injected sky-high prices for crypto began to wane. Bitcoin’s price reduced from an all time high of about $70k per token down to about $30k in a short time. For a company like BlockFi, that meant less interest in trading and lending, which meant less revenue. They were already burning money like crazy. Coupled with the large SEC fine and they were in trouble..
I only had two tech jobs before BlockFi. But I got a sense that a lot of these high-growth companies were being run from a simple playbook:
I Got an Idea!: Get investor money, stand up a product
Burn Baby Burn: Grow rapidly, but continue to lose money every month
New Boss in Town: Get purchased by a fund or VC
Make sure to wipe out all of the stock options by employees, this is key
Trim Some Fat: Fire (I mean “reduce”) 20% of your staff
Repeat: Keep repeating steps 2, 3 and 4 until……
BlockFi was working on step step 3. But with crypto prices plummeting and the large SEC fine, I knew step 4 was coming, so I decided to leave BlockFi in 2022. This was not an easy decision. BlockFi at the time seemed like they needed discipline, but they were being valued at $4-5 billion dollars. After leaving two sinking ships at my last two jobs, I thought BlockFi was going to be a lasting company. But a better opportunity came up, so I left.
Literally the Monday after I started at my new job, BlockFi announced shitcanning firing reducing headcount by about 20%. I don’t think I was going to be fired that day, but I continued to be a customer of their services.
The Scammer to the Rescue
The story gets wild from here. I’ll do my best to hand wave over some of the details for the sake of simplicity.
BlockFi was in trouble. They weren’t the size of Enron by any means, but they were a fairly reputable company in a booming new industry that had acquired quite a bit of talent. But they had burned too much money too quickly, thinking their revenues were going to stay elevated. When revenues dipped, they needed more money to keep the company afloat and they needed it fast.
In comes a man named Sam Bankman-Fried or SBF who owned another crypto exchange called FTX (from the Tom Brady and Larry David commercials). He offered BlockFi a lifeline, an offer they couldn’t refuse. We’ll give you some money, you cut some people and you can operate as normal. Oh, and while you’re at it, those customer funds you’ve been lending out? We’ll need to take control of those. It’s the same “insurance” policy that gangsters sell. Sure is a nice hotel you have here, shame if anything happened to it.
Remember, that customers at BlockFi signed up for having their money lent out. This was BlockFi’s business model, full stop which carried risk. The yield that users received was somewhere around 1-3% (which was still higher than bank deposits). However, most users had an a assumption that BlockFi would do some level of due-diligence with these counterparties that took the loans. But here’s what due diligence looked like in the tech industry at the time:
Time is a Flat Circle
Just like Enron, no one was doing due diligence on Sam Bankman-Fried and his company FTX is also going bankrupt. SBF essentially swindled all of the money in a way that would make Bernie Madoff and Jordan Belfort ashamed. At one point I thought I had a good grasp of how the fraud was executed, but it’s something like:
The new CEO who replaced SBF was also directly connected to Enron. The personal parallels are stunning.
So FTX goes down which also brings BlockFi down and I get a new favorite word: contagion.
And here I am in my late 30s, trying to avoid the same fate that befell my dad in his early 40s - avoiding losing money to fraud. But I failed. Against my better judgement, I did not pull all my funds from BlockFi after I left. I incorrectly thought they still had enough… talent? capability? greed? to continue operating at a smaller scale. Then in late 2022, they sent out a notice they were pausing withdrawing funds.
The money I lost isn’t enough to materially hurt our family. But, the chilling effect on me right now is the same as my dad had in 2001 - should I trust this whole system or not? I have a job, kids, hobbies. I don’t have the insight into how directors of companies try to swindle funds. Other than learning some basic valuations of companies, I’m not going to outcompete thousands of analysts across the world in investments. And my trust is just gone that other companies aren’t going to commit fraud.
But… what’s the alternative? If I leave cash in a bank account, it’s guaranteed to lose purchasing power every single day. Index funds are probably a safe bet, but their performance from 2021 is dependent on interest rates in the US. I don’t think I have a good answer (only terrible ones). But I can see how easy it can be to fall into the mindset: “screw it, let’s go have fun with this money and figure out the rest later”.
One last parting thought. I had a couple friends of mine that genuinely thought that more regulation would solve this problem. It’s an earnest opinion, but when I press back and ask what kind of regulation would make sense I get ¯\_(ツ)_/¯. But I am curious how groups like the SEC might do with the “protection” money they received.