The Value Perspective Podcast episode – with Bethany McLean

Hi, everyone. We are very excited about this week’s guest on The Value Perspective podcast. She is a financial journalist who, when working for Fortune magazine, was contacted by the short-seller Jim Chanos, who suggested she look into a business called Enron. Bethany McLean went on to publish a column in 2001 titled ‘Is Enron overpriced?, which kickstarted the unravelling of the company. Then, in 2003, she co-wrote with Peter Elkind The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. She is also behind the books All the Devils Are Here: The Hidden History of the Financial Crisis (2010); Shaky Ground: The Strange Saga of the US Mortgage Giants (2015); and Saudi America: The Truth About Fracking and How It’s Changing the World (2018). Bethany has also been a contributor editor at Vanity Fair for over a decade now and has pretty much covered all of the famous corporate frauds of the last 20 years. Her background is as a mathematician and she started her career at Goldman Sachs as part of their M&A department. In this conversation, she and Juan build on our earlier episode with activist short-seller Carson Block – exploring the nature of the people who commit these frauds, the thin line between ‘visionary’ and ‘fraudster’; the qualities needed to stand on the other side of the trade to uncover these frauds and withstand the pressure coming from believers; and, finally, the role of short-sellers in today’s markets. Enjoy!


Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

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Chapter headings for Bethany McLean on The Value Perspective Podcast

Please click on the link below to jump straight to a chapter

* Bethany McLean, welcome ...

* Being ‘The Enron Girl’

* The human power of self-delusion

* The thin line between ‘visionary’ and ‘fraudster’

* The other side of the trade

* The dangers of ‘groupthink’

* Telling stories, checking facts

* Book recommendations and one big mistake

JTR: Bethany McLean – welcome to The Value Perspective podcast. It is a pleasure to have you here. How are you?

BM: I’m doing great. Thank you for having me on.

JTR: Where do we find you today?

BM: I am in an area of the US called Lakeside, Michigan, which is an unincorporated township right across the border from Indiana on the shores of Lake Michigan – and it is pretty remarkable. For any of your listeners who have not visited the Great Lakes, they are incredible bodies of water – and more interesting than oceans in some ways, dare I say?

JTR: I used to think you were based in New York, but you are based in Chicago, right?

BM: I go back and forth between New York and Chicago but I am mostly in Chicago.

JTR: For those of our listeners who may be unfamiliar with your work, please can you give us a brief summary of who Bethany McLean is?

BM: That’s an interesting question! Let’s see – I have been a journalist for, I guess, 25 years and I have written a couple of books. My first was about Enron in 2003, called The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, which I co-authored with another journalist at Fortune, where I worked at that time. And I sometimes think I will always be ‘Enron Girl’ – despite the fact I have tried to do other things in order to move on from that! My second book was about the financial crisis, called All the Devils Are Here, which I co-authored with a guy named Joe Nocera, who is also a former colleague of mine at Fortune. Then I have written a couple of smaller books about quite wonky areas of interest – one was about fracking and the other was about the US housing giants, Fannie Mae and Freddie Mac. And I have worked as a contributing editor at Vanity Fair for the last, oh goodness, 12 years ... 14 years! Oh, my – a long time.

JTR: It’s funny you said you worry you’ll always be seen as ‘The Enron girl’. I guess that’s a bit like The Beatles, when they moved on to solo careers – people kept bringing up their time in the band. Still, the latter two books you mentioned there have moved you on – Saudi America, which is about the history of fracking in the US, and Shaky Ground, which is all about the financial crisis in the US, right?

BM: It is about the financial crisis but it is actually narrower than that. It is specifically about these two companies – Fannie Mae and Freddie Mac – that dominate the mortgage industry in the US. Lord Mervyn King, the former governor of the Bank of England, once joked to me that we in the US do things the opposite of you in Europe. In Europe, you have socialised healthcare and a free market in mortgages; in the US, we have a supposedly free market in healthcare but we socialise our mortgage business! Anyway, that is the clearest description of Fannie and Freddie I can come up with.

JTR: Correct me if I’m wrong but weren’t you also the producer of a Netflix documentary on Valeant?

BM: Well, I helped with the documentary so ‘producer’ is probably a stretch! Maybe I got a producing credit – I’m not sure. But, yes, I had written a large story on Valeant for Vanity Fair and then I was part of the Netflix documentary that followed, called Dirty Money. But actually the creative genius behind that is a guy named Alex Gibney, who had also made the Enron movie, The Smartest Guys in the Room. So I have known Alex for a really long time.

JTR: And you have also run a podcast show?

BM: I did a podcast of my own for a while called ‘Making a killing’. The idea was to interview, not famous people in business, but people who had written really interesting stories about something going on in the business world – because sometimes you can learn something more from the close observer than from the person at the centre of the story. At least, it is a different perspective. So I would interview people I thought had done really interesting work on some facet of the business world. I am debating restarting that but, at the current time, I co-host a podcast called ‘Capitalisn’t’, which is basically a look at what is working in capitalism and what isn’t. I co-host it with a professor at the University of Chicago named Luigi Zingales,

JTR: I believe you are in the process of finishing a new book. Can we know what it’s about or is that still a secret?

BM: Oh no – it’s not a secret. I have been working on a book about the economic consequences of the pandemic – again with Joe Nocera, my long-time collaborator. The idea is really to look at the things in our economy that were fraying even before the pandemic hit – that were problematic even before the pandemic hit – and then show how Covid-19 exacerbated them or pushed them to the breaking point. Broadly writ, I guess it is the topic I am most interested in now, which is how capitalism is working and how it isn’t working – and the pandemic, I think, shone a spotlight on some of the things in capitalism that are not working well.

JTR: Like energy?

BM: Like energy but also like healthcare in the US, for sure, and the way in which our supply chains have become incredibly fragile or not resilient. It really wasn’t just PPE – PPE may have been the first time we said, wow, this just-in-time supply chain model where everything is stretched to the breaking point? Well, it breaks! But I think we realised it really isn’t just PPE – it is much broader than that. Semiconductors are getting a lot of the focus now – but healthcare, for sure, and all the way through to the Federal Reserve and, really, central bank policy around the world in keeping interest rates very low and engaging in quantitative easing. So the question is whether that has left our economies more fragile than they might otherwise be – and I think the answer to that is ‘yes’.

JTR: From your brief summary of your very impressive career, I think you omitted the fact you are a mathematician. That was your major, right?

BM: Yes. As an undergrad, I was a math and an English major. That was a lot of years ago and so I no longer think of myself as much of a mathematician but, in a very practical sense ... it was actually funny – my mother was here recently and she is going through the process of throwing things out of her house. She brought some papers of mine from college and one of them were the math proofs I used to do – pages and pages of tiny little handwriting and just detailed proofs. And I looked at it and I recognise the handwriting and thought, that’s mine – but the math behind it, I mean, it has gone! But at the same time, I said to a friend of mine recently, well, I’m no longer a math major, I have become a writer. And he was like, oh no – you still write like a math major! I take that as a compliment in the sense that the backbone of logic formed by having been a math major does inform my writing to some extent. Once a mathematician, I guess, always a mathematician!

JTR: And you started your career doing M&A for Goldman Sachs?

BM: Well, that’s a little more grandiose than I would describe it. I started my career as an analyst in the investment banking division at Goldman, so I was probably doing the grunt work involved in M&A!

JTR: So how did you transition to becoming a journalist and start writing for Fortune magazine?

BM: It was a lot of years ago – and the lessons from this are no longer incredibly applicable. What I mean by that is, back in those days – in the mid-1990s – all the big magazines like Fortune were very profitable. Fortune was part of Time Inc, which had offices in Rockefeller Centre and was a profitable magazine company – the biggest in the world. And they all had fact-checking departments so it was a way for someone like me, who had no experience in journalism, to get in the door.

I was hired to check facts on other people's stories and they said, well, we don’t know if you can write – you probably can’t – but you can read this financial story and see if it’s accurate or not because you know enough about this business world, having worked on Wall Street for three years. So that was my way in the door and, because no-one in publishing has money anymore – those big institutions don’t exist apart from newspapers and they don’t hire fact-checkers – it is not applicable as a career path anymore. But that was how I did it.

Being ‘The Enron Girl’

JTR: My next question is central to much of what I will be asking you during our session but, before we get to it, I think it’s important to remind our listeners the reason you are sometimes referred to as ‘the Enron girl’ is because your piece in Fortune, back in 2001, was the starting point for Enron unravelling as a fraud. Is that correct?

BM: I think that is correct – in the big-picture sense. It was the one of the first sceptical stories about Enron to run and it was the first in a major publication that said, something doesn’t make sense here. I have always thought, though, rather than starting anything, that story more picked up on the underlying scepticism about Enron that was brewing in the market. I suppose it started something in the sense that, once somebody is publicly asking questions, it gives people a licence to ask questions – but to ask questions publicly. So I suppose in some ways it did but I have never thought that I uncovered anything so much as I picked up on something that people were already thinking. I don’t know if that makes sense as a distinction.

JTR: Yes. I think it is easy to forget – for those that lived it – and difficult to understand – for those that did not – just how big Enron was back then. This was a company that had many eyes on it from sell-side analysts to all sorts of investors yet no-one really picked up on what you disclosed in your article – although one very big-name short-seller did help to point you in the right direction, yes?

BM: Yes. Journalists are really only as good as our sources. I suppose that is not entirely true but we do rely on sources – and I was a generalist journalist at the time, meaning I wrote about lots of different things. So there is no reason I would have looked at Enron if a well-known short-seller named Jim Chanos hadn’t said, why don’t you take a closer look at Enron as we don’t understand this? He was not ‘on the record’ so that meant I could take the tip and say, oh, this is interesting – but then I had to go and do all the work myself.

I actually think Enron still looms large in a way that I would never have understood or anticipated at the time – for lots of reasons. One of them is that it was the beginning of a breaking point in the sense that, up until Enron, which coincided with the collapse of the first dotcom boom, there was this idea that individual investors were now on the same playing field as major investors. In the US, we were responsible for managing our own retirement through our 401(k)s and choosing our own stocks and the market was supposedly a place where stocks went up and everybody got rich and companies didn’t lie.

And Enron was the first time where everybody said, wow, maybe none of that is true. This huge company that is on the Fortune 500 list and is so celebrated – everything about that can be wrong. So I think it was the beginning of a crack in confidence, in a sense, that was exacerbated by the financial crisis of 2008 and which I’m not sure we have ever really recovered from. So I have come to see Enron as a breaking point of sorts – or as a real turning point.

Another reason Enron remains so broadly interesting is that, as you just alluded to, it really is a tale of human nature. I mean, I was a math major and I worked at Goldman for a mere three years – I am not a forensic accountant. So why could I see something when everybody else ... well, not everybody else, but the majority of people – all the sell-side analysts, portfolio managers – were saying, this is the greatest company since sliced bread. This stock is going to double in the next year. Why couldn’t they see what I saw?

And I think part of that is a story of Wall Street, right? Everybody wants things to go up because that’s how most people make money – and so the bias is very strong in that direction. Lots of people get paid when things go up. Very few people get paid when things go down. And I think it’s also a story of the power or the cult of personality and how strong that can be in business. People in the business world tend to think of themselves as analytical and cold-blooded and able to see facts – that’s just so not true!

It’s just so dictated by emotion. And, in this case, people really believed in Jeff Skilling, the former CEO of Enron. He is a very intellectually charismatic figure and one who I think intimidated a lot of people. And so people went along with what they didn’t understand. And that lesson of how the old fable of the Emperor's New Clothes can actually apply to the modern business world is one that I think is worth not forgetting.

JTR: Also, people don’t realise or they forget that it was not only the investment community and the sell-side research analysts. The consultants – the McKinseys of the world – were framing Enron as a company to copy and I think I have heard you mention in the past that even Harvard Business School had a case study on them. Is that correct?

BM: So McKinsey, yes – their consultants were running around the world preaching to other companies how they could make themselves more like the Enron executives. I think they coined a word to describe the Enron executives – ‘petropreneurs’ – and so I have often joked that maybe it is a red flag when consultants start coining words. That’s when you just should run away! And yes – Harvard Business School wrote a number of glowing case studies about Enron. Jeff Skilling had gone to Harvard Business School.

And I have been told those case studies are no longer accessible on the HBS database – they have been wiped clean – so you have to know where to look in order to find them. And, to me, that has always been a huge knock on Harvard Business School because, if they were really intellectually honest, they would do a wraparound case study of all their positive case studies and then say, here’s why we believe we got it wrong. And that would be psychologically interesting, right? But no, they just pretend it didn’t happen.

JTR: That’s really interesting. You have talked in the past about what the media world looked like 20 years ago, and which Fortune magazine was a part of. We recently had the pleasure of having Carson Block on the podcast and he made the point that, in the past, most corporate frauds were uncovered by journalists doing lots of fieldwork. But he also claimed that specific business model has declined over the last 20 years as traditional media companies have had budget constraints and less appetite to do this kind of work – given shortening attention spans among consumers. Do you think that’s correct?

BM: I do think that is correct. My view of this is more observational than it is necessarily quantitative so it would be interesting to look at it and see if this is really true. But in the old days, when I worked at Fortune, I was paid a salary by Fortune magazine and I could take three months to work on a story that may or may not come to fruition. Now, if 10 of those did not work out back-to-back, your career probably wouldn’t be in very good shape – but you could do that. And you could take the chance on something not working out in order to dig into a story that was important.

If I had pursued the Enron story and my editors had ended up saying, no, there’s nothing here, we can’t publish this, it would not have been the end of my career. I still would have collected my salary, I still would have been able to pay my rent in New York, I still would have been able to feed myself – all that sort of stuff. But that world is now pretty much gone. A lot of magazines operate on a freelance basis where you get paid when you publish a story – and that’s it. And so the incentive then is to do pieces you know are going to get published – not to take a chance on investigating something.

The big newspaper companies – the Wall Street Journal, the New York Times, the Washington Post – they still do a lot of investigative pieces so that is where I might have a caveat about this. But newspaper journalism has always been a little bit different than magazine journalism because newspaper journalists have ‘beats’ [particular areas they follow] and, on the plus side, that means they know their industries very, very well.

But, on the negative side, it means they cannot see the facts coming at them from the outside, right? If you are immersed in something and this is the world you are living, then it is very hard to change your perspective and say, oh, this company everybody I talk to is celebrating? It might actually be a fraud. And so the glory of the old magazine model was that you came at things fresh and you were able to say, well, just because everybody sees it this way doesn’t mean I see it this way. So I do think something has been lost.

On the flip side, back in that old world, the only way you were going to get something published was if you were a journalist – you had to have access to a major media company and you had to be able to publish in their pages. Today, anybody can publish – you can publish on Twitter, you can publish on Seeking Alpha, you can publish on Substack ... there are so many mechanisms by which you can get your own point of view out there. And so, in some ways, the de-professionalisation of writing is not a bad thing.

Although I would argue as a follow-on that it has come with some bad aspects in the sense that, in the old world, you were very highly accountable for what you wrote. If there were factual inaccuracies, you were going to have to correct them and there were certain processes you had to follow, like calling someone before you published something that was critical of them, and making sure you gave them a chance to respond. And I think there has been a rise in bullying in this new world, because people are able to publish and say things about other people without having to make that very difficult step of picking up the phone and calling them to say, here is what I am going to say about you – do you have anything to say for yourself?

The power of self-delusion

JTR: This podcast aims to explore decision-making – especially how people make decisions in conditions of uncertainty and how they can improve – and part of that journey is to explore and understand human psychology and biases and character in general. In your experience, how often is it the case that people do not believe they are actually doing anything wrong? There are the actual frauds, where a person will be aware they are out there lying – for example, I guess Bernie Madoff must have known at some point he was committing fraud. But in many other cases, people must believe that, at some point, the grand idea will come good or market condition will prove them right – for example, Enron with its broadband or energy services, or Valeant with its next purchase or price increase.

BM: I think that is almost always the case – that people don’t understand or don’t allow themselves to admit they’re doing something wrong. The human powers of self-delusion and rationalisation are extraordinarily strong. That’s how most of us get through this thing called life – with some degree of that! And I think that explains almost every story of business-gone-wrong. It is rarely a case of someone sitting in a dark room and coming up with a bad thing they are about to do.

As a journalist, you only wish you could find that moment where the heads of all the big financial firms are sat in a dark, smoky room off Wall Street – preferably with cigars – figuring out how to take down the global financial system! But no – that is not how it works. Even in the case of Enron – it was my biggest surprise because I was such a math major at that point and I thought, if people are doing bad things, then it must be bad people deliberately setting out to do those bad things. Yet, when I started talking to former Enron employees – much to my shock – very few of them had any idea something was going badly wrong. And many of them look back and say, how did I not see it? How did I not add up the pieces?

But Enron seemed to them like an immensely profitable corporation so even if, in their division, it looked like something was badly wrong and they were manipulating each transaction in order to produce reported earnings while cash was going out the door, they would say, well, look at all of this – the cash has to be coming from somewhere. And they didn’t put all the pieces together and say, wow, if this is what we’re doing here, maybe we’re doing this across the entire corporation.

And I think for leaders at the top of a company, there is a huge incentive to rationalise and to say, well, maybe I’m bridging this gap in quarterly earnings here by coming up with this transaction that is going to plug the hole so I can meet Wall Street’s estimates – but that’s only until this new business kicks in. And then everything is going to be great. And this transgression won’t come to light. And, by the way, I’m doing the right thing for my investors and for my employees by bridging the gap because, if I don’t do this, the stock is going to plunge and that’s going to be bad for everybody.

So there is a very human process of rationalisation – and I have often thought that, even more broadly, this line between the visionary and the fraudster is actually much narrower than most people think. You want to believe they sit at opposite ends of the spectrum but I think they actually sit where the two ends of a circle meet and the line dividing them is much, much finer than you might think. I mean, Enron’s broadband business, as you referenced, was Netflix – ahead of its time. And so, if the shenanigans of Enron’s chief financial officer and all the other ways in which Enron was manipulating its earnings hadn’t come to light ... and if the questions about Enron hadn’t coincided broadly with the end of the first dotcom bubble, when all of a sudden there was scepticism in the air ... and if Enron had been able to continue to raise money and the capital markets hadn’t panicked, would Enron have been able to become Netflix? Possibly.

And then would anybody care about what Enron did in order to bridge the gap in these in-between years? No. It would be sort of an interesting academic exercise that, oh, they engaged in all the shenanigans to look more profitable than they were, but no-one would really care. I mean, if Elizabeth Holmes’ machine – the Edison – had eventually worked and it had revolutionised this field, would anybody care, looking back, that there was a period where she was lying and it wasn’t really working? No. It is the same thing – arguably – with Elon Musk: if his non-self-driving cars do actually drive themselves anytime soon, will anybody care that he once said they were self-driving when they really weren’t? Probably not.

The thin line between ‘visionary’ and ‘fraudster’

JTR: Is fair to suggest the difference between someone going down in history as a fraud or a ‘visionary’ can sometimes be a matter of luck?

BM: I’m not sure. I think that’s a great question and I wrestle with this. I think, in some ways, there is some luck involved because it is the ability to continue to raise money through that period where the vision might have some elements of fraud – where it’s not quite what you’re selling. And I think there is some luck – and there is some timing in that, some salesmanship, some ability to find the right investor who is going to keep backing you through that period, the right idea that is going to capture the imagination of investors around the world such that you can keep raising money through that period.

There is also a little bit of luck in what prosecutors choose to look back at. So there are some lies that no-one will ever investigate and there are other lies that will get investigated – and I think some of that is a matter of luck in the mood of the public and how hungry people are for scalps. But then I wonder – is there something else? Is there an ability to hear the word ‘no’ that the people who do get their vision to the other side of the line have learned? Is there an ability to wrestle with the uncomfortable – the fact that this might not work? Is there an ability to say, oh, this is the line I won’t cross, that those people have?

And I think that might be the case – that people who have experienced failure are more able to hold these two competing notions in their head. I often think of that great quote from Fitzgerald – ‘The mark of true genius is the ability to hold two competing notions in your mind and not go crazy’. It is close to that – I’m paraphrasing. But I often think the really great entrepreneur can hold both notions in their mind – that this is the greatest idea ever and it is going to change the world; and, oh, this might fail. To be able to be very clear-headed about the signs of failure while not losing the charge forward on the brilliant idea – I think to be able to do that is a mark of an incredible mind.

JTR: You have covered some of the major frauds in corporate history over the past 20 years. From your own experience, what are the sorts of personality traits you find in many of the people behind these events? Is it a matter of being incredibly smart, very self-confident, good storytellers, builders of cults – what is it they have in common?

BM: It is all those things. And again, that’s interesting, right? Because some of those traits you would also use to describe very successful entrepreneurs and visionaries. But yes, they’re often very, very good storytellers. They are people who become ‘cult leaders’ – in the sense investors just believe in them and begin to think, well, I will put my trust in this person, regardless of what anybody else says. And that actually can sometimes be the right decision – to put your trust in a person – but it can also be the hallmark of disaster to come.

They are often very charismatic and often the company itself has taken on a kind of status where, if you say something negative about that company, you are going to get attacked or draw a lot of criticism because the company itself has become this iconic thing that cannot be criticised. So those are all things they have in common. Think about Mike Pearson [at Valeant] and Jeff Skilling [at Enron] ... oh, and they were both McKinsey consultants, too. That might be another hallmark – I’m only half-joking.

JTR: I guess, on the other side of the coin, you will find the likes of Warren Buffett, Steve Jobs, Bill Gates have all, at some point in time, created their own cult of personality and, to a certain extent, people believe in them blindly. As an example, a lot of people have actually pointed out there are aspects of Berkshire Hathaway’s accounting that might not be as transparent as they claim it to be.

BM: That’s right – and, for sure, you can look back on many of the stories around Microsoft in the early days. Did the term ‘vapourware’ originally come from a Microsoft product? I’m not sure that’s true but there were certainly many Microsoft product launches that were vapourware in the sense of the product not quite doing what the company was claiming it did. So what is the line between that and Elizabeth Holmes’s Edison machine? Well, there is a line, but it is finer than you might think.

And yes, Steve Jobs is a perfect example, right? An incredibly charismatic man, who was very difficult to work for, and who has created in some ways this idea in Silicon Valley that, be an asshole just like he was and that must mean you are going to be successful just like he was. And maybe that is an interesting lesson – to be very, very careful about correlation versus causation. I think we all get really sloppy about that. So the idea in Silicon Valley – and it really did happen for a while – became if you were an asshole like Steve Jobs, then you were going to be successful. That must be the hallmark of somebody who is going to be successful.

Well, maybe not. Maybe it was correlated in the case of Jobs or maybe it wasn’t even correlated. Maybe it was just random. And the idea that one thing causes the other – if you step back and think about it – well, it is obviously not true. So maybe we need to separate out our human desire to simplify and to find a personality trait that must mean we should believe in this person and really think about, well, is that true correlation versus causation or maybe just the randomness of life?

JTR: Correct me if I’m wrong but Jeff Skilling was said to be a very difficult person to work for – and he was actually caught once on an analyst call calling someone something we cannot really repeat on this podcast. And Elon Musk called out an analyst on a call as well because he didn’t like the question, which was something like, how are you making money?

BM: Yes, that’s true. Jeff Skilling was infamous for dividing the world into the people who ‘got it’ and the people who didn’t ‘get it’. And everybody wanted to be on his list of the people who got it because you felt like one of the uncool kids if you were on the list of people who didn’t get it. And the way to land yourself on the list of people who didn’t get it was to ask a question that Skilling didn’t like and he would just dismiss you by say, you don’t get it.

And it’s really amazing how powerful that is in life – particularly as we get older – because you tend to think that, as you get older, you get more confident so of course you’re going to call things out and say no, I don’t understand that. And in fact, again, just like the fable of The Emperor’s New Clothes, life often works in exactly the opposite way. As you get older, you have more to lose and so you are more afraid to say, I don’t understand it – particularly when everybody around you appears to be understanding it. The temptation is just to say, well, maybe I wasn’t paying close enough attention but I’m sure this must be right – or everybody else around me wouldn’t be agreeing with this.

And so I often think one really important lesson in life and something I think about a lot is: how do you make sure you are being intellectually honest with yourself? And, for me, it’s always when I sit down to write. I suppose it’s the math major in me but, when I do that, I figure out I didn’t really understand what I pretended to understand – because I do it too. If someone is explaining something to me, I will often nod my head and I really think, in that moment, I’ve gotten it – and then I sit down to write and try to explain it to somebody else and I realise I didn’t understand. That is my ‘enforcement mechanism’ for intellectual honesty, if you will.

And I think everybody has to find that for themselves. It doesn’t mean you have to be public about it – it doesn’t mean you have to be the person in the room who says, I don’t get it – but you have to know yourself that you didn’t really understand what just happened. And then you can go back and do more work and try to understand it. That doesn’t mean there is something wrong with it, by the way – that you didn’t understand it – it may just mean you weren’t paying attention. Or, often in my case, you weren’t smart enough to understand it and you need somebody to hold your hand and walk you through it a little more carefully. And all of that is good – where you get into trouble is when you pretend you understood it and you didn’t. And when you pretend to yourself, especially, that you understood it and you didn’t.

JTR: Have you ever had the chance to talk to Jeff Skilling or Enron CFO Andrew Fastow after the events unravelled and they came out of jail?

BM: Andy and I have run into each other a couple of times, because he is now out on the speaking trail, giving talks about his experiences at Enron. So yes.

The other side of the trade

JTR: OK. I want to flip things a little bit – and this is something we also asked Carson Block and is very much of interest to us – from a behavioural point of view, what is needed in terms of personality and character to be on the other side of the trade? You have all these people believing in the company and the narrative and the story. You have regulators that sometimes side with management. You have long-only investors and hedge funds – I think Jim Chanos once said that on the other side of almost every high-profile short is a high-profile long-only investor. So anyone raising questions about the company’s business model gets attacked incessantly. That’s not just the case for short-sellers – it can be for journalists too, so what does it take to be one of those people?

BM: Jim Chanos once said to me – it was years and years ago – that he had no problem finding really smart people to come and work for him who could do all sorts of interesting analysis. What was hard was to find the person who could stand against the tide – especially for a really long period of time. It was easy enough ... well, not easy enough, but it was OK to say, all these people think this and I think it is this, once – but to continue to believe that in the face of being told you’re wrong by all the people you just mentioned, was really, really difficult.

And I think, more broadly, that’s it – as humans, and it’s probably a pro-social trait, we want to belong, right? We want to fit in with other people and standing against the tide when everybody thinks something and saying, no, no, no, I don’t believe that, I don’t think that’s right, it’s very, very difficult. And it’s more difficult for some people than others. So I guess it comes back to knowing yourself – and, if it’s easy for you, that’s great. But then that may mean – as in my case – that you have a little bit too much of a tendency to be a contrarian. And in the end, being a reflexive contrarian is no better than being a reflexive believer, right?

If you don’t believe something, just because everybody else does, well, that’s not really any more thoughtful than believing it just because everybody else does, right? So I have a little bit of that in me and I have to be wary of that. But if you don’t, and your overwhelming desire is to belong and to fit in then, equally, you have to be aware of that in yourself. And when you’re going along with something, or when you agree with something that everybody else thinks, you have to ask yourself, why is this? And if you don’t agree with it, then you have to know this is going to be hard for you because it’s more comfortable to think like everybody else does. So I think it just comes down to that basic tenet of self-knowledge.

JTR: Did your first piece on Enron lead on to a series of articles?

BM: It was one major piece and then I did a few smaller ones before Enron went bankrupt. But that was one of the downsides of the old model of magazine journalism – and still holds true to some extent today – it is kind of ‘Hit me with your best shot’. You don’t have the opportunity to publish one piece on Enron and then, in the next issue of the magazine, publish another piece on Enron, right? You get to publish one piece on Enron and then that’s that – you've said what you had to say. So – and this is a different question to what you asked – I do think one of the strengths of journalism today is it can be more iterative. You know – you can publish and then people can come to you and say, but what about this? And you can publish again, online, and so on. Anyway, that wasn’t what you were asking!

JTR: What I was building up to ask was whether you came under a lot of pressure from Enron itself, or from analysts or long-only investors, or was it more that you wrote the story and it just served to make public the uneasiness many people were feeling about the company?

BM: There was a lot of pressure. I had to call Enron, of course, before the story ran. I did a lot of homework and I called them and I still remember the call because I sort of expected them to say, yeah, yeah, whatever – go away, pesky little journalist! You know – here are the answers to your questions. This is absurd. And they sort of said that – but in a very aggressive way. They had Jeff Skilling get on the phone and he yelled at me and said, anybody who raises these questions is unethical because you haven’t done enough homework to understand our business. And if you had done your homework, you would understand how stupid your questions are so it’s unethical of you to publish a story like this when you don’t understand anything about us.

And then he had a couple of Enron executives, including Andy Fastow, fly up to Fortune’s offices in New York and sit down with me and my editors. And Ken Lay, who at the time was the chairman of Enron, called the editor of Fortune and said, don’t you dare publish the story – you’ve got an ignorant young journalist who is taking a story from a short-seller and you cannot do this. So there was a fair amount of pressure. And that was, for sure, intimidating.

I am also, by nature, always inclined to think I might be wrong. To some people, that kind of pressure could make them say, well, I must be right – look at all this pressure that is trying to silence me. In my case, I suppose there was a little of that – but it was more, oh, I might be wrong. But one of the great glories of the old model of magazine journalism was that my editors stood with me. I have always wondered, if they had not – if they had said, oh, Bethany, we can’t go forward with this – how hard I would have fought for my story? I think I would have fought but, the reality is, I didn’t have to do that because they all backed me up.

The dangers of ‘groupthink’

JTR: Why do you think it is that regulators can sometimes be so sceptical of claims made against these sorts of companies? It is easy enough to recall the cases where fraud was uncovered but what about the times where people were pointing fingers at a company where maybe it was not properly investigated or the company got bailed out by markets or any of the other reasons we’ve touched on?

BM: I think there are maybe three parts to this. First, as you say, there are a lot of cases where people bring complaints to regulators and it turns out the complaints aren’t totally real and what they really want is for the regulator to take action so they can make money off their position. And that is a real concern, right? So regulators have an inherent and valid scepticism of people who are trying to get them to take an action that will benefit their own pocket. And I would say that’s true – but not entirely. Everybody in the market is self-interested, right? We all want our position to benefit. So the idea someone who wants a stock to go down is somehow worse than somebody who wants a stock to go up? Well, that’s not very honest – that’s not true.

So that’s one portion of it. Another component of it, though – the broader human nature aspect of it – is that people just don’t ... well, let me focus on another issue first, which is often there is implicit bias and I think, for example, that was true in the run-up to the financial crisis. It’s not explicit bias – it’s not like someone was shoving a bag of cash under the table at Ben Bernanke and telling him to say the subprime mortgage crisis was going to be contained and wasn’t going to be a big deal. It’s that, when people all come from inside the same world, they tend to think the same way – and so you just don’t see it because you think like the people you’re regulating. And because you think like them, and these are the people you talk to, you don’t mean to get it wrong – but you do.

But I think the biggest thing is this broader lack of imagination. And that’s because, when you look at some of these corporate disasters before they happen – if someone were to have told you this was going to happen, you would say, no way. This could never happen. This just couldn’t happen. Enron – one of the biggest companies in the US couldn’t possibly be a fraud. The financial crisis? Wall Street institutions going bankrupt or almost going bankrupt? No, no, that can’t happen.

Even Elizabeth Holmes – that her whole Edison machine could be a fraud while she is so celebrated on the cover of every magazine? No, no, that can’t possibly happen. The idea a global pandemic is going to come along and, two and a half years later, we are still going to be fighting our way through it? No, no, that can’t happen – that’s out of some kind of science fiction book. So I think people often have a lack of imagination in a way that is very dangerous – because they think some really big, bad thing cannot be on the list of possibilities. And the reality is, it is.

JTR: Does that same rationale apply to long-only investors and analysts on the ‘sell’ side?

BM: I think it does. I think the idea that this worst-case outcome, this big, bad thing, could actually happen – it’s not the way our human brains work. And you would say it’s an outside probability – that it is at the very tail end – except that, when you look back over the last couple of decades, it really isn’t. This stuff happens over and over again and that crazy worst-case outcome is actually possible – it may not be probable, but for sure it’s possible.

JTR: Is activist short-selling heading for extinction? With markets largely going up for the last 10 years, short-selling has become very difficult and short-sellers face so much pressure nowadays. You have Jim Chanos and maybe Carson Block, who are quite famous, and I know there must be a lot of smaller shops out there but you don’t hear as much about them as you used to. Is that fair?

BM: I think it is – but it’s also sort of like that famous Businessweek cover in 1980 that predicted the death of equities, right? Right now, we’re predicting the death of short-sellers – and it certainly has been a terribly rough time to be a short-seller – but I think we’re heading into a very different market going forward. So this next decade could be the golden age of short-sellers, right? And yet we’re all predicting their extinction.

JTR: More than short-sellers as a whole, I was thinking more about the activist ones – those kind of pointing fingers at a company they believe is misbehaving or manipulating reality or the economics of the business. Just because they tend to be attacked by so many people, I guess it must be emotionally and psychologically very, very difficult.

BM: Well, I think it depends on who you are because – back to my comments in our discussion about human nature – there are some people who thrive on that. I mean, there really are. So I hope not because, when I think back on Enron, one of the great misconceptions about that period was that everybody had access to the same information. And they really didn’t because, when you looked at the public narrative about Enron, it was this glowing success where the stock was going to triple in the next year.

But then there was a private narrative – among short-sellers – about Enron in the credit markets where they were trying desperately to raise money, which was very, very sceptical. And yet that narrative didn’t ever make it into the public domain and so individual investors got screwed. They had no chance to protect themselves because it wasn’t as if they had these two competing views and they were able to weigh them for themselves and say, well, this is what I choose to believe.

The world is very different today. In the case of Tesla, for instance, if you choose to believe in Tesla, it’s not because there’s not lots of information to the contrary, right? But you can look at that and make your own decision – and I think that’s much healthier. And, in some ways – even over the course of the last 10, no, 20 years of huge difficulty for short-sellers – that has been because there are so many people who are public about their negative views and willing to take that heat.

And I think that’s something for which we should all be grateful. Why would you not want to hear a contrary opinion, even if you’re the biggest believer in Tesla there possibly ever was? Why would you not want to know that this is the viewpoint of a really smart person who is taking the opposite bet? Dismiss it if you want, but at least you know it’s there. Whereas, in the old days, we didn’t even know it was there.

JTR: Do you think the world has changed much over the course of the last 20 years? The reason I ask is we had Dominique Mielle on the podcast. She used to be a partner at alternative asset manager Canyon Capital but now she is an author and commentator and in her book, Damsel in Distressed, she argues that, when it comes to finance, there is nothing new under the sun. Things repeat over and over again – it’s just that people have short memories and they forget it has all happened before.

BM: I haven’t read her book but I will go read it now. And yes, I completely agree with that – there is nothing new under the sun. And, just when we start to say, oh, this is done, short-sellers are dead, the world changes and, all of a sudden, we are back in a time we have seen before. But you know, since the beginning of time, since the tulip mania, all of these frauds or business-gone-wrong stories have this one thing in common, which is the complicity of the victims – the belief of the great majority of people in the thing that, after the fact, is going to seem clearly too good to be true.

If we didn’t all believe, the thing wouldn’t happen, right? It is human nature to want to get rich – to believe in that thing that clearly, in retrospect, is going to be too good to be true. So whether it’s Enron; whether it’s the financial crisis, where we all for a period of time believed that mortgages made to people who couldn’t afford to pay them back could be turned into super-safe securities; whether it’s Elizabeth Holmes, where people believed a young woman with no formal training could invent a machine that had bedevilled scientists for decades – you look back and you say, of course, that didn’t make sense. But we all wanted to believe – and I think, by the way, that’s not necessarily a bad thing. I think, in some ways, that human capacity to believe in what seems to be nearly impossible is also what makes the world move forward. So it is both a very bad delusional trait in people and also a very good trait – it can be both at the same time.

Telling stories, checking facts

JTR: I would like to circle back to something we touched on earlier – about how much the media has evolved over time and the capacity for people to create and publish content out of the blue. How much has narrative and storytelling taken over the world – to the point it makes it much more difficult to discern what is fake news or reality? Given you’re being bombarded by all sorts of content that receives no filter and you just can’t identify narrative like, for example, Tesla fans saying it’s not a car manufacturer, it’s a software company.

BM: I think narrative has always ruled the world. There is a reason human beings have told stories since the dawn of time. It’s because that’s how we make sense of our world – and storytelling inevitably involves some slippage. It’s not a story, if it adheres to the actual facts – fact after fact after fact – it has to be woven into a story that makes sense to humans. And stories are archetypal – so I think it was ever thus.

What is different today, I think, is the lack of fact-checking – spoken as a former fact-checker! – but, if you read something in traditional media, the journalist had to have called the person who was being criticised because that’s the way it worked. You couldn’t publish otherwise – it was considered unethical. If the facts weren’t accurate, then there was going to be a retraction somewhere – it may not be what the person who was criticised would like but it was going to be clear that it was wrong.

And that’s gone today so I have often thought that, if I had all the money in the world – and the time – I would set up a not-for-profit that taught fact-checking. It would come up with a curriculum that could then be given to schools so that kids in high school and even middle school would be learning to fact-check. Because when I got to Fortune, this was the way it worked – you were handed a story and it was printed, in those days, in black and white ink. And often when we’re given something in that kind of format, the idea that it could be wrong or that it could be made up was just inconceivable because it was so beautifully written.

And yet I remember being given my first story to fact-check – it was something on 401(k)s – and I read it and was like, well, of course. And then I had to fact-check it – and when you actually break down something into its discrete facts, and then you also ... in those days, in fact-checking, you were responsible for the overall gist. Was the overall gist accurate and did the facts support the overall argument? And you would often find –much to your shock – not only were lots of facts wrong but the entire thing was wrong. And it was really good training – really good training – and I think the world would be a better place if we all learned to do that.

JTR: I’d like to see that fact-checking curriculum myself when it’s ready – it will be very powerful.

BM: Some day!

JTR: This feels like a great question on my side but I don’t know if it’s a great question for you. Some people argue you should try not to meet company management very often because, every time you meet someone, you are creating a bias – especially with people who have made it to the top and become CEO or chairman as they tend to be good at storytelling and selling a narrative. In your job, however, you need to meet these people so you need to be able to fight against the bias of buying into their story.

BM: I’m not sure I agree with that ... well, you simply can’t do it as a journalist, right, because you have to give the person a chance to respond. And I think there’s something very powerful in that – and if your convictions aren’t strong enough to withstand the other person’s narrative, then maybe you haven’t sufficiently tested those convictions. Still, I do think there is something to be said for trying to develop an independent point of view before you talk to management.

I have often thought, if I had been a beat reporter or if I had met Enron’s management team first and been given their whole slate of perfectly put-together presentations, would I have believed? Probably, right? I mean, the amount of money corporations pay people to put together an incredibly powerful narrative – one that is so well put-together the gaps in the narrative don’t reveal themselves very easily – it’s very hard to see through that. And then there are all these other ‘human nature’ components of wanting to be liked – especially, if you’re in the presence of a powerful, intellectually charismatic corporate management team, most people are going to want them to like you. And then that will override some of your natural scepticism.

So I do think it’s really important to have done your own work and have your own point of view before you go into something. At the same time, being able to test that point of view against the power of someone else’s storytelling is important because, if you can’t withstand that, then maybe you haven’t earned the right to your point of view.

JTR: Have you had the chance to read Dan McCrum’s Money Men – the story of the Wirecard fraud?

BM: I have read pieces of the book and paid attention to that story but I have not read the book in its entirety. But yes, once again, Wirecard – could there be a better, more powerful example of this, and a more powerful example of your previous point that there’s nothing new under the sun? I mean, this is all that in spades, right? Somebody is warning for a long, long, long time that Wirecard was a fraud and no-one wanted to pay attention – until they did.

I guess that’s another interesting lesson I have thought about – things change in an instant. And you can’t predict the instant in which that thing is going to change. So the scepticism about Wirecard was out there for years before, all of a sudden, everybody said, oh my god, this is right. And so you have to be careful of dismissing scepticism and saying, oh, well, this is an old story – it’s been out there for three years and it doesn’t look like it’s right because nothing has happened in that time. That doesn’t really mean anything – it just means its time hasn’t yet come.

JTR: Dan McCrum said on a podcast recently that a lot of fraud is going on, given what has happened in markets over the last five years – with cryptocurrencies, bitcoin, the venture capital explosion, private markets and so on. Do you share that view?

BM: That has to be true. I have been lost – lost? ‘Immersed’ is a better word! – in this book I have been trying to write for the last couple of years but, in some ways, I’m sad because I think this period would have been a banner time for uncovering all sorts of stuff. I mean, all you have to do is look at the story told by the Wall Street Journal-ists in their WeWork book – the ways in which the investment bankers fighting to take WeWork public prostrated themselves to Adam Neumann in order to get his business – to conclude, something is really wrong here! If that’s happening in the case of WeWork, then it’s happening on a smaller scale with all sorts of companies everywhere and all the mechanisms we think are policing this – for example, that the investment bankers who take a company public would never want their names on the prospectus of a business that’s going to blow up? Oh, no, no, no – they don’t care. They just want the fees.

Book recommendations and one big mistake

JTR: That’s super-interesting. Bethany, we’re coming to the end of our session and we always ask our guests two signature questions: for one or more book recommendations – and you can recommend one of your own! – and an example of a bad outcome that was down to bad process and not bad luck.

BM: Speaking of bias, I have recency bias! And so books I’m reading now always feel really, really, really appealing to me. So I’m going to give you a recommendation of a book I’m reading now, which is Peter Zeihan’s The End of the World is Just the Beginning. That is a really thought-provoking look at how the forces we have taken for granted over the last three or four decades may actually not be permanent, and may instead be transitory. I think it is thought-provoking and important.

I would also recommend – and it’s a book I wrote a ‘blurb’ for – The Lords of Easy Money by Christopher Leonard, which is a sceptical look at the Fed and the role it may have played in creating a bubble in various asset classes with its monetary policy over the last couple of decades. There is this really interesting split here because I think most people in the markets would agree that Fed policy has played a role in inflating the price of assets while most academic economists do not. So there’s this interesting split and you can come down on whichever side you want. But this is a really interesting and well-told argument and an important contribution.

JTR: And an example of a bad outcome to a decision that was due to bad process, not bad luck.

BM: Let’s see. In my own case, I think where things go wrong is when I don’t do my homework and when I rely too much on intuition, rather than actually talking to everybody who is available and really trying to be honest about the facts I’m coming up with. And I think ... is it bad luck or bad process? It’s interesting to try to draw the line between those two things but, for me, I try to stick with a very clear process of doing my own homework, doing my own reporting and then coming to a conclusion.

I guess, although it isn’t mine, when I look back at the Valeant story, for a lot of people who ended up on the wrong side of that, some part was bad process in that people looked at the other people who were involved in Valeant and said, oh my goodness – Sequoia, ValueAct, Bill Ackman – look at all these incredibly intelligent people who believe in this company. Well, they must be right. So one part of bad process I always try to be aware of is believing in something just because somebody who’s really smart and who you also respect believes in it too. Often that’s the right call but you know what? Really smart people who believe in something can get it wrong.

JTR: Bethany McLean, this was fantastic. Thank you very much for your time.

BM: Thank you so much for having me.


Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team and manage Emerging Market Value. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet, I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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