229|A Cynic's Perspective On A Long-Short Story ft. Jim Chanos with Srivatsan Prakash

SPEAKER_1 (0:00)

You're listening to Market Champions, a podcast on navigating the financial markets. Here's your host, Srivatsan Prakash.

Srivatsan Prakash (0:24)

This episode of Market Champions is brought to you by Simplify ETFs. For more information, go to simplify.us. No Simplify ETFs will be discussed in this episode.

Hey, everyone, welcome back to another episode of Market Champions. Today, I've got Jim Chanos, founder and president of Kynikos Associates. Jim, thank you so much for being on the podcast. It's fantastic to have you on.

Jim Chanos (0:50)

My pleasure.

Srivatsan Prakash (0:52)

Awesome, so Jim, the one thing that's been on everyone's minds lately or the biggest development has been this blow up with FTX. When you saw that, what was the first thing that came to mind and what are your thoughts on it? How are you looking at it?

Jim Chanos (1:08)

So when the amazing SPF interview on Bloomberg dropped in April, it was on a Monday afternoon when I teach my history of financial fraud class. And after reading the interview while over coffee right before my class, I scrambled to try to get the actual article up on the screen for my students.

I thought it was sort of a jaw dropping event whereby the SPF, the founder of Alameda and FTX really made some just stunning admissions in that interview, if you remember, about how crypto worked, how yield farming worked, or how it didn't work. And he sort of, as I said at the time, said the quiet part out loud many times about the nature of the economics underlying these businesses. And so I guess we shouldn't be shocked when someone who basically admits to running a Ponzi scheme is revealed to possibly have been running a Ponzi scheme. And that's really, nobody after that April interview should have been keeping a dollar at FTX.

And again, remember these are unregulated entities. I keep stressing that. One of the advantages of fiat over crypto is of course not only regulation, but the existence of deposit insurance. So that God forbid something like this happens, you don't lose your life savings. And that is going to be the one area that crypto is going to be found wanting going forward no matter what happens, is the ability for people to lose everything in a case of fraud.

Srivatsan Prakash (3:01)

Mm-hmm, got it. Yeah, and so one interesting perspective that I sort of read about was sort of a comparison between Enron and FTX. So, you know, of course, Jeff's killing and SBF have very different personas, but overall it sort of seemed as if both firms sort of promised to revolutionize trading and Enron for energy and then FTX for crypto in different ways, of course. But then they had a lot of hubris. They talked about the shiny objects in a similar fashion. Then at the end of the day, you know, they were both massive fraud. So, you know, is this sort of a perspective or dynamic that you agree with? You know, what sort of your take on that?

Jim Chanos (3:38)

Well, I would say that SBF was probably the anti-Jeff Skilling in terms of he was everything personally that Jeff Skilling wasn't, right? Jeff was very slick and polished.

And SBF, I think we probably all could agree, was probably not slick and polished. But that was part of his persona, clearly. But what is, as you point out, very, very similar, is the whole nature of the black box.

At the time, Enron was a trust me story. And when I would ask the sell side analysts, well, just how are they making their money?

They would sort of say, well, it doesn't matter. They just do. And they beat their earnings projections every quarter. And it's a black box. And you just have to have faith.

And I said, well, if they're going to defraud you, isn't that exactly how they would do it?

And so fast forward 20 years and we see the crypto industry following a little bit of that model. Now, there are obviously differences. But another big similarity is that both Enron and FTX fit one of my fraud models that I teach that was from Mary Ann Jennings, The Seven Signs of Ethical Collapse. And in that book, she has a wonderful seven-point checklist of companies that have committed serious fraud and some of their attributes. And Enron picked all seven. I think I was conversing with someone the other day who knows the model. And we kind of agreed that SBF and FTX picked off six of the seven. So these things are not always exactly the same, but they share a lot of the same characteristics.