Jim Chanos & Bethany McLean on Lessons from Enron, Financial Fraud Throughout History, and the Fall of FTX, SVB & Wirecard | #479

Meb Faber (0:06)

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SPEAKER_3 (0:20)

Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria's funds on this podcast.

All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb Faber (0:39)

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Welcome my friends. We have a truly special show for you today. Our guests are Jim Chanos, Hall of Fame short seller and generally one of the nicest guys around. Also happens to have an encyclopedic knowledge of market history and Bethany McLean, contributing editor at Vanity Fair and the author of multiple books, including The Smartest Guys in the Room, The Amazing Rise and Scandalous Fall of Enron. In today's episode, Jim and Bethany cover all aspects of fraud. They share where we are in both the financial cycle and the fraud cycle, why we continue to see fraud since they first connected about Enron over 20 years ago and the thin line between a visionary and a fraudster. We discuss the anti short seller rhetoric that pops up all the time in media, the impact of social media on the rise and fall of companies and the trends in stock based compensation and how companies try to hide them with adjusted earnings. As we wind down, Jim shares his concerns about the commercial real estate sector and Bethany gives us a preview of her new book releasing this October. Please enjoy this episode with Jim Chanos and Bethany McLean.

Jim, Bethany, welcome to the show.

Bethany McLean (2:53)

Thank you.

Meb Faber (2:54)

This is gonna be a lot of fun. You guys, we've had a lot of short-themed sort of shows over the years, which is impressive because there's not too many shorts left this day and age. I see that like the famous chart, a normal short-selling funds by year. We may have had a brief reprieve last year. We're gonna talk about a lot of fun stuff today.

Jim, are you deep in your spring class right now? Are you as a professor, do you have your professor hat on? We're recording this kind of mid end of April.

Jim Chanos (3:24)

Yeah, and special guest lecturer Bethany McLean is coming to speak on Monday on Enron.

Meb Faber (3:30)

Well, I know you feature one of her frameworks in your class. Can you guys give us the main, I think you say five types of ideas you're looking at from the short side and Bethany can talk about hers as well.

Jim Chanos (3:47)

Well, I mean, the five models are systematic models of fraud and one of them derives directly from Bethany. But we try to teach the students to think about the concepts of financial fraud systematically and then we use a historical narrative in cases to sort of drive home the points. But we have a macro model. What is the overall milieu and the idea being that the fraud cycles follow the financial cycle and business cycle with a lag. And the longer the expansion, the longer the bull market.

Typically, the more evidence toward the end of the cycle you get a fraud as people begin to believe things that are too good to be true and fear of missing out replaces healthy skepticism. Then there's a micro model on how frauds are allowed to be done in the C-suite. And then we have a governance model, which is derived from Bill Black's great book, The Best Way to Rob a Bank, his own one. In that, he makes the great point that modern fraud uses the corporation as both a weapon and a shield. We have a checklist on fraud from Mary Ann Jennings' Seven Signs of Ethical Collapse that most frauds adhere to. And last and certainly not least, we have Bethany McLean's concept of legal fraud, which really applies to almost all modern day financial fraud, whereby everything that's done by the corporation committing the fraud is actually legal, yet there's an intent to deceive.