--:-- Dwarkesh Patel: This line between a visionary and a fraudster. You think there are two opposite ends of the spectrum, but in reality, they're where the ends of the circle meet. Somebody has the ability to put a vision forward like Jeff Skilling did at Enron, like Elizabeth Holmes did at Theranos, like SBF did. Then you're particularly susceptible. Self-delusion is such a strong component of all of these stories of business gone wrong. The line between what happened at Enron and what happened in the global financial crisis is not a matter of black and white. Well, do you believe in the efficient market hypothesis?
--:-- The rapid implosion of a company worth tens of billions of dollars, insider dealing and romantic entanglements between sister companies, a politically generous CEO well connected in Washington, the use of a company's own stock as its collateral, the short-lived attempt to get bought out by a previous competitor, and the fraudulent abuse of mark-to-market accounting. We are not talking about FTX. We are talking about Enron, which my guest today, Bethany McLean, first broke the story of and has written an amazing and detailed book about called *The Smartest Guys in the Room*. She has also written a book about the housing crisis, *All the Devils Are Here*, a book about Fannie and Freddie, *Shaky Ground*, and a book about fracking, *Saudi America*, all of which we'll get into.
--:-- She is, in my opinion, the best finance nonfiction writer out there. I'm really, really excited to have this conversation now. Bethany, thank you so much for coming on the podcast.
--:-- Bethany McLean: Thank you so much for the probably undeserving compliment. Thank you for having me on the show.
--:-- Dwarkesh Patel: My first question: what are the odds that SBF read *The Smartest Guys in the Room* and just followed it as a playbook, given the similarities there?
--:-- Bethany McLean: I love that idea. I have to admit, I guess I love that idea. I don't know. That would make me responsible for what happened, so maybe I don't love that idea. Let me take that back. But I actually think that even if he had read the book, it would never have occurred to him that there was a similarity because self-delusion is such a strong component of all of these stories of business gone wrong. It's very rare that you have one of the characters at the heart of this who actually understands what they're doing, understands that they're moving over into the dark side, thinks about the potential repercussions, and chooses this path anyway. That's usually not the way these stories go. So it's entirely possible that SBF studied Enron, knew all about it, and never envisioned that there were any similarities between that and what he was doing.
--:-- Dwarkesh Patel: That's so fascinating, which raises the question: what are we doing when we're documenting and trying to learn from books like yours if somebody who is about to commit the same exact kind of thing can read that book and not realize that he's doing the same exact thing? Is there something that just prevents us from learning the lessons of history, that we can never get the analogy right, and we're just guided by our own delusions?
--:-- Bethany McLean: Wasn't there a great quote that history rhymes, that it doesn't repeat? I'm relying on who said it, but I think that's absolutely true. I think it's important for all of us—those of us who are not going to find ourselves at the center of that giant fraud, or so I hope—to understand what went wrong. I do think there's great value and greater understanding of the world without necessarily a practical payoff for it. When something goes wrong on a massive societal level, it's really important to try to explain it. Human beings have needed narrative since the dawn of time, and we need narrative all the more now. We need to make sense of the world. I like to believe that the process of trying to make sense of the world has a value in and of itself.
--:-- Maybe there is some small deterrence aspect to it. I often think that if people understand more the process by which things go wrong—that it isn't deliberate, that it's not bad people setting out to do bad things, but human beings first convincing themselves they're doing the right thing and then ending up in a situation they never meant to be in—maybe on the margin that does help. Maybe it has deterred some people who would have started down that path but for the fact that they now see that's the usual path.
--:-- Dwarkesh Patel: That raises the next question I wanted to ask you. Bern Hobart, a finance writer, wrote a blog post before FTX about Enron. He said, "In the end, it actually looks like we fixed the precise problem Enron represented. Nobody I know solely looks at GAAP financials. Everybody ultimately models based on free cash flow. We're much more averse to companies that set up a deliberate conflict of interest between management and shareholders." There's a way you can read that and say, "Doesn't FTX prove him wrong?" But there's another way to look at it: FTX deliberately set up outside the U.S. So there's a story to be told that we actually learned the lessons of Enron, and that's why they were in the Bahamas, and we haven't seen a fraud of that scale in the continental United States. Do you think the FTX saga and the absence of other frauds of that scale in America shows that the regulations and changed business and investment practices in the aftermath of Enron have actually worked?
--:-- Bethany McLean: I think they probably worked, narrowly writ, in the way the writer you quoted articulated. It would be very hard for the CFO of a publicly traded company who set up other private equity firms that he ran that did all their business with his company, because everybody would say, "That's Enron," and it would be completely on the nose. In Sarbanes-Oxley, in the sense of helping to rein in corporate fraud of the sort practiced by Enron—the abuse of very specific accounting rules—I think that works.
--:-- But you say there hasn't been fraud on a scale like Enron up until perhaps FTX, but you're forgetting the global financial crisis. In the end, the line between what happened at Enron and what happened in the global financial crisis is not a matter of black and white. It's not a matter of one thing being clear-cut fraud and the other being great practices we love. They're both somewhere in the murky middle. A lot of what happened at Enron wasn't actually outright fraud. I've coined the phrase "legal fraud" to describe what happened. A lot of what happened in the global financial crisis was legal, hence the lack of prosecutions. But it's also not behavior that leads to a healthy market or a healthy society.
--:-- There's a reason you had Sarbanes-Oxley, and what was it, eight short years later, you had Dodd-Frank? Read broadly, I'm not sure Sarbanes-Oxley did that much good. When President George Bush signed it into law in the Rose Garden, he gave a speech about how investors were now protected and everything was great. Compare that to the speech President Barack Obama gave eight years later when he signed Dodd-Frank into law in the Rose Garden. It's remarkably similar: now ordinary investors can count on the rules and regulations keeping them from people preying on their financial well-being. I don't think it's true in either case because our markets, particularly modern markets, move and evolve so quickly that the thing coming out of LaSalle to get you is never going to be the thing you are protecting against.
--:-- Dwarkesh Patel: Given that Enron was committing illegal fraud, is it possible that the government, when they prosecuted Skilling and Fastow and Lay, prosecuted them to a greater extent than the law as written at the time would have warranted? In other words, was there something legally invalid in the quantity of sentence they got?
--:-- Bethany McLean: I get what you're asking. It's a really tricky question. In absolute terms, Enron needed to be prosecuted aggressively. While I say it was legal fraud, that is for the most part. There was actual fraud around, but it's on the margin. It doesn't explain the entirety of Enron's collapse. Much of what they did was using and abusing accounting rules to create an appearance of economic reality that had nothing to do with actual reality. But then there was actual fraud in the sense that Andy Fastow was stealing money from these partnerships to benefit himself. And if you believe the core tenet of the prosecution—this agreement called Global Galactic signed between Andy Fastow and Jeff Skilling, where Jeff agreed that Andy's partnerships would never lose money—then that invalidated all of the accounting. That's the chief reason Skilling was convicted: the jury believed the existence of that agreement, along with one set of insider stock sales.
--:-- In absolute terms, it's hard for me to say. Enron was such a watershed moment in our country, far beyond business. It caused so much insecurity about our retirement assets—can you trust the company where you work? I think the government did have to prosecute aggressively. But relative to the financial crisis, where a lot of people made off with a lot of money and never had to give any of it back, it doesn't seem fair that Jeff Skilling went to jail for over a decade and no one involved in a major way in the financial crisis paid any price whatsoever. People didn't even really have to give up that much of the money they made. That seems a little bit unfair. So it's an absolute versus a relative question.
--:-- Dwarkesh Patel: By the way, who do you think made more money? The investment banks like Goldman Sachs and Morgan Stanley from providing their services to Enron as the stock was going up, or Jim Chanos from shorting the stock? In absolute terms, who made more money?
--:-- Bethany McLean: I think the investment banks, for sure. They made so much money in investment banking fees from Enron. But it's a good question. I think Jim made a lot of money too.
--:-- Dwarkesh Patel: You've spoken about the usefulness and the shortage of short sellers as a corrective on irrational exuberance. I'm curious why you think that shortage exists in the first place. If you believe in the efficient market hypothesis, you should think that if some company has terrible financials and implausible numbers, people would be lining up to short it, and you would never have a phenomenon like Enron. It's so odd that you can have reporters who are basically ahead of the market in predicting what's going to happen. How do you square that with the efficient market hypothesis?
--:-- Bethany McLean: Well, do you believe in the efficient market hypothesis?
--:-- Dwarkesh Patel: I'd like to, but I'm trying to wrap my head around Enron. I'm not sure how you can, unless you adopt Warren Buffett's point of view—I'm going to mangle the quote—but the market in the short term is a voting machine, in the long term it's a weighing machine. The idea is that the market may be very inefficient for a long period of time, but rationality does actually work in the end. I think I might believe that.
--:-- Bethany McLean: But isn't it John Maynard Keynes who said the market can remain irrational for a lot longer than you can remain solvent? I think that's true too. Believing that the market is efficient and rational in the short term is just obviously wrong.
--:-- Back to your question about short sellers. I think part of it is that there is still this idea—certainly a couple of decades ago, and I think it still exists—that owning stocks is mom and apple pie and American, and shorting stocks is somehow bad and evil, rooting against America. I remember going back to the Enron days, people criticizing me, even other people in the press, saying, "But you took a tip from a short seller; they're biased." I would say, "But wait, the analysts who have buy ratings on stocks and the portfolio managers who own those stocks are biased too. They want stocks to go up. Everybody's biased." The trick as a journalist is getting information from all sides and figuring out who you think is right, not avoiding anybody with any bias. It was really interesting that people saw the bias on the part of short sellers and did not see it on the part of longs. I think that preconception exists broadly, that somehow you're doing something wrong and rooting for a company's failure, and that's anti-American if you short a stock. I think that's part of why there's a shortage of short sellers.
--:-- I think also, we've had an incredible, unprecedented bull market for the last four decades as a result of falling interest rates. Especially in the decade before the pandemic hit, it was very difficult to make money shorting anything because everything went to the moon. It didn't matter if its numbers were eventually unmasked as fraudulent. Stocks just went to the moon anyway. The riskier, the better. Only diehard short sellers have managed to stick it out.
--:-- Lastly, Jim Chanos said this to me once, and I think it's true: he could find dozens of people who are skilled enough and smart enough to come work for him. There's no shortage of that. But being able to be contrarian for a long period of time, especially when the market is going against you, requires a completely different mindset. To have everybody in the world saying you're wrong, to be losing money because the stock is continuing to go up, and to hold fast to your conviction—that's a different sort of person. I think that's another part of the explanation.
--:-- Dwarkesh Patel: That raises an interesting question about venture capital, or private markets in general. In public markets, shorting is in shortage, but it is a possible mechanism. In private markets, if one guy thinks the company is worth $100 million and everybody else thinks it's not, the price will still be set by the person who is a believer. Does that increase the risk of some sort of bubble in venture capital and technology? Is that something you worry about—that there could be incredible bubbles built up if there's a lot of money floating around in these circles?
--:-- Bethany McLean: I think we're seeing that now. I don't think it's a coincidence that FTX and Theranos were not publicly traded companies. There's a certain black box quality to these companies because people aren't shorting them, aren't whispering to journalists that there's something wrong, and there aren't publicly available financials for people to dig through. I don't think that's a coincidence. I do think this gigantic move into private assets has been probably not great for the safety of the system. You might say, "It's just institutional investors who can afford to lose money," but it's really not, because institutional investors are just pension fund money and in some cases mutual fund money. That distinction—that the people investing can afford to lose it—is not really true. I don't like that rationalization.
--:-- There was a really good piece from *The Economist* about private equity marks on their portfolio companies and how they still look much higher than what you would think they should be given the carnage in the market. What things are really worth in private markets, both for venture capital firms and for private equity firms, is another bubble starting in the market. I think we're going to see how that plays out over the next year, and it might be a wake-up call for a lot of people.
--:-- All that said, investors have been very complicit in this. A lot of investors are absolutely delighted to have their private investments marked at a high level. They don't have to go to the committee overseeing the investments and say, "I lost 20% of your money," the way they might if the numbers were public. The ability of these private investors to smooth the returns has been part of the appeal, not a negative. I would say investors who wanted this might be getting what they deserve, except for the point I made earlier: it isn't their money. It's the money of teachers, firefighters, and individual investors around the country. That's problematic.
--:-- Dwarkesh Patel: Being in the world of technology and around people in it has made me shocked when I read about these numbers from the past. When I'm reading your books detailing things that happened in the 90s or 2000s, I realize that the salary Hank Paulson made as CEO of Goldman, or Skilling made as CEO of Enron—I have friends my age, 22-year-olds, raising seed rounds as big as those people's salaries. These books with $50 billion frauds or hundreds of billions of dollars of collapse feel like they're missing a few zeros because of the delusion of the private market.
--:-- Speaking of short sellers and private equity, I think it'd be interesting to talk about Musk. Your 2018 *Vanity Fair* article about the Musk factory in Buffalo was really interesting. How do you think back on Tesla and Musk now, given that the stock did continue to rise afterwards and the factory was completed and hired the 1,500 or so people promised to New York State? Is Musk just a fraud who can pull it off, and so he's a visionary? How do you think about Musk in the aftermath?
--:-- Bethany McLean: I don't think that's right about Buffalo. I have to look, but I don't think they ended up—the SolarCity business at Tesla has pretty much collapsed. People haven't gotten their roofs. There was just a piece about how they're canceling some of their Bruce installation. Musk has repeatedly made grand visions about that business that haven't played out. I will check this for you after the podcast, but I don't think if there is employment at that factory in Buffalo, it's because they're churning out solar products doing what was originally promised.
--:-- I think about that story in a couple of ways. It was not meant to be a piece about Tesla. It was meant to shine a little light on how Musk operates: his willingness to flout the rules, his reliance on government subsidies despite presenting himself as a libertarian free marketeer, and his willingness to lie to enrich himself, which also runs counter to the Elon Musk narrative that he doesn't care about making money for himself. The main reason for Tesla to buy SolarCity was that Musk and his relatives had extended loans to SolarCity that were going to be lost if SolarCity went bankrupt. By having Tesla buy it, Musk was able to bail himself out.
--:-- A reason for the acquisition was that Musk knows that this image of himself as invincible, invulnerable, always able to raise money, whose companies always work out in the end, was really important. If SolarCity had gone bankrupt, it would have cast a big question mark over the Musk narrative. I think he literally couldn't afford to let SolarCity go bankrupt.
--:-- All of that said, I have been and was quite skeptical of Tesla. I always believed the product was great, but I wasn't sure about the company's money-making potential. I started thinking about that around the SolarCity time, maybe earlier. This line between a visionary and a fraudster—you think there are two opposite ends of the spectrum, but in reality, they're where the ends of the circle meet. The characteristics of one have many of the characteristics of the other. Sometimes I think the only thing that separates the two is that the visionary is able to keep getting money, raising money to get through the really difficult time where he or she isn't telling the truth. That person goes down in history as a visionary, but because no one ever looks back to the moment in time when they were lying, the fraudster gets caught in the middle.
--:-- Enron lost access to the capital markets as the market collapsed after the dot-com boom, and people began to wonder whether Skilling was telling the truth about Enron's broadband business. If Enron had been able to continue raising money, Enron Broadband might well have been Netflix—it was Netflix ahead of its time. Enron just got caught in the middle, and all the fraud got exposed. But that's not because Jeff Skilling wasn't a visionary who had really grand plans for the future.
--:-- I think Musk falls somewhere in that category of fraudster and visionary. What's going to be really interesting—and why I said we bring it to the present time—is what happens to the Musk narrative if something fails. What happens if the world watches Twitter implode? What does that mean for the Elon Musk narrative overall?
--:-- Dwarkesh Patel: Going back to *The Smartest Guys in the Room*, the title obviously suggests something about the ability and likelihood of very smart people committing fraud. Garrett Jones has a book called *Hive Mind* where he talks about how smarter people are more likely to cooperate in prisoner's dilemma-type situations and have longer time preference. One of the things you've written about is the problem in corporate America of people doing too much time discounting. Given that trend of greater cooperativeness among more intelligent people, do you think the reason we often find people like SBF and Skilling running big frauds despite being very intelligent is that on average, smarter people might be less likely to commit fraud, but when they do, they do it at such gargantuan scales that it brings down entire empires? How do you think about the relationship between intelligence and fraud?
--:-- Bethany McLean: That's interesting. I'm not sure I know a coherent answer to that. *The Smartest Guys in the Room* as a title was a little bit tongue in cheek. It wasn't meant to say these guys actually are the smartest guys in the room. It was a little bit ironic. But that doesn't take away from the really good question you asked: what is that relationship?
--:-- If you look at the history of corporate fraud, you are not going to find unintelligent people having been the masterminds behind this. You're going to find really, really smart, even brilliant people. Maybe some part of that is this linkage between the visionary and the fraudster. So many of these corporate frauds are people who have qualities of the visionary. To have the qualities of a visionary, you have to have pretty high intelligence. I do think so many of these stories are about self-delusion. I don't think smart people are any less likely to suffer from self-delusion than dumb people. They're probably more likely to, because the smart person's ability to rationalize just about anything they want to rationalize is pretty profound. Someone who doesn't have quite the same brain power isn't going to be able to create a narrative under which their actions are blameless and they're doing the right thing.
--:-- So maybe there is some relationship there—somebody more qualified than I am would have to study it—between smart people's ability to rationalize just about anything as a path to self-delusion and as part of the path by which these things happen. But that's completely Bethany theory. There's absolutely nothing to back that up.
--:-- Dwarkesh Patel: Let's do some more speculation. One of the things John Ray talked about in his testimony two days ago was that FTX had done $5 billion of investments and deals in the last year, and most of those investments were worth a fraction of the value FTX paid for them. We see this in Enron too, with broadband and with their international department. What is this obsession with deal-making for its own sake? Is it to appease investors and make them think a lot's going on? Is it because of the hubris of the founder wanting to set up a big empire as fast as possible, even if you're getting a bad sticker price? Why do we see this pattern of excess deal-making for its own sake?
--:-- Bethany McLean: That's an interesting question. I'm not sure that's limited to companies that go splat dramatically. There's a lot of deal-making in corporate America that has that same frenzied quality. I haven't seen an updated study on this in a long time, but I began my career working as an analyst in an M&A department at Goldman Sachs. Definitely, deals are done for the sake of doing deals. I once joked that synergies are kind of like UFOs: a lot of people claim to have seen them, but there's no proof they actually exist. There was a study years back that showed most M&A transactions don't result in increased value for shareholders, and most projected synergies never materialize. Just getting bigger for the sake of getting bigger, doing deals for the short-term value of showing Wall Street a projection that earnings are going to be so much higher even after the cost of debt, and that there are great synergies from combining businesses—I don't think that frenzy of deal-making or deals gone wrong is solely limited to people committing fraud. I think it's kind of across the spectrum.
--:-- Dwarkesh Patel: One thing I find interesting about your books is how you detail that incentives are not the only thing that matter. There's this perception that we set bad incentives for these actors and that's why they did bad things, but also the power of one individual to shape a company's culture and the power of that culture to enable bad behavior, whether at Enron or with Clarkson at Moody's. Is that a good way of reading your books? How do you think about the relative importance of culture and incentives?
--:-- Bethany McLean: I think that's really fair. Incentives are part of culture. If you've set up a culture where how you're valued is what you get paid, it's a little difficult to separate those two things out because the incentives do help make the culture. But for sure, culture is incredibly compelling. I've often thought and said that if I had, when I was leaving my short-lived career in investment banking, if one of the headhunters I was talking to had said, "There's this great, really energetic, interesting energy company down in Houston," and if I had gone there, would I have been a whistleblower or would I have been a believer?
--:-- Bethany McLean: And I like to believe I would have been a whistleblower, but I think it's equally likely that I would have been a believer. Culture is so strong. It creates this miasma that you can't see outside of.
--:-- I remember a guy I talked to who was a trader at Enron, really smart guy. And he was like, after the bankruptcy, he said, "Of course, if we're all getting paid based on creating reported earnings, and there's all this cash going out the door in order to do these deals that are creating reported earnings, and that's the culture of the entire firm, of course it's not going to work economically." He said, "I never thought about it. It just didn't occur to me."
--:-- And I think the more compelling the CEO, the more likely you are to have that kind of mass delusion. There's a reason it's called success, right? We are as human beings remarkably susceptible to visionary leaders. It's the way the human brain is wired. We want to believe. Especially if somebody has the ability to put a vision forward, like Jeff Skilling did at Enron, like Elizabeth Holmes did at Theranos, like SBF did, where you feel like you're in the service of something greater by helping this vision actualize. Then you're particularly susceptible.
--:-- I think that is the place where incentives don't quite explain things. There is this very human desire to matter, to do something important, to be doing something that's going to change the world. When somebody can tap into that desire in people, that feeling that what you're doing isn't just work and a paycheck, but that you're part of some greater good, that's incredibly powerful. We all want to matter.
--:-- Dwarkesh Patel: Speaking of people's psychology, *Crime and Punishment*—underrated or overrated as a way to analyze the psychology of people like Skilling and SBF? Or maybe SBF specifically because of the utilitarian nature of his crime.
--:-- Bethany McLean: I think it's underrated. I'm not sure anybody has ever proven that jail sentences for white collar criminals do anything to deter subsequent white collar crime. I think one part of this is the self-delusion that I talked about. Nobody thinks, "Oh, I'm doing the same thing as Jeff Skilling did at Enron, and if I do this, I might end up in jail. Therefore, I don't want to do this." I just don't think that's the way the thought process works.
--:-- I think Elizabeth Holmes probably for the most part convinced herself that this was going to work, and that if you just push forward and push hard enough and keep telling people what they want to hear and keep being able to raise money, it's going to work. If you pause to think, "Well, what if it doesn't work and I've lied and I go to jail," then you'd stop. Right then and there. So I'm not sure it's much of a deterrent.
--:-- I remember a piece my co-author Peter Elkind and I wrote right after Jeff Skilling and Ken Lay were convicted. We wrote a piece for *Fortune* in which we said that the entire world has changed now, that corporate executives are on high alert, that behavior in the gray area will no longer be tolerated and will be aggressively prosecuted. This was spring of 2006. The events that caused the financial crisis were pretty well underway. It didn't do much to prevent the global financial crisis. Enron's jail time didn't do anything to prevent Elizabeth Holmes. Doesn't seem to have done anything to change what SBF was doing.
--:-- I'm sure a psychologist or somebody who specializes in studying white collar crime could probably make an argument that shows it has had a deterring effect. But I just don't think that people get themselves into this situation consciously thinking, "This is what I'm doing."
--:-- Dwarkesh Patel: So you have other incentives—stock options. You've spoken about how that creates short-term incentives for executives. If you wanted to set up an instrument that aligned a leader's compensation with the long-term performance of a company, what would that look like? Would you have the options vest in 10 years instead of a year? How would you design a compensation scheme to avoid short-term thinking?
--:-- Bethany McLean: If I could do that, I should rule the world. I think that is one of the really tough problems confronting boards. Almost anybody who's determining compensation seems to have really terrible unintended consequences. They look really good on paper, and then as they are implemented, it turns out that there was a way in which they accomplished exactly the opposite of what the people designing them wanted.
--:-- If you think back to the advent of stock options, what could sound better? Giving management a share of the company such that if shareholders did well, they'd do well. Nobody envisions the ways in which stock options could be repriced, the ways in which meeting earnings targets could lead to gaming, the ways in which the incentive of stock-based compensation could lead to people trying to get the stock price higher and cash out as soon as their options vested.
--:-- The whole Valeant saga was fascinating on this front. The people who designed Mike Pearson's compensation package as CEO of Valeant were convinced that this was absolutely the way to do it. He got bigger and bigger stock option incentives for having the stock achieve certain levels. But of course, that creates this incredible bias to just get the stock to go up no matter what else you do.
--:-- It does seem to me that vesting over the long term is a much better way to go about things. But then do you create incentives for people to play games in order to get the stock lower at various points so that they have a better chance of having their options be worth something over the long term?
--:-- Particularly on Wall Street, there was this clearing of deadwood that happened where people got paid and they got out of the way and made way for younger people. It was a harsh culture, but maybe it made sense on some level. Now, with much longer vesting periods, you have people who don't want to let go. So you have more of a problem with people who should have retired sticking around.
--:-- And then it also becomes a question of how much money is enough. If somebody is getting millions of dollars in short-term compensation and they have a whole bunch more money tied up in long-term compensation, do the long-term numbers matter? At what point do they really matter? If you gave me $5 million today, I'm not so sure I'd really care if I were getting another $5 million in 10 years.
--:-- All things considered, I think longer term is probably better.
--:-- Dwarkesh Patel: I didn't think about that downside of the long vesting periods. That's so interesting. I guess there is no free lunch.
--:-- So with Enron, it was clear that there was a lot of talent at the firm. You had companies and trading firms launched in the aftermath by people who left Enron—Kinder Morgan and John Arnold's Centaurus—that were wildly profitable and did well. Do you think we'll see the same thing with FTX? That while SBF and his close cadre were frauds, there actually was a lot of great trading and engineering talent there that are going to start very successful firms in the aftermath?
--:-- Bethany McLean: That's interesting. And just for the sake of clarification, Kinder Morgan was actually started years before Enron's collapse. Rich Kinder was vying with Jeff Skilling to become chief operating officer, Ken Lay picked Jeff Skilling, and Kinder left and took a few assets and went to create Kinder Morgan. But your overall point holds. There were a lot of people who left Enron and went on to have pretty remarkable careers.
--:-- I think with FTX, I bet there will be some for sure. But whether they will be in the crypto space depends on your views on the long-term viability of the crypto space. It's funny, as crypto exploded over the last couple of years, I was working on this book about the pandemic. I always thought, "I don't get it. I don't understand." I understand the argument about blockchain being valuable for a lot of transactions. But I never understood crypto itself. I thought, "As soon as this book is done, I need to put a month into understanding it."
--:-- But now I think, "Oh, maybe I didn't understand it for a reason. And maybe there isn't anything to understand." And you have people like Larry Fink at BlackRock saying the whole industry is going to implode. With the news today that Genesis's auditor is basically saying they're out, I don't know how much of it was a Ponzi scheme. You might know better than I do.
--:-- It's a little bit like when Enron imploded—yes, a lot of people went on to start other successful businesses, but the whole energy trading business practiced by undercapitalized energy firms went away and never came back. So I don't know.
--:-- Dwarkesh Patel: The time to be worried will be when Bethany McLean writes an article titled "Is Bitcoin Overvalued?" For the audience, that was the first skeptical article about Enron's stock price. It was titled "Is Enron Overpriced?"—the meekest title in business journalism history, before the company was bankrupt six months later.
--:-- Let me ask you a bigger question about finance in general. Finance is 9% of GDP. How much of that is the productive use of allocating capital towards its most productive ends, and how much of that is just zero-sum or negative-sum games? Is 9% too high, do you think?
--:-- Bethany McLean: I think it's too high. I have no idea how to break it down to what the proper level should be. But I think there are other ways to see that in past decades it hasn't been at the right level. When you've had all sorts of smart kids leaving business school and heading into finance, hedge funds, and private equity as their career of choice, I think that's a sign that finance is too big. When the rewards for doing it are so disproportionate relative to the rewards of doing other things, it's sucking up too much of the country's talent.
--:-- The counter to that is that there have also been a lot of rewards for starting businesses. And that's probably how you want it to be in a productive economy. So I think the number is too high.
--:-- A former Goldman Sachs partner said this to me when I was working on *All the Devils Are Here*. She said that finance is supposed to be like the substrata of our world. It's supposed to be the thing that enables other things to happen. It's not supposed to be the world itself. The role of a financial system is to enable businesses to get started, to provide capital. It's the lubricant that enables business. But when it's become the thing itself, you've got a problem.
--:-- Dwarkesh Patel: There's your article about crypto, right there.
--:-- Bethany McLean: There you go. Another way I've thought about it is: how can it be that you can run a hedge fund and make billions of dollars with five or ten people, versus starting a company that employs people, changes the neighborhood, provides jobs, and provides a product that improves people's lives? It is a shame that too much of the talent and such a huge share of the financial rewards are going to the former rather than the latter. That just can't mean good things for the future.
--:-- Dwarkesh Patel: When people criticize technology, for example, for the idea that people who would have been teachers are making half a million dollars at Google—I think when I was in India, people were using Google Maps to get through the streets in Mumbai, which is unimaginable to me. That service was built out of Silicon Valley. So I think that actually is a good allocation of capital and talent. I'm not sure about finance.
--:-- Bethany McLean: I think I agree with you. There are other problems with Google and with the social media giants. But they are real businesses that employ people that make products that have had a huge impact on people's lives. In that sense, it's very different than a private equity firm. Private equity, even more so than hedge funds, draws my ire. I think one of the reasons they've been able to make part of the financialization of our economy has been due to super low interest rates. Low interest rates enabled so many people to make so much money in finance. It wasn't because these people were uniquely smart. They just found themselves at a great moment in time. The fact that they now think they're really smart makes me crazy.
--:-- Dwarkesh Patel: Are Fannie and Freddie America's special purpose entities? Are they Alameda? It's just a way we hide our debt.
--:-- Bethany McLean: Interesting. Well, I don't know anymore. I last wrote about them in 2016. But you're right, their debt is still off-balance sheet. So in a lot of ways, they are. I would argue though that the old Fannie and Freddie were structured more honestly than the new Fannie and Freddie. Conservatorship has made them America's off-balance sheet entities.
--:-- At least when they were their own independent entities, yes, there was this odd thing known as the implicit guarantee. Back to your point about efficient markets—how can you possibly believe there's such a thing as an efficient market when Fannie and Freddie had an implicit guarantee? It wasn't real. There was no place where it was written down that the U.S. government would bail them out. And everybody denied that it existed. And yet it did exist.
--:-- Dwarkesh Patel: I feel like that confirms the efficient market hypothesis, right? Because the market correctly thought that mortgages backed by Fannie and Freddie would have the government's backing, and they did.
--:-- Bethany McLean: You might be right. I think what I was getting at is that it is such a screwed up concept. When people were first explaining this to me, I was like, "No, wait, this is American capitalism? What?" But I think that Fannie and Freddie, at least with shareholders that were forced to bear some level of the risk, were actually a more honest way of going about this whole screwed up American way of financing mortgages than the current setup is.
--:-- Dwarkesh Patel: What is the future of these firms? Are they just going to stay in conservatorship forever? What's going to happen to them?
--:-- Bethany McLean: The latest lawsuit that could have answered that in some ways ended in a mistrial. I don't think anybody in government sees any currency in taking this on. Someone once said to me about it, and it's really depressing, but various lawmakers get interested in Fannie and Freddie, engage with it, only to figure out it's really, really complicated. Any kind of solution is going to involve angering people on one side of the aisle or another and potentially angering their constituents. So they slowly back away from doing anything that could affect change. But I think we have a really unhealthy situation. I don't think it's great for these two entities to be in conservatorship. But at this point, I'm not sure it's going to change.
--:-- Dwarkesh Patel: Speaking of debt and mortgages, total household debt in the United States has been climbing recently. In Q3 alone, it increased $350 billion. Now it's at $16.5 trillion. Should we be worried about this? Are we going to see another collapse?
--:-- Bethany McLean: I don't know how to think about that because it's too tied up in other things that no one knows. Are we going to have a recession? How severe? What is the max unemployment rate? All of those things dictate how to think about that number.
--:-- I don't think consumer debt is embedded in the bowels of the financial system in the same way mortgages were. In the end, the problem with the financial crisis of 2008 wasn't the losses on the mortgages themselves. It was the way in which they were embedded in the plumbing of the financial system in ways that nobody understood. The resulting loss of confidence from the fact that nobody had understood that, and that lies had been told about that, is what caused everything to collapse.
--:-- Consumer debt is a little more visible. I don't think it has that same opaque quality that mortgage-backed securities did. I could be wrong. I haven't dug into it enough. But you can see the delinquencies starting to climb.
--:-- With mortgages, there was this profound belief that since home prices would never decline, there would never be losses on these instruments because you could always sell the underlying property for more than you paid for it. That's what led to a lot of the bad practices. Lenders didn't think they had to care if they were screwing the home buyer because they always thought they could take the home back and make more money on it. Consumer debt is unsecured. It's different. I'd have to do some more homework to understand where consumer debt sits in the overall architecture of the financial industry.
--:-- Dwarkesh Patel: I'm really glad you brought up this theme about what the overall big picture looks like. I feel like this is the theme of all your books—that people will be so obsessed with their subsection of their job that they won't notice broader trends. At Enron, it's like, "Why do we have all these special purpose entities? What is the total debt load of Enron?" Or with mortgage-backed securities, "Maybe they weren't correlated in the past, but do we really think there's no correlation between delinquencies across the country?"
--:-- Whose job is that big picture thinking today? Is it journalists? Is it short sellers? Is it people writing on Substack? Is it anybody's job?
--:-- Bethany McLean: I think it's the latter. It's an important role with nobody assigned to it. And there is a limit. It is not an accident that many of my books have been written after the calamity happened. They weren't so much foretelling the calamity as they were unpacking it after it happened. That's a different role. As I said at the start of our conversation, I think it's an important one—to explain to people why this big bad thing took place. But it's not prediction.
--:-- I don't know that people are very good at prediction. In the wake of the global financial crisis, they established this thing called FSOC—the Financial Stability Oversight Council. It's supposed to be this body that thinks about these big picture risks, that thinks about the ways in which mortgage-backed securities were repopulating through the entire financial system in ways that would cause a loss to echo and magnify. So there are people who are supposed to be thinking about it, but I think it's really hard to see.
--:-- In an increasingly complex world, it's even harder than it was before because the reverberations from things are really hard to map out in advance. Especially when some part of those reverberations is a loss of confidence. Then all bets are off, because when confidence cracks, lots of things fall apart. But how do you possibly analyze in any quantitative way the risk that confidence will collapse?
--:-- That said, and of course I am talking my own book here, I don't think the lack of journalism helps matters. In an ideal world, you want a lot of people out there writing and thinking about various pieces of this. Then maybe somebody can come along and see the various pieces and say, "Oh my god, there's this big picture thing here that we all need to be thinking about." But there's a kind of serendipity in the ability to do that. The chances of that serendipity are dramatically increased by having a lot of people out there doing homework on the various pieces of the puzzle.
--:-- In a world where local news has been decimated, the chances of that sort of serendipity are definitely lower. People may think, "Oh, it doesn't matter. We've still got national news. We've got the Washington Post, the Wall Street Journal, the New York Times." I would love to have somebody do a piece of analysis and go back through the New York Times stories and see how many were sparked by a piece in a local paper. You might not even notice it from reading the New York Times piece because it'd be in the sixth paragraph that credit should go to this person at this local paper. But if you no longer have the person at the local paper who started writing about this, it's less likely that the big national piece gets written. The idea that the national press functions at the same level without local news is just not true.
--:-- Dwarkesh Patel: But even if you have local news, and that's a really important point, there still has to be somebody whose job it is to synthesize it all together. What is the training that requires? Your training is math and English major, then working in investment banking. Is that the right sort of education for somebody who is thinking about the big picture?
--:-- Bethany McLean: I don't know. There are probably multiple answers to that question. For me, my math major has proven to be pivotal. My parents were moving, and my mother dug up my math work from college. If it weren't for the fact that I recognized my own handwriting, I would not recognize pages of math formulas and proofs. They're gibberish to me now. But I still think that math has—I do not want to exaggerate my mathematical ability at this stage. It's basically zero. But I do think that doing math proofs, any kind of formal training in logic, is really, really important. The more you've been formally trained in logic, the more you realize when there are pieces missing and when something isn't quite adding up. It forces you to think in a way that connects the dots. Because you know that if you're moving from A to B and B doesn't follow, you understand that B doesn't follow.
--:-- That training is what's given me whatever backbone I have as a journalist. Not because I like to create controversy and make people mad—I actually don't. It's just because something doesn't make sense to me. And it doesn't make sense to me either because I'm not getting it, or because B doesn't actually follow and you're just being told that it does.
--:-- I also think another part of training is realizing that basic rule you learned in kindergarten: follow your imagination, because the truth is anything can happen. If you look at business history over the last couple of decades, it will be the improbable becoming probable becoming truth over and over again. The idea that Enron could implode—one of the biggest, supposedly most successful companies in corporate America could be bankrupt within six months from its stock price high. The idea that the biggest, most successful financial institutions on Wall Street could all be crumbling into bankruptcy without the aid of the U.S. government. The idea that a young woman with no college degree and no real experience in engineering could create a machine that was going to revolutionize blood testing and land on the cover of every business magazine, and this whole thing could turn out to be pretty much a fraud. The entire idea of FTX. If you told people a year ago that FTX was going to implode six months ago, three months ago, people would have been like, "No, no, no."
--:-- So I think that knowledge—that the improbable happens over and over again—is also fundamentally important.
--:-- Dwarkesh Patel: If we're continuing on the theme of FTX, I interviewed him about four or five months ago. This is one of those interviews that I'm really—I don't know if embarrassed is the right word—but I knew things then that I could have asked about. But it's also the kind of thing where you look back in retrospect and you're like, if it had turned out well, it's not obvious what the red flags are in the moment. There are things you can look back at—the story of Facebook and how Mark Zuckerberg acted in the early days—and you could say if the thing fell apart, this is why. So I have a hard time thinking about how I should have done that interview.
--:-- Bethany McLean: Cliches are often cliches for a reason. "Hindsight is 20/20" is one of the best cliches ever. I am so fundamentally annoyed by stories that say, "Here were all the red flags. Why didn't anybody see it?" Oftentimes, the person writing that story didn't see the red flags either. It's really easy in retrospect to pick up all the signs that there was a problem. It's really hard in the moment.
--:-- There's a little bit in all of us, a subconscious sense that this doesn't sound quite right. But getting the subconscious suspicion to rise to the level of conscious thought is also really difficult. I hope we're coming back to a world that appreciates old people, because I'm getting older, but there is some value in having seen it before. The red flags do maybe tend to rise to the level of conscious thought. That said, if I had gotten interested in crypto a year ago, would I have seen the problems with FTX? I don't know.
--:-- Bethany McLean: Doubtful. I don't know. You just can never know. Sometimes these things also depend on the way in which they're presented to you and by whom. And I think that shouldn't be. I think it's not intellectually honest. But if somebody you really respect comes to you and tells you this business is the next greatest thing and this person is brilliant, chances are that preconception is going to be lodged in your mind in a way that's going to make it really hard for you to see the red flags.
--:-- Whereas if first you heard of this company with somebody coming to you, somebody really smart you like, coming to you and saying, "I don't think this makes sense. These are my problems with this," you're going to be far more apt to see the red flags. And I say it's not intellectually honest or not smart because really you kind of want to strip that away. You want to strip those biases away because even really smart people make mistakes all the time. So you want, to the extent possible, to think for yourself. But of course, it goes back to math, right? Order of operations. The order in which information is presented to you unfortunately is going to have an effect on how you see that information.
--:-- Dwarkesh Patel: Yeah. Let's talk about fracking. So in this year, I think quarter two, was it the first time that fracking and shale finally became profitable? Were the fracking investors right that there would be an oil shock and now it is actually profitable? Or how do you think about Saudi America in the aftermath of the events this year?
--:-- Bethany McLean: Well, at least from my understanding of it, and again because I have been to lunch on this difficult book I'm writing, I haven't actually—I'm not as up to date on this as I should be, so take what I'm saying with a grain of salt. I think actually it proves the underlying thesis, because fracking is profitable, but at a much smaller scale than it was when people were saying this is going to change the world.
--:-- So it hasn't. The idea that U.S. shale oil was the swing factor in world oil prices, I don't think anybody believes that anymore, because it can't possibly produce the amount of oil required for it to be the major force that it was supposed to be. So I think what has happened actually proves the point instead of negating the point.
--:-- And for how long it can be profitable and at what level of oil prices was also part of the underlying thesis, which is how much oil is there actually that can be extracted at this price. So the fact that at very high oil prices, there is a certain amount that can be extracted profitably, that's not surprising. I think the way in which the Bucks thesis would be wrong is if it turned out U.S. shale oil could be the swing producer for the world and we could be the world's largest oil producer and the Permian could continue to grow whatever it was, 20% a year and grow profitably. And then I would have to say, yeah, the investors were right or the people who believed in this were right.
--:-- Dwarkesh Patel: Yeah. If you could have a Robert Caro-like biography of anybody in finance in the last 100 years, especially somebody who we feel hasn't been talked about or covered enough, who would it be? Who do we need a thousand pages about?
--:-- Bethany McLean: A thousand pages? I don't know that we need a thousand pages about anybody. Who would I like to write about? Think about that. There are some books I've been mulling over that I'd like to do, but I'm not sure. I think I might prefer to keep those to myself for a little while.
--:-- I'm also always going to be—at least I'm trying to change my orientation—but I'm always going to be biased toward the thing that went badly wrong rather than the thing that worked out. I don't know. Maybe that betrays the underlying darkness of my personality, but I always find that more fun. So I'm probably not the right person to ask about a glowing biography.
--:-- You could say Warren Buffett, but plenty has been written about Buffett. I don't know if there's anything to be added to that. So let me think. If I come up with a great answer that I'm prepared to share, I will tell you. Maybe it goes back to your question about how big a role that finance should play in our economy overall too. Maybe I just don't think that anybody in finance is necessarily worthy of that kind of sustained focus.
--:-- Dwarkesh Patel: Yeah. I want to talk about the rating agencies because they have featured heavily in both the story about the housing crisis and Enron. And as a libertarian-leaning person, that's been kind of devastating in the sense that there's a hope that you can maybe replace things like the FDA, or at least functions of it, with private agencies that are tasked with rating how good is this food or how safe is this airplane, things like that.
--:-- I'm curious if you think that there is any possibility of having any private agency that is being paid by the person they're evaluating being able to give fair evaluations. This even brings us to—it doesn't even have to be rating agencies. It can be things like, you know, now we have the big four accounting firms. I'm curious how much trust you put in them in terms of being able to do evaluations fairly. Do we think we have passed through the Arthur Andersen days? How credible are these institutions? Look at EY's rolling Wirecard, right? And then the scandals PwC has been involved in over the last bunch of years.
--:-- Bethany McLean: Yeah, it is a really good question. I thought you were going to go somewhere different with the rating agencies, which is why in a supposedly free market, you have so many investors who rely on credit ratings. That's a good question. And I do think that this is another, perhaps counter to your efficient market theory or maybe counter to a libertarian view of the world.
--:-- A lot of big investors who complain about the rating agencies after there's been a disaster really want the cover provided by the rating agencies because they can say, "Well, you told me this was AAA. I bought it. Therefore, I can't be blamed." And so once the crisis has passed, the appetite of big investors to reform the rating agencies or do away with them—meaning then they would have to do their own work and not just say, "Well, I bought a AAA rated security"—is really next to nil. And that's a good part of the reason why reform doesn't happen.
--:-- I mean, remember, the credit rating agencies were reformed in 2006 in the wake of Enron. The credit rating agency reform was passed. And yet the rating agency sat at the center of the global financial crisis just a few years later. I'm not sure they can be reformed, but I'm also not sure there is a perfect—maybe it goes back to your question about the ability to see the big picture and foresee a problem. I'm not sure there is a perfect regulator who wasn't being paid by companies who could then do a better job. You'd like to believe that's true, that if they were a government agency in charge of credit rating and they weren't paid by the companies and the securities, that would lead to better ratings. Would it? I don't know, right?
--:-- So I'm not sure there's—I guess another way of saying this is it's very easy to criticize the current system as really problematic. And it's certainly the fact that credit rating agencies were making so much money by rating subprime mortgage-backed securities for sure played an enormous role in what happened. But then if you ask the next question, "Well, what's the alternative?" that's when it starts to get pretty complicated.
--:-- Dwarkesh Patel: Yeah. Now that we're going to have this long proceeding on FTX in terms of compensating the people who are harmed. Looking back at Enron, that was a long process. And I think you said in the book that a billion dollars of the remaining sum that should have been doled out to the victims was actually spent in legal fees and the procedures, if I'm right about that number.
--:-- Bethany McLean: I think so. I'm not sure. I admit I don't remember, but it was some enormous amount.
--:-- Dwarkesh Patel: Yeah. So what should be the procedure when an implosion like this happens? Because it seems suboptimal that so much of the capital that these people are supposed to be doling out is just going to themselves. Do we need something like the FAA, where when the plane crashes they have a body of experts that kind of figures out what happened? Do we need a completely non-legalistic or a different sort of procedure in these kinds of situations? How should the FTX disbursement of remaining assets and so forth be done?
--:-- Bethany McLean: It's a really interesting question and a really interesting analogy, and something people have brought up to me that I've never really dug into, which is the incredible success of the FAA in cutting down on problems with planes because of the incredibly thorough job they do in investigating the cause of a crash afterwards. So maybe somebody's written about this, but to really get inside that process and the incredibly powerful and profound role it's played might provide an interesting roadmap for corporate America and how to do this sort of thing and how to prevent it in the future. Maybe the analogy doesn't hold up in some kind of subtle way.
--:-- But for sure, that's a really interesting question because you need this to happen, right? You need the bankruptcy. You need the excavation. And even if it costs a great deal of money, just for all of us, the worst possible outcome would be for everybody to throw their hands up and say, "OK, it's done. Nobody." No, no. Because the truth of the matter is, even journalists who excavate and try to excavate this stuff, we depend on the work done by others.
--:-- I mean, I could not have written my Enron book if it weren't for the Justice Department investigating in their indictments, for the role of Congress in getting all these documents from all these internal documents from Enron, including, by the way, the list of executives and their cell phone numbers, which turned out to be incredibly valuable. But the role of the bankruptcy examiner and getting in there and really uncovering all of what Enron was doing in order to manipulate its earnings—there's no way that a journalist could do that without all of that data provided by all these entities that are doing their own investigation. Because as a journalist, you don't have subpoena power. You literally can't do this. And it becomes an incredibly important part of telling the overall story. So it's hard for me to say, when it's a calamity like this, that those dollars are wasted. But is there a better way to go about it? Maybe.
--:-- Dwarkesh Patel: Yeah. Another similarity between Enron and FTX is that the bankruptcy is being overseen by John Ray. And this is a rather mysterious person. I believe one of the first times you've seen a photo of him is when he appeared in front of Congress a few days ago. And I checked the index of *The Smartest Guys in the Room*, and I don't think he was mentioned in the book. Who is this guy? What's his deal?
--:-- Bethany McLean: I don't actually really know. I feel like people have made a really big deal over the bankruptcy administrator being the same person. I'm not really sure how much that matters. When people—it was all over the press, you know, he says, "This is a bigger disaster than whatever it was." I can't remember the exact quote. But that's his incentive to say that, because then any money that he can recoup looks like due to his genius in administrating this thing in bankruptcy. If you say, "Oh, this wasn't that big a deal, everybody's going to get their money back," and then they don't, then you've got a huge problem. This is terrible and it's awful and there will be no money left, because then any money you get back people are like, "Look what a great job he did." So I don't know. I don't remember him being a really pivotal figure in the excavation of Enron.
--:-- Dwarkesh Patel: Yeah. I want to ask you a bit about your writing process. Do you go into the book with some sort of thesis about the actors? And if so, is it often that you realize that somebody you thought was a bad actor is actually one of the good guys, or the other way around? Or is basically your initial picture confirmed by further investigation?
--:-- Bethany McLean: Well, I guess that's a tough question about the books I've done, because the books I have done, especially the two big ones, were after the fact. And it was pretty clear that something went badly wrong and that the people who were in power had to be responsible for it, because if they weren't responsible, who else was? The way in which they were responsible and the degree to which they were responsible were open questions that I don't think I had a view on going in.
--:-- To that point on the financial crisis, I actually ended up changing my mind pretty radically. I wrote a piece in the early stages of the financial crisis saying that basically homeowners were equally to blame because homeowners had cashed out, homeowners took out risky mortgages, and without personal responsibility, what were we lost? And homeowners had also cashed out and people had made a lot of money. So the idea that this was all the fault of the banks was absurd. And I still think that's true to some extent, because without personal responsibility, we are lost.
--:-- But I remember coming across this presentation that had been given by Washington Mutual, which was one of the big lenders at the time—no longer exists. And they were trying to get people to take out—a whole internal presentation about how you got someone to take out a risky mortgage when what they really wanted was the same 30-year fixed rate mortgage that their parents had had. And it was all the tactics and tips you could use to twist their arm to take out this riskier mortgage, because those are the ones that were in demand to be packaged up into subprime mortgage-backed securities. So WaMu could turn around and sell those mortgages for more money to Wall Street than they could the fake 30-year fixed rate mortgages.
--:-- And then I remember thinking, there's just something wrong with a world where all of the responsibility is on consumers to understand and none of the responsibility is on the people selling the product to be honest about what this thing is. So anyway, that was a case where I changed my mind over the course of reporting a book.
--:-- I try not to work on stories where there has to be an answer, because if you're working on a story where it has to be one way for it to be a good story, then you're biased to want to see it one way. And if it's not that way, you no longer have a story. So I always prefer to work on things where it's just really interesting, and whatever you end up thinking or saying about it, it's still a really interesting story.
--:-- I guess one of the last stories I did for Vanity Fair was when David Sackler wanted to talk to me about his view of what had gone wrong with the Sacklers and Purdue in the opioid crisis. That in a way was a weird story for me, because usually I'm working from the outside in. I don't get stories where people want to cooperate with me, for all these reasons. But in a way, it was my favorite type of story because it was really interesting that he was willing to speak publicly. And if I had ended up thinking the Sacklers were totally blameless in the whole opioid crisis, I could have written it because it was really interesting that he was speaking publicly. So I like stories where it's a story, no matter how you end up viewing the main characters and how you end up viewing the arc of the thing. Does that make sense?
--:-- Dwarkesh Patel: Yeah, it does. And I guess it raises another question: the people you studied in your books and your journalism, have you concluded afterwards that there are some people who are fundamentally deceptive and some people who are ethical, and that there's sort of this line? Or do you feel like if anybody was put into Skilling's shoes at the time or SBF's shoes, there's a good chance they would have done the same kinds of things?
--:-- Bethany McLean: I think we all have the capacity to be deceptive. I think it's part of human nature. Some people are more inclined toward truth-telling and transparency than other people, maybe just by nature, maybe by nurture and what's been rewarded in your career and your life inclines you to either be open and honest or to try to hide things. And maybe that's more the experiences that you've had, but I think we are all capable of a fundamental level of deception.
--:-- For CEOs, whenever people look at a Jeff Skilling or an Andy Fastow or any of these characters and say, "I could never have done that," there's a fundamental rationalization. Skilling, by manipulating Enron's money and Enron's earnings, was trying to keep the stock price high so he didn't hurt investors by having the stock go down the way it would have been if he had been radically honest about all of Enron's problems. And so we're all capable of that kind of rationalization, that what we're doing is really in the long-term interests of somebody else and really in their best interest, even if it's not telling the truth. And I think to say that you're not capable of that—I don't know. I almost think that's more dangerous than admitting that you're capable of it, because if you admit that you're capable of it, then you can make a fundamental choice to either behave that way or not to behave that way.
--:-- But there's also another component of human nature that I think is more prevalent in some people than others. And it's not—I don't know if you'd characterize it as dishonesty—but it's very deeply believing something in the moment and convincing other people because you so deeply believe it. And a month later, you don't believe it anymore because you're somebody who changes their mind. So is what you told people a month earlier a lie, or was it a truth at its moment in time? And so there's that too that makes it more difficult to label somebody fundamentally deceptive, right? It may look like a lie to the person who believed what that person was saying and acted on that person's advice and belief, and a month later finds out that the person sold their stock or no longer believes that. But was the person being dishonest in that moment?
--:-- Dwarkesh Patel: Yeah. And it raises the interesting question of moral luck. I'm sure there were tons of CEOs, and there are tons of CEOs today, who are like Ken Lay, who are just basically disconnected from the business they started and are kind of hanging on. And it just so happened that Ken Lay was the CEO of the one that was committing massive fraud. But it's kind of like texting and driving, where lots of people do it. One guy crashes, and obviously he should be punished, but he's no more culpable than the rest of us who do it.
--:-- Bethany McLean: I like that concept of moral luck. I think that's incredibly true. It goes with the concept of somebody who was an investor over the last 40 years. Sure. Probably most people did really, really well with a tailwind of declining interest rates. Does that mean these people were brilliant, or that they lucked into the right field? And of course, some people didn't luck into it. They saw what was going on and chose it. So there's that too. But maybe that trivializes your question, because I think that's a very profound question. I think there really is such a thing as moral luck.
--:-- And the only way in which you can tip the scales is by trying to be aware of bad people and bad situations and keeping yourself clear of them. Because back to your earlier question about culture, it's a trite cliche, but you are who you surround yourself with, either in a job or in your friendships. So if you want to have the best chance possible of steering clear of accidents, you do have to be careful about the situations you choose to put yourself into. Because the idea that you can remain an island in a bad situation is not true of most of us.
--:-- Dwarkesh Patel: Yep. Final question, or I guess second to final question. What advice would you give to people who want to do something similar to what you've done over your career, whether that's investigative journalism or some other role in maybe finance or technology that involves putting together the big picture? What advice do you have for them?
--:-- Bethany McLean: It's an interesting question. I can't give advice for journalists anymore because the world in which I grew up no longer exists. I once would have told anybody to go work on—and maybe that's leading me to the right answer. But the world in which I grew up in journalism no longer exists. To go off and be a writer back when I did it, you could get a job at a magazine and you could take home a paycheck that would enable you to cover your rent. And if you were like me and didn't have any family money, then you needed that. So the idea now of telling somebody to go off and pursue a career as a writer without any other source of extra support, it's a lot more difficult than it once was.
--:-- But actually, I think that does lead to a better and deeper answer to your question, which is: don't allow yourself to be seduced by the quick ease of PowerPoints and putting together bullet points. Force yourself, when you're dealing with something complicated, to write it out. And maybe that would be different for other people. But for me, writing forces a level of intellectual honesty and a clarity about the big picture that nothing else does. It's really hard work. I've never understood people who say, "I just love to write. It's so fun." It's one of the most difficult things you can do, because to write clearly requires thinking clearly, and thinking clearly is really, really hard for me.
--:-- But it is really only in writing that I realized that I didn't understand something that I was pretending to understand. It's really easy to pretend to yourself that you understand something. And if you have to write it and write it clearly in a way that somebody else can understand it, that often forces you to realize your own lack of comprehension. And I think that exercise, in terms of an understanding of the world and a chance of seeing the big picture, is really, really critical. Maybe there's something for somebody else that would work that isn't writing. Maybe it'd be turning the world into a math proof. But for me, that's what it is.
--:-- Dwarkesh Patel: Yeah. And final question: what is your next book about? And when will we have the pleasure to read it?
--:-- Bethany McLean: I hope it's a pleasure. I'm not sure at this point it's going to be a pleasure. So I'm writing it with Joe Nocera, again, who I wrote *All the Devils Are Here* with. And we set out to write about the economic consequences of the pandemic, but it's really become a broad look at how capitalism is and isn't functioning in our modern society. And then underneath that, a look at how government is and isn't setting the right rules for capitalism to function.
--:-- Because back to your point about being a libertarian, I do think there's this lovely idea that markets exist independently of the rules set for them by society, but I'm not really sure that that's true. If you think about everything from the existence of a limited liability corporation to bankruptcy law, these are all rules laid down by society that dictate how the market functions. And so in the end, if the market isn't functioning the way we want it to, chances are it's the result of the improper conditions having been set. So that's what the book has turned into: a way of looking at the flaws in capitalism, even leading up to the pandemic, and how those were exposed and exacerbated by the pandemic.
--:-- Dwarkesh Patel: Yeah. Okay. I'm really excited to read it. That's an exciting thesis. Do you know when it's going to be out, by the way?
--:-- Bethany McLean: October 2023.
--:-- Dwarkesh Patel: Yes. Okay. You'll have to come back on the podcast.
--:-- Bethany McLean: I would love that.
--:-- Dwarkesh Patel: Awesome. Thank you.
--:-- Bethany McLean: Thank you.
