Ten famous busts and what they had in common
Every famous collapse has its own villain, its own headline and its own documentary. Read enough of them, though, and the stories start to rhyme. The industries change, the decades change, the technology changes. The underlying mistakes are remarkably consistent. Here are ten busts from the Sixty-40 catalogue, followed by what they had in common.
Ten collapses in brief
Enron (2001). An energy trader that reinvented itself as a financial and technology powerhouse, Enron used aggressive accounting and off-balance-sheet entities to make its earnings look smoother and its debts look smaller than they were. Once journalists and short sellers started asking how it actually made money, the answers did not hold up. It filed for bankruptcy in December 2001, and its auditor, Arthur Andersen, went down with it.
Lehman Brothers (2008). A storied investment bank that loaded up on real estate and mortgage-related assets using enormous leverage, at times borrowing in the region of thirty dollars for every dollar of equity. When housing turned, small percentage losses on its assets were enough to threaten its entire capital base. Lenders stopped rolling over its short-term funding, no rescuer appeared, and it filed for bankruptcy in September 2008, the largest in US history.
Pets.com (2000). Selling heavy bags of pet food online with free or cheap shipping turned out to be a very efficient way to lose money on every order. The company had a famous sock puppet mascot and a Super Bowl advert, went public in early 2000, and was liquidated before the year was out.
Webvan (2001). An online grocery delivery service that raised a fortune and spent it building large automated warehouses in city after city before proving the model worked in the first one. Customers liked it; the economics did not. It went bankrupt in 2001. Grocery delivery later became a real business, which is its own lesson: being early can be indistinguishable from being wrong.
Pan Am (1991). Once the flagship of American aviation, Pan Am was weakened by deregulation, high costs and a debt-heavy history, then hit by the Lockerbie bombing in 1988 and the fuel price spike around the 1990 Gulf crisis. It ceased operations in December 1991. Iconic brands are not a balance sheet.
Blockbuster (2010). The dominant video rental chain reportedly had the chance to buy a small company called Netflix around 2000 and declined. Its business relied heavily on late fees that customers hated, and on physical stores that streaming made unnecessary. It filed for bankruptcy in 2010. Nothing dramatic happened; the world simply moved and Blockbuster did not.
Wirecard (2020). A German payments company that rose into the DAX, the country's flagship index, despite years of reporting by journalists questioning its accounts. In June 2020 it admitted that €1.9 billion of cash that was supposed to sit in trust accounts in Asia probably did not exist. It filed for insolvency within days.
Terra Luna (2022). TerraUSD was an "algorithmic stablecoin" meant to hold a value of one dollar through a mechanism linked to its sister token, Luna, rather than through reserves of actual dollars. A savings protocol called Anchor offered depositors close to 20% a year. When large withdrawals began in May 2022, the peg broke, the mechanism minted Luna in vast quantities to defend it, and both tokens collapsed toward zero within days, erasing tens of billions of dollars.
FTT, the FTX token (2022). FTX was one of the largest crypto exchanges; FTT was its in-house token. In November 2022 a report revealed that Alameda Research, a trading firm closely tied to FTX, held much of its balance sheet in FTT. A rival exchange announced it would sell its FTT holdings, customers rushed to withdraw, and it emerged that customer funds were not where they were supposed to be. FTX filed for bankruptcy within days and its founder was later convicted of fraud.
Beanie Babies (late 1990s). Small stuffed animals became a nationwide collecting craze, fuelled by deliberately limited production, "retired" designs and price guides that listed ever-higher values. Many people bought them as investments for their children's education. Once the manufacturer and the market stopped cooperating with the scarcity story, prices for the vast majority collapsed, and most are now worth little more than their original price, if that.
What they had in common
Strip away the details and five themes keep appearing.
- Leverage turned a setback into a death sentence. Lehman did not need its assets to go to zero, only to fall a little, because so much of its balance sheet was borrowed. Pan Am's debts left it no room to absorb a bad year. Debt is the ingredient that converts "painful" into "fatal".
- Growth was bought rather than earned. Pets.com and Webvan spent investors' money to acquire customers on terms that lost money per customer. Revenue rose and so did losses. Scaling a business that does not make money on each sale just makes the hole bigger, faster.
- The numbers could not be checked. Enron's accounts were notoriously hard to understand; Wirecard's cash sat with third parties in distant jurisdictions; FTX's books barely existed in any conventional sense. When smart people cannot explain how a company makes its money, that is information.
- The value rested on itself. Luna supported TerraUSD, which supported Luna. FTT was collateral for an affiliate whose health propped up FTT. Beanie Baby prices were justified by price guides that tracked Beanie Baby prices. Circular value works beautifully on the way up and in reverse on the way down.
- Prestige substituted for scrutiny. Enron was hailed as an innovator; Lehman had a century and a half of history; Wirecard sat in the DAX; FTX had celebrity endorsements and blue-chip venture investors. Each of these lent a sense of safety that the underlying business had not earned.
There is a sixth, quieter theme: in nearly every case, the decline was faster than anyone expected. Lehman went from troubled to bankrupt in a weekend. Luna fell apart within a week. FTX went from a household name to bankruptcy in about ten days. The phrase often used, borrowed from Hemingway's description of going broke, is "gradually, then suddenly". Problems build up for years and are then repriced in days.
What the survivors did differently
It is worth noticing what the counterexamples look like. Amazon also lost money for years and also survived the dot-com crash, but its losses came from investing in infrastructure, its customers kept coming back, and it raised enough cash before the window closed. Netflix, the company Blockbuster passed on, nearly wrecked itself in 2011 but had no crushing debt load and a product people kept paying for. The difference between a bust and a comeback is rarely the size of the setback. It is usually whether the company could afford to survive it.
The busts on the wheel
In Sixty-40, these names sit on the wheel next to future giants, and in the moment they can look just as promising. With hindsight, picking Enron in 1997 looks absurd; at the time it was a darling of Wall Street. When a bust lands in your five options, it is worth a second look at why it seemed attractive then. Recognising that pattern, debt, bought growth, opaque numbers and borrowed prestige, is a more durable skill than remembering any single name.