Short seller Jim Chanos gained fame for accurately predicting the downfall of Enron, the world’s largest energy trading company at the time. He was widely acknowledged as the first to realize that Enron’s foundation was unstable.
“In the dot-com era, there was a growing acceptance of narratives that weren’t strictly about technology companies,” Chanos remarked in the latest segment of CNBC’s “Art of the Trade.”
“Investors were convinced that these companies were disrupting traditional industries like energy. It was an opportune moment for a bold company like Enron to pitch that narrative to investors.”
Enron’s unsustainable business model and dubious accounting practices prompted Chanos to short the company in late 2000. He continued to increase his position as reports surfaced of significant insider selling and executive departures.
“We kept adding almost continuously,” he recalled. “The situation kept deteriorating, and each piece of negative news was more severe than the last.”
Interestingly, Enron wasn’t the only stock Chanos profited from during this period.
When Enron’s stock plummeted in late 2001, its competitor Dynegy proposed a bailout acquisition. This news bolstered both Enron and Dynegy’s stock prices. However, Chanos detected a significant warning sign in Dynegy that led him to short the stock, resulting in a 90% decline.
Monday marked the 20th anniversary of the U.S. Securities and Exchange Commission charging former Enron CEO Jeffrey Skilling with fraud and other offenses related to the company’s collapse.
