Book Review: Bad Blood by John Carreyrou


I recently finished the best business book I’ve read in the past year, John Carreyrou’s Bad Blood: Secrets and Lies In a Silicon Valley Startup, about the rise and fraud of healthcare technology firm Theranos.

At its peak, prior to the fraud exposure, the company inspired awe. Stanford dropout and founder Elizabeth Holmes channeled Apple founder Steve Jobs. She presented Theranos as the next world-changing company, able to quickly and cheaply conduct hundreds of diagnostic tests with a single drop of blood from a nearly painless finger stick. 

Blond, steely blue-eyed and with a deep voice, dressed all in black (like Jobs), Holmes was a self-made startup billionaire rose surrounded by Silicon Valley thorns. She graced the covers of magazines like Forbes, Fortune, Inc, and even T, The Times Style Magazine, all by age 31.

Holmes owned half of Theranos, then valued by investors at $9 billion, and was counted with her $4.5 billion paper fortune as the youngest self-made woman on the Forbes 400 list in 2014. 


Her governance board and venture capital investors included a Who’s Who of powerful men in finance, politics, the military, and media. Members of her board included former Secretary of State Henry Kissinger, Former Senate Majority leader Bill Frist, former Secretary of Defense James Mattis, former Secretary of Defense William Perry, former Secretary of State George Shultz, former Senator Sam Nunn, former Wells Fargo CEO Richard Kovacevich, and super-lawyer David Boies. Oracle Software founder Larry Ellison poured in millions early on, and media mogul Rupert Murdoch invested $125 million in Theranos in March 2015. 

Ten years of apparent astonishing success began to unravel in October 2015 with a deeply reported Wall Street Journal investigation casting doubt on the technology and the company’s methods. 

What we know now is that the technology never reliably worked. Theranos falsified testing of its methods and faked demonstrations. They risked patients’ health by reporting unreliable data.

The Tools of Fraud

Most interesting to me is the story of how Holmes and her top deputy built an information and security apparatus over ten years to quash dissent, isolate and eliminate naysayers. 

Holmes invested deeply in information technology security professionals to purportedly plug leaks, claiming the company paranoia was necessary to prevent technology secrets from getting out to competitors. Employees soon learned they were under very tight IT surveillance. In retrospect, the secrecy and paranoia make sense because that’s what you have to do to maintain a long con.

Holmes had a clear pattern of lying, often about seemingly smallish things. She lied about her primary romantic relationship, with her deputy. She lied to prospective pharmacy clients about the progress of the technology. She lied during early beta-tests about how they actually had used other competitor’s technology, but hidden it.

Severe non-disclosure agreements covered every employee. When any employee questioned the reliability of results or apparently dishonest methods, they would be sidelined and usually escorted from the premises in disgrace. After their departure, a rumor might be started about their embezzlement, negativity, work ethic, or unethical use of company time. Engineers worked in isolated silos, cut off from collaborating with each other. Holmes hired extremely aggressive lawyers and private investigators to sue and bully ex-employees into silence.

In Carreyrou’s telling, the swiftly revolving door served an important purpose. Holmes continuously shed critics within her team. Criticize her judgment or object to her morally grey decisions? Typically you’d be gone immediately. The high turnover seems to have masked for a long time the central problem that “there was no there, there” when it came to the blood testing machines. 

The Whistleblowers

Carreyrou’s story focuses on the whistleblowers. The high-profile venture capitalists and high-powered board members who bolstered the Theranos myth for ten years largely do not appear in the book as sources. I assume Carreyrou asked, and that they declined. One of the most astonishing facts of this narrative is just how badly taken in these wise men were. 

There’s no reason to believe any of this high-powered group spotted Theranos’ fraud in advance. As important investors they were in fact the primary financial victims, as a result of their own credulity. 

A year and a half before the Wall Street Journal investigation report, George Shultz’s own grandson Tyler Shultz, a Stanford grad who worked at Theranos until he was forced to resign for questioning their science, spelled out the issues as a whistleblower. Seemingly under Holmes’ personal spell, George Shultz refused to believe his own grandson.

One underlying but unanswered question proposed by the Theranos fraud is: What do the powerful funders and board members think about their incredible mistake? Are they reflecting on how they got taken in so badly? Do they regret going along, even as red flags mounted? Will they suffer consequences to their reputation as wise people?

When we expect fraud

In April I traveled to Las Vegas to speak at a conference of investors focused on an alternative investment finance niche that I used to actively invest in. I brought Bad Bloodwith me to read on the trip.

I’ve attended maybe a dozen different off-the-beaten-path investment-type conferences over the years. Many in Vegas. I usually adopt a skeptical “try to spot the con man” approach to meeting people at conferences like this. Lightly-regulated finance niches always attract their share of hucksters and baddies. It’s part of the deal. But in an important sense, I expect that, so I’m in an appropriately defensive mindset.

I also subscribe to the Texas State Securities Boardemail list regarding enforcement actions against fraudsters. In this way I get my weekly fill of news about squirrely cryptocurrency operators, foreign exchange traders, and unregistered securities in my state.  That’s just your run-of-the-mill, everyday, fraud.

But the Theranos fraud, like very few others except maybe Enron before 2001, attracted utterly mainstream support. How do we develop the proper imagination to protect ourselves against fraud happening even inside our most historically respectable institutions?

And then how do people continue to whistleblow in the face of overwhelming pressure from non-disclosure agreement, threats of litigation, and bullying, to just shut up and not rock the boat? It’s an interesting question for our time.

A version of this ran in the San Antonio Express News and Houston Chronicle.

A list of all Book Reviews on Bankers Anonymous is here.

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Recap and Release of the GSEs


The US Treasury department, reportedly is wrestling with a plan for the re-capitalization and re-privatization of the Federal National Mortgage Association (aka FNMA, aka Fannie Mae) and the Federal Home Loan Mortgage Corporation (aka FHLMC, aka Freddie Mac), two entities at the center of the $10 trillion US mortgage bond market. 

As a former mortgage bond salesman, Fannie Mae and Freddie Mac give me painful flashbacks. Their weird past, and current status, represent one of the last unresolved issues of the 2008 mortgage crisis.

Since their $187.5 billion bailout and effective nationalization in September 2008, virtually all profits from Fannie and Freddie have been remitted to the US Treasury. The first quarter 2019 profits sent to the Treasury from Fannie and Freddie were $2.8 and $2.2 billion, respectively. Over the last 11 years, the firms have returned more in profit to the US Treasury in the form of dividends than they received in the bailout.

The Obama administration inherited the problem of these companies from the Bush administration in 2009 but could not figure out a way to move forward on a permanent resolution of their status. The Trump administration appears poised to announce their “recap and release” plan soon  – meaning raise enough private capital to make the companies fail-proof, and then turn the companies back into private entities again.

If they truly become private, well then, fine. But I have my doubts. My worry is they will revert back to the public/private hybrid monstrosities they were before the 2008 crisis. Bloomberg reported that Treasury Secretary Mnuchin would like the privatized companies to retain a government guarantee. Ugh. That’s the part I don’t like.

Forget Left Vs. Right

If we see the Fannie and Freddie problem and their resolution through the simple dichotomies of left/right, nationalized/private, socialism/capitalism – we’ve forgotten the weird history of these companies.

Like many policy issues when seen up close, the question of what to do with Fannie and Freddie defies easy characterization and solutions of the left versus right variety, or our ideological or aesthetic preference for more government or less government in our lives. 

Now, I like government. I think it does some wonderful things. I also like private companies. They also do wonderful things. Governments have their important functions, and private companies have their important functions. 

But also: What I don’t like are companies that straddle the hybrid line between public and private. What I really don’t like – and here’s what Fannie and Freddie always represent to me, as the worst of the 2008 crisis – is the hybrid company problem which, most succinctly stated, is “privatize the gains, socialize the losses.” By existing in their in-between status as “government-sponsored entities,” Fannie and Freddie were the ultimate “heads-I-win-tails-you-lose” companies.

In the 2000s, bond buyers loved owning Fannie and Freddie debt, known as “agency debt,” because of this in-between status. They were private, for-profit companies, sure, with private shares trading on the New York Stock Exchange. But they had the implicit backing of the federal government, because they had been originally Congressionally chartered and because they played such a systemically important role in the mortgage bond market. So they could issue more debt, at cheaper rates of interest, than any fully-private company. With that cheaper-than-anyone financing, they could build up larger-than-annual mortgage bond portfolios.

The federal government tried to claim, numerous times, that it didn’t fully backstop Fannie and Freddie agency bonds. They were “government-sponsored” but not “government guaranteed.” But of course in the end they did. It was a distinction without a difference.

Top executives paid themselves like rock stars more than $14 million and $12 million in 2006 and 2007 for Fannie Mae CEO Daniel Mudd, before he drove his government-sponsored entity off the cliff in 2008. Freddie Mac CEO Richard Syron collected nearly $20 million in 2007 before similarly destroying his company the following year. 

Those rock stars took over after both Freddie Mac CEO Leland Brendsel and Fannie Mae CEO Franklin Raines left within a year of each other, in 2003 and 2004, for inflating portfolio values and smoothing earnings in accounting scandals. 

Meanwhile, Washington has happy because DC regulators could periodically order the government-sponsored entities to loosen lending standards for new programs to encourage further home ownership, even among folks with dicey credit and fewer resources to weather any financial storm.

Government-guaranteed, but paid like the private sector! Totally malleable to government political pressure! Borrow at below-market rates to grow your balance sheet without limit. What’s not to love? Good times! Back in the 2000s National Public Radio played near-constant public service announcements that they were supported by Fannie Mae, ‘We’re in the American Dream Business” of homeownership. 

The Risks of the GSEs were known

Two years after I left Goldman’s mortgage desk in 2004, but two years before the mortgage crisis, I remember a dinner conversation in 2006 with a table full of bankruptcy trustees – folks who like to be alert to financial catastrophes and their causes. One asked my opinion of what the source of the next market crash would be. I confidently answered: Fannie Mae or Freddie Mac. They were too large and levered (indebted) and they ran the essential plumbing of the mortgage bond market. Any loss of confidence in them could trigger a tsunami of losses.

I mention this not to brag about my prescience, but rather to point out how obviously problematic Fannie and Freddie were to many people, years before the crisis blew up. The systemic risk posed by Fannie and Freddie wasn’t my original idea. Among people who understood the mortgage bond market it was a major fear. Hedge fund manager, author, and irascible financial philosopher Nassim Nicholas Taleb concluded similarly in his 2007 book The Black Swan: The Impact Of The Highly Improbable. He wrote in a footnote criticizing poorly-designed risk-management models, “…[T]he government-sponsored institution Fanny [sic] Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events ‘unlikely.’”

In the end, Fannie and Freddie didn’t cause the crisis. They were further kindling caught in the firestorm of housing-based over-indebtedness. After investors and executives collected the profits, the taxpayers were left with the liabilities.

Let’s hope Mnuchin’s Treasury Department comes up with a better plan for the future.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related post:

Book Review: Black Swan – The Impact Of The Highly Improbable, by Nicholas Nassim Taleb

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