But when Chanos started poring over Enron’s financial statements and regulatory filings in 2000, he saw a lot of related-party transactions with so-called special-purpose entities that Enron had set up, but that weren’t on its balance sheet. When he factored in the losses shovelled into those entities, he figured that Enron really was earning hardly any return on its invested capital.
His main journalistic ally this time was Bethany McLean, a Fortune reporter. After Enron collapsed in 2001, she and a co-writer scored a $1.4-million book deal for The Smartest Guys in the Room, which served as the basis for an Oscar-nominated documentary.
Thanks to Enron, Chanos was back on a roll, and couldn’t resist the opportunity to gloat. Testifying before the House of Representatives committee on energy and commerce in 2002, he said, “I can’t think of one major financial fraud in the United States in the last 10 years that was uncovered by a major brokerage house analyst or an outside accounting firm. Almost every such fraud ultimately was unmasked by short sellers and/or financial journalists.”
As Chanos peers at you through thick glasses and delivers a torrent of numbers, you’re reminded of the whiz in your high-school physics class who actually knew the equations. No wonder reporters love this guy as a source.
Yet Chanos is no nerd: He co-owns Manhattan’s rugged Edge Gym. As for the statement in a 2008 New York profile that he can bench-press 300 pounds, he demurs. The actual number is 335. (His shoulders are formidable, although he might want to do more cardio to reduce a slight paunch.) The man is clearly happy in his skin—in person, he’s more relaxed and laughs more than in his TV appearances on CNBC or, needless to say, while testifying in congressional hearings.
He’s an intriguing mix of Establishment and Outsider. In 2008, he bought a 14-room triplex penthouse in a former Gilded Age mansion on Manhattan’s Upper East Side that had been listed for $24.8 million. The father of four grown children, he’s president of the board of trustees of the elite Browning School and a trustee of the New York Historical Society.
Divorced in 2006, Chanos likes going to dance clubs in New York and the Hamptons, where he has a summer house. In 2008, his name hit the tabloids when reporters discovered that his house sitter was none other than Ashley Dupre, the escort in the scandal that had brought down New York governor Eliot Spitzer that February. “I’m a divorced single man,” is all that Chanos will say about his after-hours activities, albeit with a bit of a smile. What he’s told friends is that the association with Dupre was innocuous. Like a lot of young women, she approached him in a club. He didn’t sleep with her, didn’t know she was an escort and was as surprised as anyone else when the scandal broke.
Chanos isn’t always right, and he can get carried away by his own numbers. His bravado has earned him a spot in a $6-billion lawsuit filed by Toronto-based insurer Fairfax Financial Holdings against about a dozen U.S. money managers and analysts. The lawsuit argues that this supposed cabal of short sellers mounted “a massive, illegal and continuing stock market manipulation scheme,” dating back to the early part of the last decade, with the objective of driving down Fairfax’s share price. Chanos, loudly and publicly critical of Fairfax for years, was not among the original defendants, but Fairfax added Kynikos to the suit in 2007.
Neither Chanos nor Fairfax will comment on the case. The various parties have filed literally millions of pages of court documents, and lawyers say the dispute likely won’t go to trial until next year at the earliest. The documents show that some defendants certainly communicated with one another, but whether that amounted to an illegal conspiracy is another question.
Kynikos’s submissions say it first shorted Fairfax in March, 2002, at $175 (Canadian). The company’s share price declined to a low of $70 (Canadian) the following year. Fairfax chairman and CEO Prem Watsa has a formidable investment track record, but Chanos argued that the company’s underlying property and casualty insurance business—which is an Everest of complex accounting—wasn’t profitable. In 2005, Chanos told a value-investing newsletter that he typically makes a call as to whether “something is a zero or just meaningfully overvalued. In this case, we think this is a zero.” Since then, however, Fairfax’s share price has climbed back up past $400 (Canadian).
Chanos’s history on big, sector-wide calls isn’t perfect, either. At a 2005 investment conference, he delivered a widely publicized presentation about traditional media/entertainment giants, titled “Twilight of the Gatekeepers.” Among the companies he singled out: Time Warner, Viacom, News Corp. and Disney. Six years later, share prices of all four have held up, more or less.