High-flying Land Baron Hits a Wall

By now you know that Aubrey McClendon started the “fracking revolution,” parted ways with the company he founded Chesapeake Energy, and without a seat-belt, drove his vehicle into a concrete wall at high speed two hours before he was to turn himself in at court.  Apparently intentionally, since there was plenty of room to avoid the wall, and at least not yet any report of a medical event.

McClendon

Aubrey McClendon (Wikimedia)

What you may not have thought of yet is that this is not a “simple” case of not wanting to go to jail, though that may have been the last straw.  And there are lessons for investors.

McClendon took a simple vision of the future, and bet on it.  Everything.  Much of his bet was land, usually considered safe.  In particular, he assumed the “price” of natural gas and oil is what it is, or rather “was,” and would be the same or go up.  Most of us thought that.  Not all of us bet so heavily on it.

As a direct result of the revolution McClendon championed, prices of first gas and then oil plummeted.

In chronicling the rise and fall of McClendon, even though he has been having legal disputes with his company and various political entities for some time, Business Insider does not cite this as a factor in his “fall.”  He went heavily into debt, put his company in debt, and then gas prices fell.  See article.

McClendon also appears to have encountered the three strikes rule.  You can make nearly any one and most pairs of two mistakes and survive and find something to be happy about.  McClendon was wrong about the future (not taking into account effects of his own actions and the likely actions of others), and took too much risk with his leveraged bets.  So he probably lost a lot of money.  Then he got desperate and possibly tried to cheat to fix it, and suffered his third strike.

A number of financial high rollers, from Martha Stewart to Ivan Boesky have survived jail terms.  They didn’t combine the legal misconduct with leverage and short-sighted vision.  Martha is back on TV and looking well.  Boesky didn’t regain his reputation, but he got $23 million and a $180k/year reverse alimony from a divorce, so he isn’t doing badly.

 

 

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