Enablers

Submitted by QTR's Fringe Finance

There’s an obvious growing failure at the center of modern markets that, as a former short seller, has become beyond obvious to me over the years.

It isn’t just fraud or aggressive accounting. It’s the ecosystem that allows both to thrive: financial media that won’t press, and a sell side that won’t risk upsetting management teams they depend on for access.

We’ve seen this movie before. Enron did not implode because there were no warning signs. It imploded because the warning signs were inconvenient. There were whistleblowers. There were people inside the system who knew the numbers didn’t add up. But complexity was treated as brilliance, and skepticism was treated as cynicism. Analysts admired the innovation. Television hosts admired the executives.

And the stock went up—until it didn’t.

The same institutional shrug preceded the collapse of Bernard Madoff. And one line is enough about Harry Markopolos: he handed regulators a mathematical proof Madoff’s returns were impossible, and they filed it away until the financial crisis caused Madoff to collapse.

The common thread wasn’t ignorance. It was incuriosity. Or, more precisely, selective incuriosity.

Now consider Carvana. For years, short sellers have argued that Carvana’s reported outperformance relative to peers strains economic logic. Short seller reports have laid out, in detail, why investors should be extremely cautious with the subprime used car dealer whose numbers blow away its competitors somehow. All you have to do is take an hour and read the damn reports — something apparently no one on the street is capable or doing, or cares to do.

Used car retailing is not software. It is capital intensive, cyclical, and brutally competitive. Yet the narrative presented has often been one of operational genius and dramatic margin recovery.

Skeptics have focused on the company’s web of related-party entities tied to the founding family, including DriveTime, Bridgecrest, and GoFi. The allegation is straightforward: reported earnings are materially influenced by transactions within that ecosystem—loan sales, internal transfers, and accounting treatments that allow gains to be recognized without corresponding arm’s-length economics.

Recent work by Gotham City Research didn’t merely wave at “aggressive accounting.” It walked through the structure in detail, connecting financial statements across entities and suggesting that the apparent profitability is deeply intertwined with highly leveraged affiliated companies. The gist of the allegation is that Carvana is selling off shitty subprime loans to an off-balance sheet entity controlled by the CEO’s father, booking the sales as earnings, while the private company takes on massive losses that it isn’t forced to report as transparently as a public company would. This would allow Carvana to post huge “earnings” while another entity absorbs massive losses.

It’s not so dissimilar to Enron, where debt was shifted into off-balance-sheet special purpose entities that were technically separate but effectively controlled by the company, allowing liabilities to disappear from reported financial statements.

If Gotham’s analysis of Carvana is directionally right (and I believe it is) then remove the internal scaffolding and the earnings picture changes dramatically. That is not a personality dispute. That is a balance sheet issue.

And yet the scrutiny from mainstream financial media and much of the sell side has been tepid at best. One example stands out...(READ THIS FULL COLUMN, 100% FREE HERE).