Diana B. Henriques - Taming the Street

31:01And as you said, when we were just beginning, before we started talking, you held Douglas up as perhaps the patron saint of the SEC. And I agree with you. I think he embodied everything Roosevelt dreamed this watchdog agency could be in his management of the agency. And he maintained an extremely close relationship with the president, had walk-in privileges in the Oval Office throughout his tenure. Roosevelt took tremendous interest in what Douglass was doing, sought his advice about key financial reforms, followed his advice about the need to regulate mutual funds in a new and more aggressive way.

31:48The 40 Act that regulates our mutual funds today was one of the last pieces of New Deal financial reform that Roosevelt signed before World War II swept his attention away to national defense matters. So the relationship between Douglas and Roosevelt was central to putting the SEC on the path to be a powerful, fair, and effective regulator. And a large part of that was the attention FDR gave it. And he gave it that attention because he just enjoyed Bill Douglas. You know, they had a close friendship. They were politically aligned right down to the last semicolon. In fact, in the 1940 election and in the 1944 election, William O.

32:42Douglas was on Roosevelt's shortlist for potential vice presidential candidates. And, of course, if he had taken that job in 1944, he would have been president instead of Harry Truman. So we can't overstate how close the relationship was between Douglas and FDR and how much that contributed to Douglas's ability to stand firm in the face of New York Stock Exchange opposition. He knew Roosevelt had his back and would have his back as publicly as he needed to. So that idea of White House backing for financial reform efforts is something we've largely forgotten now. The idea that Joe Biden ought to be meeting regularly with the head of the SEC about issues of regulating cryptocurrency.

33:43Maybe they are, but they're sure not letting us know it. And Roosevelt and Douglas let us know it. Everybody on Wall Street knew that Douglas had FDR's ear. Everyone on Wall Street knew that FDR had Douglas's back. And that gave Douglas a good measure of the power that he had. So Douglas originally started his work, though, in bankruptcy law, right? Which was, I mean, you want to talk about self-dealing, as I think that was just such an excellent point you made in your book, that just the bankruptcy process was nothing close to what we'd see today. And ultimately, I think it was Douglas, I can't remember if it was FDR or Douglas in your book, but they argued that the SEC's ultimate goal and kind of, I'll call it simple mandate, is investor protection.

34:30So I'm going to read a quote out of your book that kind of typifies this investor protection. Quote, but would ordinary Americans tolerate a freewheeling capitalism that laid its heaviest burdens on the backs of the little guys while steering most of its benefit into the pockets of the big guys. End quote. I thought a lot about this in light of what we just saw in 2020 and 2021 and 2022 with the whole meme stock Reddit craze. Because I think this is such a poorly understood point. I'll never forget, I think it was like CNBC or Bloomberg had gone to one of the congressional hearings where they brought in, you know, Citadel securities and, you know, the, you know, the meme crowd and whatnot into these hearings.

35:18And I think it was Maxime Waters who said, you know, it's so good that investors have this freedom. Okay. Well, she was saying that from an access perspective, but if you read between the lines, what she was saying is, isn't it so awesome that these small investors can go out and do such stupid things to ultimately profit these big players. And get ripped off. Yes. And get ripped off. But here's the great part. It's like, I was blown away. That's the last person I would expect to say that. Yeah. I share your astonishment, but I hold it up, Cole, as the reason why I felt this book was so necessary.

35:52I think we've forgotten that we're living under Roosevelt's rules right now, and we need to understand why they were put in place and how they protect us. And I mean, another area, of course, I don't know if you wanted to get to this later on, but, you know, I'm deeply concerned about the unregulated world of cryptocurrency. By the way, it's gambling. That's why males dominate it. It's a gambling ring. That's all it is. I mean, I don't disagree. I think I don't disagree with you. I mean, I think one of the key points that needs to be made is we've had a major meltdown in the crypto market, major exchanges closed because of fraud or bankruptcy, what economic act have we not been able to carry out as a result of the collapse of the crypto market?

36:40None. We can still do everything we used to be able to do. So that suggests to me it's not really a central tool that our American economy needs on a daily basis. But it is an unregulated form of speculation that became fiercely popular among retail, unsophisticated investors. And the SEC should have seen that. They should have seen that and stepped in much sooner than they did. Now, the idea of regulating crypto goes back more than a decade. The SEC was already quarreling with the Commodity Futures Trading Commission, which regulates the commodity and derivatives markets, about who should regulate crypto.

37:26I mean, was crypto a derivative or was it a commodity or was it a security? And those arguments dragged on and dragged on and dragged on. And as a result, no meaningful steps were taken to establish a regulatory regime for crypto. I mean, somewhere around 2021, I'm saying, I don't care which one of you regulates it. Somebody step up here. Because my nephew's son in college was trading crypto with absolutely no knowledge about what he should be doing. So my friend Michelle Singletary at the Washington Post was saying she was getting calls from relatives about putting crypto in their IRAs. And she would just, you know, after she picked herself up off of the floor, she would say, no, no, no, no, no, no, no.

38:12So, you know, we, that was a regulatory oversight that illustrated to me how far we've really come from the ideal that Roosevelt created and the practical agency that Bill Douglas helped build. Sure. They looked at what retail investors were getting sucked into. And they tackled them. I mean, one of the omissions that Jim Landis, the second chair of the SEC and the drafter of many of its key statutes, he acknowledged that he had left out a form of investment from coverage under the Securities Act. They were called oil royalty trusts. And they were complex, idiotic instruments that allowed you to share in some piece of the oil flow from some oil well out in some God forsaken patch of the Middle West and the West.

39:21And they traded like baseball cards. And Eastern-centric Jim Landis had not included them in the investments that ought to be registered with the SEC. By the letter. It didn't include them by the letter, not necessarily by spirit. Right. They could have argued the man, but they hadn't written the man. And as soon as he wrote amendments, in 1934, he wrote amendments at FDR's direction to the 33 Act to try to address some of the points that Wall Street had raised about impractical procedures, things that could work better. And when he did those corrective amendments, he added oil royalty trusts to the jurisdiction of the SEC.

40:11And one of the first big cases to test the constitutionality of the SEC arose at the hands of a flamboyant, you know, Jay Gatsby-like oil royalty trust salesman. He was a virulent opponent of FDR and the New Deal, and he was determined that he would not bow down to the SEC. He challenged the SEC's actions in his case, and he challenged the fundamental constitutionality of the SEC. He won on the first count. The SEC was barred from pursuing a search warrant where it felt it should have. But he lost on the second point. The SEC's constitutionality was upheld. That was nearly 90 years ago. So this is an agency whose lawfulness under the Constitution has been tested from its infancy and has been upheld.

41:16So it's a marvel to me that no one saw the analogy between what Landis did to go back and recoup oil royalty trusts and pull them into the SEC's orbit after realizing that they had been left outside the fence and they were being consumed by unsophisticated retail investors who were getting ripped off. We have thematically we fall and I quoted Munger earlier, but we very much fall into the Munger pragmatic discussion on this, which, you know, if someone says, you know, what about this new financial innovation? And Munger would say something along the lines of, well, you know, do we really need to create new ways to lose money?

42:01I think the old ways work just fine. Okay. And I love that because he's right. In other words, like, I mean, I'd rather go play craps in Vegas than I would go trade crypto because at least they give me free drinks. It's a more enjoyable way to go through the evening. So I agree with you. Let me make a small pivot because I think I want to mention something. So we all, you know, you do a good job of talking about Glass-Steagall and some of the things that came with that. Prior to Glass-Steagall, there was the McFadden Act. Can you teach our listeners what the McFadden Act said? Well, this is one of the interesting mysteries of the 1920s.

42:40There was an opinion letter, a legal opinion from President Taft's attorney general that said that banks could not engage in securities underwriting. You know, they just couldn't do it. But it was in violation of the banking law as it existed at the time. And that ruling was, so far as anyone knew, the state of everybody's understanding until the Roaring Twenties came along. And banks just started to ignore it. And we'll start just a little security sales operation over here and then a bigger one and then a bigger one. Until you reach the 1920s, the late 1920s, when National Citibank, which is the great grandparent of Citicorp today, National Citibank had the largest security sales force in the world.

43:40And they were selling stocks to their depositors, to their depositors' families, to anybody they could sell stock to, high-pressure salesmanship, inadequate disclosure, sometimes deceptive sales pitches. And this was one of the most admired successful banks in the country. And it was blatantly violating at least the spirit of that old ruling. So with the McFadden Act, the Congress of the 1920s basically said, oh, all right, you win. And we will affirm what you're already doing. So I guess in a way, it's proof positive of, you know, ask for forgiveness, not permission, and you'll get away with murder.

44:34But the creation of a banking industry that was also so inextricably intertwined with the securities industry happened almost as a fluke. It happened in defiance of expressed public policy from the attorney general of the United States, at least. It happened through gaps in regulation, through unwillingness to confront and challenge these giant institutions, until finally what the institutions had decided to do, which was to have these alter egos that sold securities, became the law. And it was so inextricably linked, as I mentioned in the book, Cole, the common practice was for the share of stock.

45:34There were paper stock shares back in those days, many of them framed for artistic purposes today. But a share of stock of bank XYZ would give you ownership of the bank. This is the regulated depository bank taking customers' money and making loans. And then on the B side. On the B side, on the opposite side of the same piece of paper, you would become a shareholder of the securities operations of that bank. So you couldn't choose not to be an investor in the securities operations. And this created just illogical and insensible practical realities for depositors and investors. I mean, in that pre-FDIC world, if a bank failed, the bank shareholders were often on the hook to cover the deposits.

46:32Well, what if the depositors are the shareholders? They are, in essence, insuring their own nest eggs with their own nest eggs. So it left banks even more exposed and bank customers even less protected than they were under the existing legal regime anyway. Agree. So Glass-Steagall comes about in June of 33. Along with that, you just mentioned this, but the FDIC insurance comes along as well, which the banks weren't excited about because there was a cost. But as we know today, we think of FDIC insurance. It's still very relevant, as we all learned in early 2023. I think more about this because obviously, you know, Glass-Steagall was taken down with the, again, Citibank, the merger of Travelers Insurance with Citibank by Sandy Weil in the late 1990s.

47:22And it was a very similar political arc, wasn't it? In that the rule said, no, here's the limits. You know, Glass-Steagall is the law. No securities operations by a depository bank. And they had nibbled away, crocheted a few little new additions on the margin, knitted together a few little things until finally the reality was challenging the legality. And ultimately, the legality changed. Ultimately, Glass-Steagall fell because banks had already – it was a dead letter. Banks had already been defying it in their practical operations and not been stopped. So that was how we got to Glass-Steagall in the first place, and that's how we lost Glass-Steagall in the second place.

48:22Because Munger commented on this, I think, in the Berkshire meeting this year. And he said, you know, he was kind of pointing out how crazy it is that we have this marriage of securities businesses today with banks. But he points out something really interesting, because I think this is a theme in your book. He said it's what people actually want. In other words, like there's not a huge cry from middle America right now to say we don't want these connected versus at a prior time. Right. After the devastation of of the crash of the 20s, there was that people could understand why you wouldn't. So how do you look at that public sentiment?

48:59Because I think that's a I agree with Munger. There's no one saying, oh, you know, I don't want to be able to have my brokerage business in my bank be the same place. In fact, people want convenience. They want that scale. They want it all in one place. But are they always going to want that, I guess, is my question. Well, sometimes the bill that falls due for that arrangement falls late. You know, you're enjoying the benefits of it right now. But as we learned in the 2008 crisis, you know, having all your eggs in one basket is fine unless that crisis is about to crush that basket. And at that point, you want more diversification.

49:34I mean, there were days when we were covering the 2008 crisis where I went to work wondering if that was the day the ATMs would go dark. These were not trivial crises. Yes, it was scary. I was a student of financial history. Still am, obviously. But I had read a great deal about the 1929 crash. And I'm going into work to cover a run on money market funds after the reserve fund broke the buck a few days after Lehman Brothers filed for bankruptcy. And I'm looking around me and saying, whoa, this is panic. This is 1929 level blind panic. I was going to say on that, it's funny. It's so much of your book.

50:19Like, you know, I was ruminating on some of these stories and thoughts I had. I'll never forget, we were talking to an investor and it was like one of these moments where they're like, listen, I think I just want to go to cash, right? And we said, well, think about it like this. Let's theorize that you're right. Let's go down that alternative path of life, that you're right and you should be sitting in cash. We said, listen, if this system fails, your cash being held at that financial institution will be worthless. even the FDIC insurance would fail under the sheer weight of the calamity of the system.

50:54And so we said, listen, if these companies don't survive and produce the tax revenues to end up supporting this system of regulation and this financial plumbing we have, the cash won't help you at all. And that was the reality of the situation. FDIC would fail if the system failed, right? You're right. One of the key lessons of the 87 crash, as I noted in my book, I'll give a little plug here, A First Class Catastrophe, which is the story of the road to Black Monday of 1987. And one of the lessons of the 87 crash is that, yes, markets rise and markets fall. What you want to avoid is markets falling apart.

51:36Because a market that's risen and fallen can rise again. a market that's risen, fallen, and fallen apart is very, very difficult to put back together again. And our deepest and most painful recessions, not just in this country, but in other examples that we see from abroad, the deepest and most damaging depressions, economic downturns, are those where you've lost your financial system, where it's been shattered in some way, and you have to rebuild it before you can rebuild your manufacturing and consumer economy. Agreed. So you had a great FDR quote that really kind of touches at that tension, because you're getting at a fine line, a really good tension right there.

52:23So I'm going to quote out of your book here. FDR said, quote, I am against the private socialism of concentrated economic power. As thoroughly as I am against the government socialism, the one is equally as dangerous as the other, end quote. So he's pointing out that there's two spectrums, right? We have where the system falls apart and we go to a very high level of social programs to support the economy, which I would argue is probably not in the long run sustainable. But on the other end of that pendulum is socialism that's being practiced through, I'll call it, really large economic powers in the U.S.

53:07economy. And I think of going back to 08, 09, we were at one end of the pendulum. Business was very weak back then. And I think a lot about how much power business has today. And yet, like in your story, a lot of pragmatists out there, I'll use like Dennis Cicilline or Josh Hawley, people that do not agree on anything, by the way, that they agree that the socialism in economic power is the biggest danger to the American household. Well, certainly the rise of very concentrated industries in many, many sectors, the dissuade of antitrust enforcement over the past 40 years has left us with an economy not Not greatly unlike the one that confronted Roosevelt, or even the one that confronted his distant cousin Teddy Roosevelt in the early days of the 20th century, where you have an enormous amount of economic power concentrated in a few hands.

54:14And it was that power that Roosevelt was speaking out against. He wanted to express in that beautiful quote, by the way, it's my editor's favorite quote in the book, but he was expressing in that quote the belief that both extremes are dangerous. A powerful government that will run your economy for you without your input. Yes, socialism. That's what everyone was screaming about. All the conservatives are saying, oh, you're a socialist. You're a socialist. They call them pigmies. Yes, the other extreme was extremely powerful oligarchs answerable to no one running your economy, who cannot be reined in by government, who cannot be reined in by any moral call by their shareholders, who are largely unregulated and unregulatable.

55:08So he saw those two extremes and tried to navigate his little ship of state between those two shoals to get it into a safe harbor where the market could be regulated but not ruined. It would still work, but it would work more fairly for everybody. And that was his mission. And to an amazing degree, that was his legacy. So let me ask you a question of that because I don't have this in my notes but it just came to mind so I have to ask it so how do you as a historian look at say the size of let's just use like a like the passive indices like a Vanguard or BlackRock, etc. But not necessarily, I'm not going to portray them as some bad actor or actress.

55:56I think of it as, what about the proxy voting, you know, that will be given off to like an ISS or someone else like that, because they want to abdicate the liability. So they go to them and say, you vote for us. But doesn't that give some of these proxy voting services, like to FDR's point, concentrated economic power, where just by the stroke of their decision, a vote is decided for a company and the remaining minority shareholders have no say. Well, it can. You're certainly right, Cole. That can be an outcome of this bifurcated and almost detached ownership process that we have. Correct. Yeah.

56:36It is encouraging, however, that we've had a few intriguing examples come out over the past 10 years where concerted shareholder interests, whether led by an activist like Bill Ackman or led by a pension fund acting in the interests of its public employees, have been able to crack that shell. They've been able to exercise their power in the proxy voting process if they chose to. I think what many of us get frustrated at is the unwillingness of our largest investors, mutual funds, pension funds, the huge money managers. We've got three money managers right now, you can name them off, who have together, just the three of them,$10 trillion under management.

57:32Now, that is an unthinkable number. FDR would have rolled screaming out of the room if we'd given him that number to deal with, because that degree of power is just staggering. Now, our market today is obviously many times bigger than the market that he had then. But this still represents an astonishing degree of concentrated money. Agree. And as I pointed out in the 1987 book, in A First Class Catastrophe, the danger comes when all of that money decides to move to the same side of the boat at the same time. Totally. By the way, welcome to 2023. I mean, we just talked about this earlier today.

58:16When everyone says, hey, we're going to all go do ESG, you just got to go to the other side of the boat because it's so much more profitable. Right. Or when everybody says we're going to index to the S &P 500. Or when everybody says we're going to index to the this or that international index. You know, they'll add countries to the international index without looking at the capacity of their stock markets to absorb the international investment that will be necessary when their index becomes a benchmark that money managers have to match. So, you know, I think one of the biggest challenges that today's regulators face is scale.

58:57They're truly dealing with investment on a scale that would have staggered Bill Douglas back in 1936 and 37. It would have just completely agree. So, by the way, your discussion on the OTC market. I mean, like if someone just did a presentation on the history of the OTC, I think it exposes exactly what you're talking about. Because, you know, your book does a great job of telling how vast the OTC market was when Bill Douglas was trying to regulate it, which, you know, as you point out, what we know as FINRA today, which was prior the NYSE and the NASDAQ rulemaking boards have now merged. And it's still an SRO like was intended from Douglas's regulation.

59:37But I think how many OTC securities existed in America in the 30s, in the 50s, in the 80s, and now there's almost none relative to then. It shows you how concentrated these markets are. They really are. And of course, we're also seeing the rise of the non-listed investments. We're seeing private equity to a large degree replacing listed stocks with really worrisome implications for the retail investor, the average investor. You know, it's worrisomely reminiscent of an age where, you know, investors like me, you know, stood outside the door and hoped that someone inside the room would whisper some good advice to me.

1:00:28But the real movers and shakers were in the room. They weren't out where we were. So this largely opaque world of private equity investment is, to my mind, a fresh terrain crying out for regulatory study and regulatory assessment. One of the lost gifts of the SEC, this I know wasn't on your agenda, but let me just quickly toss it in. Sure. The SEC that Roosevelt created, that Kennedy and Landis and especially Bill Douglas and his successors oversaw, saw as one of its missions the research into what's happening now. And the studies, the special studies that were done by the SEC over the ages, over the decades, have been priceless guideposts to how to cope with changing technologies, changing composition of investors, changing laws as the courts shifted in one direction or another.

1:01:40that aspect of the SEC's work has been largely forgotten. But this is an area where it cries out to be done. I want to see a major regulatory study of the role of private equity in our current economy and whether there are sensible, necessary ways that it should be regulated in the public interest. And I would look to the SEC to do that. So would FDR. That's what he would have expected. To your point, in a lot of these presentations, they'll show that they have lower risk adjusted returns than other public investment vehicles, which we all know from investment theory. If you put leverage on a business, it's going to exhibit higher volatility, all things equal because of the leverage.

1:02:25And yet you'll rarely find a performance track record that exhibits the higher level of volatility relative to other levered assets. So I agree with you. It's oddly strange in how it looks compared to other markets that are more regulated. Yes, it is. And I'm not saying I know exactly how to regulate it. But I am saying when it has become this potent a force in our financial economy, somebody better be looking at whether and how to regulate it. because we're right back at kind of like 1933 level understanding of private equity. And we need to start doing exactly the kind of studies and pragmatic consultations with the practitioners in the fields to figure out what we should be doing.

1:03:14And that's really the lesson I try to convey with this book, Cole, is that, yes, it's a lively history. And I think it's a lively tale. I tried to make it as dramatic as I could. But, you know, suitable for motion pictures. But the lessons are not old and dusty. The lessons are applicable today, right now, whether we're talking about applying them to cryptocurrency, which is the most obvious evidence, or to private equity or to esoteric securities arising out of derivatives. These are lessons we need to consider right now. And the fundamental lesson that I hope it will convey is to raise a gigantic question mark in the minds of every voter who hears the word deregulation on the political campaign trail.

1:04:08If you don't understand why we came to regulate finance in the first place in this country, you're a sitting duck for stupid and specious arguments about why we should deregulate it now. So I'm hoping that taming the street will equip a nation of middle class and concerned investors and arm them with saying, wait a minute, these regulations you're talking about, they were put in place to protect me from you. Why would I want to take them apart? Well, to your point about power, I mean, you know, we are a, you know, we obviously have 40 products as a firm, our two mutual funds. But it's interesting, like I think about your power discussion, I totally agree.

1:04:58We are not a member of ICI, the Investment Company Institute. And when people ask us why not, I'd say, well, listen, they really only care about what three or four businesses say. Why would they care about what we think, right? And also, maybe it's like a Whitman College thing, but in the ghost of Douglas, I look at things like the Gartenberg decision and would say the courts got it wrong. The Gartenberg decision was wrong, and Jones v. Harris was wrong, and all these rulings have been wrong because ultimately the best pricing should have been provided to the mutual fund investor, not the institutional investors, in my opinion.

1:05:34But that's how we ethically look at this world. It's not illegal, as we know from the courts, but what's the highest ethical standard for going out and doing business with retail investors? And that's how we look at it versus how the letter of the lies. And in this environment, I think reminding people that so long as finance is a world where everybody is coloring right up to the line, without any thought of the ethical component, we're going to need strict regulation. You know, it's very hard for the most ethical players to stand firm against those who cheat. I mean, we just we know this from tons of academic research.

1:06:25You know, you put you put five liars into a group and, you know, let people compete over which team they'll be on. And before you know it, you've got teams full of liars. So there's a real hazard to asking ethical, upstanding, principled firms to be the first line of defense against misbehavior. It's a copycat industry we're in. Yes. And the guy you copy is the one who got the best returns last quarter. Or raised the most money. Right. Raised the most money. If he did that by cheating a little, you know that the only way you can compete with that is to cheat a little. And the only thing that keeps everybody from trying to compete by cheating a little is a cop on the street that says, nope, we're not going to have any cheating, period.

1:07:24You guy that cheated, we're taking you away. The rest of you, hold to your principles. Continue to be ethical because we will shut down the unethical actors. And that was FDR's vision for the SEC. see. When the one thing that still hold true, and I, as I thought about the Whitney's and I thought about, you know, the old guard, it still holds true. And I don't know whether this, I can say this is sad or it's good, or I don't know what it is, but it still holds true that if you're good looking, you're well-educated and you also come from a good social circle, you can make a lot of money in this industry, whether or not you're good at what you do.

1:08:04Or whether or not you're honest, obviously. Agreed. Yeah. It's one of those things that that has stayed around. Yeah. And Dick Whitney is the avatar for that in my story. He stands for all of those well-dressed, well-spoken, well-educated, well-padded figures on Wall Street whom we all are drawn to and admire and think must be geniuses. Dick Whitney was not a genius. Dick Whitney was a crook. And his downfall opened a lot of eyes at the time to the utter incapacity of Wall Street to police itself because it falls for that romantic notion too. You know, it sees a Dick Whitney with all of these attributes, good-looking, well-dressed, living at the apogee of American society.

1:09:04And they say, oh, you know, he's a good guy. You don't want to pull him down. He's one of the guys. He's one of the guys. He just got in a jam. You know, he just got in a jam. It wasn't, you know, I mean, one of my favorite passages in the book is from the hearings that Bill Douglas insisted on holding after the fall of Dick Whitney, where he is challenging the lawyer for the New York Stock Exchange and a close friend of Dick Whitney's. And, you know, no, I guess it's Ted Lamont. So he's talking to Tom Lamont, the head of J.P. Morgan. J.P. Morgan, yep. And Lamont had known about Dick Whitney's criminal behavior months before it became public.

1:09:52And the young lawyer who went on to become a great judge and handled many of the Watergate cases, Jerry Gerhard, pounds him and says, you know, but didn't it bother you that you knew that this pillar of the New York Stock Exchange was a thief? The Morgan partner was jolted. He sat back in his chair and he said, I just never thought of him as a thief. he had stolen millions of dollars from his clients but and friends and friends and family and yet the his his brother's boss excused it saying well you know it was we all love dick he just got into a jam he got into a jam what one other one other name you mentioned and i rarely hear people bring this up in books.

1:10:46And I feel like, you know, we like footnotes in disclosures that you can find some very interesting things. And I feel like there were two footnotes in your book about John Brooks. Okay. And I think of John Brooks as being one of the greatest New York authors of the 20th century. And really, he epitomized the 50s and 60s of New York and Wall Street, in my opinion. okay he certainly did i'm a huge fan i have every book he published on my shelf so i the go-go years i always tell people listen we just got done with the go-go years you've got to understand who john brooks was it higher rates higher inflation john lived that okay how just to give our readers a picture into john brooks how influential as a writer was he you know i could say that you could say that but who was he in your mind relative today i mean i think of like a jim Stewart as an example, who's very notable out there.

1:11:42That's who I think of. Yeah, I think he's a Jim Stewart, a little bit of Michael Lewis, certainly a little bit of William D. Cohen. But in all three cases, these are people who had the ear of people on the street. And that was John Brooks's great gift. I mean, he was such an engaging person. And did so much shoe leather that he knew everybody. And for me, the treasure of Brooks's reporting, particularly in his book Once in Galkanda, which was his account of the 20s and 30s, was that he was interviewing people for those books who had been through the Whitney hearings, who had been through the 29 crash.

1:12:33And he was interviewing them while they were still alive and picking their memory like one of the best reporters ever. He asked them every question I would have asked them if I could have been there. And so he left a body of reporting, active, live reporting from the memories and reactions of people who lived through these events, and he left it for future historians like me. So he just left a priceless and an immensely entertaining body of work. Agree, agree. So I have one other question. And then I'll did the did the Biden administration call you up and say, OK, here's the deal, Diana. We're thinking about packing the court.

1:13:18What do you think about that? And then you went to your book and said, listen, it didn't work for for FDR. And you, Mr. President, are no FDR. No. And in fact, I'm not sure that's a careful characterization of my posture on the on the whole thing. And certainly Roosevelt faced an extremely challenging Supreme Court. President Biden did not ask me about what his strategy should be toward the Supreme Court. But I think if he'd consulted FDR, he might have gotten the more nuanced explanation than has come down through history. I mean, the popular view is that Roosevelt tried to add additional justices to the Supreme Court after they had proven deep hostility to almost every measure that he tried to put forward to address the Great Depression.

1:14:12And remember, this was a national crisis on the scale of war. More than 25 percent of our workers were out of work. People were scavenging on landfills. People were starving. Factories were idle. towns were not getting tax revenues. The nation was teetering on a knife edge of anarchy. Roosevelt had to fix it. And he was faced with a Supreme Court that was regularly striking down the provisions that he had undertaken to try to fix the Depression. So he needed to alert the country that this was a problem. I think his strategy was understandable. I think his tactics were wrong. He failed to communicate what he was trying to do clearly and honestly to the public.

1:15:09He failed to communicate it clearly and honestly to Congress. He ignored the simple realities of public relations. It was an extremely articulate and popular chief justice who was able to talk rings around most of the congressmen that he testified before. So while FDR's overall effort to add members to the Supreme Court failed, it did happen, whether coincidentally or not, that from that point forward, the Supreme Court was far less likely to overturn New Deal initiatives than it had been. Like Abasco, for example. Yes. So the Abasco case, upholding this constitutionality of the Supreme Court, of the Securities and Exchange Commission, upholding the labor protections.

1:16:10So it marked a shift in early 37. It marked a shift in Supreme Court rulings with respect to the New Deal. Now, you know, obviously, one of the great truisms is the Supreme Court reads the newspapers. And Roosevelt had come into 1937 on the back of one of the most outstanding political landslides in American history in the 1936 election, which everyone thought was going to be very, very close. Republican Al Flandon might win, said a few pollsters. In any case, it's going to be really, really, really close. And in fact, Roosevelt swept every state except two. Only Vermont and Maine didn't vote for him.

1:16:59So he came into office, reelected in 1937 with a popular mandate, the likes of which the country never seen in modern times. So if you're the Supreme Court and you're looking at that and you're smart and you're worried about the reputation of the institution, how much longer are you going to stand in front of the New Deal train and put your hand up and say, stop. So I think he was more successful than we give him credit for. And even on a very practical level, although the reform bills that he put through Congress were struck down as far as the changes that he wanted to make to the Supreme Court, he did affect some meaningful reforms to the appellate court level that we're still benefiting from today, in fact.

1:17:46And I had to do a little bit of homework because I was like, gosh, man, these wealthy, you know, Catholic, Republican, Protestant types. I mean, they really dislike, they really dislike Roosevelt. And I had to remind myself because they, you know, I think it was Aldrich in your book, you quote Aldrich talking about, he says to pay such taxes, very large blocks of securities must be liquidated in a thin and inadequate market. So I did, you know, to be fair to his point, taxes did it from 29, they went from being 24 % for the, like the income tax rate to 63 % in 32 and then 79 % in 35. So I'm not saying that, you know, no wealthy person or person with income or means is ever going to enjoy that.

1:18:28But that wasn't the only reason for regulation coming. You know what I mean? It wasn't just taxes. To your discussion, it was about cleaning up parts of the economy that need to be cleaned up too. Right. And those tax rates fell on a vanishingly small percentage of the American population at that time. And ultimately, Roosevelt could stand in front of that intransigence and say, look at your country. Look at your fellow citizens out of work for two, three, four years, unable to feed their families, no sense of financial security at all. They've lost their homes. They've lost their savings in your failed banks.

1:19:09They've lost their investments in your crooked stock markets. Think of your responsibility to your country. And that was one of his most passionate arguments, really, Cole. He would sometimes, you know, kind of almost despair in private conversations with friends and notes that are in the archives, where he would, he said at one point in frustration, you know, these bankers have no more sense of public relations than a chicken. I mean, he just couldn't understand why they did not see they had a duty to mankind. They had a duty to their fellow citizens. And he was trying to reawaken in them that sense of noblesse oblige, the sense that you can't just take the money and run.

1:19:59You live here in this country, too. And you have to help us build a safe and equitable environment for everybody. And so he was a great preacher on that score, but he was preaching a sermon no one wanted to hear. And you're absolutely right. He was virulently hated by the class he was trying to regulate. Well, so I always think like right now, and this is something we've talked a lot about with our investors and just the public. But so if someone says like, you know, the post-pandemic world, how do I look at it? Well, I tell people all the time, we tell people we love it because it's just so different.

1:20:35So, for example, prior to 2020, the normal thing you'd hear is, you know, Ray Dalio, for example, talked a lot about wealth inequality. And you'd hear about the stagnant income conversation in middle class America. Well, post the pandemic, the largest increase in income in the country has been the lowest income quintile and quartile. And if you look prior to the pandemic to today, the largest real wealth build on a relative basis has been among the lowest incomes. So I run into wealthy people right now and they're just so depressed. It's so tough out there. It's miserable. And when I see like$19.50 starting wages at certain businesses on the West Coast and they can't fill the jobs, I'm like, wow, it's incredible to be a lower income in America today.

1:21:23And my question is, is that such a bad thing? In other words, I like that. I think it shows how strong the economy is, not how weak the economy is. I've got a few quibbles with that, as you might expect from my perspective. It may be a good thing to be a lower income American today, but it's a far, far better thing to be in the top 1 % today. It always has been, though. That's a constant. Well, but it is, oh, not a constant. That is an ever-increasing reality. You've seen the trajectories, an almost vertical line of the share of wealth over the past four or five years that's gone to the top 1%.

1:22:06I agree. I agree with you. But by the way, here's where you're right, and I'm right. I think that, by the way, first off, wealth doesn't sustain for longer than three generations on average. That's always been true. So dynastic wealth disappears. God, God, thank you, right? We're glad that doesn't hold forever. But the second part is, just so you know, and by the way, I'm going to buy you dinner sometime and we're going to chuckle about this because we're going to test this. But I think in 10 years, wealthy people will be poorer in real terms. And you know what? I'll be really excited for that.

1:22:40Well, it's a bet I won't take, but I do think that returning to some sort of healthy equity in society, it was one of FDR's goals. I think it has to be one of our continuing goals. Nobody objects to people getting rich in a capitalist society. FDR didn't object to it at all. He didn't object to people getting risk. He came from that wealth. What he objected to was pulling the ladder up behind you, slamming the door on everybody else. His belief was that if you could benefit the great bulk of the American population, he likened it to yeast in bread. If the programs you incorporate into your bread cause the whole loaf to rise, everybody benefits, including the rich.

1:23:42Whereas if your policies are geared towards benefiting the rich in the hope that crumbs will trickle down from their table, then you're asking for an extraordinary degree of patience from the average American, a degree of patience that was running out in the Great Depression and that may well run out as we look at stagnant income and increased income inequality these days. So I think that the argument that FDR would raise to that is, sure, go out and pursue your own wealth. But remember, if the benefits of capitalism are not widely shared, support for democratic capitalism will not be widely shared.

1:24:35Totally agree. And as we're concerned about our democratic institutions now, and FDR was brilliant in recognizing that there's a connection between a fair economy with well-regulated markets and a strong democracy with broad public support. He saw those as inextricable, and that's why his financial reforms were the heart and soul of the New Deal for him. I agree with you. I agree with you. So, by the way, to your point, I mean, that tension, I also agree with you in that there's a tension there. And that's why we also believe labor will stomp capital. Because to your point, if we don't find the middle ground to that, it's not sustainable for the capital either.

1:25:24Totally, totally with you there. But wealthy people are not scarce today. Able-bodied labor is scarce, and that's why it's commanding such a higher price. And I think that is the most interesting dynamic out there today is watching. I mean, I just I got out of college in 06 from Whitman. And, you know, if you made forty thousand dollars as a kid out of college, you felt really blessed. OK. And I tell my 13 year old, 14 year old or almost 14 year old daughter, I say, listen, you're going to get paid twenty dollars an hour for your starting wage at your job. That would have been a king's ransom 20 years ago.

1:26:00OK. You know, out of college and you don't even have a college degree. And so I think that I think the labor beating capital is a theme that not only has already begun, you know, not at a level that anyone's talking about. But the good part is, if you go look in real terms, wealthy people are already poor compared to prior to the pandemic. And the good part about that is it's the mean reversion. There has to be a version to the mean on that score, just like you're saying. I agree. One of the things that concerns me, and I'm sure you're alert to this as well. Well, if you're right, and God knows I hope you are, if you're right that labor is going to come into its own and have more bargaining power in the negotiations over distributing wealth in our economy, then we need to be especially alert to the steps that are being taken now as political policy and at the court level to restrain labor unions.

1:26:57We need to understand that the factors that help labor negotiate on some equal footing with capital have been in dissuaded for decades and need to be restored and respected again. So I, you know, when labor becomes scarce and can command a higher premium, it can also command better working conditions. It can also command better pensions, better medical care. It's the opposite of 1980 today. It's the opposite of 1980. I mean, that's that's how we you know, when Reagan stared down the air traffic controllers, we're at the dead flat opposite. That was the height of union power. were now where union power has trouble getting any foothold in big American businesses.

1:27:47So I agree. I agree with it. But the 1960s were a good time to be a laborer and a household in America. I think we're going back there. So I'm the utter optimist on labor beating capital. And I'm your right wing Republican saying that, too. You've cheered up my day, I will say. What I would like to see accompany that shift in relative power and relative wealth is a clearer understanding of what kind of regulations we need to preserve a level playing field in our financial markets as these shifts occur. Or to quote Sherman, to keep the social order, which is exactly what FDR was really worried about.

1:28:31He was, and not without good cause. You know, if you explore the tensions that were emerging in the days of his campaign, right wing fascist movements that were on the rise, left wing and anarchic forces that were on the rise on the left. You know, there was an apocryphal quote that I wanted to use, but I couldn't find a valid enough way to footnote it. And you know how important those footnotes are. But there was a quote that I do love because it had one admirer of Roosevelt's telling him after his success with the banking crisis after he was sworn in. And he said, oh, if you can turn this Great Depression around, Mr.

1:29:15President, you'll be the greatest president in this country's history. But if you can't, you'll be the worst president. And FDR answered back, no, if I can't, I'll be the last president. Yeah, that's true. By the way, so there's so much we didn't go over. I mean, I just got to mention some of this because I love your book. As you can tell, I just gig out when I was going through this. We didn't talk about the Reconstruction Finance Corporation. We didn't talk about Kennedy as a diplomat. But listen, I couldn't be happier, Cole, if I were right. In fact, I'm looking at my talking points right here in front of me.

1:29:54And yep, you got that one. You got that one. You got that one without even me having to bring them up. So I couldn't be happier. You got the core of the book. You got the core of what I wanted to convey to readers. And I'm so grateful that you've given it such a lovely showcase here today. Let's see. I was going to ask you, going forward, where could our audience and our readers follow you? Are you on social media at all? Is there a place you write off? They can find me on x.com still. Okay. Hang it in there. I also have a website, dianabhenricus.com, where I will be updating with news about the new book.

1:30:30We hope to get an excerpt posted on the website as soon as we can. The book, again, will be out on September 12th. And around that time, folks can check my website for where I'll be speaking, for events that I'll be doing around and about, some of them virtual so that anyone can tune in. So I'm going to be hoping that I can hear back from a lot of readers and engage in a great conversation about what do we need to learn from FDR and what can we apply from FDR to today. And to your point earlier, how relevant it is. So I really appreciate you again joining me, Diana. For our listeners and our audience, if you want to understand the history of how we arrived at the investor protections and regulatory frameworks that we have in place today, that, as we mentioned, are so relevant, you must read Taming the Street by Diana Henriquez.

1:31:20You will also learn, as we talked about, strange belled fellows like Joe Kennedy and William Douglas can create powerful and lasting change in society. If you enjoyed this podcast, go to Apple, Spotify, YouTube, or wherever you listen to A Book with Legs. Give us a review. Tell others about the books and great authors like Diana that we have on. And we'd love the opportunity to teach them how we look at these great authors as well. For our tribe, if you have a great book that you'd like to recommend, email podcast at smeedcap.com. That's podcast at smeedcap.com. You can also send your suggestions to us on the former Twitter, or as Diana called it, X.

1:31:58Our handle is at SmeadCap. Thank you for joining us for A Book With Legs podcast. We look forward to the next episode. Thank you for listening to A Book With Legs, a podcast brought to you by Smead Capital Management. The material provided in this podcast is for informational use only and should not be construed as investment advice. You can learn more about Smead Capital Management and its products at SmeadCap.com or by calling your financial advisor.

1:32:31We'll be right back.