Andrew Ross Sorkin on Market Bubbles, Banking Rules, and the Real Lessons of 1929

26:55Charlie Mitchell, who ran National City, who becomes Citigroup. You know, Charlie was the equivalent of a Jamie Dimon of his time, but maybe looks more akin to a Jensen Wong in terms of just his sort of sunny disposition towards everything all the time. I think they're still driven by the same things, which is, you know, at some level, I've always thought that people are driven by an insecurity, a FOMO, a YOLO kind of hole that they're all trying to fill. Money is just sort of one example of how they measure it all. I don't think that they're all that different, in fact. Do you think they're even more woke today?

27:32Are they even more woke today? Or is that also the same, that there's maybe the appearance of being more woke, but ultimately attitudes on gender or race are, you know, more similar than one might think or not? Oh, goodness. You know, I can't even I'm struggling to relate the word wokeness to the 1920s. You know, interestingly, Carter Glass, well, I think I told you before, was sort of akin to an Elizabeth Warren. The truth is he would have been a racist Elizabeth Warren because he was from Virginia. He was trying to bring segregation back to America, in fact. I'm not sure how woke these CEOs were at the time.

28:14I mean, the sort of upstairs-downstairs situation among the elites and the wealth in terms of where they lived and how they lived and who worked for them and the various servants and others, I don't think you'd think that they were that woke back then. So that's one difference. Did they do philanthropy better? So you have the Morgan Library in New York, everything Carnegie did, which seems quite remarkable. Are today's wealthy business leaders living up to that track record or somehow they're failing to? That's a fascinating question, too. You know, I think, first of all, a number of those people in the 1920s actually were not that philanthropic yet and then, of course, lost so much of their fortune that they were really never in a position to be that philanthropic.

28:58I remember coming across an article as I was working on this book with the headline, it was in 1929, our second billionaire. That was the title. And it was Henry Ford. Our first billionaire was Rockefeller. These are, of course, not inflation adjusted figures. These were real. And I'm not sure that the actual sort of leaders, whether it was a John Roscoe or a Mitchell or any of those characters, frankly, were that philanthropic in part because they were new money in the 1920s. It was sort of a new thing and they were not philanthropic yet. Maybe they had ambitions at some point to become such, but then the crash happened and most of them, frankly, lost it all.

29:42So I don't know. I mean, you look at, obviously, Bill Gates, very philanthropic. And then you have people like Jeff Bezos, who's engaged in some philanthropy, Elon Musk, but both of those, Elon and Jeff Bezos, I think, think that they're using their fortune to go to space. And while that may turn out to be fabulous business in the end, we'll see. I think they thought of it first, at least, as their own version of helping humanity. I know there's lots of people who have lots of different views of both Elon Musk and Jeff Bezos. But without speaking for them, I think if you actually talk to them, I remember talking to them years ago, that was at least the initial conceit, that they were helping humanity if they could do this.

30:29Should we have allowed interstate branch banking back then? So the U.S. essentially bans it. Canada has it, right? No Canadian banks fail in the Great Depression. Couldn't we have been in that position? Oh, so I, sacrilegious to say in America, if it was left to me, if I was king for the day, I would consolidate most of the banks and make the country look much more like the Canadian banking system. I think it is slightly insane that we have allowed local banking to happen at the sort of scale that we do, because I do think it presents a risk to the system that's likely unnecessary. And I've never fully, you know, jumped on board with the argument that, you know, these local banks can serve their communities so much better than the larger banks.

31:14But I also recognize, you know, as you do get banking consolidation and the like, that there will be communities that probably will be underserved. And so is there a way to thread that needle to do both? Let's say we make you king for 10 years today. How would you change U.S. banking regulation? Oh, goodness. I probably actually would do just what I said. I think that I would probably have more consolidation in the banking space. But as a result of that, I would probably also force some of those banks to effectively serve communities and provide loans and other things that they would otherwise not provide.

31:51And then, of course, I'm sure that you and others would say, but Andrew, if you put together these types of policies to do things that would otherwise be economically irrational, you know, economically irrational things or things that we can't conceive of will happen. So I would probably struggle in that regard. What would you do? Well, I'm not sure, but let me first point out, there's been a lot lot of consolidation since 2009, right? There's hardly any new banks. One of them is like an Amish bank, right? Very small number of new banks. The too big to fail doctrine has crowded a lot of deposits into the four biggest banks.

32:23Given where we ended up, maybe that's inevitable. But you want even more consolidation than that? I don't think I need huge amounts of consolidation to that. But I think that you look at Silicon Valley Bank as a good example, or Signature Bank as a good example of what happens in an environment where you have sort of smaller banks doing things that aren't necessarily the right things without the sort of backstop that you'd prefer. Now, you could argue that the government turned out to be the backstop, the FDIC turned out to be the backstop, and it worked. So maybe we're in a good position. The other thing, though, that I do worry about, and I also be very curious about where you land, is we now are living in a very bifurcated world as it relates to the loan market and credit market in America, which is really post-financial crisis 2008, the private credit business has just exploded.

33:15And so if you're a company seeking credit, you're oftentimes not getting it from the bank. You're getting it from, effectively, the shadow banking system. Some of that shadow banking system is attached to the insurance industry in certain ways, potentially presents all sorts of risks that I'm not sure we all understand. Yeah, I agree with that. This is my biggest worry. I don't think I know how to solve it. So formal banks are about 20 % of lending. So 80 % is other stuff. It's regulated in other ways, but it's not protected by what we would consider our core regulatory structures. And the more you impose capital requirements on banks, FDIC, premia, other regulations, you just make that smaller.

33:55It's already trending downwards. That's why I'm reluctant to induce these banks to do more local community lending. Ideally, you'd like maybe the banking system to shrink more slowly than what it's doing. And the stuff you have left, I don't think you can insure it, really. You hope it's well enough capitalized. You can't bail out everything. I don't think we have any idea what to do about it. But what's your thought on that dilemma? This is probably my biggest concern, and I just don't know what the inflection point would be that could turn it into a problem in a demonstrable way. I don't fully appreciate or understand how connected we think the private credit funds are to the banks themselves.

34:41Some of these funds are effectively leveraged by dint of the banks. Some of them have liquidity lines back to the banks. You could argue that the private credit funds should be less risky insofar as there's a better duration match around those loans. They're not going to be called by the day. You know when they're going to be called in hopefully five or 10 years or whatever the length of the fund and the loans are. But if it all comes undone at one moment, what happens? That's like a horror movie to me, but I don't know. I don't know the script of that movie or what that book would read like at the moment.

35:20John Cochran wants more narrow banks. Do you agree or disagree with him? It depends. How would you define more narrow banks? Something like near 100 percent backing with either T-bills or very high quality commercial paper. Well, here's a different question. If you do that, what happens to credit in America? It dries up at some local points, right? Right. And I think you and I would both agree that credit is the lifeblood of the system. And you do want, by the way, you want some speculation in the system going back to where we started this conversation. You need speculation in the system to create that innovation.

35:58I'm not here to tell you that, you know, you don't want that. It's the question is, how do you prevent it from, you know, becoming euphoria and crazy and too much? Now, as you know, through the Genius Act, we're going to run stable coins through what are, in essence, narrow banks. Good idea, bad idea. Or should we just let them hold all sorts of other assets and be riskier? This is a great question. I do worry that because the stable coins are going to require the backing of these treasury bills, that effectively you're taking that out of the market, which means less credit to the system ultimately.

36:31But the alternative also feels risky. I don't know. It seems like two choices. It's not a Hobson's choice. It's just a difficult choice. I imagine over time that we will loosen those standards. That's what I imagine. I imagine this is sort of the first baby step so that people can say these stable coins are safe. And then over time, we will maybe shift gears slightly. What do you think? I think I agree with that. And it will be necessary. And even with high debt and deficits, you know, there's only so many T-bills to go around and we want to use them for everything. and so does the rest of the world.

37:08You don't want to get into T-bills paying a rate of zero. The real economy is intrinsically risky for obvious reasons and financial engineering can only make it so much safer. I mean, that's the ultimate dilemma. And it seems to me New Deal banking regulation is finally truly obsolete and we just don't know what to replace it with. Okay, I got one for you. Yeah? Talking about the Genius Act, what do you think of the idea that we're going to have private credit in venture capital and private equity funds effectively in either retirement counts or available to retail investors without the sort of commensurate or similar disclosures that we've typically had for publicly traded companies.

37:50So these are going to be funds that are going to have private assets in them. They'll have a NAV, a valuation ostensibly, at least in my mind, unfortunately being measured by the manager of these funds. So I would like to see more disclosure personally and auditing and the like. But there are also going to be these interesting semi-liquid funds, which is to say it's going to look like a stock. You could buy it on any day, but it's not clear you could sell it on any day. I think it's inevitable. And if I invest, which I do only at very modest, diversified, non-stock picking levels, I don't consider the disclosures to be worth very much at all.

38:31I have some faith in diversifying. And I think markets are not entirely efficient, but to throw darts and diversify, you'll do almost as well as you can do any other way. And we let people bet on football games, right? A lot of people now are going broke with sports gambling. So to tell people, well, you can bet on football games, or you can buy Bitcoin, which at least used to be super volatile, but you can't own shares in these funds because they don't meet some what is obscure to the voter SEC requirement about disclosure and liquidity, people think you're crazy, right? Over time, I think that distinction goes away.

39:06Yeah, but I'll tell you something interesting that happened to me. And maybe, I don't know if you've had a similar experience. In 2020, there was a real phenomenon around SPACs. You remember these blank check companies? Of course, yeah. Everybody was excited about SPACs. They were the new lottery ticket. And I would go on television or write articles almost in a paternalistic way and say, folks, be careful. You may not understand what the sponsors are really getting, the fee structure, what the alignment or frankly, lack of alignment was between the promoters of these things and actually the duration which they have to hold them relative to how long you'll have to hold them and some of the projections that they're making and all these things.

39:44And people would say to me, Andrew, stop trying to protect me. I want to buy the lottery ticket. And by the way, you're not protecting me, you're protecting the man by saying these things. And the truth is that they were like lottery tickets in that most lottery players lose. And so I recognize that people should have access to the lottery ticket. I get that. By the way, I often buy lottery tickets as crazy as that sounds, especially when, you know, it's like super power ball and it's a billion dollars or something. And I feel like an idiot that I'm doing it, but I do it anyway because it's, you know, it's a dollar to dream.

40:19But I don't know what the right answer is in this regard. You're making the argument we don't need the disclosures or the disclosures is sort of unimportant, at least on the margin. And I'm concerned that if people don't understand what's going on inside these things, they're going to buy the lottery ticket and they're going to lose. I think we need stronger social norms that any new thing, whether it's sports gambling or something in crypto or whatever. It is gambling of some sort. And people just have to realize that and that we're going to let people twist in the wind, so to speak. I don't know any other way to do it.

40:55You're like Andrew Mellon, Tyler. You're like Andrew Mellon. But there's so many risky things. You can't stop them. They'll go overseas if they have to. Crypto has done that, would do that, could do that. I don't see what the alternative is. I'm not opposed to these disclosure laws. I just don't think that extending them to more parts of the economy is going to make us safer. How do you feel about prediction markets? I mean, people are not just gambling on who's going to be the next mayor of New York City. They're gambling on where Taylor Swift and Travis Kelce are going to get married. And I can't figure out whether that's a good thing or a bad thing.

41:31It's one way to spread the norm that anything new in finance is like gambling, treated as gambling. Assume that it is money you are willing to lose. That's what I would do, just as a matter of stated policy. And you need the private sector to cooperate more. But government can take some role in simply spreading this message. But Tyler, I will tell you one of the great lessons for me, and this is true of 1929, covering the financial crisis and the like. We, we, humanity, us, people, we're not great at self-regulating ourselves. We're not great at control. That's what greed is. There's a great line.

42:06I don't know if you saw the movie Wall Street 2. not nearly as good as Wall Street 1. And there's a scene in the movie where Shia LaBeouf looks at, I think it's Josh Brolin, and says, what's your number? As in, what's your number to feel independent or financial freedom? Or when would you stop? When would you feel like you got to the top of the mountain kind of thing? I remember that, yes. And he looks back at him, and he doesn't give him a number. He says, more. But those are the people we don't have to worry about, right? if there's something like a public option, a series of safe assets, T-bills, FDI-insured checking accounts or some equivalent thereof, I think that's the most we can do for people.

42:50People can take risky decisions with their careers, with how they drink, with the drugs they use. They do all the time. In a way, the financial risks are often the least important of the ones they take. These people don't become rational just by electing them to office and putting a hat on them that says government, right? So if you think people are bad at risk, our government is terrible at risk. Oh, I completely agree with that assessment. But, you know, you go back and look at what happened, frankly, in 1929. And actually, you could look at it in the context of what happened in 2008 too. Interestingly to me, in 1929, when people lost money, for the most part, at least initially, they blamed themselves.

43:34There actually was personal accountability. If you go look at what Groucho Marx famously lost his home during this. He actually had to mortgage his home because of mortgage loans. And while he blamed the broker, if you will, to some degree for suggesting he buy some of these stocks, he ultimately blamed himself, which I think is a very different approach to life than we have today, where there's always finger pointing. It's never our own fault. It's everybody else's fault. Now, is that a human condition? What is that? The Fed. Has the United States Fed ever been independent as a central bank? I think the lesson of what was happening in the 1920s and reading all those diaries suggests that they never were, that they were always concerned about the politics in some regard.

44:17Back then, it wasn't that Hoover was, you know, manhandling them per se, but they were conscious of what the political implications would be. Obviously, we've had a whole number of situations over the past 100 years now or nearly 100 years where actually we have had presidents manhandle, in fact, physically manhandle the head of the Fed. And now we have President Trump doing the same. My preference would be that we don't have those things. And my preference would be we don't have those things for a different reason, though, which is that oftentimes you have to make super politically unpopular decisions.

44:50And if the politics in the moment are going to influence you, you can't do it. And this was why I actually give great credit to Ben Bernanke, because Ben Bernanke did things in that moment. And frankly, Hank Paulson, too, that were very politically unpopular. They were against everything that any conservative Republican would be doing at that time. And yet they did them anyway. And by the way, give credit to President Bush for not pushing them otherwise. But think about what would happen if we had a crisis and either a president or somebody else who had a very different view of how to handle it.

45:23I agree with much of what was done. But keep in mind, they're always sitting down with the Treasury secretary, right? And these decisions are made jointly, which I would say is inevitable, not a complaint I have. But once you see that, you see the same during COVID, right? Treasury fed, they worked together. So all the hand-wringing over central bank independence, I don't want Trump being the one who pushes it around. But I find a lot of the hand-wringing a little out of place or not contextualized properly. Well, look, the thing that I think is more concerning now, which is slightly different, is that President Trump has talked about the Federal Reserve having a, quote, majority on the Federal Reserve as if it's the Supreme Court.

46:05And by the way, even a couple of years ago, we never talked about that. in such a sort of political context. And maybe he's just speaking the quiet part out loud. I mean, maybe that's what's really happening here. But, you know, if you have a political majority on something like the Fed, and then you use that political majority to effectively, by the way, you could potentially even replace all of the presidents of the regional feds as well, leveraging that quote unquote majority, it could create, you know, a lasting, you know, decades-long generational shift based on politics in terms of what our economic policies are to some degree.

46:43But if someone says, look, we have, what,$37,$38 trillion in debt, some of that will be inflated away. None of us like that fact, but it's inevitable. It probably partly should be inflated away given that it's there. And that's what matters. And Trump having the majority, whatever. To me, it's objectionable. But I just think the fiscal position, which ultimately, at least in theory, is the responsibility of Congress, is the actual villain here. You and I, if I could high five you over our link here, I would high five you because I completely agree that we need to get our house in order. And I have no great optimism that we have any intent to do that anytime soon.

47:25For our last segment, a few questions about you. Did the Knicks have any real chance of winning an NBA title this season? I have been a long-suffering Knick fan back from the age, I don't know how old I was, back when Patrick Ewing was still playing. And I still have great hope, but I have been disappointed too many times to make a prediction at this point. We got so close, got so close last year. When you were in high school, you started submitting articles, including to the New York Times. Yes. How did you know to do that? What led you to that point? Because a lot of people would have told the high schooler, that's silly, don't do it.

48:03But in fact, you succeeded with it, right? Because I didn't know any better. That's why. A little bit of naivete when you're young, I think, actually can go very, very far. I had started a sports magazine when I was 15 years old. And that actually led the New York Times, interestingly, to write a little tiny article about me when I was, I think, 16. And I thought anything was possible back then. And so I started writing these letters to this particular reporter at The New York Times who I desperately wanted to work for when I was 18 years old. And I would call him up on the telephone and leave voicemails and all sorts of things.

48:36There were people who told me that I was crazy and it would never work, but that somehow, magically, they let me in the building. And he knew you were 18. He knew I was 18. But the truth is that the person who assigned me my first article to write, I had gone there playing to Xerox, Staple, and get this gentleman a lot of coffee. That was what I thought the job was. I had no intention of putting two words together, let alone a sentence. And there was a woman there, an editor who had no idea how old I was. I had my suit on. I had my tie on. She overheard me talking about this thing called the internet back in 1995.

49:10This is back when we would write the word modem, comma, a device that transmits data over a telephone line. And she thought I was a real person in the building. And she assigned me a steward. Right. And I somehow convinced Stuart Elliott, who was my sort of sponsor and mentor at the time, that I wasn't going to tell her how old I was and why I was there. And I would just write the article and we would see where the chips fell and the chips broke my way. Obviously, you're a very busy person. And also, you need to imbibe a lot of financial news about many different topics. Do you have any tip or advice on how it is you manage to do this, what would seem to be much better than how other people manage?

49:48No, I'm just – I mean, look, I'm very – I was born curious. I am addicted probably to my great detriment to X, formerly Twitter. I follow all sorts of people. I read the Wall Street Journal and the Financial Times and Business Insider and I go to the Drudge Report and I go here and there. And I mean, I'm just constantly trying to absorb things. I'm reading academic papers. And the truth is I do benefit. You know, I started this thing called DealBook back in 2001. And we have a great team. And we live in a Slack channel all day. I think playing with different stories all day, meaning we're constantly giving each other new ideas, new things to read.

50:33And so that's sort of how I take in the news. And then we have a team of producers at Squawk Box. So I'm sort of a beneficiary of a whole bunch of systems. How much do you rely on chat groups? Not as much as I should. I know you have a bunch of chat groups, and I wish I lived more inside WhatsApp than I do. And I've been invited into a couple of interesting ones, but I've never really engaged as much as I should. And that's maybe because I've been trying to finish this book for too long. How much do you rely on travel? Like, oh, I want to learn about Japan. I'm going to get on a plane. I'll spend a week there, meet with people.

51:10Or do you do it more at a distance? Yes and no. So I have the one real conundrum of my existence is that I am not as spontaneous as I wish I could be because of the TV show and really feeling like I need to be in New York on the set most days. It's hard for me just to say, you know what, I'm going to go to Japan for a week. But I do try to travel around the world throughout the year, and I sort of do make these sort of pilgrimages. But I have to plan them out, you know, months and months in advance. In terms of the question, like how many people recognize you in airports? Do you feel you're more than optimally famous?

51:51Like Fareez Akaria tells me, in half an hour, 10 people might recognize him. That, to me, seems like more than optimally famous. Are you at that level? You're optimally famous? You're not quite yet famous enough? How do you view this? I'm not sure what the great benefit of fame is yet. I find that there's great joy when people come up to me in the street or on the subway or in the airport and tell me they've read a book or they watched Billions or they read an article or something that they loved. I love that joy that I get. I get from them having that joy. I find it more awkward when I'm having dinner with my family and somebody comes up and wants to take a selfie.

52:30or if you're ever at the gym and people, you know, walk over to you or it's a little awkward. And so I don't know. I'm not sure if I'm optimally set up or not. You know, I love it's a high five and it's a great moment and I'm by myself or whatever. Great. But then there's other times where it can be a little, you know, a little awkward. But the truth is that I always think about myself in these instances. There are people that I admired for whatever reason over time. and, you know, I see them in a restaurant myself or I see them at the airport and I look at them or want to go over to them. And I always don't want that experience to be awkward for the other person, even if it's awkward for me.

53:08So I feel like I then have to try to make sure that they have a great moment if they can. With Billions, you had a significant foray into non-news TV. And while it involves finance, it's not financial in the sense that most of your work is. What surprised you most about that experience? learning like a TV show and how it works. Oh, goodness. First of all, the enormous credit goes to Brian Koppelman and Dave Levine, who co-created the show with me, and they were our showrunners. You know, I think I just marveled at the fact that it's like a remarkable circus that gets sort of built for, you know, six or nine months.

53:46You know, hundreds of people who are engaged in this, you know, enterprise, creative enterprise, both in terms of writing of the scripts to the acting, to the crews, to the various different directors that direct each episode. I mean, I think actually that was an interesting surprise for me early on, actually, that typically in television, virtually every episode is directed by a different director. So the whole experience was actually a great sort of learning experience for me, just in terms of how all of this can be done. And I will say, I'll give you one other. How much a story can be changed for the better in an editing room after it's shot.

54:24It's not just what's shot that day. It's what can be done and crafted later on in terms of creating that narrative. Actually, I think I learned that actually when Too Big to Fail was made into a film. I had an opportunity to sit in the editing room out in LA for a while, and I was just mesmerized by how extraordinary things could happen. Two final questions, a bit of a pair. Your book is out. You've done plenty of interviews. First, what do you want to learn about next? And second, what will you do next? Oh, my goodness. So I've become kind of obsessed actually with tulips because of this experience.

55:01No joke. I kind of actually do want to go back to understand exactly what happened. I don't know if you could recreate a kind of 1929 or too big to fail book about the tulip craze, because I don't know if the archives exist. But what I will do next, my wife has told me, I have three children, and my wife has told me that I am not allowed to write another book until they go to college. So I'm going to hopefully spend a lot more time with them. And maybe I'll be plotting my tulip story. The Peter Garber paper on tulip mania has a lot of data. You might want to look at that. I'll start there. Your book again, 1929, Inside the Greatest Crash in History and How It Shattered a Nation.

55:44Andrew Ross Sorkin, thank you very much. This was so much fun. Thank you, Tyler. Thanks for listening to Conversations with Tyler. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other listeners find the show. On Twitter, I'm at Tyler Cowan, and the show is at Cowan Convos. Until next time, please keep listening and learning.