The Crash That Shook Wall Street — And The Lessons We Keep Ignoring - Andrew Ross Sorkin

0:00How you create a crash. Speculation. Hoover ever missteps in economic policy. Banking wild west in the banking. Take us through the base ingredients and tell us if anything is different today, what should we be worried about? The match that lights the fire every time. And I would argue effectively that in 1929, it was his margin loans. Now you said, could it happen again? And where are we today? Welcome to Open Book. I am your host, Anthony Scaramucci. Joining us now is the world famous and very talented Andrew Ross Sorkin. Title of the book is 1929. the inside story of the greatest crash in Wall Street history.

0:42Andrew, welcome to the show. I love our relationship, and you are very famous for many reasons, but you're also the best-selling author of Too Big to Fail. But what drew you back nearly a century to write the 1929 crash? I mean, the truth was that I didn't know enough about the 1929 crash. I'd written about 2008 in the financial crisis, and people would always ask me to compare the two. And I didn't always have a great answer. And I think most people that I know sort of have only a vague conception that something pretty terrible happened back then that led to the Great Depression. And I always loved books, I think like you love books about people, about those great books that put you in the room with those people.

1:32Barbarians of the Gate, Den of Thieves, all those kind of inside the room kind of books, fly on the wall kind of things. And I thought, wow, could I try to do that to this? Listen, I was enthralled by the different characters in the story. I had read Lords of Finance by Leaquad Ahmed 15 years ago. You referenced it a little bit in here. I read Galbraith's Crash, but that was like when I was in college. So I didn't really have a lot of memory of that. But let's set the scene, though, because, you know, when I closed your book, I took some notes and I said, OK, what did I learn from Andrew's book?

2:09Greed always overcomes wisdom. I think that's one of the number one things. You had tremendous excesses going on in the late 20s, OK, as it related to margin and the use of margin. And then you had an insider grab bag, which was legal at the time, but the insiders were sort of moving things around in a way that the outsiders could never have been able to have taken advantage of. Right. So guys like Joe Kennedy got out of there barely unscathed. Right. Pretty much. You got it right with with one extra feature, I think, which is set against a backdrop of just wild euphoria. so i think it's it's the piece it's the debt piece meaning just the amount of credit and leverage in the system that to me is the match that lights the fire it's there's always some semblance of euphoria because by default you have to get sort of a speculative frenzy going and then when you sort of don't have enough transparency in the system when you have people manipulating and doing all sorts of shenanigans charlatans and frauds and everything.

3:14It gets complicated quick. All right. The other thing I got out of the book is that these were like patricians. These were waspy people living in the Fifth Avenue salons. They were living in Tuxedo Park. They were summering in Newport and hanging out in Greenwich. I mean, these were not old school, like when you think of the mob and Al Capone back in the 30s. this was a different style of crime, right? This was a totally different style of crime. And the truth was, it really wasn't crime. I mean, because it was because there was no rules. I mean, I think about this all the time. You know, sometimes I wonder what I would have done back then or you would have done back then or any of us would have done back then.

4:01And not to excuse the behavior, because I think as you read it, especially in the context of today, you'd say, oh, my goodness, this is criminal. This is wrong. At a minimum, this is immoral. But I always have found that one of the things that's so interesting about the markets is it's a business of people who think they're trying to outwit somebody else, right? Whoever's buying a stock thinks they're smarter than the guy they're selling it to. And whoever's selling the stock thinks that they're smarter than the guy who's buying it from them. All right. So draw an analogy to today. Okay. So you obviously, you were influenced by your research on too big to fail.

4:36You know, what's interesting, I finished this book about two weeks ago, and I read Too Big to Fail about, I don't know, 12 or 13 years ago. So I went back and reread that book as well. Oh, God bless you. And it was interesting because you definitely took the elements of that book, the motif, the individual stories. You're in the boardroom. You're talking to the people's spouses. You're talking to the people's friends. And you got a lot of interesting characters in this book, Winston Churchill, et cetera. But I guess the thing that took me aback about this book is that it wasn't really just a single day of that.

5:18It was like a slow motion crash leading up to the event. So tell us a little bit about that. Tell us about some of the things that went haywire while the fuse was burning in the late 1920s. Well, that's the thing that I think is oftentimes misunderstood about 1929 and frankly, the Great Depression. And I will say it was my own misunderstanding, too. One, that, you know, it wasn't just that there was one horrific crash. It really was this sort of slow motion situation. In truth, sometimes people talk about Black Thursday, Black Tuesday, Black Monday. There were a lot of black days. I mean, like a lot of black days.

5:54In fact, the stock market effectively fell, when you really think about the fall, close to 50%, but really between the months of October and middle of November of 1929. So it wasn't just one moment. But then, oddly enough, by the end of 1929, the stock market was actually only down 17%, which I think I know surprised me. Didn't even make the list of some of the most important stories of the year. And that's because I think there was a misunderstanding in that moment of actually how many families were just completely wiped out because of the leverage and debt that they had taken on. So it wasn't just that the stock market had gone down 50 % and they could hold their stocks and the equity value had gone down.

6:38It's that they were all getting margin called and having to sell their homes and mortgage their houses and, you know, had lost everything. And then it wasn't even just that the crash itself was somehow going to impact the economy by itself, which it was, but not didn't have to be the Great Depression. It was really the first domino of then a series of policy choices. And I try to put you in the room with Hoover as well and with, you know, Andrew Mellon, his Treasury Secretary and inside the Fed and then Roosevelt. And you see just the mistake after mistake after mistake that they made that made the whole situation that much worse.

7:14Everything from raising taxes to implementing tariffs to the Fed, obviously, you know, trying to hold on to the gold standard. I mean, well, the president was trying to hold on to the gold standard. The Fed, you know, wasn't wasn't flushing the system with with with money the way, frankly, Ben Bernanke did in 2008, which I think was, by the way, one of the lessons that he learned when he did his Ph.D. at Princeton about the Great Depression. So I think you're sort of looking at a story that's not really just about 1929. The story, and I had intended actually when I first began the project, I thought, oh, the book's going to start on February or January 1st, 1929, and the end of the year.

7:49And I realized really to tell the story, you really had to, the full breadth of it, in fact, goes at least through 1933 and at least the way I've tried to tell it actually all the way through 1940. The two big players to me, and you mentioned Benjamin Strong, of course, who passes away. He's the first Fed chair. He passes away prior to the crash. And Ahmed in his book and you in your book suggests that he probably would have been a little less tight on the Federal Reserve reins and probably would have created more laxity and more liquidity had he not passed. So there's a little bit of a single man theory here, but let's go to Hoover because, I mean, Hoover, basically the way you describe him, I was thinking, geez, I mean, you could have had a monkey flipping coins and at least would have gotten half of the decisions right in a coin toss, but he was going nine out of 10 for getting decisions wrong.

8:40So talk about him, some of the mistakes he was making. And by the way, he was a great guy and a very classy guy. And he made a lot of money and he was a charitable guy. You know, he did all those things, the food programs for veterans and stuff. But he really got this wrong. He had a terrible blind spot as a presidential leader. What was that? Well, the biggest blind spot was that he really believed that the stock market was somehow disconnected from the real economy. I mean, that was probably his number one mistake. He also thought somehow that it was, you know, that he had the ability, which he did not, to jawbone his way out of it, which was, you know, this idea that he could sort of tell the public something that actually wasn't really happening and tell them basically go put a smile on your face and that they would have a smile on their face.

9:27By the way, this is sort of akin to what was going on, you know, when President Biden was telling people that, you know, there was no inflation in the country and like they didn't understand what was happening. People felt it. And they felt it in 1930, 1931, 1932. You know, Hoover implements these tariffs, which every economist in America is telling him is a terrible idea, in large part because back in 1928, when he was trying to win the election, he went around telling farmers, you know, I'm going to try to protect you. I'll put tariffs in place if you elect me. So he felt that he needed to make good on his pledge.

10:02Again, sort of another terrible mistake. He was also being advised by a guy that, frankly, he didn't really like that much, Andrew Mellon. But Andrew Mellon was a true capitalist in the sense that his view was, if you made a lot of money, great. If you lost a lot of money, great. So I think there's a whole bunch of things going on along the way that just really unraveled things. Going online with that ExpressVPN is like forgetting to mute yourself on a Zoom meeting. Do you really want your co-workers to hear you trash talking them? Because all your traffic flows through their servers. Internet service providers, including mobile network providers, know every single website you visit.

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12:15So take us through some of the steps. Well, so that's actually, I mean, by the way, I'm so curious how you think about it, given how much you know about transition, you know, presidential transitions and the like, you know, one of the things that could have prevented some of the bank failures, and by the way, we ultimately had something like 9 ,000 bank failures in America, was that Hoover really did understand by 1932, now, 32, 33, he was late to the party, that he needed to try to bail out the banks. He needed to try to declare a bank holiday or do something relatively drastic to try to save the banking system.

12:49But he was so, what's the word? He almost refused to do it. He was doctrinaire. He was a very doctrinaire guy. He was the opposite of George W. Bush because in Too Big to Fail, you have this great scene where Bush is talking to Paulson and Bush is like, well, I'm a conservative. I don't want to do that. And Paulson's like, OK, well, the whole system's going to blow up. Right. So then Bush says, OK, then we're going to do that. That's a left-leaning strategy to dump a trillion dollars into the banks. But it felt like Hoover was, you know, he missed the beat there with that. I think he was both doctrinaire but also embarrassed, to be honest with you.

13:28because to some degree, because he had told people for so long that there was no problem, I think it was hard to go back on that. I think that's one of the reasons he was so he was so desperate. At this point, he's now lost the election, knows they need to do something about the banking system. And he goes to Roosevelt secretly and begs him and says, look, I'm going to go do this. I want to do something, but I want you to approve of it. I need you to endorse it. Otherwise, the public is not going to buy into it. And of course, Roosevelt basically has lies to his face and says, well, I'm not doing that and I'm never going to do that, basically.

14:03And of course, Roosevelt's saying that to Hoover because the truth is that he does want to do all those things, but he needs a clean slate. He doesn't want to be attached to this, you know, Hoover doing it first. But as a result, they lost actually some serious time and frankly, hundreds of banks probably as a result of it. Yeah, which caused a further contraction, right? And the other thing, you were great on the concepts of deflation in this book. I mean, the deflation in the economy, we always talk about inflation, Andrew, but deflation destroys debt-laden economies because you just can't pay back the debt.

14:40And you watch these people get back their farm equipment or turn back the keys to their capital equipment, their houses. I mean, it was just absolutely devastating. But you mentioned presidential transitions. They're very similar. You know, egomaniacs are fighting with each other and they don't want each other to get any credit for anything. And it was exemplified there. I guess the story between Wall Street and Washington, you know, like when I read your two books side to side, I'm like, wow. I mean, that clash has been going on for a hundred years and it's the same story. It's the same story.

15:20Wall Streeters feel like the Washington people know nothing. The Washington people feel like the Wall Street people are just greedy pigs feeding at the trow. Both feel slighted by each other. Right. Take us into some of that intrigue. Well, look, I knew that I could write this story or thought I had an opportunity to write this story when I began to fully form and appreciate the story between two, I think, very unique individuals in the context of Charlie Mitchell, who was the CEO of National City, which goes on to become Citigroup. He was running what was the biggest bank in the country. He was as famous as Jamie Dimon, but probably less conservative than Jamie Dimon in terms of how he thinks about the market.

16:04He called him Sunshine Charlie. He used to always say, we thought we should sell stocks the way we sell neckties. So he wanted to sort of demystify finance. And he was largely responsible for really almost creating the credit market so that people could buy stock on margin. And people were doing this, you know, 10 to 1. You put up a buck, they'd loan you$10 because of Sunshine Charlie. And on the other side of the story, and this is where I really thought, okay, this could be the spine of the story, this is the clash of the easy egos, is a guy named Carter Glass, Senator of Virginia. I think a lot of your audience will know him better because his name is attached to the bill that ultimately breaks up the banks in 1933.

16:45But Carter Glass was the Elizabeth Warren of his time, and he was railing for years about this thing called Mitchellism. I mean, he used to call it Mitchellism, how he believed Charlie Mitchell and Wall Street were going to just ruin the economy, that speculation got it out of control. He was trying to come up with every possible way to damp down some of the speculation. At one point, he was proposing ideas to put taxes on stock trading to end speculation, for example. And interestingly, he did have a sense he was a smart guy. He understood the economy and finance pretty well. he was largely responsible actually for the creation of the Federal Reserve and the bill that actually put that in place back in 1913.

17:28And so you could sort of see the Washington, Wall Street fight through the prism of those two individuals. So, Andrew, I love that story about Mitchell, by the way. I followed it right to the end and his eventual exoneration at trial, but also just the things that he went through and the reputation damaging. And the way you wrote about Lamont and JP Morgan's son, it was classic, right? The one guy's working, the other guy's like a dilettante, doesn't want to get his hands dirty, right? I mean, it's just everything that you and I have experienced in life. But I want to talk in a Dr. Frankenstein sort of a way, okay?

18:04In terms of like how you create life, you know, Mary Shelley, Dr. Frankenstein. But I want Andrew Shorkin to channel how you create a crash. Speculation. Hoover ever missteps in economic policy.

18:23Banking, Wild West in the banking, fractional banking system with the Wild West and the people don't even understand if they put their money in the bank, they could lose it if the bank has credit missteps. Take us through the base ingredients and tell us if anything is different today? And if it isn't different, what should we be worried about? Okay. So look, the match that lights the fire every time you saw it in, you read too big to fail or you reread too big to fail, the match that lit that fire was too much leverage in the system in the context of subprime loans. Leverage and confidence, right?

19:02Because you had these applied modes that were AAA rated. Yep. People are like, well, I'm going to get the money back. I mean, doesn't keep leveraging them, right? The CDO market, you know. Exactly. And I would argue effectively that in 1928, in 1929, it was margin loans. It largely was margin loans. Now you said, could it happen again? And where are we today? The good news in my mind is, look, there was no SEC back then. You know, even if you think that, even if you think the SEC is not doing a lot right now, still exists. There are people who are hopefully monitoring some of this. So some of the shenanigans I like to think aren't as significant as they were then.

19:45By the way, there was no bank capital requirements back then. There was no rules. There was no insider trading rules. There was no nothing. So I like to believe that, yeah, we can have corrections. We can even have crashes, but they don't have to turn into depressions. So could you have a crash like 1999? Sure. Could you have a crash even like 2008? Sure. But in both instances, we did come back a lot quicker than obviously what took place in 1929 and then ultimately 30, 31, 32. And I think part of the answer is we've also learned that in those moments, you do flood the system with money. Now, the one difference that is very different today than even 10 or 15 years ago or 1999 or before, which I haven't really, I don't know the full extent of just what the implication would be, which is U .S.

20:42debt is so large that it might make it more and more complicated to throw money at the problem. So here we are back in 1929. There was a budget surplus, by the way, back then. We hardly had any debt. But I think the biggest thing is leverage. And the biggest thing is where's the leverage and knowing about it and having transparency around it. And I do have some worries today about those issues. So we have the euphoria in the AI bubble that's clearly taking place. There's indiscriminate spending. I think everyone would agree with that. Then the question is where's the leverage and is there too much leverage in the system?

21:18And I think partially because of private credit today, which is to say that so much of it is in the shadows. I don't think we know right this moment. I don't know. What do you think? Well, yeah, I mean, I'm worried about it. I mean, one of the analogies that you brought up that had me worried was what the Federal Reserve was doing in 29. They were tightening credit after the bubble had already formed. Jerome Powell is sort of, you know, he's taking balance sheet back, right? He's shrinking the balance sheet at a time where you've got an explosion in corporate debt. I mean, it's a record corporate debt.

21:50And it's direct corporate debt, so it may not hurt the banking industry, but it'll collapse the credit markets, which will seize the economy. Right? I mean, so I'm worried about that. Also, the thing you also brought up, which I want to reference, is the inequality. So I think the numbers you used in 1929, it was like 25 % of the 1 % controlled 25 % of the country's wealth. But today, Andrew, doing the calculation, it's a little bit over 30%. And so I'm wondering if that extreme inequality, okay, is hurting the country. Like, you know, for sure, as an economist, the extreme inequality actually hurts innovation.

22:32because what happens is the rich just sit on everything and then they pay the government not to break them up. So they sit there, they lobby the government, don't break up my MAG7 company. And even though the irony is breaking up AT &T enabled us to create the MAG7, they don't want to get any breakup. So when you get wealth concentration, you weirdly get a lack of innovation. So I think not only are you right about that, there's one other feature of it, which is that once you get into a serious inequality situation, people start to be desperate and start to, ordinary individuals who are suffering from the inequality part of this take risks that they otherwise would not, right?

23:17You know, a lot of what was happening was people really wanted access to the lottery ticket. They wanted to buy the lottery ticket. and you know the truth is that when most people buy a lottery ticket most people lose and i think that's actually you know a big feature of of why people were making some of the bets that they were making in the late 20s they saw people making money they wanted they wanted in on it you know i'm curious where you land on this i think there's a lot of people who've actually and they've by the way they've benefited from this they've looked at bitcoin and crypto as lottery ticket for themselves.

23:51And actually, so far, on the whole, if they did it early, it's paid off in a very, very big way. But there's also a lot of leverage in some of those trades. You look at some of those interesting option markets around Bitcoin and Ethereum and some of these others where you could do it for 20 times, 50 times. I don't know how much of a big piece of the market that is in crypto, but obviously crypto was something that didn't exist in 1929. Well, listen, this is me interviewing you, but I will interject here a little bit and tell you that that was the first thing I thought of when I closed the book.

24:25Where is the Wild West right now? The Wild West was the stock market in 1929. The Wild West right now is the unregulated crypto market and the unregulated global crypto market. Now, the good news is it's only about$4 trillion. dollars. So if the whole thing implodes, it'll be painful, but it won't destroy the whole system. But I'm going to say something in praise of Gary Gensler. Okay. You ready? Okay. Oh my goodness. Right. In praise of Gary Gensler. Okay. Get your seatbelt on. So weirdly, by being politically motivated and blocking the cash or the spot Bitcoin ETF, ETF, like when I took administrative law, and I've come on your show, the futures ETF is approved in November of 21.

25:17You would look at administrative law statute and say, okay, though, the cash one will be approved within six months because it's the goal is not to be arbitrary or capricious. But Gensler shuts it down. Okay, he's very politically motivated. He loses the court case as evidence of how politically motivated it is. But weirdly, he sets in motion the car crash of Three Arrows, Sam Bankman freed, those blockchain lending companies all imploded. And he took so much leverage out of the system that when it was time to get the ETF approved, like when BlackRock got its ETF approved, he had strained all the excess out of the system.

25:59Now, that excess is building again. So I'm worried about it. You're worried about it. and I think smart people should be. But weirdly, we could still be living in a world of Sam Bankman freed because maybe that floating of the ETF would have masked over some of the nefarious things that he was doing. That's interesting. That's interesting. Look, my colleagues in the industry probably get pissed at me for making that comment, but I think he weirdly helped the industry survive because there was a lot of nefarious things, a lot of 1929 things going on in the industry due to the lack of regulation.

26:41So, all right, well, we're down to the last five minutes. So what I do with my producers, Andrew, is I come up with five words, five thoughts. We call them from your book. Okay. So you have to, it's almost like a Roshaw test. I'm going to say the thing and then you respond. Okay. You ready? Okay. Here we go. All right. I say the word crash. You say what? Pain. Okay. I say the words, two words, Wall Street. Complicated. Complicated. All right. Give me another, just give me one more sentence. Go ahead. Matching of wits. Matching of wits. See, when I hear the word Wall Street, I think of good and bad.