The White House, Wall Street, and the SEC with Diana Henriques

0:04Hello, I'm Anthony Scaramucci, and this is Open Book, where I talk with some of the brightest minds out there about everything surrounding the written word, from authors and historians to figures in entertainment, neuroscientists, political activists, and of course, Wall Street. Sorry, I can't resist. Before we get into today's episode, if you haven't already, please hit follow or subscribe wherever you get your podcasts and leave us a review. We all love a review, even the bad ones. I want to hear the parts you're enjoying or how we can do better. You know, I can roll with the punches, so let me know.

0:38Anyways, let's get to it.

0:47My guest today, Diana Henriquez, wrote one of the best books I have read over the past year, an account of Wall Street in the time of its greatest crisis alongside a real-life political battle. It is a vital, timely story of Wall Street versus the White House, when Americans knew what needed to be done and supported the leaders who could do it.

1:17Okay, so joining us now is Diana Henriquez, who is an incredible writer. She's an award-winning journalist. She's a best-selling author. She's out with a book this past year called Taming the Street. I've got my copy right here, Diana. The Old Guard, The New Deal, and FDR's fight to regulate American capitalism. I'm a huge FDR fan. And so I was gravitated to your book, but also I'm a huge Diana Enriquez fan. I've read just about every one of your books. And so congratulations on the book. When Bloomberg asked me, what was my favorite book last year? I said it was yours. And so I appreciate you.

1:55So it's a big honor for you to be here, for me at least. I'm a big fan. Tell us what got you into the world of Wall Street before we get into the book. Well, you know, I can actually almost remember this kind of epiphany moment I had. I was covering state government in New Jersey, and there was a crisis brewing in the New York state budget. And the state legislature in New York was absolutely adamantly opposed to what the governor had been recommending in terms of budget cut. And there was an announcement that Moody's rating service had put New York state bonds on negative credit watch. And within hours, the legislature capitulated.

2:34And I said, whoa, who is this that's more powerful than the politics of Albany, more powerful than the politics of New York state? And so I got into Wall Street literally by way of the municipal bond market as a financing mechanism for local governments and the power that the marketplace had to overrule political priorities. I mean, nobody wanted the budget cuts in Albany. There were strong constituencies in favor of maintaining them. But maintaining the state's credit rating was so critically important that basically the bond market was telling New York, here's what's going to happen. That's what pulled me in from covering government, which I always expected to spend my life covering, into covering first the municipal bond market.

3:19And then once you've covered a market and you love markets, you love markets. So that's - Yeah, amen. And I get that because markets are everything that we need to know about human emotion. Bingo. So if you're a student of human behavior, the markets provide endless fascination. In real time, second by second. There's no question. the greed, the fear, the delusion, the fabrication, which you write about in Wizard of Lies. I missed that one, actually, Bernie Madoff. I got caught up in the FDX thing, of course. I saw that. I was offered to invest in Bernie Madoff several times. I honestly just didn't understand it.

3:55And so, by the way, I thought he was a wizard, Diana. I'm not one of those guys to revise history and pretend that I knew that he was a fraud. I did not know that he was a fraud. I just thought, okay, this is an elder stage that has some secret sauce. One of the best, one of the most successful con artists of history, really. And I've studied all of them, but he had a gift for inspiring trust and disarming everyone's skepticism alarms. I mean, you know, you know yourself, the retired CEOs of Merrill Lynch, you know, top people on Wall Street, Wall Street economists, people who were brilliant people fell for Bernie Madoff.

4:34So there's no no question. He had a gift for this. And listen, there was a calmness to him, actually. We could talk about that. But that was what I think got people. It was just this assuredness. Meantime, he was peddling very fast to keep the whole game going. I want to get to your book. The book is a brilliant exposition on what needs to happen because of our human emotions. OK, we have fear and greed, but we also have charlatanism and we have people that will take advantage of other people. And so how do you prevent that? And the book is loaded with great stories. But let's go back to the 1920s where we had a world of banksterism.

5:13We had a world of bootlegging. Of course, we took America off the sauce, but we never really were off the sauce. All we did was really foster and create organized crime. But we had a situation in America where the markets were being heavily manipulated and capitalism, which I think we both agree, and based on reading your book, we both agree in the spirit of capitalism and the need for capitalism, but we also understand that there has to be some regulation. There needs to be a referee because of the way human beings act with each other. So take us into the story. Well, the 20s have had a great press agent over the years.

5:48The image of the 1920s, roaring prosperity, great fashions, wonderful cars, One long, decade-long party for America is so wrong. I mean, it's just so distorted. I don't know, by Hollywood, by F. Scott Fitzgerald, who knows? But in reality, the 20s were the high-water mark, the apotheosis of unregulated capitalism. And it had been building over decades and decades. Teddy Roosevelt, another of the Roosevelt clan, had made some inroads into restraining monopolies, the giant trusts that were coming to dominate the economy. But subsequent presidencies had backed away from that. And by the end of World War I, during which American companies had suffered under some wartime restrictions, by the end of World War I, they were ready to be done with government regulation.

6:44Just no more. And unleashed a decade of absolutely remarkable corporate misbehavior. The most admired, respected business people in the country, the household name corporations were engaged in illegal union busting. They were engaged in price fixing. They were engaged, as you said, in stock market manipulations at a rampant daily level. They owned the government. There was rumor in Pennsylvania to have been price lists for what it cost to buy a U.S. senator. But they controlled all of the levers of power and they weren't letting anything go. And for the vast majority of the rest of the country, the 20s were a time of really desperate struggles.

7:32The farm belt never recovered from the gluts that were created by overproduction in World War I. The working class in textiles, in lumber, in mining, in livestock were struggling just to keep their head above water. And by the time of the crash in 1929, which is where I bring the curtain up on my FDR story. We had a nation that was absolutely locked in the grip of the most powerful plutocratic forces that the country had ever seen. We'd really never seen such a degree of corporate power. And understandably, when the crash occurred, the reaction of a lot of people, fairly or not, and historians can argue about that, was that Wall Street was largely responsible, not just for the crash, but for the ghastly depression that followed.

8:22Now, the levers by which the crash created the depression are disputed. My description of it, as you saw, was that it was a prelude to the Great Depression. One thing we know it did do is have a massive immediate impact on spending by the 1%. And the economy in the 1920s had become so lopsided, so tilted towards the high-end earner that when they start tightening their belts, it rippled back down through the rest of the economy. Yeah, no, it's fascinating. And when we talk about the butterfly effect, I had a gentleman on talking about that. And I think you know about Lords of Finance, or maybe you read the book, Lee Quadamid's book.

9:05Had Benjamin Strong not gotten sick and died, he may have liquefied those markets as the Federal Reserve Chairman. He had a much better understanding of what needed to get done during a systemic panic like that. But I mean, this is life. The difference that one person can make, that's a wonderful example of that. I love Ahmed's book. I also love Ahmed because he reviewed Wizard of Lies very favorably, which was great. But the parallels with today, both in the Lords of Finance and now, are remarkable. A reverse parallel with the Federal Reserve. We've seen a Federal Reserve system really from the days of Paul Volcker come into a deep maturity in terms of managing interest rates and the money supply.

9:53The fact that we've managed to navigate the post-pandemic economy as successfully as we have is evidence of that. Where we haven't made that kind of progress, though, is in this world of regulation. So what I wanted to do with Taming the Street, to answer your question, was to, first of all, show people what it was like before. I talked to so many younger investors who never knew that there was ever a world without an SEC, that we ever operated capitalism without any regulation. So I wanted to show people what this deregulatory paradise that free market zealots envisioned actually worked like, how it dealt with individual investors like you and me.

10:35Well, not like you, you're much smarter than most investors, but just individual investors got chewed up and spit out by that system. So I wanted to show them that. And then I wanted to show them what it took to change it. It wasn't an act of nature that markets worked this way. Human beings, just like Benjamin Strong, Human beings could step in and change it. It wasn't easy. And as I describe in Taming the Street, there were some bitter battles and there were times when FDR's back was to the wall and his political capital was just about exhausted in trying to get the Public Utility Holding Company Act passed, for example.

11:15If there hadn't been a very timely scandal in the utility industry, that bill probably wouldn't have passed. But if we see that you can change things, My hope is that we will look at where we are today, see what needs to be done and get it done. Well, if America had three fathers, George Washington being the first one and Abraham Lincoln being the second in terms of preserving the union, the father of the American century was FDR. He understood that he needed to fortify the democracy and capitalism by providing a safety net for people and to make people have a feeling of aspiration, at least if they had some place to start with.

11:53And I've always said this to my conservative friends. I'm not for equal outcomes. I want there to be Jeff Bezos and Elon Musk, but I am for equal opportunity. And we don't pick who we're born to. And therefore, we're a rich enough society where we can provide a package of services to people to help them get their start in life. Roosevelt understood that. He was written about in his time, and H.W. Brands uses this in a very great biography called a traitor to his class, but he was actually a savior to his class. Well put. If you really understand what he was trying to do, he recognized what the very famous racist and anti-Semite Henry Ford recognized, which if you pay the people, and Ford said this, if I pay them enough money to buy the product that they're purchasing and I put them in a single family home with a good public school education, they won't come after my Dearborn, Michigan mansion while I'm eating caviar with a pitchfork and a tiki torch.

12:46So FDR got this. He also got the fact that if you wanted to have a promotion of capitalism, and you and I both know, and I've read your work, so I know you believe this, that Wall Street is the - The engine with that. Yeah, it's the engine. It is the circulatory system of capitalism. It's the heartbeat of capitalism, and it provides the money to the great ideas and the innovations and to the Amazons of its day or the Googles or the AIs of today. But you need to have people feel that they're being treated fairly. And I think, you know, when I read your book and I think about your book, the hallmark for me is transparency.

13:24You take risk, but we have to explain to you what the risks are and there needs to be some semblance of transparency. So take us to the origin of this thing that we now know as the Securities Exchange Commission. I'm so glad you touched on the transparency requirement because that was really the regulatory revolution that the FDR approved, but that the young securities lawyers that he brought into the administration had actually come up with. Prior to the New Deal, the idea fostered by conservatives who opposed regulation was that regulation was some bureaucrat telling you what to do. You can't buy this.

14:03You have to buy that. Can't invest in this. You should invest in that. Because they thought that was a limitation on freedom. It was a limitation on capitalism. That was offensive to them. FDR gave them a new definition, just as you pointed out. He said, OK, we're not going to tell you you can't buy that or you can't have to buy this. We're just going to force whoever wants your money to tell you what they're going to do with it. Honestly, you know, comprehensively and completely. And then we're going to let you decide. You know, if they tell you, look, I'm going to take all your money, go to Brazil, sit on a beach for a year, see if I can think up an idea for a bestselling novel, sell it, and I'll pay you back out of the proceeds.

14:41If you put that under prospectus and someone is stupid enough to give you their money, the American regulatory system is fine with that. That was a revolution, Anthony. The notion that people could come and say, I'm going to do this crazy something with your money. And you could say, fine, and no government would step in and stop you. Now, in our unregulated corners of the marketplace, we're falling way short of that ideal. But the idea in a regulated marketplace was tell people what you're doing. Show people the work. Show people the price movements. You mentioned manipulation before, and I don't think modern readers have any idea of the degree of market manipulation that was routine.

15:24New York Stock Exchange on down, and every big city in those days had a stock exchange. And corporations sometimes manipulated their own stocks. Banks were routinely found to manipulate stocks. And it was an open secret. It's fascinating to go back into the old archives of the Wall Street Journal and Barron's. the financial pages of the daily newspapers and see their stock market columnists commenting on the fact that a pool of investors is getting organized to manipulate the price of stock XYZ. It was an open secret. It was patently illegal. It violated the rules of the New York Stock Exchange to do it.

16:03But nobody ever prosecuted anybody for it. Nobody ever disciplined anybody body for it. So it just became a way of life. And manipulation was the primary target of the SEC, was to force the marketplaces where capitalism lived and breathed to force them to show their work, to be transparent in the trading that they conducted. So transparency, sunlight, full disclosure was the Roosevelt revolution. It was a different way of regulating capitalism. And it has proved to be the, to my mind, only effective way. I mean, our - Yeah, it's the best of class. It's the best of class way. It's not perfect. And the SEC can miss things.

16:49Oh, God, yes. You write about that with Madoff. They missed that. They went and examined him a few times. He thought the gig was up in 05. Right. He lasted till 08. But let's say we have a contradictory character in your book that David Nassau wrote a biography about, which I encourage people to read, Joseph Kennedy. What an interesting man, right? In some ways, he was a nefarious actor. He understood these systems better than anybody. FDR felt he needed him to form a coalition. He wanted the Irish American help in his voting bloc. In some ways, he despised Joseph P. Kennedy. Kennedy turns out to be an unbelievable public servant as the SEC first commissioner.

17:30He goes on to become less valuable to FDR, as we both know, as an ambassador. So let's talk about Mr. Kennedy, Jack Kennedy's father, Joe. What was his skill set? What did he bring to the commission? What did he add? And what was the relationship like with Franklin Roosevelt? I agree with you that it was one of the most intriguing relationships of the book and of that period of history. One thing that it's important to know about Joe Kennedy is what drove him in both his best work, which was at the SEC, it was a masterpiece of public service, and in his worst work, which was arguably as ambassador to Britain in the lead up to World War II, was personal interest.

18:11He signed on with Roosevelt. He probably voted for Hoover in 1928, but there's conflicting historical evidence. But he signed on with Roosevelt very early, early 1930, in fact, and started raising money for him. He visited Roosevelt in Albany and came back and told his wife, Rose, you know, I think I just met the next president of the United States. He saw in Roosevelt a politician who could do the hard work of saving capitalism from the rising outrage and anger that the Depression was bringing to bear on the plutocrats like him. And so there's a quote I use in the book, which you may remember, where he said, it was a time when I would have happily given half of what I owned to be able to enjoy the other half under law and safety.

19:00He was very worried about it. Remember, he moved his family to Westchester County, I think the Bronxville, at that period of time. He was very worried about it. Very worried about social unrest, about a communist takeover, a socialist takeover. Diana, am I surprising you with my nerdy geekiness? I'm loving it. I am loving it. You don't realize that I'm like a nerdy geek, right? They don't realize it. But then, you know, let's keep going. Okay, so, but he comes up with some great ideas for the commission, right? Yes. So it just happened that in that moment of history, Joe Kennedy's personal priorities were a perfect overlay for FDR's priorities.

19:38He needed someone who could disarm Wall Street's attacks. Now, Wall Street didn't trust Kennedy either. He'd always been an outsider. He'd always been a lone wolf and never played well with others. But what could they say? To the public's eye, Joe Kennedy was as Wall Street as you get. He had speculated through the 20s. He played the games that the SEC was set up to stamp out. He had manipulated markets. He had run pools. He had done all of those sins. And so to the public, he was absolutely Wall Street, even though Wall Street didn't trust him. But they had to keep their hands off because of who he was.

20:17So he was a brilliant choice. He took it on, I think. As you know from the book, he wanted a much higher position in Roosevelt's cabinet and thought he deserved one. He thought he should be secretary of the treasury at least. And Roosevelt Well, had no intention of putting such a bossy, opinionated, strong minded person in his cabinet. He was going to run his cabinet. There was nobody else in his cabinet as strong as the State Department. He was going to run the Treasury, the Commerce Department. He thought he was going to run the Supreme Court. Yes, he did. Got himself a little bit of trouble with that.

20:52Ultimately, he did. By the end of his 12 years in office, he had shaped the Supreme Court for decades. Exactly. He figured out he had to play with inside the rules to do it. But he was, you know, listen, I have an endless amount of fascination with Roosevelt because he was the man. He was the person that we needed at that time in our country. And so he brings in Kennedy. He brings in Kennedy. They have a contentious friendship. They were definitely a friendship. I think that we shouldn't make too much of it. I think he had that kind of bad boy charm that FDR always liked. He and William O. Douglas, both of them, were kind of these bad boy kids, young and brash.

21:33And FDR always loved that kind of figure. But when he lured Kennedy to run the SEC, basically, he saw that this was where he could give Kennedy carte blanche, which was what Kennedy had to have. He couldn't give him carte blanche at the Treasury or at the State of the World, but he could give him carte blanche at the SEC and say, all it is is words on paper right now, Joe. If it's ever going to be a real thing, it's going to be because you brought it into being. And what followed in the next 400 plus days was, as I said, it's just a masterpiece of public service. He finagled the Budget Bureau.

22:12He clawed back money from the Federal Trade Commission for doing work that he was now doing. He hired an extraordinary core of people. He marshaled congressional support across the board. He established, and this would surprise many people, he established unimpeachable standards of ethics for the agency. He put all his own wealth into a private trust the day he took that oath of office and told the portfolio manager, not a single change in my portfolio while I'm in office, period. So that he was operating completely clear of any personal financial considerations. So he surprised Wall Street. I think he surprised FDR to some degree.

22:53He probably even surprised himself with how well he did in that job. But he remained a behind the scenes ally of the SEC for most of the rest of his life. He always had their their back when they were under attack. So it's a maybe a forgotten moment in the career of a very complex man and the founder of a political dynasty, not just Jack Kennedy as president, of course, but Ted Kennedy, Senator Ted Kennedy, Senator Robert Kennedy, and now many congressmen who are grandchildren and great-grandchildren of Joe Kennedy. You know, very, very well said. And what draws me to your book and to your writing is that it's a teaching guide for today's current dilemmas.

23:36You know, your book, Wizard of Lies, here's a manual, avoid fraud, a first class catastrophe. This is how a confluence of events led to a 22.8 % one day decline in the stock market. But this book is about actually the future. You're writing about the past, but you're really giving us a manual for the future. So if you had a few moments to guide the SEC or guide Wall Street, what would be some of the things that you would say for the future of Wall Street and the SEC? Well, the first thing I would say is reimagine the regulatory frontier. Reimagine the regulatory borders. We have, by default, allowed far too much acreage in the world of finance to fall outside the regulatory reach of the federal government.

24:22Whether it's private equity, whether it's cryptocurrency, whatever it is. If retail investors are engaged in it as an asset class, the regulators must be there. It's just that simple. Now, so that would be the first thing I would say to them. The second thing I would say to them, and I'd say it in the immediate next breath, is we need to move towards a unitary regulator. Our regulatory system is so fragmented now after decades and decades and decades of adding on and sticking on and, you know, hang in another little bell or whistle here or there. We've got 50 state securities regulators and bank regulators.

25:00We've got more than a half a dozen important federal regulators and many of them competing on each other's surf. One of the reasons we've been so slow to develop a sensible, modern regulatory regime for cryptocurrency, which I know is something that you've talked and thought a lot about. One of the reasons we've been so slow is simple regulatory competition between the CFTC and the SEC. That's ridiculous. Absolutely ridiculous. If I could ignore all the political realities that would be involved, I would say we need a unitary regulator. We need a ministry of finance that regulates the world of finance wherever it is.

25:40So that would be the second thing I would say. But on a more practical level, recognizing the polarized political situation, the near paralysis in Congress, at a more practical level, I would say something that Joe Biden could do tomorrow that would influence the way the regulatory agencies, all of them, work would be to elevate them in his own personal agenda. One of the keystones of FDR's architecture was that the people he put on the commission were incredibly formidable figures. And whoever was the chairman had walk-in privileges at the Oval Office. He knew what they were doing. He knew what problems they were facing.

26:22He knew what attacks they were under. And he came to their defense. He was firmly in their corner and Wall Street knew it. Wall Street knew that if they attack Bill Douglas as the third chairman of the SEC, Roosevelt had his back and was going to defend him. It's been decades since we've had that kind of. He enjoyed their scorn. Do you remember that famous speech where he said he enjoyed their scorn? Right, right. So, I mean, when was the last time a president and an SEC chairman actually had the kind of relationships that I write about in Taming the Street? Yeah, it's very well said. I think that the issue, of course, is that we need, you know, we're in the entertainment business now in politics, you know, it's no longer a hiring process.