Settle In with Andrew Ross Sorkin

Key Concepts

1929 Crash: The stock market crash of October 1929, which marked the beginning of the Great Depression.
Margin Buying: Purchasing stocks with borrowed money, a practice that became widespread in the 1920s.
Investment Pools: Secret groups of wealthy individuals who colluded to manipulate stock prices for profit.
Pump and Dump Scheme: A fraudulent trading strategy where an asset is artificially inflated and then sold off.
SEC (Securities and Exchange Commission): A U.S. government agency established to regulate the securities industry.
Glass-Steagall Act: Legislation enacted in 1933 that separated commercial and investment banking.
Accredited Investor Rule: A regulation that limits the types of investments that individuals can participate in based on their net worth and income.
Shadow Banking System: Financial activities and entities that operate outside of traditional banking regulations.
Federal Reserve: The central banking system of the United States, responsible for monetary policy and financial stability.
Democratization of Finance: The idea of making financial markets and investment opportunities accessible to a wider range of people.
Financial Literacy: The ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.

1929: Inside the Greatest Crash in History and How It Shattered a Nation

This summary details a conversation with journalist and author Andrew Ross Sorkin about his new book, "1929: Inside the Greatest Crash in History and How It Shattered a Nation." The discussion explores the events leading up to the 1929 stock market crash, drawing parallels to contemporary financial practices and societal attitudes towards money.

The Genesis of the Book and the Appeal of Narrative History

Sorkin explains that his motivation for writing about the 1929 crash stemmed from frequent comparisons made to the 2008 financial crisis, for which he had previously written "Too Big to Fail." He found that existing literature on 1929 was largely academic, focusing on economic systems rather than the human element. Sorkin's approach, inspired by his previous work, emphasizes character-driven narratives, aiming to bring readers "inside the room" and understand the motivations and decisions of the individuals involved. He discovered a wealth of detail in the archives of Thomas Lamont, who ran JP Morgan during that era, including transcripts of phone calls with Presidents Hoover and Roosevelt, which allowed for a moment-by-moment recreation of events.

Key Figures and the Rise of Speculation

The book focuses on two central figures:

Charlie Mitchell: Head of National City Bank (precursor to Citigroup), often called "Sunshine Charlie." He pioneered making stock purchases on margin accessible to the public, leading to the proliferation of brokerage houses. Sorkin likens him to the "Jamie Dimon of his time" in terms of fame and influence. Mitchell's philosophy was to sell stocks and bonds "over-the-counter, just the same way a clerk sells a necktie," aiming to democratize finance.
Carter Glass: A Senator from Virginia, described as the "Elizabeth Warren of his time." He vehemently opposed Mitchell's practices, warning that Wall Street's speculative lending would ruin the economy.

A notable, albeit minor, character is Angelina Adams, an astrologer whose office in Carnegie Hall was visited by prominent businessmen, including J.P. Morgan himself, seeking market advice. This highlights the often irrational and speculative atmosphere of the time.

The Dramatic Shift Towards Credit and Speculation

A significant cultural shift occurred in 1919 when General Motors began offering loans to facilitate car purchases. This normalized the idea of taking on debt for large purchases, a concept previously viewed as a "moral sin." Sears Roebuck followed suit for appliances, and Wall Street, led by figures like Charlie Mitchell, embraced this trend to "democratize finance" by enabling individuals to buy stocks on credit. This era coincided with rapid technological advancements, similar to the current excitement around AI, fueling optimism and a desire for quick wealth.

Sorkin emphasizes that this was a period where the American Dream evolved from a "Horatio Alger kind of story" to a "get rich fantasy." The celebrity status of business leaders like Mitchell, featured on magazine covers alongside figures like Babe Ruth, further fueled this perception, creating a culture where ordinary people believed they too could achieve immense wealth.

Shady Practices and the Absence of Regulation

The lack of regulatory oversight in the 1920s is a critical theme. There was no SEC, no insider trading laws, and no mandatory disclosures. Sorkin notes that obtaining a prospectus was rare; often, only a street leaflet was available. This environment facilitated manipulative practices such as:

Investment Pools: Wealthy individuals formed secret groups to artificially inflate stock prices through coordinated buying and selling, a practice akin to modern "pump and dump" schemes. They would then sell their holdings at a profit, leaving ordinary investors with losses.
Journalist Bribery: In some cases, journalists were paid to write articles promoting specific stocks, further enticing public investment.
Information Asymmetry: Even some investors aware of these pools engaged in a "contest of wits" to profit by timing their entry and exit before the manipulators.

While Charlie Mitchell was eventually prosecuted years later, most individuals involved in these schemes faced no significant legal repercussions. Sorkin argues that the prevailing mindset on Wall Street was one of outwitting others, viewing trading as a "contest of wits" rather than a regulated market.

The Devastating Impact of the Crash

The stock market crash, which occurred over several days in October, had devastating consequences beyond mere loss of stock value. Because many investors had purchased stocks on margin, they were liable for the borrowed money. This led to widespread financial ruin, with individuals like Groucho Marx having to mortgage their homes. The psychological impact was profound, resulting in "generational scarring," with some individuals resorting to suicide. Sorkin shares a personal anecdote about his grandfather, who witnessed someone jump out of a window on Wall Street and subsequently refused to buy any stock for the rest of his 91 years.

Parallels to Today's Financial Landscape

Sorkin draws clear parallels between the practices of the 1920s and contemporary financial phenomena:

Meme Coins and Crypto: The "pump and dump" tactics seen in 1929 are directly comparable to the manipulation of meme coins and certain cryptocurrencies. Sorkin recounts a personal experience where a "Sorkin Coin" was created and gained millions in value within hours of a casual remark by Larry Fink of Blackrock. He received invitations to join groups coordinating the manipulation of this coin, highlighting the ongoing issue of collusion.
Democratization of Finance and 401(k)s: The language of "democratizing access" is being used again today to justify opening up 401(k)s to venture capital, private equity, and crypto investments. While this can provide access to historically high-performing assets, Sorkin raises concerns about transparency and the potential for manipulation, especially given the existing "Accredited Investor Rule" designed to protect less wealthy individuals from risky investments.
Deregulation and Lack of Transparency: Sorkin expresses concern about the current trend towards deregulation and reduced transparency in financial markets. He notes that much of today's lending occurs within the "shadow banking system" (private credit), making it difficult to track debt and leverage, unlike the more regulated banking system post-2008.

The Importance of Guardrails and Vigilance

While Sorkin is hopeful that the existence of the SEC, insider trading laws, and the Banking Act will prevent a 1929-style crash leading to a Great Depression, he believes a "dot-com bubble" scenario is very possible. He stresses the need for:

Increased Disclosure: New financial products require more transparency.
Third-Party Auditing: Independent verification of financial products and practices.
Vigilance: A proactive disposition from regulatory agencies and the public to monitor financial markets.

He is concerned by a current political climate that seems to favor less transparency, arguing that transparency is generally beneficial and that a lack of it allows frauds and charlatans to emerge.

The Role of the Federal Reserve and Political Influence

Sorkin highlights the crucial role of the Federal Reserve in stabilizing the economy. He points out that in 1929, the Federal Reserve was a relatively new institution (established in 1913) and was influenced by politics. President Hoover and his Treasury Secretary, Andrew Mellon, were ideologically opposed to government intervention. In contrast, Ben Bernanke, as Fed Chairman during the 2008 crisis, drew lessons from the Great Depression and understood the necessity of flooding the system with liquidity, even if politically unpopular. Sorkin worries about a Federal Reserve that could be influenced by politics, hindering its ability to make necessary but unpopular decisions.

Personal Reflections on Money and Responsibility

Sorkin discusses the often uncomfortable conversations around money within families, noting that his children are more financially aware than he was at their age, possibly due to his public profile. He touches on the debate about the "going rate" for the tooth fairy, with figures ranging from $1 to $10 per tooth, highlighting the varying economic realities and the need for parental collusion to set price caps.

He reflects on his responsibility as a journalist and author, believing that his passion for the subject, deep immersion in the financial world, and empathetic approach allow him to engage with powerful figures like Elon Musk and Jamie Dimon. He aims to understand their perspectives, even when disagreeing with their actions, believing that illuminating their thought processes can lead to a better understanding of complex situations. He sees history as often "gray" rather than black and white, and his work seeks to uncover that nuance.

The Human Condition: The Desire for "More"

When asked what he wants readers to take away from his book, Sorkin points to the human condition's inherent desire for "more." He references a line from the movie "Wall Street 2": "What's your number?" The answer, he suggests, is often "more." He advocates for a balanced approach to risk, acknowledging that speculation is necessary for innovation but warning against excessive risk-taking. He emphasizes the importance of humility and recognizing that while some risks are calculated, others can be detrimental.

Conclusion

Andrew Ross Sorkin's "1929" offers a compelling narrative of the events leading to the stock market crash, emphasizing the human decisions and systemic flaws that contributed to it. The conversation underscores the cyclical nature of financial history, drawing stark parallels between the speculative excesses of the 1920s and contemporary financial trends. Sorkin's work serves as a crucial reminder of the importance of transparency, regulation, and vigilance in safeguarding against the devastating consequences of unchecked financial ambition and the enduring human desire for "more."