Investment Trust Leverage Pyramids Reach Unsustainable Peak

Investment trusts reached peak popularity and systemic danger by selling at premiums higher than underlying stock values while creating complex pyramids of cross-ownership and hidden leverage. These 1929 equivalents of closed-end mutual funds bought stock on margin with funds loaned not by banks but by “others,” creating opacity and systemic fragility. Goldman Sachs Trading Corporation and similar vehicles pioneered dangerous structures where a single trust owned shares in other trusts, which owned shares in yet more trusts, amplifying both gains and catastrophic losses. Public utility stocks were driven to unsustainable levels by the explosion of investment trust formation and margin investing. The trusts’ funds proved very sensitive to any market weakness, with cross-ownership creating a web of interconnected vulnerabilities. Financial entrepreneurs structured these vehicles to maximize fees and commissions while obscuring the actual leverage ratios and risk exposure. Media and public sentiment hyped these investments, creating a euphoric environment detached from fundamental economic reality. The proliferation of holding companies and investment trusts created debt that could not be liquidated when the market turned. This unregulated shadow banking system collapsed spectacularly in October 1929, demonstrating the need for securities regulation that would not arrive until the 1933-1934 New Deal reforms.