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By Don Phillips | 06-13-2013 12:00 PM

Bogle on Fund Industry Progress and Imperfections

The Vanguard founder offers his thoughts on the need for money fund reform, the dilemmas with retirement planning and savings, the fiduciary duty of fund managers, and much more, in this video exclusive to Premium Members.

Don Phillips: Let's begin with a couple of hot topics in the industry. One of the things that has been on a lot of people’s minds recently are the money market reforms. I'd love to get your sense of just how grave is the problem, the threat that money market funds might present to the financial system? And what do you think are the solutions that have been suggested, and are they the ones that you would advocate?

John C. Bogle: Well, it's really interesting when we talk about probabilities and risks and things like that. Because the probability of something happening bad in the money market business is tiny, but the consequences of that going wrong--as it did with a big institutional fund run out of New York, I guess eight to 10 years ago--is fatal. The U.S. Treasury had to come in, back up the money market funds and backed up every single one of them, which was an interesting kind of step. But now Congress has decided no more tax-payer money to bail out the money market fund industry. It seems like a reasonable position to take. Tax payers are bailing out everything else, but we might as well draw the line in a profit-making business. So the consequences are dire, but the probability is tiny.

I think we still must act. And what bothers me, and this bothers me a lot about the industry in which I find myself--you know I have a lover’s quarrel with the fund industry that I loved for 63 years now--they don’t seem to like to get right down to the truth.

What's the fact? The fact is that money market funds' net asset values fluctuate. What's the industry's problem? They don’t want to let the world know that money market fund asset values fluctuate. So, I think they are leaning on kind of weak reed to fight against having, say, a $10 asset value that will go to $9.99 or $10.01 whatever it does in fluctuation, not large. And of course this industry, which is well, the technological Vanguard of just about everything, they can do anything, but they apparently can't deal with a single class of funds that has a floating net asset value. That seems a little kind of crazy to me.

So, I think the industry has got to stop defending its own financial interests and start thinking about the interest of shareholders and letting them know actually how money market funds work. I don't like the reserve solutions that they proposed, having the funds hold the reserve; I wouldn’t even know how to do it from an accounting standpoint. But having a floating net asset value, say $10, and you can hold the $10 if you really want to be conservative, that's up to the money market manager. But having that as the solution.

Now what the government has decided to do or the SEC is recommending, it's not done yet, is to have asset values float for institutional funds, where the largest problem is. That seems to me like a King Solomon type decision, cut the baby in half. I think they should either do it or not do it.

In my reputation, which is mixed, one thing that people rarely call me, like they call, I think, [U.S. politician] Henry Clay, the Great Compromiser, and I don't think we should compromise. I think we should be straight-up, upfront and do the thing that we know is true. And I should say this, insulting myself a little bit or maybe more than a little bit, I thought the $1 asset value was crazy from the day the business began. So I go back a long way on this, maybe 1974.

So I started our Vanguard Money Market fund with a $10 asset value. So, it kind of has come full-circle for me, and it was totally unmarketable and ignored. Nobody would use it. Everybody wanted the dollar. So I caved, and I’ve told people the consequences were not dire in that case. But every time I did something for marketing reasons, it was going to be in that long, long list of things that I never should have done. Don’t do things for marketing reasons is my lesson in anything you do. And I’ve done too many things that way. I haven’t done it for a long, long time because I learned. But we really ought to be thinking about the shareholder and about the society, not having the Treasury bail us out all over again. Did I make my position clear?

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