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Bogle: Financial Reform Better Than Nothing

Christine Benz

Christine Benz: I'd like to segue into financial reform. I know that you are very vocal about changes that you would like to see in the investment industry. Do you think that the financial reform package that was passed earlier this year, goes far enough? Does it address the right things in your view?

Jack Bogle: Well, first only in America. Can we appoint a commission to study the causes of the crash in the stock market, and pass a law to deal with them, six months before the commission makes its report. Because the law was passed in July and the commission, which I don't think a particularly impressive one, is going to send down its report at the beginning of December.

So we've got kind of the chicken and egg problem there. The first thing I'd say about financial reform is, we just don't know. So much has been left to regulation, capital requirements, quality requirements – portfolio quality and security requirements have been left to the regulators. That it's hard to say where we are.

Third, I think what we have is better than nothing, but still didn't do as much as it should. I mean, I really believe that we should bring back Glass-Steagall Act that separated commercial banking from investment banking, and let the banker's bank. Taking deposits and lend the money out, that's conventional banking.

And when they get into all of these peripheral activities with that kind of government guarantee now for those deposits, they've got into a lot of risky areas that they shouldn't have. And I think we ought be rethinking deposit insurance, understand that Sheila Bair, who is the Chairman of the FDIC, Federal Deposit Insurance Corporation is going to be very tough on guaranteeing anything but the deposit base of the bank when it goes belly up. She doesn't want to guarantee their debt anything that's lend out to on the big world out there.

And she is right. But we didn't do that, for example, the Citibank, all that debt was protected by the government in effect. And I don't think that should have happened. And there have been other calls for having banks issue some subordinated debt that everybody knew would go if the bank went. Would be interesting to see what that interest rate would be, and how it would change. But I don't see why the Federal Government has an obligation to bail out investors who should know what they are doing. But even in the professional management business, often seem not to know what they are doing. I'm disgusted and disappointed with the level of analysis I see among professional security analysts, bond and stock alike.

Benz: Jack, I wanted to follow-up on the SEC's proposal to reform the 12b-1 rule. What's your take on that?

Bogle: Well, we are in the happy position of having abandoned sales force and it's about the first or second, the first thing we did when we started Vangaurd in '74 was bring out the Index fund which came out in finally in '76. We started operations in '75. The Index fund came out in '76. And then we went no load in '77 and got out of the dealer business which we've been in for 50 years. And so, I haven't felt it necessary to keep up with 12b-1. But I think it should just be eliminated, honestly.

The new "reforms", I don't think fundamentally alter the problems with 12b-1 and that is sales charges are hidden from the buyer. They are made to look minimal, and if you have any understanding of what increments of fund costs are, how much they matter over the long term, 0.5%, 1%, is a lot of money over an investment life time. A devastating amount of money over an investment life time. I'm sure there are a lot of reasons, it would be difficult but let's just call it a sales charge and here we are, and you pay the commission, you don't want to pay the commission buy a nice no-load fund. But have a more clarity.

The SEC, I think honestly, I think pays much, too much attention to the Investment Company Institute, or trade association. Which of course purports to represent fund investors which is a big joke. The Investment Company still represents fund managers. They are lobbyists for fund managers and to portray themselves as the advocate for fund, investors is one might say a bit much.

Benz: There's a new Consumer Financial Protection Bureau that's being started up. Wondering if you have any advice for Elizabeth Warren who is charting the course for that new bureau?

Bogle: Well, she's pretty tough and I think that's what's needed. I mean, I can see why she's not popular in the banking industry. But a tough regulator isn't going to be and that's sort of mysterious part of the process that they didn't think they could get her confirmed; and I think they were probably right in that by the way. But I would say, don't forget mutual funds. Her charter is broad enough to look at mutual funds, but I don't think mutual funds are mentioned there. But I think she has the authority to do that or will have.

So, I'd say don't forget mutual funds, because this industry its problems are much more subtle than the problems that we've seen in commercial banking and credit cards and those kind of things. But nonetheless, an industry that has a long way to go to measure up to its mandate which is I would have said to be good stewards of the money entrusted to us by American citizens.