Jack Bogle Says Financial Reform Better Than Nothing

Vanguard founder Jack Bogle thinks that although financial reform was a step in the right direction too many questions were left unanswered.

Morningstar.com Jack Bogle Says Financial Reform Better Than Nothing Christine Benz: (Director of Personal Finance, Morningstar.com)-I would like to segway into financial reform. I know that you are very vocal about changes that you would like to see in the investment and 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: (Founder & Former Chairman, The Vanguard Group)-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 6 months before the commission next it’s report because it was always passed in July and the commission which is not I don’t think of particularly impressive one is going to send an honest report. I think at the beginning of December. So we got kind of check and a name problem there and I said, the first thing I would say about financial reform is we just don’t know. We so much has been left to regulation. Capital requirements and quality requirements portfolio quality and security requirements have been left to the regulators that it’s hard to say where we’re and third I think what we have is better than nothing but still didn’t do as much as it should and I really believe that we should bring back the last legal act that separated commercial banking from investment banking and let the bankers bank you know take in deposits and lend the money out, that’s conventional banking and when they get into all these peripheral activities with that kind of government guaranteed now for those deposits. Now they got into a lot of risky areas that they shouldn’t have likely the deposit insurance and understand that Sheila Bear 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 a bank when it goes belly up. She doesn’t want to guarantee their debt, anything that’s lent out to you know the big world out there and she’s right but we didn’t do that for example with Citibank. All that debt was protected by the government the fact and I don’t think that should have happened. Now there have been other calls for having banks issue some subordinated debt that everybody knew would go off the bank with. It 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 their doing but even professional manner of business often seeing not to know what they’re doing. I’m disgusted and disappointed to the level of analysis I see among professional security analyst born— like. Christine: Jack I want to follow up on the SCCs proposal to reform the 12 B-1 rule. What’s your take on that? Jack: Well we’re in the happy position of having abandoned sales force as not the first or second, the first thing we did when we started Vanguard in the 74 and was that bring out the index fund which come out and finally in 76 we started operation 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 don’t then filling this to keep up with 21B1 but I think it should just be eliminated honestly and then the new quote reforms quote. I don’t think fundamentally all the problems with 12B1 and that is sales charges are hidden from the provider there, they are made to look minimal and if you have any understanding of how and what increments of fund cost are, how much they matter over the long term half a percent 1% is a lot of money over an investment lifetime a devastating amount of money over an investment lifetime. I’m sure there are a lot of reasons that would be difficult but let’s just call the sales charge and here we are and you pay the commission and if you don’t want to pay the commission by means no load fund but have a little more clarity. The SEC I think honestly I think pays much too much attention to the investment institute, now our trade association which of course purports to represent fund investors which is a big joke. The investment company as it represent fund managers. There are a lot of these for fund manager and to portray themselves as an advocate for fund investors is one might say a bit much. Christine: 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? Jack: Well she’s pretty tough and I think that’s what’s needed and I can see why she is not popular in the banking industry but that tough regulator isn’t going to be it’s still a mysterious part of the process that they didn’t think they could get her confirm like they were probably right in that by the way but I would say don’t forget mutual funds and 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 and so I would say don’t forget mutual funds because this industry, it’s 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 measure up to its mandate which is I would have said to be good stewards of the money entrusted to us by American citizens.