A Trillion-Dollar Fund Manager's Take On Bailout

Scott Simon talks with John C. Bogle, founder of the trillion-dollar mutual fund The Vanguard Group, about his take on the financial meltdown.

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SCOTT SIMON, host:

John Bogle is one of the few people who's dealt with billions and billions of dollars personally. He's the founder of The Vanguard Group, a trillion-dollar mutual fund. Mr. Bogle, thanks so much for being with us.

Mr. JOHN BOGLE (Founder, The Vanguard Group): And good to be with you again, Scott.

SIMON: And what do you make of what - well, I'll make it personal - what Mr. Valdes, a member of the Stock Exchange, and Mr. Weisberg suggested. They said they're angry too, but they didn't write the laws that allowed this financial mess to occur. It was Congress.

Mr. BOGLE: Well, it's a lot more complicated than he says. What we've had here in the stock market is what I call a speculative orgy like nothing we have ever seen before in the history of the United States, a turnover in the stock market that's twice as high - more than twice as high now than it was in 1929. So we've become a market dominated by speculators and not by investors. And Wall Street plays a big role in this simply because they like to get out, quote, "new products," quote, and they don't pay much attention to the quality of those products. They're trying to do all this complex innovation to make money for themselves. And they sell it to people, these collateralized debt obligations, essentially where the problems are, mortgage debt behind it, sell it to people who ought to know better, who are just looking for more yield. And if there's anything we know, it's reaching for yield is a dangerous thing to do.

SIMON: John, of course, under this rescue package, the government is probably going to buy hundreds of billions of dollars of distressed securities, what some people are calling toxic properties, from the banks. People today were kind of joking, calling them bad assets. What's the effect of that? And is that a good way out of a financial crisis?

Mr. BOGLE: Well, first there are a lot of unanswered questions. And question one is what does the Treasury get for this investment they're making? Are they going to get equity in these banks? There's some language in the bill that says yes. The federal government will have an ownership position or a warrant position in the common stock and the equity of the banks they're holding. We don't know very much about that, but that's what Dubai would do if Dubai buys part of Citibank, or if somebody else buys part of a U.S. investment bank from Shanghai, they get equity. And that has to be an important return to the government for their investment. Number two, there's been barely a word said about how these securities are going to be priced.

SIMON: Yeah.

Mr. BOGLE: Take a $100 unit of a collateralized debt obligation that's on the bank's books. They bought it for 100. They may be carrying it for 20 today. Is the government going to pay them 20? Which is probably fine. Get movable liquidity in return for that, but no change in the total balance sheet. Or is the government going to pay 30 or 40 or 50? And who's going to decide? We don't know the answer to that question. So I think it's not quite fair to call it a bailout yet at least.

SIMON: Of course, there's this astonishing headline that almost has been unnoticed this week, a little bit unnoticed, is that the change where you've got huge investment banks going out of business. Even Goldman Sachs eventually will be forced to find a partner. How's Wall Street going to change?

Mr. BOGLE: Well, I mean, it's been said that Wall Street is over. The term Wall Street will be with us, I'm sure, in 2050, because Wall Street is how we think of the market. It's a metaphor for the stock market, and the stock market is not going away. And none of those banks are down on Wall Street, anyway. Haven't been for years and years - nor the investments banks. So it is going to change. I, for one, I'm very ambivalent about it. At first I don't know if it can succeed. I mean, Goldman Sachs collecting deposits from investors, putting an ATM on every corner? I can't imagine it.

SIMON: Yeah.

Mr. BOGLE: So it's easier said than done. Now when you get these mergers, it's hard to know how it's all going to shake out. But I worry about mixing banking - commercial banking and investment banking - just like they worried about when they put in the Glass-Steagall Act back in 1933 or 1934.

SIMON: John Bogle who's the founder of The Vanguard Group, thanks so much for being with us again, John.

Mr. BOGLE: Good to be with you always, Scott.

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