John Bogle, founder and retired CEO of The Vanguard Group, assess governance practices at public corporations and how they affect the underlying value of a firm's equity.
He also discusses if the "free market" has corroded "moral character" and how the recent structural changes in the character of the financial and capital institutions have contributed to the current financial crisis.
John Bogle created Vanguard in 1974 and served as Chairman and Chief Executive Officer until 1996 and Senior Chairman until 2000. The Vanguard Group is one of the two largest mutual fund organizations in the world. Vanguard comprises more than 120 mutual funds with current assets totaling more than $1 trillion.
Vanguard 500 Index Fund, the largest fund in the group, was founded by Mr. Bogle in 1975. It was the first index mutual fund.
In 2004, TIME magazine named Mr. Bogle as one of the world's 100 most powerful and influential people. In 1999, Fortune designated him as one of the investment industry's four "Giants of the 20th Century." Mr. Bogle is a best-selling author beginning with Bogle on Mutual Funds: New Perspectives for the Intelligent Investor (1993); Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (1999); John Bogle on Investing: The First 50 Years (2000); Character Counts: The Creation and Building of The Vanguard Group (2002); Battle for the Soul of Capitalism (2005); and The Little Book of Common Sense Investing (2007).
His seventh book Enough: The True Measures of Money, Business, and Life published by John Wiley and Sons was released in November 2008. Mr. Bogle graduated from Princeton University, magna cum laude in Economics.
Means by which buyers and sellers are brought into contact with each other and goods and services are exchanged. The term originally referred to a place where products were bought and sold; today a market is any arena, however abstract or far-reaching, in which buyers and sellers make transactions. The commodity exchanges in London and New York, for example, are international markets in which dealers communicate by telephone and computer links as well as through direct contact. Markets trade not only in tangible commodities such as grain and livestock but also in financial instruments such as securities and currencies. Classical economists developed the theory of perfect competition, in which they imagined free markets as places where large numbers of buyers and sellers communicated easily with each other and traded in commodities that were readily transferable; prices in such markets were determined only by supply and demand. Since the 1930s, economists have focused more often on the theory of imperfect competition, in which supply and demand are not the only factors that influence the operations of the market. In imperfect competition the number of sellers or buyers is limited, rival products are differentiated (by design, quality, brand name, etc.), and various obstacles hinder new producers' entry into the market.
The thing Bogle is saying is that his peers have not been "unmonitored monitors" to use a phrase of Thomas Sowell, they have not looked out for the client. His decency and goodness are apparent and there is no solution to the problems he spells out. The fianancial industry is populated with people that would make Used Car Salesmen blush.
Personalized Social Security: A concept for tax reform that would allow individuals to opt out of paying taxes every year in exchange for saving 5% of their income each year in a new kind of IRA. This IRA would pay interest only during retirement. After death of both husband and wife the balance in the account would got to the State and then to the Federal Government based on constitutional enumerated requirements. It has the potential for the elimination of ALL state, federal, employment, and corporate taxes on income, give retirees more income than Social Security and provide money for health insurance.
5% of your income invested in the S&P 500 or the Total Stock Market will (over a 40-50 year phase in period) completely change the way we finance state and federal government. It will also produce a retirement income 3 to 4 times better than Social Security. http://www.NoTaxUntilDeath.com
Responding to Yenko - 'Honoring the Fiduciary Relationship'
Having reviewed your comments, I'm left with the distinct impression you remain a strong proponent of a 'free market' policy unburdened by government regulation; what some might term a 'classic' Libertarian perspective of economics.
But the simple fact is, "there have already been more than 96 other major banking crises over the past 20 years" globally, a good many occurring under far less stringent government intervention than that of 2008 (see, " White Paper on All the Options for Managing a Systemic Banking Crisis "). Consequently, it should also be fairly obvious there's nothing especially new about this 'Boom and Bust' phenomena which dates back to at least the Dutch Tulip Mania of 1637, and perennially pits 'smart money' wolves against the 'small investor' lambs (see, " An Integral View on Money and Financial Crashes ").
The key point Mr. Bogle seems to be making, in case you missed it, essentially involves relationship and fiduciary responsibility . . . not Market .
We have moved from a society in which “there are some things that one simply does not do,” to one in which “if everyone else is doing it, I can do it too.” I’ve described this change as a shift from moral absolutism to moral relativism.
John Bogel's lecture is available online in pdf format as, The Fiduciary Principle: “No Man Can Serve Two Masters” .
It has caused me to realize that even though this is speaking to corporate America, it is corporate America that has created this great country and our way of life. That being said, it brings to mind the words of Franklin, in that we will only be able to maintain a Republic is we are a virtous and moral people. But we must not just be that way in business, but government as well.
Wish I could add something but Yenko seems to have hit it out the park. The ethics and actions of those responsible for our financial well-being in this country are just as susceptible to moral hazard as the rest of us. When you skew the market causing everyone to believe that excess risk is not excessive you create the culture that Bogle describes.
That being said, I do think there is a need for increased transparency, especially in the financial markets and a change in corporate structure. That is not to say that regulation is the answer, as our government's version of "regulation" tends to be to rig the system in favor of those already controlling it.
Nowhere in this lecture does John mention the role of the Federal Reserve, the FDIC, and other government-sponsored entities (GSEs) such as Fannie Mae and Freddie Mac, in mitigating the "stupefying levels of risk" he mentions as being a cause of the present financial crisis. By overlooking the role in the present crisis of federal intervention into the market, John is able to claim that the "laissez faire attitude of our federal regulators" were a cause of the crisis, when in fact our federal regulators hold no such view whatsoever.
There is no more heavily regulated industry (except perhaps health care) in the U.S. than the financial industry. The "rollbacks" of depression-era legislative reforms, rather than actually making the situation worse simply exposed deeper flaws in the existing regulatory regime. Furthermore, the "traditional link between borrower and lender—under which lenders demanded evidence of the borrowers’ ability to meet their financial obligations" was indeed severed by the very actions of such GSEs as mentioned previously. The severing of the link was encouraged every step of the way by financial regulation as banks were bullied into relaxing lending standards in order to promote the "ownership society" or "American dream" or whatever the feel-good phrase du jour happens to be.
John is not wrong that the financial industry is suffering from a crisis of ethics, but rather than talk about the cause of the problem he focuses on the effects, at the same time implying that more government involvement is the answer. The fact is that no such animal as the "free market" exists in finance...not even remotely. So to lay the blame on "laissez faire attitudes" and "faith that “free competitive markets” would protect our society against excesses" is disingenuous. Our regulators overwhelmingly believe that only government intervention can "protect our society from excesses" when in fact the actions of government nearly always give rise to such excesses in the first place.