Jim Lange and Jack Bogle Final Snippet Retire Secure Podcast Snippet

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Jim Lange: Do you think that some of the problems that you had mentioned earlier, in terms of speculation versus investment, were really the cause of the financial havoc that we had in 2008 and 2009, or at least partly responsible for some of the problems that we’ve had?

John Bogle: Well, I wouldn’t put speculation at the heart of that. Of course, there’s speculation because when someone sells you one of these collateralized debt obligations, you’re speculating that it has independent analysis says these things are money good. The basic part of that was a terrible fraud perpetuated by mortgage companies countrywide, Washington Mutual.

The system works like this: You got salesmen out there, and their job is to sell money, OK? So they find somebody that makes $20,000 a year, they get them to take on a $200,000 mortgage, and actually give them a $300,000 mortgage so he spends $100,000 before he buys a $200,000 house. This has been known to happen. And why don’t they care? Because they sell the mortgage to a bank. Why doesn’t the bank care? Because they sell it to a collateralized-debt underwriting. We sever in that system the essential link between borrower and lender. If there’s no connection between the borrower and the lender, the lender’s going to be like, “Hey, he doesn’t care about the borrower.” He’s going to get rid of the instrument and give it to somebody else. And the rating agencies have a huge onus on them after what they did in this area. You know, it was well known that you could kind of buy ratings. I believe these companies were paid to give a AAA rating to a collateralized debt obligation. The underwriter would work with the rating agencies and say, “What do we need to do to make this a AAA?”

Jim Lange: Included in your list of institutions that you indict; you do include Congress? Do you think Congress has a role in trying to change some of these habits of behavior?

John Bogle: Well, poor Congress, you know? They’re a bunch of nice people, and the complexities of the financial system are, in fact, rather overwhelming. So, they listen to industry lobbyists and get directed in that direction, unless you get a real crisis as we had in 2008 and 2009. So, they passed the Dodd-Frank Act and it’s still gotten nowhere three years later, I guess. Sensible things like what we call the Bogle rule, which is designed to keep banks largely out of dealing as underwriters for their own accounts, they’re working on 193 pages of regulation to make that happen.

Obviously, what would’ve happened, in a wise world, and without the pressures from these institutions themselves, is we would’ve gone back to what is known as the Glass-Steagall Act, an act that was passed by Congress after the debacle of the Great Depression passed by Congress, which said you can be a commercial banker and lend money, or you can be an investment banker and take all the risks of underwriting. Never the twain shall meet. So, we abandoned that in 1999, and instead of putting it back, just saying, “OK, we made a mistake,” they have this convoluted law intended to accomplish the same thing. I think Paul Volcker did a great job in getting that Volcker amendment in there, but nothing has been done about it yet. And then the lobbying pressures are terrible. The banks and their lobbyists fight every regulation with an army of lawyers and look at every comma, and here, the regulators are completely outmanned and outgunned. So, what we’re going to get out of Dodd-Frank, I think finally, is very, very little.

Jim Lange: And you would just prefer going back to … 

John Bogle: No, I’d prefer naming Bogle a czar.