Vanguard's Bogle on the 'Volcker Rule' Reforms

John Bogle, founder of the Vanguard Group, joined us again today. He took on Wall Street and endorsed the "Volcker Rule" reforms put forward by President Obama, based on the proposals of White House advisor and former Federal Reserve Chairman Paul Volcker.

Asked about the proposed reforms, which would re-draw the line between commerical and investment banking, Bogle had this to say:

JOHN BOGLE: It seems to me like the right thing to do. Largely because we’ve developed a system of enormous complexity, where people don’t understand the risks, where the banks and the bank holding companies…have gotten into all sorts of activities that have nothing to do with taking deposits and paying interest on them, lending the money out usually long and paying interest on these short term liabilities.

And that system worked pretty well for a long time. But we are -- to state the very, very obvious -- a long, long way from what we saw in “It’s a Wonderful Life” with Jimmy Stewart, that little savings and loan out there in Peoria or wherever it was. And that complexity has been very expensive, and in fact very expensive to the banks themselves. The market capital of all of our banks was probably in round numbers, the total value of their equity – common stock in the marketplace – around two and half trillion dollars only a few years ago. And it’s probably under $500 billion today. So these bank executives have cost their shareholders, if you will, $2 trillion. And yet they still get these huge bonuses. That’s a little different issue. But it just shows how badly this system is working. So we’ve got to do something, and I think the Volcker plan is a good start.

Steve Bartlett, who represents a financial services trade group, also appeared on the show today and said there's no going back to "It's a Wonderful Life"-style banking. He pushed back against the idea of reinstituting walls between different kinds of banking. Those walls had been in place until 2000, when the Glass-Steagall Act was repealed, and deposit-taking banks started operating in different, riskier, ways.

STEVE BARTLETT: …The difficulty with the so-called Glass-Steagal is that it was a concept to try to separate into fifty or sixty different categories of how to offer financial services. So you have a credit card is separate from a checking account, is separate from an insurance coverage, is separate from a 529, is separate from a mutual fund. And frankly, that whole system had simply broken down by demand of the customers, who wanted financial services and still do. Now, they do want those financial services to be offered in a safe way, with better regulation. And a lot of that regulatory structure broke down and it needs to be rebuilt in a much better way. But restoring back to “It’s a Wonderful Life” is just simply not feasible and would do a lot of harm.

TOM ASHBROOK: John Bogle, simplicity’s too much to hope for?

JOHN BOGLE: No, I don’t think it’s too much to hope for. I mean, we’re in a complex world. I’m the first one to say that. But investors have to wake up to the fact that all this complexity has produced virtually nothing but losses for them.

You can listen to the full Bogle-Bartlett exchange today. On Point has looked closely at these issues before. A recent hour with MIT's Simon Johnson is worth a listen.