The Economy: “This Too Shall Pass”

Vernon Hill, founder and former CEO of Commerce Bank, and Jack Bogle, founder and former CEO of Vanguard Mutual, had never met — until we got them together to talk about the economy, Wall Street’s excesses, ninja loans, and their dictatorial reputations.

Bogle: Well, the Treasury had no choice whatsoever but to bail out the system, because we’ve got this incredible interlinkage. We need a bailout of some kind, and the banks are, without any question, going to be partially nationalized. I’m not smitten with the idea, but they’ve got themselves into a mess that only the federal government has the strength to —  
Hill: Yes, but I don’t think there are very many banks — commercial banks of America — that have this problem. Yeah, there’s some. Wachovia was an extreme example. I think it’s more the investment banks in New York than the commercial banks.
Bogle: How about Citi?
Hill: Yeah, Citi had moved toward being an investment bank. But Wells Fargo doesn’t need a government capital bailout.
PM: So how did we get here?
Hill: I think we grew a Wall Street trader mentality. I think when they’re making a loan to, say, a restaurant, the overwhelming majority of banks aren’t playing games. As long as the guy’s paying, it’s a loan that pays back over time. Then we moved into all this exotic stuff — credit default swaps, CDOs. Believe me, no one at Goldman Sachs understands what they have on their books, because these kids are sitting at their computers dreaming this stuff up.
Bogle: Absolutely right. And what I want to know is, when did bank chief executives stop looking at the quality of their balance sheet? Everybody’s looking at earnings per share and the next quarter.
Hill: I think commercial bankers are generally more like you and me — with exceptions, like Washington Mutual. I’ve been saying for years that Washington Mutual should go out of business. The investment bank guys have a completely different mentality. It’s, “What can I make this month for this quarter’s bonus?”
Bogle: In my fifth book, called The Battle for the Soul of Capitalism, I had a little section titled “Bring Back Glass-Steagall.”
Hill: Actually, we’re going the other way.
Bogle: You’re right. And we might not even be able to bring it back.
PM: That’s the law that —
Hill: Separated commercial banks from investment banks.
PM: And was repealed in the late ’90s.
Bogle: That’s where a lot of the abuse has been. Citibank is a good example. It just got too deeply into investment banking. There was an ignorance of fiduciary responsibility on the part of our banks. Nobody seems to realize how this orgy of speculation came about. The most speculative market we ever saw in the U.S. was 1929, when stocks turned over at 145 percent a year. In the 1950s, stocks turned over about 25 to 30 percent a year. This year, stocks are turning over at 320 percent. That’s almost two and a half times the highest speculation in our history. And what is speculation? It’s  people swapping pieces of paper with one another, which is a zero sum game — I buy yours, you buy mine — in which the man in the middle wins. So how is it we are in this most speculative of all eras? Well, you have this great marketing machine, Wall Street, constantly dreaming up what I would call lunatic ideas of dubious validity.