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: Us. There’s too much “more” in our society. It’s become a sort of speculative, impatient, why-wait-for-something-before-you-buy-it world. Let your credit card debt go and go. And pay 16 percent on your credit card. People ask, “Can you think of any good investments?” And I say, “I’ve got one that’s guaranteed to give you 16 percent. Pay off your credit cards.” So we all have some responsibility, but Wall Street is the worst of it. And where the heck were the public accountants? I think the public accountants were working for the management of these companies, not the shareholders. And where were our vaunted security analysts? What was it they were analyzing? They didn’t seem to know about the quality of bank balance sheets.  
Hill: There is one basic rule in the banking and lending business: The further the borrower and lender are away from each other, the worse the credit. If I lend to you directly, I know you, and I can make a decision about your credit. But the Wall Street guys were the lenders. The borrower was seven steps removed, and then they chopped the loans up a million ways, so your loan might be in seven pools around Wall Street.
Bogle: Just think about what happens in this peculiar daisy chain. First, you’ve got a salesman in the mortgage lending business. And he finds people to sell mortgages to. So he gets a commission. And the firm that he works for gets a commission. And they sell it to the bank. There’s another commission. And then the bank packages it in a collateralized debt obligation. There’s another commission. And the debt obligation is sold to investors at the other end of the chain through the investment banking system, and there is yet another commission. It’s a great big marketing scheme. It’s not quite a Ponzi scheme, I guess. …
Hill: Well, it turned out that way.
Bogle: It turned out that way. If nobody trades stocks today, that’s a bad day for Wall Street, because Wall Street depends on speculation. In the old investment society, 50 years ago, 92 percent of all stocks were held by individual investors, and eight percent were held by financial institutions. Today, 76 percent of all stocks are held by financial institutions, and only 24 percent by individuals. That is really the fundamental flaw in the whole system.
Hill: You know, Jack, my career’s been completely different from yours. You own the market. I’ve owned one stock my whole life.
PM: You never invested in the market?
Hill: Very little. Almost nothing. I had all my wealth in my one stock. Fortunately, we had a 23 percent compound return over 20 years, so it worked out that way.
Bogle: I salute you, Vernon. I don’t think you would have put every penny you had into a company run by somebody else.
Hill: [Laughs] You’re so right, Jack.