NewsNotables – Issue 79

In Person: Bogle, Inventor of Index Funds, Wants to Tame Wall Street Speculators

The Associated Press, January 18, 2012

John Bogle, inventor of index funds, counted himself among the one percent of wealthiest Americans a couple decades ago. You might not guess that today, when you hear the founder of mutual fund company Vanguard rail against economic equality. It has been 15 years since the low cost investing pioneer stepped down as CEO of Vanguard. It was Bogle who launched the first index mutual fund in 1975. Vanguard Group has since grown into the largest fund company, managing nearly $1.7 trillion in U.S. fund assets.

Bogle remains wealthy, but his income is a fraction of what he earned when he ran Vanguard. He is far from retired, now 82, and is in the office every day. He’s also writing his 10th book, The Clash of Cultures: Investment vs. Speculation and continues to deliver speeches.

Below are several questions and answers from a recent interview with Bogle:

Q: What do you think about the discussion over tax fairness?

A: “I believe the rich should pay more but that’s not a good platform for tax policy. What has gone wrong is that we’ve failed to recognize the difference between earned and unearned income. Is it really fair for gamblers on Wall Street to pay a 15 percent tax rate when they make a winning investment?”

Q: What’s your take on the Occupy movement?

A: “I’m happy to say that my current income puts me in the 99 percent group. So maybe I’m not so happy, I don’t know. This movement has brought to the surface some very serious problems in our country about disparities in opportunity and income. So many young people are having a terrible time getting a job.” He goes on to say, “The negative side is that they just pushed too hard for too long. It’s very difficult for any movement without any seeming leadership to have any sense of taste or judgment. In some places, it’s just gone on too long, and it’s been too disruptive.”

Q: What’s the focus of the book you’re writing?

A: “That our financial system has gone off the rails. It’s something we think of as providing capital for new businesses, that we will enable people to finance new companies or add to the capital of existing companies.” Bogle believes we need a transfer tax on trading which will help tame the trading and speculative element in our financial system.

Q: What’s your investment outlook heading into 2012?

A: “If you’re investing in stocks with the idea of a one-year outcome, you should not invest. If you invest in stocks with a five-year outlook, I would think it is highly debatable if you should do that. You have to consider the consequences for your savings, and whether you’d be decimated.

Bogle is very cautious considering the current economy and doesn’t expect a boom in consumer spending over the next two or three years.

Comment: It’s obvious Bogle has been burned and regrets his part in the failed economy. I find his comments interesting and probably as you, agree with some of his points and disagree with others. He makes a distinction between how earned and unearned income should be taxed. The debate will go on as to the definition as to what income is earned and what income is unearned. Many consider investment earnings as unearned of which I would disagree.

◊ ◊ ◊ ◊ ◊

Oh, for the Good Old Days of Rude Cellphone Gabbers

The New York Times, December 2, 2011

Is talking to a phone the same as talking on it? The sound of someone gabbing on a cellphone is part of the soundtrack of daily life, and most (some) of us have learned when to be quiet — no talking in quiet cars, on trains, on buses, in restaurants, etc. But the etiquette of talking to a phone, more precisely to a virtual assistant, like Apple’s Siri, in the new iPhone 4S, has not yet evolved. Eavesdroppers are becoming annoyed.

“How is he doing question mark how are you doing question mark,” Jeremy Littau of Bethlehem, PA, found himself telling his new iPhone recently as he walked down the street, dictating a text message to his wife, who was home with their newborn. The machine spoke to him in Siri’s synthesized female voice. Passers-by gawked. “It’s not normal human behavior to have people having a conversation with a phone on the street,” concluded Mr. Littah, an assistant professor of journalism and communication at Lehigh University.

The technology behind voice activated mobile phones has been around for a few years, allowing people to order their phones around like digital factotums, commanding them to dictate text messages, make appointments on their calendars and search for nearby sushi restaurants. Apple has taken it to another level with Siri. Amtrak’s quiet car policy bans only phone calls, not banter with a virtual assistant. Cliff Cole, a spokesman for Amtrak, says, “We may have to adjust the language if it becomes a problem.

Voice-activated technology in smartphones has been around for a few years but Siri is a more sophisticated iteration of the technology. It responds to natural sounding phrases like, “What’s the weather looking like?” and “Wake me up at 8 a.m.” Apple gave Siri a dash of personality with the impression that the iPhone users are actually talking to someone. Ask Siri for the meaning of life, and it responds, “I find it odd you would ask this of an inanimate object.”

James Katz, director of the Center for Mobile Communication Studies at Rutgers, said, “People who use their voices to control their phones are creating an inconvenience for others — noise rather than coping with an inconvenience for themselves — the discomfort of having to type slowly on a cramped cellphone keyboard. Mr. Katz compared the behavior with someone who leaves a car engine running while parked, creating noise and fumes for people surrounding them. Katz believes the initial irritation will fade and will largely be accepted by most people. But he predicted, “there will be a small minority of traditionalists who yearn for the good old days when people just texted in public.”

Comment: I think we still have a long way to go with people having “loud” conversations on a cell phone in public places. I put both conversation on a cell phone and talking with a virtual assistant, like Siri, in the same category. Consider others’ privacy and talk only where no one else can hear. I’m guilty of talking too loud (according to my wife) when using a cell phone, so I will try to be an example of discretion and change my ways.

◊ ◊ ◊ ◊ ◊

A Banker Speaks, With Regret

The New York Times, November 30, 2011

As a regional vice president for Chase Home Finance in southern Florida, James Theckston acknowledges that he and other bankers are mostly responsible for the country’s housing mess. Theckston shoveled money at home borrowers. In 2007, his team wrote $2 billion in mortgages. Theckston made several comments concerning mortgage loans made in 2007 and prior:

  • Sometimes those were “no documentation” mortgages.
  • On the application, you don’t put down a job ; you don’t show income; you don’t show assets. But you still get a nod.
  • If you had some old bag lady walking down the street and she had a decent credit score, she got a loan.
  • You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it. That was crazy but the banks put programs together to make those kinds of loans.
  • The bigwigs of the corporations knew this, but they figured we’re going to makes billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of there, maybe even overseas.

Theckston said that borrowers made harebrained decisions and exaggerated their resources but the bankers were far more culpable, and that all this was driven by pressure from the top. When mortgages were securitized and sold off to investors, senior bankers turned blind eye to shortcuts.

One memory particularly troubles Theckston. He stated, “that some account executives earned a commission seven times higher from prime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.” These less savvy borrowers paid a higher interest rate making them more likely to lose their homes.

In 2008, when the mortgage market collapsed, Theckston and most of his colleagues were laid off. He said he bears no animosity toward Chase, but thinks it’s unfair that troubled banks have been rescued while troubled homeowners have been evicted. The writer of this article, Nicholas D. Kristof stated, “When I called JPMorgan Chase for its side of the story, it didn’t deny the accounts of manic mortgage-writing. Its spokesmen acknowledged that banks had made huge mistakes and noted that Chase no longer writes subprime or no-document mortgages. It also said that it has offered homeowners four times as many mortgage modifications as homes it has foreclosed on.”

Comment: There are many issues here and most of us have read many articles concerning who’s at “fault” or who should be “blamed” for the mortgage mess. Many can share the blame: banks like Chase that issued the mortgages; Theckston, who was an “executive,” being a regional vice president, who now looks back on his participation but did nothing at the time; home owners who borrowed exceedingly more than their capacity to repay; opportunists who “flipped” mortgages; Fannie Mae and Freddie Mac who participated in pushing loans to unqualified participants, and our government who idly sat by and did nothing until after the fact.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics