(Bloomberg News) John Bogle, the founder of mutual fund company Vanguard Group Inc. who popularized index investing, and Paul Volcker, the former Federal Reserve chairman, said confidence in the U.S. financial system is broken as regulators struggle to rein in speculation.
Bogle, who has spent 60 years advocating a low-cost approach to personal investing and railing against conflicts of interest in his industry, said he would grade the U.S. financial system a "D." Volcker, 84, who has urged Congress to ban proprietary trading by commercial banks, said banks are lobbying to undermine financial regulation aimed at making the industry more stable.
"There's no question that confidence in government is shaky," Volcker said in New York today at The John C. Bogle Legacy Forum hosted by Bloomberg Link. Washington is "filled up with law firms that cover whole city blocks. Lobbying firms. And it's all living off the influence of the government."
The so-called Volcker rule seeks to stop regulated banks that receive support from the government from making risky bets with their own money. Wall Street firms including Goldman Sachs Group Inc. have argued the limitations could harm capital markets by reducing the role of banks. The Dodd-Frank Act, the regulatory overhaul enacted in 2010, requires that the rule be in place by July 21.
Bogle, 82, whose influence on the fund industry was discussed at the event by more than a dozen figures from the fields of investing and finance, said he backed the Volcker rule and called for investors to focus on longer-term investing instead of short-term trading and chasing stock-market swings.
"Returns are not created in the stock market," Bogle said. "The stock market is a giant distraction and investor confidence in active management is broken."
Bogle, a Princeton University graduate, founded Valley Forge, Pennsylvania-based Vanguard in 1974 and introduced the Vanguard 500 Index Fund, the first retail index mutual fund, two years later. His economics research at Princeton helped lay the groundwork for index mutual funds. When Bogle retired from Vanguard in 2000, the company established the Bogle Financial Markets Research Center.
Rather than relying on a manager to choose individual stocks or bonds in the hope of outperforming the market, the index fund simply bought most of the securities to closely track the Standard & Poor's 500 and kept costs low.
The Vanguard 500 Index fund has $99.5 billion in assets. Vanguard index funds make up four of the 10 biggest stock and bond mutual funds in the U.S., according to data compiled by Bloomberg. The company, which oversees about $1.65 trillion, surpassed Boston's Fidelity Investments in 2010 to become the largest mutual-fund manager.