World Economic

CHICAGO — Capitalism in the United States needs an overhaul, one that returns a sense of responsibility and integrity to executive suites, boardrooms and investment businesses.

That’s the call from one of the most respected patriarchs of the mutual fund industry at the annual Morningstar Investment Conference.

John Bogle, founder of the Vanguard Group Inc., one of the largest mutual fund companies, told investment advisers and mutual fund managers last week that it’s time to return to the ethical standard of his youth.

"There are some things that one just didn’t do," said the 80-year-old financial icon. "That’s the way I was brought up. It was black and white. Now, ethical standards seem to be ‘if everybody else is doing it, I can too.’"

He was referring to some of the nation’s largest banks and financial companies that traded in repackaged mortgages and other exotic investments to make easy profit.

It was those lax ethics with little government regulatory oversight that are at the root of the nation’s current financial crisis. Those things must change if we are to emerge from the recession better off than before, he said.

Other experts pointed the finger back at themselves and others in the securities trade for failure to see signs of economic collapse.

Bond fund guru Bill Gross of PIMCO, for example, said not only must the economy be fixed, but the industry needs a serious self-examination and must accept lower fees and less income.

Still Bogle’s unflinching criticism of the industry, which treats him as royalty, is nothing less than shocking at times. He said the mutual fund industry went from investing to placing bets on risky portfolios that amount to nothing more than speculation.

Instead he wants to see more managers return to the "buy and hold" strategy that he says is ultimately the only winning one.

In today’s belt-tightening environment, another key concern he raised was what he described as the insatiable drive of investment managers to make more money through fees.

Bogle said investors pay $600 billion a year in fees, an amount he called staggering and unnecessary. He feels it’s exploiting investors and will ultimately kill the industry if it’s not stopped.

"People will figure it out," he said. "A lot of people already have no trust."

In complete agreement, bond fund manager Bill Gross, who oversees $720 billion in fixed securities for California-based PIMCO, said the public will no longer tolerate high fund fees faxless payday loan.

To some extent, he said, pay in the investment industry has gotten out of sync with the rest of the working world, and investment bankers and investment managers will need to adjust to making less money.

"Over a longer period of time there has to be a rebalancing of investment compensation to be more in terms of the compensation for firefighters, teachers and policemen," he said.

Gross told a story about a local country club where he grew up, whose members were airline pilots, doctors and car dealership owners 50 years ago.

"In my country club this past weekend, the only people there were investment bankers, real estate developers and investment managers," Gross said. "That was it."

Many of the pressures for industry change surfaced as the economic collapse led to 30 to 40 percent average losses in workers’ 401(k) retirement accounts.

Such steep declines have led to calls for reform across the industry. Bogle suggests a more integrated retirement planning system that complements a repaired Social Security system.

"The 401(k) system has to be fixed, and I don’t know anybody who can fix it but the federal government," he said.

The government-administered system he envisions would prohibit people from taking money out of their retirement account when they change jobs and would not allow borrowing against the balance.

The government also would establish qualifications for companies that participate in providing the accounts, disqualifying those who charge excessive fees.

But change may come at a hefty price, at least according to some.

The conference’s keynote speaker, First Pacific Advisors fund manager Robert Rodriguez, took on the government and its attempts to fix the crisis. He said its efforts could end up making things worse and get the nation into serious debt.

Pumping trillions of dollars into banks is distorting and already impaired financial system by protecting "inefficient and questionable business enterprises," he said.

So while change is necessary, even the experts are at odds on what’s best.

Ultimately, when will we emerge from the recession? Rodriguez wasn’t pulling any punches. He said he expects it to take a decade before consumers return to the financial shape they were in before the crisis.

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