Transcript: Warning From Wall Street Legend

This is a partial transcript from "Your World with Neil Cavuto," October 26, 2005, that was edited for clarity.


GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: We've got a resilient and strong economy. If you think about what this economy's been through, I think you'll agree with me it's been resilient and strong.


NEIL CAVUTO, HOST: Well, President Bush says the U.S. economy is on the road to recovery.

But my next guest says, not necessarily. In his new book titled "The Battle for the Soul of Capitalism," American capitalism is doomed and only getting worse — well, not that blatant. But this is FOX.


CAVUTO: John Bogle is the founder of the Vanguard Group (search).

John, you what surprised me, reading the book is just how much you are at odds with the powers in the financial community, of which you once were a premier member.

JOHN BOGLE, FOUNDER, VANGUARD GROUP: Well, I am at odds with them, because the financial community has done too much overreaching for me. There are too many managed earnings. There's too much earnings guidance. There's too much money taken out of the system.

CAVUTO: And it's too much short-term oriented. That's a big issue with you, right?

BOGLE: Very short-term oriented.

But let me just spend a second on how much is taken out of the system. The financial system costs investors around $350 billion per year. That means, in three years, $1 trillion is paid by investors to pick stocks and bonds, in effect. And, of course, the investors are picking back and forth with one another. So, it's a dead weight loss to the returns that investors earn. That's a big loss.

CAVUTO: And it's a pricier loss, if you think about it, because the returns that we have today vs. 20 years ago, 30 years ago, are based on earnings that really haven't measurably improved.

BOGLE: Well, they haven't measurably improved. And we have our own new measurement standards.

CAVUTO: Right.

BOGLE: And when you think of something like one of the worst sins, I point out in the book, is that, if you don't have any earnings, just say, well, I don't expect our pension plan to earn 7 percent. I think our pension plan will earn 9 percent. All of a sudden, you have got a profit.

CAVUTO: I was reading that. And I was wondering, I thought we were not doing that as much, that maybe Sarbanes-Oxley (search) and some of the people like you, who have been on Mount Olympus, saying, don't do this, don't do this, that we weren't doing it as much.

BOGLE: Well, there's much less manipulation.

But the point is where we are now, like a 8.5 percent or 9 percent future return on stocks. And there was just a Morgan Stanley (MWD) report a couple of days ago that said executives expect stock returns in the future — these are the executives of the companies that are producing these pension returns — about 6.75 percent over the next 10 years.

With the bond market at 4.5 percent or 4.75, they might expect, before costs, a portfolio return on their pension fund of 6 percent, say, after costs, 5 percent, at best. But they're using 8.5 percent.

CAVUTO: Well, they are using the old historical numbers based on 20 years of data, which was very cushy, right?

BOGLE: Right.

Well, the way they do it is, the more stocks go up, the more they predict they'll go up in the future. Well, you don't have to be very smart to know that exactly the opposite is the case.

CAVUTO: But what would stop them from just saying, all right, you know, we told you it would be a 10 percent return, but now it's going to be likely a 6 percent return?

BOGLE: They would take a huge hit to the earnings they report and, therefore, a hit to the guidance they have been giving.

CAVUTO: What about if mutual funds did that?

BOGLE: Well, mutual funds should be paying much more attention.

The analysts for mutual funds let this go on. And to give you a very specific example — example — I have never heard of a mutual fund analyst, professional security analyst, or any institutional analyst go to a corporate manager and say, look, tell me about that 9 percent that you are predicting. Where you are going to get it?

I actually happened to talk to the head of General Motors (GM) once. And he said, well, I know we're not going to get it in the stock and bond market, so we are going to get it in hedge funds. That's a tough way to make money.

CAVUTO: Getting a little tricky.

BOGLE: That's a tough way to make money.

CAVUTO: But you even — real quickly — draw GE (GE) into this massaging area.

BOGLE: Well, GE was one of the great earnings managers of our generation.


CAVUTO: Right.

BOGLE: And the fact of matter is, that's come back to kind of haunt them. And that stock has now gone down, from its high, about $280 billion dollars which is more than the loss in Enron (search) and WorldCom (search) combined.

CAVUTO: Interesting.

John Bogle, thank you very much. The book is "The Battle for the Soul of Capitalism." It's an eye-opener. It will scare you, but that's John. He is scaring people.


Content and Programming Copyright 2005 FOX News Network, L.L.C. ALL RIGHTS RESERVED. Transcription Copyright 2005 eMediaMillWorks, Inc. (f/k/a Federal Document Clearing House, Inc.), which takes sole responsibility for the accuracy of the transcription. ALL RIGHTS RESERVED. No license is granted to the user of this material except for the user's personal or internal use and, in such case, only one copy may be printed, nor shall user use any material for commercial purposes or in any fashion that may infringe upon FOX News Network, L.L.C.'s and eMediaMillWorks, Inc.'s copyrights or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.