Small Investor and Retirement Security Session
Remarks by the President at the Small Investors & Retirement Security Session - Economic Forum
Baylor Law Center
Baylor University
Waco, Texas
MR. HUBBARD: It's a long ways; it's nice to be here.
THE PRESIDENT: It is a long ways. It's going to be a great day.
I appreciate you all being here and I look forward to hearing what you
have to say.
MR. HUBBARD: Well, thank you, Mr. President and welcome to
everybody. I hope this will be a very good discussion this morning;
certainly a very important topic.
I just want to briefly tee up a couple of issues and then turn it
over to my colleague Ann Combs and then to Chuck Schwab. You know, we
all know that saving is about the future. And people typically think
about retirement saving, but there are many reasons that people save.
And the flip side of that is that investing always comes back to our
guesses about the future -- you know, what are the economy's
fundamentals.
And we all want to, and we want other people to own a piece of
something that's valuable. And, ultimately, the something that's
valuable is a piece of our vibrant economy. Just a couple of facts to
set the stage. We saw a real upsurge in the economy's possibilities in
the past decade. We've had very good experience on our economy's
ability to grow. And we think the administration's policies are
obviously in that direction, as well.
But with that vibrant economy has come also fairly vibrant
financial markets. Over the past decade, household wealth grew from
$25 trillion to more than $40 trillion. And most important in the
minds, I think, of many people, we've moved more toward an ownership
society. A decade ago, stock ownership was something we talked about
for "the rich," or people somewhere.
Now, more than half of Americans own stock. We've seen a major
shift in the way we structure retirement saving from defined benefit
plans years ago to defined contribution plans and 401(k)-style plans.
These are very welcome trends. But I don't have to tell people here
the story that, of course, recent equity price declines have called
into question some of this. And some of these gains, as to whether
they are gains. And many people have a lot of concerns, and those
concerns have to do with investor education and policies for risk
taking.
The administration, of course, has taken many steps under the
President's leadership in this area. I'd like to turn to my colleague,
Ann Combs, for a quick review, and then to Chuck.
THE PRESIDENT: Ann, thanks. Good to see you.
MS. COMBS: Thank you, Mr. President. I want to take just a few
minutes to describe some of the steps that you've taken, Mr. President,
to restore confidence in our markets, to improve pension security and
increase opportunities for working Americans to save for their
retirement.
Last year's tax bill, in addition to returning money to people who
earned it so that they have more of an opportunity to save also
increased the limits for what people could contribute to their 401(k)
plans and their IRAs for the first time in many years.
The Corporate Accountability Bill which you just signed will
improve transparency and go a long way towards restoring the confidence
people need to have in the markets, so that they feel they can save for
their retirement. And it also included two of your pension reform
proposals that you released in February. Workers will now receive 30
days advance notice before any black-out when they are unable to trade
stock in their 401(k) plans. And executives will be prohibited from
selling stock if workers are being locked out of the ability to sell
theirs.
You have three other proposals that the House passed in April, that
we're hoping will move this year, as well. One would give all workers
the right to diversify out of employer stock after three years, so that
they couldn't be locked into investment and they'd have more rights to
diversify.
Better information about their investment options is part of your
plan, as well as access to professional investment advice. I think
that's something that's so important. Our pension system is the envy
of the world, but people do need more opportunities, more tools so that
they have the choices and the confidence and the control that they need
to be able to save for a secure retirement. Your program, Mr.
President, will make those improvements.
Now, I'd like to introduce our speaker today. Chuck Schwab almost
needs no introduction at all. But he is, as you know, the Chairman and
the co-CEO of the Charles Schwab Corporation. Chuck has been in the
securities business for 40-plus years. He works directly with ordinary
investors, starting his company in 1974 at the dawn of deregulation of
the securities industry.
Today, his company and its 18,000-plus employees serve 8 million
investor accounts that hold nearly $800 billion in assets. He operates
over 400 investment offices across the country and runs of the world's
leading investment websites. He's authored three books on investing
and Chuck and his daughter, Carrie, are co-authoring a book due out
later this year about talking to your family about how to invest and
money.
So, welcome, and please --
MR. SCHWAB: Well, thank you, Ann, and thank you all participants
for being here. And particularly thank you, our President. It's a
real pleasure to have you here with us.
It's a privilege to be able to participate in this forum today and
I especially at this moment in time, when confidence of the American
public -- in particular, American investors -- is at a very fragile
point in our view. But as someone who has spent a lifetime in the
investment world, I also understand that this is temporary. Markets
don't remain down forever. They roll along and, as we know, our
nation's stock market has taken a brutal correction, to say the least.
But it still remains the best place, in my view, for individuals to
invest for the long term. And I think our 8 million customers you
mentioned understand that, as well.
To their credit, most investors haven't panicked. We see that
through our firm. I was talking to Mickey Siebert earlier, the same
with her clients. They still are, to their credit, do need, though,
good, unconflicted help and advice is very important for our clients
and the investors at large.
Fundamentally, this means, in my view, reuniting investors with the
simple principles of asset allocation diversification, which Ann
mentioned so much. So many employees throughout corporations simply
don't know the basics about investing. We need to do a lot of work in
education. We need to reassure investors that a well diversified
portfolio remains not only the best weapon against inflation, it's the
best vehicle for reaching their long-term personal goals. But, also,
it's the best defense, in my view, against the issues like an Enron.
With diversification, Enron can be just a small, teeny part of your
portfolio, not a major part.
Over time, the stock market has out-performed all other
investments, as my friend, Mr. Siegel, Professor Siegel over here has
written a wonderful book called "Stocks for the Long Run," has
illustrated through his groundbreaking research that stocks have always
been the best place to have your long-term assets.
Yes, but there are ups and significant down periods. And some are
quite painful as they are right now. The bear market that we're
suffering right now is probably one of the worst I have gone through,
and it's not a comfortable place to be, to say the least. But we have
great confidence about our future.
Investors also need to know that government is on their side. And
I think our President, George W. Bush, and Congress have been doing
exactly the right thing concerning corporate fraud. They address the
issue head on.
Another step that has been a requirement, that came out of all this
recent legislation is that CEOs like myself will be certifying our
financial reports. We will be certifying ours today, as a matter of
fact. And I think most companies will be submitting their
certifications by deadline of tomorrow.
I'm also pleased, Mr. President, that you and the Congress have
increased the monies for the SEC by 66 percent. That will be what we
really need to bring some efforts in that area and you've done just
exactly what we had hoped for.
At the same time, we've got to encourage the Financial Accounting
Standards Board, FASB as many people call it, to accelerate the
development of a consistent system for valuing and expensing options.
I'd like to set a target date of January 1, where all companies ought
to abide by the same process for expensing options, or we'll just have
more confusion in a nation by investors if we don't do a consistent
methodology.
But the centerpiece of any effort to restore investor confidence
ought to be a crackdown on the conflicts that have left investors so
distrustful of Wall Street and many banks related to Wall Street.
Ultimately, in my view, the SEC and Congress should require the
CEOs -- me, myself and others like me, and our chief compliance
officers of every brokerage firm and bank -- to certify that we have
abided by any new conflict of interest rules. We need to get to that
point. It is outrageous in my view what goes on in Wall Street on a
consistent basis. Just pick up any paper and you'll know what I'm
talking about.
Other steps that policy makers should consider as soon as possible
include immediately allowing investor to deduct up to $20,000 against
their income for losses that they suffered in investment. It is still,
right now, a meager $3,000. That is almost an insult, was set 20 or 30
years ago.
We also ought to reduce the double taxation on dividends, encourage
companies to pay more in terms of dividends and reward long-term
investors. Also, require corporations do a better job of educating
their employees about investing and retirement plans and about the
dangers of over-concentrating in their employer stock.
And, lastly, increasing the contribution limits on IRAs and
401(k)s. We have that in your new tax bill, we ought to just get on,
fast-track it and make sure it becomes permanent on the rates that
we've already agreed upon.
Mr. President, thank you very much for this opportunity to address
you, and the rest of the participants. I'd like to turn this over to
Glenn Hubbard.
MR. HUBBARD: Thank you very much, John, for those opening
remarks. Mr. President, did you --
THE PRESIDENT: Well, I think what caught my attention was this
business about confidence. I'm spending some time in Crawford, Texas,
I think about how people in Crawford look at Wall Street and the
numbers. And one of the things I hope that comes out of this
discussion, is how do we simplify the numbers so that people can
understand what they're looking at.
People in this part of the world get a little suspicious of the
fine print. But, yet, a lot of them are now investing for the first
time. And I think Chuck brings up a great point, is how can people not
only on the East Coast or the West Coast feel confident about what they
see, but all throughout America can feel confident about what they see
and hear.
Part of it is -- I remember going, working a rope line in New
York. And a business professor said, thank you for mentioning in your
speech on corporate responsibility that business schools need to learn
how to teach right from wrong. Evidently there's this kind of
nervousness about being clear about teaching young MBAs right from
wrong.
And a guy walked up to me and said, it was a laboring man, and
said, well, the best way to teach a lesson is to put some of them in
handcuffs. That's the best way to send the message for corporate
responsibility -- which we're doing. So we'll enforce law, but
confidence is more than just government enforcing the law. Confidence
is an industry policing itself as well as understanding the new
customer. And I'd be curious -- first of all, I love your ideas about
how to account for loss and/or double taxation dividends. That makes a
lot of sense.
But one other question I would have for the panelists, and look
forward to hearing the recommendations, is how do we take care of the
new investor. Chuck does a good job of it by recruiting them and then
helping them invest. But throughout the system, how do we understand
that the nature of the investor has changed?
A PARTICIPANT: Well, on that great question, I'd like to turn
first, if I might, to you, Mickey -- Mickey Siebert, who is somebody
who has been a legend in this business -- and talk about how the new
investor issues can be best addressed.
MS. SIEBERT: Thank you.
THE PRESIDENT: How do you like being known as a legend, Mickey?
(Laughter.)
MS. SIEBERT: As long as I'm a living legend -- (laughter.)
THE PRESIDENT: You look living to me. (Laughter.)
MS. SIEBERT: Mr. President, I saw something in my firm -- we're a
mini-Charlie Schwab -- and about three months ago I got a call from the
guys in New Jersey and they said, we're seeing something new. I said,
what's that? We are seeing people selling their stocks and they want a
check -- not going into money market funds, they want a check. I said,
Pete, why don't you call them, because we have a habit of calling every
account that leaves the firm, asking them why are they leaving. So
they answers came back on this group of people, and I get the list
every week: Don't trust the system; the system is against us.
When I heard that, I said, okay, Mickey, you know some of these
people, go see them. And my first stop was Larry Lindsey for lunch. I
talked to Mr. O'Neill. I spent a lot of time with Mr. Pitt and his
deputies.
I think one of the things we have to do, and I wrote an op ed
article, which was published last week, is to allow the individual
investors to double their contributions to the 401(k)s and IRAs for
three to five years as a way to building up their retirement funds. I
get asked -- and I think they should be allowed to contribute stocks,
bonds, any asset, cash or mutual funds, because not all of them have
cash and they will not have cash.
I get asked -- I was a keynote speaker for the Miami Daily Herald,
and they fill up a convention center, and I got a question from a man
that had to be close to 90. "I've lost half of my money. Will they go
to jail?" And I'm proud over the bill that you signed because they will
go to jail.
I have another idea. There is something called derivatives. They
can be very good if they are used to hedge interest rates or
commodities, and they can be lethal, they can be misleading. I have
testimony -- I testified against derivatives in 1988 after the '87
market break. I testified against them after the long-term capital
management.
I would like to see the statements that CEOs have to sign. I would
like to see them sign, "These statements represent economic reality."
It would take the derivatives that are phoney, that allowed the wash
trading in Enron, the energy contracts which, if they traded over the
counter were illegal, if they traded on listed markets would be wash
sales. I think we could separate reality.
The head of one of our two banks said they will never do contracts
again that mask debt. Two of our largest banks were doing prepaid
forward contracts where the cash is up front and they were being
flipped around as revenues with no expenses against it. We cannot
expect individuals to read the paper every day about these things and
say, here's my money.
We have done, in my opinion, a very good first series of steps. We
have to do more in that. And then, frankly, I -- you know, I think the
corporate accountability bill is good, it's a major first step. I'd
like to see some additions. I frankly get very annoyed when I see
congress doing this. I frankly get annoyed when I see my attorney
general doing all of it. I think that we should be the one -- the
federal government should be the one, not particularly the congress.
And I certainly volunteer my help, and I'm sure that anybody at this
table volunteers theirs.
THE PRESIDENT: Well, thank you, Mickey. You bring up a very
interesting point that Chuck alluded to. And that is, you know, you
talk about some of these fancy financial instruments being designed to
inflate revenues, for example. And it takes a fairly sophisticated
soul to find out what's going on. And the fundamental question, who is
that sophisticated soul, and it seems like to me the sophisticated soul
is the recommenders of the stocks. And Chuck brought up a very good
point, and that is, the industry itself is culpable of not blowing the
whistle on practices that aren't -- that kind of deceive, I guess is
the best way to put it. And my question is, you know, apart from
government, how best can industry police itself. How best for -- as I
one time said, I said, they'll sell or buy you depending upon what's in
their interest, and how best to protect the unsophisticated.
Now, a person accumulating a lot of assets from these practices,
are pretty darned sophisticated.
A PARTICIPANT: Well, there should be major Chinese walls within
companies. They should be -- and, ultimately, these conflicts of
interest need to be eliminated and customers need to be protected and
the CEOs and compliance officers of these companies providing help and
advice need to sign a statement that we have no conflicts of interest.
And the SEC should sort of mandate sort of what that might be.
A PARTICIPANT: I wonder if they could come back to the point you
were raising, Mickey, about getting the investors back in. But, Syl,
if I could turn to you -- Syl Scheiber has been a long-time pension
expert. What do you think is the case about individuals, small
investors being in --
THE PRESIDENT: Excuse me for a minute. So here's what happens.
I'm going to four of these, the Vice President is going to four of
them. I can assure you, however, that we look forward to hearing the
recommendations -- Hubbard or somebody is going to be a note-taker. We
will look at everything you say.
Again, I also want to tell you how much we thank you for coming.
And I'll see you at lunch. We've got a great group of our fellow
Americans here that really goes to show that people are concerned about
the future of the country. I really want to thank you for coming. I
know it was a stretch for a lot of you to come, but the fact that
you're here is really meaningful for the country. So thanks from the
bottom of our hearts.
Again, I look forward to what you have to say. In the meantime,
I've got to leave. Thanks.