Charles Schwab: It will get better

But you may have to sit for a long time before seeing good returns, right?

I've been through nine of these darn breaks. This happens to be the most pervasive. But generally what happens is that at some point the compression becomes so extreme that the recovery comes.

You could see the Dow or the S&P 500 bouncing back 40% or 50% - the Dow up 3,000 points - within three or four months. If Obama takes my advice.

With regard to the Wall Street firms that failed or had to be rescued, were the executives caught in an unforeseeable disaster and therefore free of culpability, or did they mismanage these firms?

The decision was made by the SEC in April of 2004 to permit investment-banking firms to go to any leverage that they thought was wise if they had $5 billion in capital or more. So between 2004 and 2008 some of these firms went to leverage of 30 times capital or even more.

It doesn't take a genius to figure out what happens when business turns down a little bit. So is there culpability? I think there was, at the margin. And I think somebody's hands should be slapped, frankly.

What new regulations do you expect in the financial system?

There will be a lot, and there will be a risk of overdoing it. There'll be consolidation of banking regulation, but I have to say that in many respects it's not regulation, it's good sense.

There'll be re-regulation - or regulation, I should say - in the hedge fund world. They got to an incredible scale right under the nose of the regulators. At one point last year, hedge funds had some $2 trillion of capital, and that was just the equity side of the thing. Then they could lever that to three to five times more, so you're talking about the economic power of as much as $10 trillion.

To put that in perspective, our GDP is only $14 trillion. So they had huge, huge influence on stocks, futures, lots of things.

How are America's individual investors responding to this turmoil? The conventional view is that the typical retail investor gets it exactly wrong, buying at the top and selling at the bottom.

That's a myth. Over the 35 years I've run this company, I'd say that 95% of the clients are long-term investors. They believe in America, they believe in what we stand for, and they just want to participate in the success of great companies. That's what most investors do.

Yes, we do love people who trade like crazy - it creates commissions - but it's really not the assured way of making long-term returns.

In extraordinary times like these, a lot of people question the traditional advice. They've always been told to buy and hold and not to time the market. Is this situation so unusual that the traditional advice may not apply?

That question comes up every time we have a downmarket. I must remind you of a sister magazine that came out with the headline "The Death of Equities."

That was a competitor magazine - Business Week - in 1979.

It always happens, and there's a perfect example. We're all impacted emotionally by what's happening. It is not a pretty thing. The natural response is that you just want to sell and get out. But we have to fight that urge, particularly right now, because things are so cheap.

I've heard a lot of people recently piling onto Alan Greenspan. Do you fault him for what has happened?

Alan was an astute Federal Reserve chairman. He did a great job. I think there was one aspect that he truly missed. I don't think he ever watched television, but every day you could see those ads offering mortgages at a teaser rate, 2%, no tax returns required, no down payment required, no this, no everything.

That was right there on television every day through 2004, 2005, 2006, and 2007. It was unbelievable. Right in the face of our regulatory people. What were they doing?

You've been a tremendously successful entrepreneur. What advice do you give to young entrepreneurs?

No. 1, you've got to have passion about whatever it is. Couple that with some understanding of the business. Go spend the time and get some education around that subject.

In my case, I love finance. I love the stock market. I love investing. I read a lot of biographies when I was in my teens, and I had this aspiration to get into the investing side of things because I always thought that's where people really made a lot of money. Which is true.

I developed this passion early on, and there was no end to the fun I had reading about great people, whether it was J.P. Morgan or [another] guy by the name of Charles Schwab.

That Charles Schwab founded Bethlehem Steel in the early 20th century.

Bethlehem Steel. There's a big mansion up on Riverside Drive in New York City called the Schwab Mansion. I dug and dug and found out I was not related to him. In fact, he had no children. That was a terrible disappointment.

Speaking of kids, you have ten grandchildren. What advice do you give them?

I had a fun time recently - my older daughters arranged for me to make a videotape as a present to the grandkids. The message is about education, making sure they complete that, making sure they can have choices and make contributions, whatever they might be.

It doesn't have to be making $1 million. It can be being a schoolteacher, running a not-for-profit institution, whatever. It doesn't make any difference to Granddad. But have passion about whatever it is, go for it, and make contributions.  

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