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The SEC is a bunch of toothless buffoons / Demographics got us into this mess & will get us out of it...eventually

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December 03, 2008 – Comments (4) | RELATED TICKERS: MCO

 

This afternoon the SEC and its asleep at the switch Chairman Christopher Cox finally announced a series of changes to the rules governing the credit ratings agencies that played a HUGE part in getting us into the current credit crunch (see article: SEC Approves New Credit-Rating Rules)

The previous set of rules was completely absurd.  They mandated a three-company Oligopoly of Moody's, S&P, & Fitch which was paid by the companies issuing bonds, not their ultimate buyers, to rate them.  Conflict of interest anyone.  The better the credit ratings these guys assigned to companies' debt, the lower the interest rates were, and the more business was steered in their direction.  The system was so out of whack that these agencies were assigning all sorts of garbage paper AAA ratings.  Unsuspecting investors, including tons of pension funds and levered up hedge funds / investment banks, then snatched up this "high quality" paper.  Boom...you all know the rest of the story.

These guys truly disgust me.  The greed that they displayed and the lack of punishment that they have received thus far are a microcosm of the environment that got us into this mess.

Here's a description of the changes:

"To combat potential conflicts of interest that could color ratings decisions, the SEC voted to prohibit a firm from rating a security if the firm or an affiliate helped structure it, to bar employees who work on ratings from taking part in fee discussions or arrangements, and to ban them from accepting more than $25 of gifts from security issuers, underwriters or sponsors.

The SEC also approved changes intended to shed more light on how rating firms determine a rating and how well their ratings hold up over time. To that end, the new rules require rating firms to provide annual reports that detail all upgrades and downgrades for each asset class of credit ratings it provides, broken out over one-, three- and 10-year periods. Rating firms also must supply default statistics for the securities they rate, including after a rating is withdrawn, and supply more detailed information on their surveillance process after a rating is issued.

More details on rating structured finance transactions will be forthcoming as well, as the new rules require rating firms to specify whether they verified information on assets underlying a structured finance product they rate, the degree of verification they performed, and whether their ratings factored in the quality of the originators of the structured finance products."

Blah, Blah, Blah.  The SEC is a bunch of toothless buffoons.  These reforms don't go nearly far enough.  They should have fined the living ship about of all three companies, significantly expanded the number of "nationally recognized statistical ratings organizations," and possibly changed the structure of the business so that investors pay for bond ratings...not the freaking companies that are trying to issue the paper.  Too bad we didn't use this historic catastrophe to make some real changes.

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I came across a fascinating blog this afternoon by a gentleman named Kenneth W. Gronbach who is a self-described "nationally recognized expert in the field of Demography and Generational Marketing." 

I find a post that he made back in October titled "The Worldwide Financial Crisis, Demography and The End of the World" particularly interesting (link).  In this post, Gronbach contends that The United States' demographics are as much to blame for the current housing meltdown as anything:

"Roughly eighty million Baby Boomers were born in the United States between 1945 and 1964. The peak of the Boomers was born between 1957 and 1961 and are at the peak of their earnings and consumption right now according to the Bureau of Labor Statistics. They bought and built big houses that were typical of their earlier stage in life. The Silent Generation, born 1925 to 1944, that preceded the Boomers was a small generation of about fifty million owing to reduced fertility during the Great Depression and WWII and virtually zero immigration during that time period. The Boomers bought the Silents’ homes as the Silents retired but the demand outstripped the supply so Boomers built new homes with a vengeance. Now the Boomers are reaching retirement age at the rate of one every eight seconds and it is time for them to sell their big homes and move on. The problem is the younger generation right behind them, Generation X born 1965 to 1984, has critical mass of about seventy million owing to reduced fertility during this time period attributed in large part to Row Vs Wade. In very simple terms this means that for every eight Boomer houses for sale there are only seven Generation X buyers.  With the help of relaxed federal lending/mortgage standards the market found marginally qualified buyers to make up the difference in the generations using subprime loans..."

In short, droves of Baby Boomers are retiring and selling their homes and there aren't enough younger buyers who are financially ready to buy homes to absorb the new supply that's hitting the market.  This is an interesting and very plausable theory.

The good news is that the demographics of the U.S. will shift again and help to soak up the excess supply...eventually.  Generation Y now has 90 million members, all of whom are 23 years-old and younger.  They will enter the housing market over the next several years.  Plus the Baby Boomer generation is at the very peak of its tax paying ability, meaning that the U.S. should have enough money...or at least be able to print enough...to get us out of this mess.

Interesting stuff.

Deej

4 Comments – Post Your Own

#1) On December 03, 2008 at 11:05 PM, Option1307 (29.99) wrote:

While I certainly don't think this was the main cause, this is definietly an interesting take on things and liekly played some roll. Thanks for the link Deej.

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#2) On December 03, 2008 at 11:49 PM, jegr5347 (< 20) wrote:

I worked for Andersen, then the largest accounting firm in the world. They were forced out of business for allegedly issuing inaccurate audit opinions on the financial statements of Enron. These three companies have single handedly created more destruction of stock market wealth than at any other point in the history of the stock market.

One thing is for teachers and public servants pension funds to buy investments of securities that were junk and rated junk, go after the managers. It is totally different to buy junk investments rated AAA by these three hoar houses called rating agencies. 

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#3) On December 04, 2008 at 12:57 PM, EiffelPane (< 20) wrote:

Another silly article by someone who most likely abdicated his fiduciary responsibilities by only using ratings as his only criterion for evaluating investments.  And now he is looking to blame some one. Please, enough!

Every one know that the rating agencies did not do a good job.  That is evident.  However, for anyone to advovate an investor paid rating system is clearly to ignore that this would further restrict the availability of credit in general and at the same time worsen the quality of ratings.  All you have to do is look at the existing investor paid ratings track record and see that they do not perform any better than the issuer paid ratings.  So why even bother us with such clueless recommendatios as if there was some erudite thinking behind these ridiculous assertions.

  The SEC is doing the right thing.  We need ratings and they cannot be restricted.  If you wish to use an investor paid model, who is stopping you?  They are there.  

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#4) On December 08, 2008 at 6:16 PM, paebutter (< 20) wrote:

Rating agencies don't need to exist. They are providing a service to the public/investors paid for by the borrower of funds/company that needs the money. It doesn't work.

First of all, rating companies use PRIVATE information to rate bonds. That should be illegal. Even with private access, rating agencies can get the ratings correct because the borrowers either 1) Lie or 2) Don't know the future themselves.

The rating agency business is a sham. I've been there. One in particular has a history of racism and sexism that one day will take the company down.

Monopolies/oligopolies hurt everyone. Even the monopolistic companies themselves. 

 

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