The SEC is a bunch of toothless buffoons / Demographics got us into this mess & will get us out of it...eventually
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 Rating firms also must supply default statistics for the securities they rate, including after a rating is withdrawn, and supply more detailed information on their surveillance process after a rating is issued.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.
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.