Toby Segaran and Jesper Anderson are the guys behind FreeRisk.org, which has set out on the ambitious task of making Moody’s, S&P and Fitch obsolete. The idea is to create a huge open data store of financial data taken primarily from company filings, and making the data available for downloading and queries. On top of that, there will be a way for individuals to build custom-designed risk models.
The hope is that the financial system will work better once data is more accessible and risk modelling more diversified. Perhaps the best known example of alternative risk measurement is something known as the AltmanZ-Score. As they tested it, the AltmanZ-Score responded much faster to changes in data than the ratings agencies. For instance, it gave Lehman Brothers a negative credit rating–basically pronouncing it DOA–even when Moody’s was saying Lehman was still a good credit.
One big hurdle faced by FreeRisk, of course, is that several regulations reinforce the oligopoly of the ratings agencies. And beyond regulations, many investment funds have covenants with investors that specifically require the use of ratings agencies. Almost every credit agreement produced in the world has a ratings agency covenant. Still, it is reassuring to see people trying to innovate away from this clearly broken model.
Earlier this week, Segaran and Anderson spoke at a conference put on in New York City by Wired Magazine. Here’s a video of them discussing the problems with ratings agencies and their innovation. The duo are a bit awkward but we can’t help that it just this sort of nerdy type who will help get us out of the mess of dependency on the ratings agencies.
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