Tuesday, March 6, 2012

A New Rating Agency Model

If you follow the financial news, you probably already know that the ratings agencies have done a poor job of informing investors about risks before market events have made those risks clear. (To their credit, however, the ratings agencies are quite good at telling investors about risks after the market has already made them clear.*)

Furthermore, the business model whereby issuers pay the agencies for their ratings creates conflicts of interest that may be tainting what should otherwise be independent work. But a new rating agency model is upon us, and it puts the ratings in the hands of the people: Wikirating

As per The Financial Post "Wikirating boasts that its system is completely transparent and untainted by financial bias. It covers the same stuff as the other guys, including sovereign debt, companies, even structured products."

Will it ever become a legitimate competitor to the established agencies? Who knows. As a crowd-source application, it may just become Mr. Market if it gets popular enough. As a result, it would probably automatically be better at identifying risks than the established credit rating agencies!

* Here's a great example. In December of 2009, Moody's declared "Investor Fears Over Greek Government Liquidity Misplaced" and had Greece at an A1 rating. Six months later, Greece required a massive bailout. Just two years later, Moody's Greece rating is much, much lower to say the least.

H/T Frank Voisin

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