Reinventing Risk Ratings: Notes

Notes from the session titled:
I just don’t trust you: how the Tech Community can reinvent risk ratings.
by: Toby Segaran (Metaweb), Jesper Andersen (Open Data Group)

There are two superpowers in the world today in my opinion. There’s the US and there’s moodyu’s bond rating service… And believe me; it’s not clear sometimes who’s more powerful. – Thomas Friedman 1996
Credit agencies are broken safety net.
Our economy is fueled by debt. Moody is the gatekeeper to that debt. Credit risk measures trust. People are good at fufiling their obligations.
Our system promotes gaming.
4 most important problems facing. Moody’s, S&P, and Fitch provide ratings. You pay to get ratings. Companies will pay to get the best rating. This is a lot like bribery. But it is pricing.
Our Risk Rating System has a patent without the disclosure. They have no incentive to say who’s method is better. They just want us to trust their ratings. What does AAA rating really mean? It doesn’t really tell you what risk factors are involved.
After Lehman declared bankruptcy Moody’s downgraded them from AAA to C. This is not good. We need transparency. We need to know the method. We need full disclosure of how companies get ratings.
Lack of Ecosystems create bad ratings. Risks are hidden. Good predictions are ignored because our system rewards the ignorance of problems until it is too late.
Beverly McClean. Celbrated after the fact. She wrote for Newsweek for 6 months at the rating agency took notice. John Paulsen: He made the single biggest Hedge fund return in 2007. He figured out that the ratings on CDS was wrong. We have incentives for secrecy.

Single Sourced Information Creates Bad Ratings.
$45 Trillion problem. It has to be solved now! A lot of dangerous problems. A lot of big problems. Engineers don’t have problems, they have requirements.
FRS: Rating creation needs to be accessible, open, diverse, and transparent.
Ratings should be a commons. Risk management is way too important to be a competitive advantage for a company.
Freerisk is an… Authoritative Data Source, User Contributed Data Source, Set of Contributed Algorithms, Testing Frameworks.
Open Data: Consume data that’s on the web and publish it for others to use.
Becoming a nationally recognized statistical rating organization requires national recognition. We don’t need cash, we need passionate people.

http://freerisk.org/