Ontonix: Rating the Rating Agencies–Moody’s “A3” rating

Moody’s is the largest of the Big Three rating agencies. It employs 4500 people worldwide and has reported a revenue of $2 billion in 2010. Since rating agencies have been under heavy fire since the start of the financial meltdown – in January 2011 the Financial Crisis Inquiry Committee claimed that "The three credit rating agencies were key enablers of the financial meltdown" – we have decided to actually rate one of them. We have chosen Moody’s because today it is the largest rating agency.

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Ratings “farce”: SMEs facing credit ratings ‘lucky dip’

I am sickened at the thought of businesses upon which OUR recovery must be based, being treated in such a manner! The impact of Rating Agency “opinions” – which by definition are subjective – upon our global economy should be evidence enough that their influence is extremely dangerous and that an alternative, common, means of rating is a MUST.

Stories such as this one highlight the potential for them to continue to wreak havoc upon any chance of a recovery. We NEED to (re)build from the bottom up and inconsistencies such as a “spread” from £8,400 – £108,000 is all the justification a reluctant lender needs.

Where will the innovation come from, if “creative destruction”, from within crumbling institutions is stifled and small business starved of funding? If finance is about making an advance (loan) in anticipation of the rewards exceeding risk, doesn’t it mean that INNOVATION is a more stable (and robust) form of currency?

The timing of this piece is of particular interest to me and to Ontonix as we have just rated a rating agency (Moody’s)…check other recent blog items…and, of course, we have our own scientific, objective, rating service!

Rate a business (OntoNet)

Small and medium enterprises (SMEs) in Britain face a ‘lucky dip’ when it comes to credit ratings, Management Today reports.

Following news that poor consumer demand and rising costs have put extra pressure on SMEs, it is important to keep a good credit rating so companies can get the best prices on business insurance.

However, a new investigation into credit rating agencies has found that many are giving out contradictory ratings to similar companies.

One company received credit limits varying from £8,400 by one agency, up to £108,000 by another.

Poor credit ratings can severely harm a business, causing refused loans or high interest rates on loans that may be necessary for business growth, while also making it harder to get good business insurance rates.

via SMEs facing credit ratings ‘lucky dip’ claims new investigation.

Ontonix: Ratings – From an Opinion to Science

In January 2011 The Financial Crisis Inquiry Committee claimed that “The three credit rating agencies were key enablers of the financial meltdown”. Failing investment banks and large corporations enjoyed investment-grade ratings days before collapse.

Rating agencies claimed that ratings represent a mere opinion. And this is precisely the problem. Rating agencies represent a fundamental source of information for investors. Investors will evidently tend to invest in assets that are judged as investment-grade rather than junk. However, the First Amendment of the U.S. Constitution protects “publishers” guaranteeing them the freedom of speech.

A method of rating does not have to be perfect (is financial data 100% accurate?). But it has to be consistent. Serious science starts with consistent measurements. You can always improve a metric, make it more accurate, but you must use it consistently. If you don’t then mathematics indeed becomes an opinion and we don’t want that. Read more of this post