Avoiding the next financial crisis may not be easy but if there is one factor that may potentially contribute to the next meltdown that is today’s rating system. Ratings are a pivotal tool for investors and for the economy in general but, at the same time, a corrupt and subjective rating system is a devastating tool of deception, manipulation and destruction of the economy.
The Financial Crisis Senate Commission in the US has identified the Credit Rating Agencies as the key enabling factor of the financial meltdown. Recently, an interesting article has recently appeared which speaks of “Corrupted Credit Ratings”. A section of the article states:
In response to the civil lawsuit filed by the US Department of Justice in February 2013, Standard & Poor’s affirms that its ratings were “objective, independent and uninfluenced by conflicts of interest”. This column presents empirical evidence opposing this claim. The data suggests a systematic rating bias in favour of the agencies’ largest issuer clients.
Ratings are easy to manipulate, especially by the largest and most powerful clients and, of course, by those who control the rating agencies themselves. This is called conflict of interest.
Given the current state of the rating industry, reforming the system won’t work.
What our troubled economy needs is a rating system that everyone can rely on. It must have at least the following characteristics:
- Independent: no issuers involved, investment funds don’t control it
- Objective: human judgement must not used to issue the final rating
- Consistent: the same results must be obtained using the same data
- Scientific: ratings must be obtained scientifically, not based on subjective opinion.
- Global: the system must be web-based, guaranteeing everyone access
- Fast: given that the economy is turbulent and fast a rating changes accordingly
- Affordable: even SMEs must be able to purchase a rating
- Specifically built for a turbulent economy: current ratings are anachronistic – they use outdated technology which has been conceived in a World which no longer exists.
Read a Resilience Rating Tutorial here.
See numerous examples here.
Rate-A-Business is science, not opinions.