WASHINGTON, May 9, 2013 /PRNewswire/ -- Next Tuesday's Securities and Exchange Commission Credit Ratings Roundtable will include open source ratings advocate, Marc Joffe. A former Senior Director at Moody's Analytics, Joffe has been using open source technologies to evaluate sovereign and municipal bond issuers since last year. Recently, Joffe's group, Public Sector Credit Solutions, developed a credit scoring model for California cities at the request of a unit of the State Treasurer's Office.
The SEC roundtable will discuss alternatives to the present credit rating industry structure - widely blamed for the 2008 financial crisis. Prior to the crisis, rating agencies assigned high ratings to risky securities backed by subprime mortgages. Many critics, including Senator Al Franken (D-MN), blame rating agency failures on the "issuer pays" model in which agencies are compensated by Wall Street banks that created toxic mortgage backed securities. These investment banks were able to secure higher ratings by threatening to take their business elsewhere. Much of the roundtable will be devoted to debating Franken's proposal to eliminate this practice, known as "ratings shopping," by inserting a government authorized ratings assignment organization between banks and rating agencies. Critics contend that Franken's proposal could politicize ratings and may have other unintended consequences.
Joffe, participating in the day's final panel, believes that the existing issuer pays model can be made to work by increasing transparency. His specific proposal is that the SEC and other federal regulators authorize the use of certified open source credit rating models as an alternative to agency ratings. He argues that this reform will stimulate the development of fully transparent credit models at universities and other research institutions. An example of such a model is the National University of Singapore's Credit Risk Initiative which assigns credit scores to tens of thousands of companies on a daily basis. A collection of robust, academically-based and fully published models could compete with credit ratings issued by legacy agencies, forcing them to improve the quality of their analysis. "Just as Linux revolutionized operating systems and Wikipedia forever changed encyclopedias, regulators should unleash mass collaboration technologies in the credit rating space," Joffe concluded.
Joffe presents his argument in an article in today's TabbForum, a respected source of capital markets commentary, at http://tabbforum.com/opinions/can-open-source-models-fix-the-credit-ratings-industry. Additional advocacy of open source alternatives to credit ratings can be found at http://www.nakedcapitalism.com/2012/11/can-open-source-ratings-break-the-ratings-agency-oligopoly.html and http://www.guardian.co.uk/commentisfree/2013/feb/25/moodys-sp-credit-rating-agencies-need-reform.
SOURCE Public Sector Credit Solutions