Rating agency data: Getting gamed

April 24, 2010
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It looks like the rating agencies, which contributed so much to the housing bubble (and bust), made it easy for banks to game the numbers. According to a story in today’s New York Times, they shared their formulas. This apparently was in the interest of ‘transparency’, but it made it a cinch for the banks to engineer questionable offerings that would rate AAA.

This would be a bit like Google sharing the details of its search algorithms. Companies would have an easier time than they already do optimizing their Web pages for high ranking. Of course, the search engines do provide some of this information–again, in the interest of transparency.

But there’s one crucial difference. If a search engine sees that someone is gaming the formula and distorting the results, they can tweak the algorithms. The rating agencies, by contrast, have less room for maneuvering. Every change affects billions in securities.

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I’m flying to Berlin this afternoon for ECOM 2010. Making a strategic decision to leave the laptop at home and travel only with the iPad. The only thing that’s hard to do with the iPad, I’m afraid, is blogging. (It’s a software issue with my Adobe platform. I wonder


It looks like the rating agencies, which contributed so much to the housing bubble (and bust), made it easy for banks to game the numbers. According to a story in today’s New York Times, they shared their formulas. This apparently was in the interest of ‘transparency’, but it made it a cinch for the banks to engineer questionable offerings that would rate AAA.

This would be a bit like Google sharing the details of its search algorithms. Companies would have an easier time than they already do optimizing their Web pages for high ranking. Of course, the search engines do provide some of this information–again, in the interest of transparency.

But there’s one crucial difference. If a search engine sees that someone is gaming the formula and distorting the results, they can tweak the algorithms. The rating agencies, by contrast, have less room for maneuvering. Every change affects billions in securities.

***

I’m flying to Berlin this afternoon for ECOM 2010. Making a strategic decision to leave the laptop at home and travel only with the iPad. The only thing that’s hard to do with the iPad, I’m afraid, is blogging. (It’s a software issue with my Adobe platform. I wonder if it has to do with the spat between Adobe and Apple…) They usually have plenty of public computers at these conferences…

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