Nov
28
Credit Intelligence where Credit is Due
Filed Under B2B, Big Data, Blog, Financial services, Industry Analysis, internet, Search, semantic web, social media, Thomson, Uncategorized, Workflow | 1 Comment
The best network marketplace ideas are simple. And inexpensive in terms of user adoption. And productivity enhancing. And regulator pleasing. And very, very clever. So we need to give Credit Benchmark, the next business created by Mark Faulkner and Donal Smith, who successfully sold DataExplorers to Markit earlier this year, a double starred AAA for ticking all these boxes from the start. And doing so in the white-hot heat of critical market and regulatory attention currently being focused on the three great ratings businesses: S&P, Moodys and Fitch. Here is a sample from the US (taken from BIIA News, the best source of industry summary these days at www.biia.com):
“Without specifying names, the U.S. regulator said on Nov. 15 that ratings agencies in the country experienced problems such as the failure to follow policies, keep records, and disclose conflicts of interest. Moody’s and Standard & Poor’s Corp. accounted for around 83% of all credit ratings, the SEC said. Each of the larger agencies did not appear to follow their policies in determining certain credit ratings, the SEC found, among other things. The regulator also said all the agencies could strengthen their internal supervisory controls.
The SEC noted that Moody’s has 128 credit analyst supervisors and 1,124 credit analysts, in contrast with S&P’s 244 supervisors and 1,172 credit analysts. The regulator also examined the function of board supervision at ratings agencies, and implied in its report that directors should be “generally involved” in oversight, make records of their recommendations to managers, and follow corporate codes of conduct. Source: Seeking Alpha”.
Well, in a global financial crisis, someone had to be to blame. It was the credit rating agencies who let us all down! The French government and the EU have them in their sights. They have a business worth some $5 billion with excellent margins (up to 50% in some instances). They are still growing by some 20% per annum because they are a regulatory necessity. They have become a natural target for disruptive innovation, and small wonder, because this combination of success and embedded market positioning attracts anger and envy in equal parts. Yet no one, least of all the critical regulators, wants disruptive change. It is easy enough to point to the problems of the current system, illustrate the conflicts inherent in the issuer-pays model, bemoan the diminished credibility of the ratings, or criticize the way in which multiple -notch revisions can suddenly bring crisis recognition where steady alerting over a time period would have been more useful, but at present no one has a better mousetrap.
At this point look to Credit Benchmark (http://creditbenchmark.org/about-us). Having successfully persuaded the marketplace, and especially the hedge funds, to contribute data on equity loans to a common market information service at DataExplorers (a prime example of UGC – user generated content – more normally seen in less fevered and more prosaic market contexts) the team there have a prize quality to bring to the marketplace. They have been once, and can be again, a trusted intermediary for handling hugely sensitive content in a common framework which allows value to be released to the contributors, which gives regulators and users better market information, and which does not disadvantage any of the contributors in their trading activities. So what happens when we apply the DataExplorers principle to credit rating? All of a sudden there is the possibility of investment banks and other financial services sharing their own ratings and research via a neutral third party. At present the combined weight of the bank’s own research, in manpower terms, dwarfs the publicly available services – there are perhaps as many as 8000 credit analysts at work in the banks in this sector globally, covering some 74% of the risks. If all members of the data sharing group were able to chart their own position on risks in relationship to the way in which their colleagues elsewhere across a very competitive industry rated the same risk using the same data – in other words show the concensus and show their own position and indicate the outliers – then the misinformation risk is reduced but the emphasis on judgement in investment is increased.
And of course the Big Three credit agencies would still be there, and would still retain their “external” value, though maybe their growth might be dented and the ability to force up prices diminished if there was a greater plurality of information in the marketplace, and if banks and investors were not so wholly reliant upon them .The direction in which Credit Benchmark seem to be going is also markedly one which is very aligned to the networked world of financial services. User generated content; data analytics in a “Big Data” context; the intermediary owning the analysis and the service value, but not the underlying data; the users perpetually refreshing the environment with new information at near real-time update. And these are not just internet business characteristics: they also reflect values that regulators want to see in systems that produce better-informed results. A good conclusion from Credit Benchmark’s contributory data model would be better visibility into thematic trends for investment instrument issuers and their advisors, as well as more perception of and ongoing monitoring of their own, their client’s and their peer’s ratings. In market risk management terms, regulators will be better satisfied if players in the market are seen to be benchmarking effectively, and analysts and researchers who want to track the direction and volatility of ratings at issuer, or instrument, or sector, or regional levels will have a hugely improved resource. And something else will become clear as well: the spread of risk, and where consensus and disagreement lies. Both issuers and owners get a major capital injection of that magic ingredient – risk – reducing information.
None of this will happen overnight. Credit Benchmark are currently working on proof of concept with a group of major investment banks, and the data analytics demand (in a market place which is not short of innovative analytical software at present) is yet to be fully analysed. Yet money markets are the purest exemplars of information theory and practice, and it would be satisfying to be able to report that one outcome of global recession had been vast improvements in the efficacy of risk management and credit rating of investments. Indeed, in this blog in this year alone we have reported on crowd-sourcing and behavioural analysis for small personal loans (Kreditech), open data modelling for corporate credit (Duedil) and now, with Credit Benchmark, UGC and Big Data for investment rating. These are indicators, should we need them, of an industrial revolution in information as a source of certainty and risk reduction. Markets may never (hopefully) be the same again.
Nov
22
An Open Letter to Monty
Filed Under Blog, eBook, Education, eLearning, Industry Analysis, internet, mobile content, news media, online advertising, Publishing, Search, social media, Uncategorized | Leave a Comment
Is that an early Christmas Carol of Consolidation and/or Consolation I hear in the air. As CBS/Simon and Schuster Books prepares to surrender to the breathless embrace of that ardent wooer, Rupert Murdoch (Harper Collins), the UK is entranced by the appearance of David Montgomery as the saviour of the regional press. Despite the remarks made here in “Monty’s Flagging Circus” two weeks ago, it seems only fair to warn the brave man of the possible pitfalls that lie ahead and give him any advice and guidance that may be available. Media casualties help no one, and people like me who have spent a lifetime in media should do more than hop up and down on the sidelines prophesying doom. So here goes:
Dear David (everyone, me included, seems to call you Monty without ever asking, so I will try to be more correct in future),
Congratulations on the launch of the Local Worlds business, and upon your statement re-emphasizing your belief that people will always want local news and information. I have written about your intentions since they were first rumoured, but since those statements might be seen as a bit negative, I wanted to write to you publicly to say that I wish you every success, and would like to contribute something of my own amongst the more tangible contributions of your other stakeholders. You see, in 1996 I played a role as a strategic consultant in helping Trinity, Newsquest and Northcliffe to establish a joint web branding for local content called “This is…”, and, experimentally, and based in my own offices, began work on developing a service for concentrating all of the regionals classified advertising called ADHunter, directed by Marlen Roberts of Northcliffe. A year or so later this was relaunched in Hammersmith, by a brilliant manager called Jonathan Turpin, as Fish4…Homes, Cars, Jobs etc. It still exists, owned now by Trinity Mirror. From its inception and for the next four years, I was its non-executive chairman, refereeing a board of directors comprised of the CEOs of each of the major UK local newspaper groups, who were the shareholders and content contributors. Johnston Press joined twice – but also left twice. Sometimes the CEOs did not show: how well I recollect a substitute turning up for one of them, and volunteering, just after the minutes had been signed, “My mandate for this meeting is to say “NO” “!
I rehearse this escapade on the nursery slopes of British attempts to get the media to respond to a networked world simply to say that I have some knowledge and sympathy for the world through which you are now moving. But I started this letter to offer 5 points of advice. Here they are:
1. Investors. They are your worst enemy. Having investors who want a return and don’t mind how you get it is one thing: having investors who want results, but not results that deteriorate the quality of their other businesses is really tough. Is London Local as far as your investors are concerned? Will Trinity Mirror compete with what you do? Boards that cannot make decisions make chaos, and then, if you could get Newsquest or even Johnston, or Archant, to invest in you, compound the rivalry, suspicion and eventual stalemate.
2. Editors are a real liability when it comes to change. They are above all committed to the “push” world. They want to select and define. But you cannot let that happen, since, online, you cannot define “local”. Do you mean my village, this town, this suburb, this county or, indeed, this region? People define local for themselves, and “pull” it to their access point. While I agree that we all want local news and information, you have to provide an interface through which they can focus – on a smartphone, or a tablet, but certainly not primarily on paper.
3. Journalists are too expensive. Many, if not most, of your stories will cover local football , the Women’s Institute meeting or the town council. Look at the way in which excellent artificial intelligence software is now formatting and templating factual input and archived recall to create the news: a prime example is www.narrativescience.com which builds automated stories for newspapers and B2B magazines. Save your journalists for so-called investigative reporting where you can make an impact; once the editors have gone and the journalists diminished and printing severely cut back to a national centre you may come by a cost base that suits the circumstances in which you now find yourself.
4. Relaunch as an online service. Call it LocalWorld if you like. Allow users to set their own limits, by content subject as well as geography. Make it a content experience that people will pay for and add their own content to it – and they will – not an advertising experience that delays and distracts them. Make it Local Google with no ads: and, as Google gets into predictable difficulties as a local provider, use your increasingly trusted pure content brands (I know you will use the old newspaper brands in the background to suggest this trust) for lead generation and customer referral. Get it right and you could end up with a local community presence, under the radar of Facebook. Make local a place to go for education, or to recommend (and then) buy eBooks or music if you like, but not for conventional click-through advertising. But your investors must give you time to sort this.
5. Watch the winners and losers. At the moment Axel Springer and Schibsted are gaining ground with a pure digital classifieds play. Could work for you, but Trinity wouldn’t like it. Keep content and classifieds apart though – they represent different channels in a networked world. The terror to be avoided at all costs is trying to drag the newspaper online and make it work in trad business model terms. Time to turn off the life support systems: people do want local news – but they want it on their own terms.
Oh, yes. And keep having lunch with that nice Ashley Highfield chap over at Johnston Press. When you get a technology focus which does for local news what his iPlayer did for Broadcast television, then you and he will want to proliferate it as widely as you can across the localities of Britain, and shared tech investment makes more sense than competing standards. All this can be done, but not of course if the business plan is to simply cut costs and reheat the margins of existing newspapers ahead of their eventual obliteration. The newspaper at Manassas Junction shuttered last week, despite being saved by Warren Buffet, no less. Lets make local work, but lets make it work on the terms that local people want.
Best wishes for your new venture.
David Worlock
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