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.
Oct
26
Wider Still, and Wider, Shall Thy Bounds be Set
Filed Under Blog, eBook, Education, eLearning, Financial services, Industry Analysis, internet, mobile content, Pearson, Publishing, Reed Elsevier, Thomson, Uncategorized | 1 Comment
Today’s announcement of talks on a merger between Penguin and Random House has provoked a storm of pseudo-analysis of the “well, the big players must get bigger because they have to fight bigger battles with ever more powerful device manufacturers or online suppliers etc etc…” variety. I find this fairly unsatisfactory, and since the shrunken corpse of the UK retail book trade will undoubtedly seek to have this deal referred to the Office of Fair Trading on the grounds that the new combine will have a 25% market share it may be a good thing to think if there are better arguments for defending size other than negotiating power with Amazon or Apple. Here are a few:
* Most of the books published by both of these companies are agented. There is therefore no question about author access to markets here. The selectivity question comes down to who can pay the level of advances demanded and still market enough bestsellers to stay in business.
* The new driver in terms of author development is likely to be self-publishing, a remarkably democratic development in which huge progress is being made by start ups like Eileen Gittin’s amazing www.blurb.com, and by Amazon, but where neither of these players have much market share at all.
* The trend in media marketplaces seems to be towards size, clustered around the old market model, supported by shoals of start-ups, of which only a small percentage survive. If the key to survival for the old market model is cost-cutting and making infrastructure services work better and more cost effectively, then size is vital. And compared to the size of Apple, all of the so-called Big 6 consumer publishers would still seem fairly puny even if they were all lumped together.
* There is no brand loss here. Random House has little by way of consumer-recognizable brand, and Penguin, though it has a distinctive resonance for an ageing demographic who, like me, recall it as our Adult Education Institute, has little of that left in bestseller markets, where the real money is made.
* Other information and communication markets have survived consolidation. Law is the domain of West (Thomson Reuters) and Lexis (Reed Elsevier), yet a determined venturer like Michael Bloomberg has been able, via BNA, to get into the magic circle. And there is no real indicator that consolidation or the expansion to admit more major players has been good or bad for users, except that law has become a very advanced marketplace in terms of user technology and changing working practices.
* If this merger goes ahead it is likely to be followed by others. If this one is blocked in the UK does that mean that, for example (purely fictitious thought) the future merger/purchase of Hachette by Harper Collins/News as News Corp seeks to make sense of the media businesses that it has now cut adrift from the film/TV/music mothership is also impossible? I doubt it.
* What is the alternative to merging these weakened businesses whose margins are in decline and who seek to blame the new world for being unfaithful to the practices of the old? They will decline further, there will be fire sales, redundancies and eventually closures. Pearson know all about this. Their focus is education, where they have a pre-eminent global position. Behind them trail the three remnants of the former Big 4 of the textbook world of 1990. Harcourt are now with Houghton Mifflin, just moving out of Chapter 11 protection and still with no answer for the future, and McGraw-Hill Education, despite some good initiatives, is cast adrift by its owners into a separate company so that its margins do not pollute perceptions of McGraw’s bid for survival via financial services. Do Pearson bid for these ageing relics? Certainly not – no one has seen them buy a textbook for many a year. They buy cutting edge, tech progressive companies in growing markets with expanding margins. And they are very good at it indeed.
Here then are some of the arguments which I would present to the regulator, albeit in a rather less direct format. Then, during the coffee break, I would take him aside and remind him that book readers are a small proportion of human kind, though hugely vocal and opinionated (I, for example, am an avid book reader). This does not mean however that their marketplace should be immune from the pressures being felt elsewhere. Why, I would ask him, were these players not experimenters in the early days of digital change? Penguin bought Dorling Kindersley, the only publisher who could have been said to have followed the clues to multimedia in pre-internet days but threw away the learning experience. Both are now Johnny-come-latelys to the digital marketplace which they point to as a disruptor. Please, Regulator, let them have their way. Unless they discover Plan B they will deflate, separately or together. Do not stand in the way of market forces in very small markets.
And should this be a merger? Pearson should not neglect, obviously, the huge power of consumers as buyers of self education or of educational materials for children. But I doubt if this merged venture is a vehicle for that. Pearson may have a residual feeling of responsibility for the Penguin brand, which is the best there is outside of OUP in the sector. But sentiment should not stand in the way of liberating capital which can be used in further global educational developments. That is something for the Brits , who have few global brands as resonant as Pearson is in education, to relish, and could be worth a shaky chorus of Land of Hope and Glory…!
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