from the publisher of reinsurance and fac magazines

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Sell integrity

Dear friend,

What a week for E&O producers — did you see that sensational story broken by some intrepid journalists at the Financial Times?

Our beloved FT said that Moody’s had uncovered IT troubles in 2007 last year that had allowed some ultra complicated bonds to be assigned a triple-A rating when they were actually four notches lower down the Moody’s food chain. Only about four billion dollars’ worth!

So far so predictable.

If you have a dull and repetitive task to do, by all means get a computer to do it — just for goodness sake make sure that you know what you are doing.

Computers are great at following instructions using a pristine, ultra-orthodox logic. The problem is that if you ask the machine to do the wrong thing it will replicate your error a million fold, until it proliferates across the earth, like a bad Eurovision song entry from one of the younger Balkan Republics.

Just try using the ‘Find and replace’ feature on your Microsoft Word one day if you want to know what I’m talking about. Any illogicality on your part is slapped very hard back in your face like so many 25 peseta coins from an indignant (pre euro) Madrid waiter who you have failed to tip sufficiently.

(I am suddenly reminded of something I wrote the other day about Fitch miraculously downgrading over a hundred thousand ratings at the flick of a switch.)

Anyway, you get the idea.

Back to the story.

The venerable New York Times had Moody’s saying that it recognised the seriousness of the questions raised by the report and that it had asked its law firm to investigate. “The integrity of our ratings and rating methodologies is extremely important,” the company apparently said.

Too damn right!

What else does a ratings agency have to sell other than its ratings’ integrity?

Exactly what tangible assets does it have on the shelf?

Nada, zilch, zip, rien.

A few telephones, some desks, nice ergonomic office chairs and a computer or two — oh and maybe a bit of proprietary financial modelling software, (but maybe let’s forget that for now!).

The ratings agency business model is too perfect in so many ways.

You sell one main rating and you’re made. Soon one rating begets another — and clients are so sold on the whole deal that they start obliging their suppliers to have a rating, lest the lack of one dilute their own.

This is a viral sell on a vast scale. Pretty soon everyone and everything has a rating, right down to the birds and the bees.

The trouble is that if a rating agency is compromised, thousands of ratings all disappear in a puff of logic.

Looks like its time for the ratings fraternity to buy a bit of fun and funky E&O coverage, and not just fifty or a hundred million — I’m talking a couple of billion at the absolute minimum.

And it’s up to you to put it all together, and get out and sell it to all four of them.

You lucky, lucky people!

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