Can a couple of finance geeks save the world’s 45 trillion finance market? Well, alpha geeks Toby Segaren, author of “Programming Collective Intelligence” and Data Magnate at Metaweb Technologies, and his colleague Jesper Andersen, a specialist in data mining and social network analysis, are attempting to do just that. http://www.freerisk.org is a credit risk assessment tool in progress that could very well replace the oligopoly giants, like Moody’s and S&P. It is a simple idea, a platform that combines authoritative data, user generated data, algorithms, and a testing framework. It relies on open data (what is currently available, such as annual statements, filings, etc..) and is based on GAP and APIs that make statements, easier to read. The best part is that it allows you the opportunity to query the system across a diverse data set. While it is still in the prototype phase and therefore has a ways to go to aggragate all the information sources out there it could very well be the first transparent solution to solve one of the world’s largest economic structural issues.

AAA (triple A) is the highest credit rating a company can attain and it is a necessary requirement in raising capital. To get a rating you have to deal with one of the big three credit agencies. These oligopolies are powerful entities and gatekeepers and they have been a dominant force in making our financial system work. They have no legal requirement to report their methods of rating assignment. In fact, there is an inherent incentive for these agencies to give a higher rating because they know a company will pay more fees for the higher rating.

Lehman Brothers had a Moody’s credit rating of A2 (the second highest rating you can get). AIG had a AAA rating (the very highest). And Enron, even after their stock had tanked, and they were under investigation for accounting fraud, had the  high credit rating of Baa3.

With such low standards the systems to measure trust are clearly broken. The credit rating system based on “gaming” has created a moral outrage in our society that can not be ignored.

Our new emerging economy demands transparency, equality, and honest metrics. To ignor the power of the collective intelligence and the social media space it supports is futile.

Freerisk.org is one of the many innovative platforms that are being developed but one the investment community should take seriously. We all know there are more Enrons out there. But the idea the collective intelligence of the crowds could force them to be accountable through the scrutiny of a fairer credit system is rather appealing.