Wired is running an interesting story on the two guys that started Freerisk.org. Freerisk.org “provides a platform for investors, academics, and armchair analysts to rate companies by crowdsourcing.” Members of the community amass data from SEC filings, which other people then supplement with data from elsewhere. People can then run the numbers through standard (or not so standard) finance algorithms and publish the results for anyone to see.  Why should only the geeks working for the big banks (make that “government sponsored hedge funds”) have all the fun?

This is a huge step in the right direction in my opinion. Moody’s, and the like, lack transparency, rely on outdated models, and are paid by the firms they are rating! The Freerisk.org project lets knowledgeable people design their on risk models using the Freerisk API. While the API has a lot of room for change, it is at least a start. As with any open source project, as more people dive into the community, the data and API will get better.

This is a great free market approach to risk modeling and we should do everything we can to encourage projects like this. The problem of corporate credit risk grade inflation is too huge to not have complete transparency.