The latest edition of Wired (print copy I got in the mail, this story isn’t online yet) had a blurb about FreeRisk.org – a new site that wants to take on the credit rating agencies:

* A. M. Best
* Dominion Bond Rating Service
* Fitch Ratings
* Japan Credit Rating Agency
* Moody’s
* Standard & Poor’s
* CreditPointe
* Egan-Jones Rating Company

These companies “rate” the debt companies sell to finance their operations – the higher the rating, the lower the cost for a company to borrow money. So, when you hear the terms “triple A” or “junk bond” – that means the financial instrument has been rated by one of the rating agencies. Here is the problem: The company that wishes to borrow money pays the rating company for the rating. A possible conflict of interest? Or more importantly, the recent failure of the rating agencies to get it right. AAA rated companies are failing or have failed and those companies were “predicted” to be in wonderful shape by the rating agencies.

So, what can we do?

Freerisk is a project with the goal of making freely available the data, algorithms and tools necessary to perform risk modeling. We believe that risk management is too important to society to be an arcane subject or competitive advantage.

Freerisk is offering up tools and data to allow anyone to do their own research. The data is out there already, but like a lot of things Freerisk is going to put a lot of effort into making the data more available and easier to use for analysis:

* An open repository of financial data, including financial statements for public companies
* A standards-based API for querying financial data
* A distributed method for designing and running risk models
* Open-source tools for parsing and handling financial data
* Educational materials on risk-management

They have a lot of work to do going forward:

Freerisk is under active development, and not all the pieces are in place yet. This site is a work in progress and is here to inspire more people to get involved in the project.

The really cool thing about Freerisk is they might be helping to create a more distributed, independent process for the identification and modeling of risky behavior MINUS the inherent conflict of interest binding the corporate world today. Just as the “wisdom of crowds” concept has captured the imagination of investors, perhaps this will be another tool and data source for the huge debt market. Who knows, perhaps Freerisk will encourage a competition – set up by a very forward looking company – that emulates the X-Prize or Netflix Prize.