Is the Credit Score Obsolete?


The Ingenesist Project prides itself in making certain predictions that often seem to manifest in some small way every day.  One of our most enduring suggestions is that social media will begin to replace failing institutions of government and industry.

OK, that’s pretty far out, or is it?

The Wall street Journal reported recently that new bond issues – sort of like collateralized debt obligations – are being developed without consideration for the credit rating of the assets forming the bond.  The justification is that credit rating did not predict or help avoid the last crisis, so what good are they?

Now here is the twist – a surprisingly “Social Media” style solution is proposed – and accepted by the market.  The bankers put their personal and corporate reputations on the line.  If you trust the banker, you can trust their bond.

Is the Credit Score Obsolete?

This sets up an interesting new game now that many bad banks are gone and public sentiment is turned against them. The new game is playing out in interesting ways.

  • The bank does not want to put their reputation in the hands of a 3rd party credit rating agency.
  • Investor wants to put their money into the hands of the person who actually hangs if the deal goes bad.
  • “Inside Information” has become so systematized; the banker knows things long before the rating agency.
  • A system had been built to “game” the credit agencies…lose the game and lose the risk?
  • Avoid government vetting regulation in favor of “social network” vetting.
  • Tactical advantage over corrupt competitors
  • It’s easier for everyone to understand – including the banker, investor, and bond asset.

This is a profound shift in thinking from only a few years ago and almost seems like a return to a bygone era; remember the old days when the banker was actually a member of the community where the bank invested their money?

There are some lessons to take home.  If don’t need credit ratings for corporate bond issues, do they need credit ratings for people?  What if all of these institutions adopt a social network based credit score?  What would that look like?  Social media by and large rewards high integrity and punishes low integrity.  The value of social media includes a component of risk reduction.  You would think that Banks, Insurance, and even homeland security would be all over this game.

Innovating Disruption:

What happens if your credit rating is divorced from your finances?  What good is your social security number?  How does this effect all the downstream users of credit ratings like insurance, employers, credit card companies, social security payments – if any? Much of what we’ll associate with the innovation economy is the disruption, if not outright destruction, of an impossibly unstable system of finance.

Is the Credit Score Obsolete?

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