18 July 2009

Ratings Agency

I've been too busy lately to do much of anything. Too busy, too sick, too tired. I've not been in a voluntary armed engagement since 20 June. Most of the time that sees me in a capsule sees me multitasking while cutting Veldspar in a Mammoth with a Modulated Deep Core Mining Laser II and a T2 crystal or making market or BPC runs. I will say that sales are going well. If I thought about it, I'd look into picking up some more T1 BPOs.

Thankfully, I do like being an industrialist. It is in times like these that I have ideas.

Way back when, I ran a small investment firm: Prydwen Investments [PRYD]. It had just over 2B ISK. A good portion of the capital came from my own pocket, but I had a single issuing of stock. Stock was offered mainly to other members of Sturmgrenadier [SGHQ]. I didn't feel I could generate a way for the general population to trust me, so I only asked for investors from SG, people that I trusted, and people that I hope trusted me.

The idea was to make a profit on everyone's money and pay monthly dividends equal to half the profits. The main focus of my business was in making small loans to SG and Fountain Alliance pilots. I didn't mind making unsecured loans up to 300M ISK to this population. If they defaulted, I could complain to their corps and very likely have them kicked out. What I had was a small bank where I knew the clients and they knew me. They didn't fear me running away with their money, and I didn't fear them running away with the money that I'd been trusted to keep.

There is something to say for this small loan market. In 0.0, everyone should have one well-fitted battleship that they keep out of harms way. A battleship they can use to collect bounties on local small-time pirates or to run into high-end 10/10 complexes. This is how individuals can make money in 0.0 to pay for their warships.

It is sometimes hard to afford that first battleship, or to afford a replacement if something happens. It is also hard to offer collateral. In times like these, having a place to get a small loan based on trust can help.

The loans had a small weekly interest rate that didn't seem to bother anyone. I hope that is due in part to the fact that they knew the money was staying in the Alliance and going to the accounts of fellow Alliance members.

In addition to loans, I purchased some battlecruiser BPOs, and built and sold battlecruisers in Oursulaert and Jita. Battlecruisers (and the BPOs) don't tie up too much money in investment, sell rather well, and had a comfortable profit margin of 10-20%. I also purchased other BPOs and used my access to empty research queues in Serpentis Prime to research and resell these BPOs.

Life got too busy for me to stay with SG. I kept this investment company running for a little while, but finally I shut it down and stayed planetside for nearly a year. When I shut down the company, I sold all of its assets and paid out all of the cash in dividends to all of the shareholders. I don't remember how much of a return initial investors received, but I was actually surprised that it had been as profitable as it was.

I would love to start something like this again, but I'm not currently in a community where there is a lot of trust. The only community I'm in right now is the Minmatar militia, and I've not really been heavily involved in that or established a name for myself. There are a few other pilots that I've seen often enough and could trust, but I don't see any reason for them to trust me.

The massive scam that was EBANK sets such a tone in New Eden, that I'm not sure anyone would really want to trust anyone else.

This leads to my idea. Banks and investment firms need companies that conduct audits and evaluations and assign credit scores and ratings. New Eden needs a firm similar to Morningstar. Such a firm may actually exist in New Eden, but I haven't come across it. Mind you, I'm just getting back into the scene, and really haven't even bothered getting back into the forums. I'll probably do that over the next few weeks and report what I find.

There are some points to my idea that I roll over in my head though:

  • The crediting or rating agency would need access. If a company wanted a rating, it would have to allow an auditor admintance to the company. It would have to make sure that all transactions were in the corporate wallet, and that all assets were locked in visible corporate hangars. I don't really see this as a problem on the part of the company seeking the rating. They have to expect this level of investigation. The problem I see here is the rating agency running low on the man power to keep an eye on companies. Really, I see the number of companies that can be rated being less than two times the number of members of the rating company.

  • There really needs to be at least two reputable rating companies. The point behind all of this is to cut down on the possibility of scamming someone. It is harder to bribe two auditors from two separate companies.

  • I would expect the company seeking the rating to be the one paying the bill. This presents a conflict of interest, but it is one that all financial markets struggle to address.

  • I personally don't mind making myself more available. I am willing to post my cell phone number here in my blog if I thought it wouldn't generate more than one prank call. I won't tell anyone where I live, other than to say Durham, North Carolina, USA, but I will say that I am willing to meet anyone for lunch. I am willing to do interviews with whomever over the phone or in person if it would help to establish trust with someone considering trusting me with their money. I want to make myself available to anyone in New Eden that wants to vet me before trusting me, but I don't want to expose myself to pranksters and ne'er-do-wells that would cause me to change my very lovely phone number of have to get my car/house repainted. Rating agencies could be proxies for the general New Eden public. The heads of companies seeking a rating could give their private information to a rating agency instead of the general public. The rating agency could use that information to establish a personal relationship to establish trust. If the crooked rating seeker ever steals the money and runs, the rating agency could, pursuant to the contract, publish the personal information as a form of punishment.

  • Another form of punishment brought to my attention today is escrows. If the head of the investment firm wants to put 100 USD into something like a Paypal escrow account, then surely he can be trusted not to run off with 3B ISK.

The real problem isn't with making loans. Those really can be made with collateral. The problem is in investing a company, which is what anyone does when depositing money in a bank. The bank can't give everyone collateral. It has to run on trust. A rating company would simply be a third party looking to make sure the bank is as trustworthy as possible.

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