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Always Be at Least Two Steps Ahead of the Rest

Dr Patrick Caragata: heavyweight thinker, mover, & shaker

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Dr Patrick Caragata is the architect and inventor of the models and methodologies of Rapid Ratings (www.rapidratings.com), including the programmed language in the automated reports. Born in Toronto, Patrick received his PhD from the University of Toronto in 1981. He is a former Chief Tax Policy Advisor and Special Adviser Taxation Economics with the New Zealand Inland Revenue Department, Chief Economist of the New Zealand Ministry of Energy, and Senior Economist international at Toronto-Dominion Bank. He sat down with elocal to discuss his illustrious career.


You’ve had an incredible career. I mean one of the careers that would probably be in awe of many. I’m going to start with New Zealand because that is a big part of your career although you were born and educated in Canada, completing a PHD in Mineral Economics.


My PhD was in non-fuel minerals and Canadian foreign policy. So, it was a combination of economic analysis and diplomatic negotiation, not with other countries but between a host country, Canada and multinational corporations. So that was the big issue emerging out of the 1960s and into the 70s as the growing influence of multinational corporations, many of whom in the mining sector where I was focused, were being nationalised; in Chile for example, and in some other countries. So multinational corporations were becoming an object of political attention and Canada, despite the fact that it was a commodities trading country, had never seen a PHD discuss the issues of commodities trading and foreign policy. The final point on that is that my PhD was granted in 1981 and it was then published as a formal commercial book by Queen’s University in Canada, the Centre for Resource Studies. So there’s not too many people that can say that their thesis became a commercial book but mine was and it’s available all over the world now, Library of Congress and so forth. People could look up my academic record, my publishing record by looking at ResearchGate and a number of other web sites that can verify the things that I say. Always be at least two steps ahead of the rest.


And with that philosophy that you’ve always had, that’s led you into some pretty amazing places.


Oh it certainly has. But you have to have a willingness to risk everything. If you were going to do what I did, and that is leave your home country, and migrate to another country, and then migrate beyond that to another country and set up a multinational corporation based in the US. So that story in and of itself has many layers. A lot of complexity and a lot of interesting sub-stories.


I would imagine there was even some mystery and intrigue along the way.


From time to time I have faced very serious hurdles and have been able to overcome all of them. Sometimes with the help of others and sometimes based on my own ability to survive.


So, the company that you have been working with and developing or creating is called Rapid Ratings and is now is one of the biggest companies in the area of risk analysis for the globe.


I wouldn’t call it one of the biggest; I would call it one of the most effective because we’re still a young company and we are operating globally. We now are rating over fifty thousand listed companies or have the potential to do that. I mean our regular throughput is not based on the total of available listed companies but on requests by clients and prospects. And in addition to that we screen and provide ratings for about 150 million private companies that don’t have much financial data. So in the first instance as listed companies we have income statement, balance sheet and cash flow. I created an automated process that allows us to screen those companies; thousands per minute and potentially hundreds of thousands per day. If the need is there: we don’t necessarily have that demand, but the potential is definitely there. We provide the ratings and it’s available on an immediate basis to clients or prospects around the world through the web.


So for our readership. Can you explain to them what it is what a ratings company is and what it does in the bigger picture of the financial markets.


Well the traditional rating agencies, e.g. Standard Poor’s, Moody’s and Fitch, which are based in the U.S. and have been around for over 100 years. So you can see the mountain we had to climb to compete in that area. They’re focused on credit risk for securities that are issued to the market. Bondholders in particular are taking an interest in that but over time that business has become much more complex and has expanded significantly into new areas. So we now have collateralized debt obligations. We now have collateralized loan obligations. We now have residential mortgage backed securities, which was one of the triggers when you look at Fannie Mae and Freddie Mac going under in August of 2008. That new type of investment, where the risks were under-estimated by the big rating agencies, led or helped to lead to the collapse of markets in 2008 when Lehman Brothers fell on the 15 September 2008, followed by AIG a few days later and subsequently attempts to rescue the whole banking sector of the United States. The “Global Financial Crisis” was not a global financial crisis; it was a North Atlantic financial crisis involving the US, the UK and some European countries. American Banks and Canadian banks were reasonably stable when provided extra liquidity. Australian banks were reasonably stable. So, the credit risk issue has become writ large because it now comes from many different directions. But since that time the whole issue of supply chain risk is emerging significantly. This was the orphan area of rating agency activity. In other words, they focused on ratings for the investment market and for pension funds for example. They focused on ratings for companies that lent money, either banks lending money to borrowers, or big firms like large manufacturing firms lending money to purchase each of their products. But, increasingly, especially as just-in-time inventory became a more dominant part of the management surveillance, you find that more and more companies are lending money to suppliers because they want to be able to guarantee that just-in-time inventory, and the inventory can’t be held in the consumer’s market or the consumer’s property and so has to be held by the suppliers. That makes sense from an efficiency perspective and the area where we have had our fastest growth is in supply chain because that was, as I’ve said, the orphan rating agency activity. The main active player in that area is Dun & Bradstreet and their technology is outdated. (And then there is one other rating agency that has gotten into that. But there are some difficulties with the solutions they have. I won’t be more specific than that because I don’t want to name and have a sort of negative discussion here about the rating agencies. That’s not the purpose of this discussion.) But the key point is that the rating agencies are now operating in what I call a 360 degree risk environment. Every single company needs to look absolutely all around itself to see where the risks are, coming off the credit side, the investment side, supply side or some other avenue, and so risk management is becoming an integrated whole now, and it never used to be. Just going back one hundred years it was concerns about relatively small but important things, like insurance risk.


In the area of risk analysis and risk management who uses your services?


We have hundreds of clients, listed companies, unlisted companies. We operate in over 130 countries. We have many small companies that we screen for others and many large companies. I don’t want to name the companies, you can go on to our website (www.rapidratings.com) and see many listed there. So, my objective is not to brag about how well we’re doing. The objective is to focus on what are some of the issues and problems we are trying to solve.


So for what purpose do people use the ratings?


Well like I was saying we’re now in a 360 degree risk assessment environment and so that means just like the gunner on top of an airplane flying during a war you’ve got to have rotational ability of 360 degrees to see what’s around you. What’s at 3 o’clock, what’s at 9 o’clock and what’s at 12 o’clock and behind you (6 o’clock) and you can’t anticipate all the risks, because risk is often times arising from a new source… you know the past can predict the future to some extent, but history is more like a spiral, rather than a repetitive cycle.


So, for example, that would be in the evaluation of stock, give me some other examples of where it would be used?


Well as I was saying, you start out by looking at credit graphs. So what’s the risk posed to a company by a firm that is borrowing money in order to make a purchase, or buy it for a firm that is borrowing money from a bank to go and invest somewhere, or to use for cash flow or whatever. So it’s on the investment side, on the credit side and elsewhere. But it is on the supply chain side, where we are growing fastest, as companies are starting to appreciate the fact that their supply chain needs much more attention, because many risks pop up, companies go out of business; sometimes big firms will buy out a firm that is close to bankruptcy just to ensure supply, or they will provide extensive loans, and then they become actively engaged in helping to superintend the company back to health. So they use our tools to give them a perspective on where the risk is and how much risk is there, and how much risk is there relative to other risks that they face. So, every company is facing a portfolio of risks. They’re not just facing a risk from one source or another and so they need to benchmark to see the relativities of risk, and we provide an accurate assessment of absolute risk. In other words, between zero and one hundred there is a company position and relative risk, ….is this company more risky or less risky than another company? or where do these 10 companies fit into a portfolio of 100 companies? What level of risk is it facing? These types of questions are now part of governance requirements for boards. So as I wrote in my book on Business Early Warning Systems back in 1999 – that was published by Butterworths in New Zealand, because I wrote it in New Zealand – we are watching the emergence of risk management that is a core component of corporate governance. That was 20 years ago when I said that, and it’s more true today than it was then.

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elocal Digital Edition – February 2020 (#227)

elocal Digital Edition
February 2020 (#227)

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