KEY POINTS:
Somewhere, gathering dust, on bookshelves goodness knows where, are dozens and dozens of copies of the 1998 financial thriller Why Are Your Taxes So High?
Written by two former Kiwis, economist Dr Patrick Caragata and writer Simon Carr, the book caused a bit of a stir at
the time because it claimed to contain the most important discovery of the 20th century: that a 20 per cent tax rate would solve all of the world's financial woes.
Nearly a decade on, Carr is a political satirist for the Independent in London and Caragata is living in Brisbane, from where he runs a credit rating agency that is taking on the big boys in the United States and Britain.
"I'm sure Michael Cullen very much remembers who I am," he chortles.
In fact, Caragata already had an international reputation before he arrived in New Zealand in 1988 on holiday. As head of the country risk analysis unit for the Toronto Dominion Bank, he oversaw a team whose job it was to assess the creditworthiness of entire countries.
But the Canadian was so enamoured with New Zealand that he happily threw away a promising career to move here and took up a job as the chief economist for the Ministry of Energy. He then became chief policy adviser for the IRD.
But one day in 1991 something happened that was to change his life yet again.
"I was walking along the street in Wellington and - sort of like St Paul on the road to Damascus - I had a complete vision of what I'm doing now," he told a financial industry magazine two years ago.
That vision was running a credit rating agency based on extremely clever software Caragata developed while in New Zealand that he claims is vastly superior to the analysis offered by the big three rating agencies: Standard & Poor's, Moody's and Fitch.
One of the main faults of the major agencies is that their ratings usually lag the share price, he claims. In his case, his ratings almost always anticipate it and, in fact, a major use for his software is for the equity markets.
He is also able to use the software to analyse information at any point in time - enabling him to demonstrate that his company, Rapid Ratings, would have picked up major problems at Enron and Australian insurer HIH years before they were spotted by anyone else.
The original idea came to him from a database developed by the IRD, which included information from 100,000 companies. Having such a large database raised interesting implications. "The more I looked at the data, the more I started to see pictures in the data."
Rapid Ratings was formally launched in Auckland in 2000. By 2005, it had rated 17 companies, but only eight decided to publish the ratings they received. Its Australian backers decided New Zealand wasn't worth bothering with and pulled out.
Rapid Ratings is now based in New York and has the backing of US merchant bankers Howland Partners. In April, it expanded into India. But Caragata is also keen to see it re-enter New Zealand, now the Government has decided to get serious about credit ratings.
He is not kidding himself that his company is going to make a fortune here. The reason he launched it in the first place was because it bothered him that billions of dollars of Kiwi savings were not being supervised.
"New Zealand, unlike the US and UK, does not have a ratings culture, which is one of the reasons why we pulled out of the NZ market. What that means is New Zealanders and Australians are prone to pursue returns regardless of risk."
He blames a similar mentality for what seems to be a common assumption in New Zealand that only American rating agencies are any good, despite the many inquiries into their practices.
"If people stampede to the assumption that S&P and Moody's and Fitch are a safe harbour then they are mistaken and they will actually throw out the baby with the bathwater," he insists. "What you want is effective competition and not just international rating agencies."
This time, Rapid Ratings will probably team up with Axis Ratings, which is run by Wellington-based finance industry veteran Ron Keene. Keene used to work for Caragata and has since set up his own consultancy here, using Rapid Ratings software.
Keene is acutely aware that his company will be history if the Reserve Bank decides not to endorse the partnership. Bank officials have confirmed that no one except approved agencies will be able to issue any ratings at all, he says.
"They want to have reliability because, at the end of the day, if someone rates someone well and then they fall over in six months' time, then the Reserve Bank gets a bit of egg on their face as well - and they're pretty averse to that, I can tell you."
But it hasn't been lost on him that S&P is already spending a lot of time and money trying to butter up the local industry.
It has cut its prices, sponsored conferences, launched an investor website, and "goodness knows what else".
He confesses he's a bit puzzled why it's bothering. "I would have thought it's chocolate biscuit money for them."
Naturally, S&P spokesman Shaun Evans, who has been based in Wellington for the past year, is diplomatic in his response, saying the company is happy to stand on its track record.
"We've been around for well over a century now and we believe we provide a useful service in providing independent, credible research."
But Kapiti Coast sharebroker Chris Lee says he'll be outraged if Keene is shut out.
"He's a grumpy guy but he's confident and experienced and he does his work well. He's tuned to NZ finance companies and, in my opinion, he is much more thorough than any of the others.
"I don't think you need people who come in and gladhand you and are nice to you and you all drink tea in the boardroom. You do have to be able to say to people 'I think your model is wrong, your balance sheet is not representing reality and it's not fair to mislead the public'."
Some investors would be horrified to learn how little time some ratings agencies spend with their clients, he says.
He has heard of one case where they turned up for just a few hours.
According to Keene, he spends 120 to 140 hours on the job, and two people will spend two full days examining the books and interviewing staff. The process is more demanding than an audit or due diligence.
"At the end of the day, I would know more about the company than the guys running it."
