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An article relating to this blog post on Finextra:

Fair Isaac cuts 420 jobs

Fair Isaac, the Minneapolis-based provider of credit scoring technology, is cutting 420 jobs and shedding several business units under a restructuring programme designed to boost revenue and cut costs...


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Software scapegoats for the sub-prime situation

 

Fair Isaac is the technology company most damaged by the subprime crisis. In fact some banks, such as HSBC Finance, have said its ubiquitous FICO credit scoring system contributed to the problem by being "ineffective" in predicting behaviour during a period of aggressive lending and low interest rates.

I don't know the FICO system well, but this strikes me as a prime bit of blamestorming from the banking community. Surely it was mainly the agressive sales and incentive culture driven by the lenders that led to risky behaviour such as heavily loading their portfolios with mortgages requiring less income documentation than a standard credit card application, high loan-to-vale mortgages etc.

The old saying about poor tradesmen always blaming their tools seems to be appropriate here. I'm sure it's not perfect (hence the current revamp for FICO 08), but FICO is (was?) apparently used by 80% of the US mortgage market. If it was fundamentally flawed, the crisis would probably be much-worse. And if the banks' only criticism is that the system didn't work well within a context of irresponsible lending, then I'm not sure who that reflects on worse.

Regardless, Fair Isaac finds itself tarred heavily with the sub-prime brush, and as US mortgage lenders feel the pinch, their appetite for spending in the new product areas Fair Isaac has invested is much reduced. As is Fair Isaac's share price, which is trading at around its 52 week low.

Fair Isaac is also feeling the pinch from VantageScore - a competitive company backed by the three US national credit reporting agencies Equifax, Experian Information Solutions, and TransUnion. VantageScore claims its predictive results are superior and is actively targeting banks to switch to it from FICO. 

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Comments: (1)

Paul Penrose
Paul Penrose - Finextra - London 03 April, 2008, 09:47Be the first to give this comment the thumbs up 0 likes I sense a similar search for a scapegoat in the opprobrium heaped upon the ratings agencies for their role in the sub-prime debacle. Sure, they may have got it badly wrong, but then so did everybody else. As the BIS pointed out yesterday: "Some investors placed excessive reliance on credit rating agency ratings, doing minimal or no in-house due diligence on the CRT products employed." A rich example of the blind leading the blind.

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