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Fallout: The Financial Crisis

He plans a new way to rate investments

Steve Henn Oct 19, 2009
Fallout: The Financial Crisis

He plans a new way to rate investments

Steve Henn Oct 19, 2009


Kai Ryssdal: Jules Kroll isn’t necessarily a name you ought to recognize. But for those who’ve got more than a passing acquaintance with the world of multibillion-dollar mergers and acquisitions, the man’s a legend. Thirty years ago he completely reinvented the concept of the detective agency, offering to do the in-depth research and due diligence that those big Wall Street deals demand. Kroll sold his firm for a huge payday a number of years ago. But he is back.

Marketplace’s Steve Henn reports that Kroll wants to start up a new kind of credit-ratings agency, one that’s not going to help create the kinds of bubbles that got us all into this financial crisis.

STEVE HENN: Jules Kroll was so effective as a corporate investigator that his last name became a verb. Now he plans to start rating mortgage-backed securities, and he’s hoping institutional investors get behind it.

JULES KROLL: Because we need their support and their enthusiasm for telling issuers, get us a Kroll.

Kroll believes there’s a simple explanation for Wall Street’s meltdown. The three biggest rating agencies — Moody’s, Standard & Poors, and Fitch — blew it.

KROLL: Not enough time was spent on basic research, not enough time was spent on the underlying facts.

Rating agencies were supposed to determine the safety of trillions of mortgage-backed securities. Kroll says the agencies became so enamored with their risk modelling, they stopped asking obvious questions.

KROLL: There was no independent fact checking as to whether even the first payments had been made on these mortgages.

So Kroll wants to get back to basics.

Bert Ely, a well-known banking consultant, agrees rating agencies have a big problem. They’re paid by the firms whose products they are supposed to rate.

BERT ELY: There is no question that there’s a conflict of interest.

But Ely’s not convinced Jules Kroll is the solution.

ELY: Does Kroll really have the analytical capability?

Kroll’s old firm has done work like this before. But it failed to find any problems with Allen Stanford — the Texas banker who ran a multibillion-dollar Ponzi scheme. That mistake cost one Kroll client more than $6 million.

BILL FINNEGAN: Part of his notion for this new credit-risk rating agency is to bring the Kroll brand.

Bill Finnegan is a writer at the New Yorker who recently profiled Kroll.

FINNEGAN: Anything that hurts that reputation hurts that brand, like a Stanford scandal that makes Kroll look inept is not going to help that new business.

Kroll calls the Stanford incident regrettable. But he says it was only one mistake out of 20,000 cases his old firm takes each year.

In Washington, I’m Steve Henn for Marketplace.

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