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Kai Ryssdal: There’s blame a-plenty to share when it comes to the financial crisis. The big credit rating firms have come in for some of the most severe criticism. Complaints that S&P, Fitch and Moody’s didn’t just miss the sub-prime meltdown — they were active participants in it.
Thanks to the fact that this is a capitalist economy, there’s a new entry in the ratings game today. One that is promising to tell bond investors exactly how much risk they are getting themselves into. Our senior business correspondent Bob Moon reports.
Bob Moon: Jules Kroll built a reputation doing investigations for big companies. Now, he’s hoping his respected name will help restore investor confidence in the bond rating system. He’s vowing to deliver what he calls “deep due diligence.”
Jules Kroll: I would refer to it as more thorough.
But skeptics are asking how thorough this newcomer to credit ratings can be following the same business model as the so-called “Big Three” — Moody’s, Standard & Poors and Fitch. Like them, Kroll will be paid not by investors, but by the banks and institutions selling the bonds.
At the boutique ratings firm Egan-Jones, Sean Egan says that creates a conflict of interest.
Sean Egan: You don’t know if the rating that was assigned was because of financial benefit, or if they truly believe that was a correct rating.
The research Egan’s firm does is paid for by investors.
Kroll argues that his own name and reputation are at stake, but at L.A.-based Envision Capital Management, money manager Marilyn Cohen wonders why people selling debt would invite a tougher rating, given that they can shop around for a favorable one.
Marilyn Cohen: I hate to be such a skeptic, but it’s hard to believe it’s going to last long. I think he has very good intentions, but it’s the same business model — tell me what’s different here.
Kroll remains convinced, though, that there’s a market for more credible ratings.
Kroll: It’ll have to be people that are confident that they feel that our name will be something very different and mean something different to investors that will be useful to them in selling their wares.
Kroll argues that most investors don’t want to pay for research, they just want to be able to trust what the rating agency says — and he aims to restore that faith.
In Los Angeles, I’m Bob Moon for Marketplace.