Mesa West's Friedman

GlobeSt.com: What is it that you like about Realpoint's approach?

Friedman: Now, for the most part, the fees rating agencies receive are paid by the investment banks on whose behalf they are rating debt. The concept of having investors pay those fees instead is an interesting one because it should theoretically remove the tension that exists between appeasing the investment banks, but still trying to do your job as a rating agency. At the end of the day most of the rating agencies on the market are for-profit institutions, and their subsistence is due to the fees paid by their clients. So you have a natural tension there.

GlobeSt.com: But you don't see the rating agencies as 'villains' in what has happened in the capital markets over the past year?

Friedman: No. I know their intentions are good. I think they felt incredible competitive pressure while trying to be honest and do their job correctly.

GlobeSt.com: By that you mean…?

Friedman: Well, there are three major rating agencies. All an investment bank would have to do is say, 'if you don't go along with us on this we can just go to Moody's or S&P or Fitch' – whomever the other two competing agencies were.

GlobeSt.com: What do you think of the changes that have been proposed by the SEC and in Congress?

Friedman: The rating system has been in place forever – it is only really tested and critiqued when there is a credit event. Generally I think the rating agency system has worked as it was meant to. It is important we don't completely dismantle how the system works, even in the name of improving it. Ratings are important – especially in that border between the A and BBB tranches where investors may not have the time or expertise to pore through every loan in the pool.

GlobeSt.com: But some change is in order?

Friedman: Oh yes. If nothing else, for the markets to function, the credibility of the rating agencies need to be restored…and that will take a long period of time because their reputation has been gravely damaged.