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Co-founder and co-chief CEO of Mesa West Capital Jeff Friedman is at the helm of a company that is a buy-and-hold investor, and that has only issued one security recently: a CDO over 70% of which was rated AAA by Moody’s and S&P in September 2007. It delivered to the firm $600 million in financing, but given the state of the capital market, Friedman does not expect to issue another security any time soon.With his relatively limited interaction with rating agencies, Friedman’s view of that slice of the industry infrastructure that oversees the capital market is an interesting one. He doesn’t see the rating agencies – as many do right now – as villains in the credit market implosion. Rather, he tells GlobeSt.com, “they have tried to do their best, but have been put in a difficult position by the market.”That said, he like many others welcomes an addition to their ranks, which number around 10 right now. [see related story "Realpoint Approaches Rating Activities from Investor Perspective"].

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.

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