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International Herald Tribune
INHT
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Credit ratings agencies have few friends on Wall Street or in Washington.

Politicians have pilloried them for bestowing top marks on risky mortgage investments. Big investors blame them for missing the problems with subprime loans. And regulators have written rules that will diminish the importance of ratings.

But Ann E. Rutledge and Sylvain R. Raynes, two veteran credit analysts who founded R&R Consulting, think it is an ideal time to enter the industry.

After more than a decade running their own firm, the two are applying to be officially recognized by the U.S. government as a credit ratings agency. They aim to inject a dose of reality into an industry that they say has been clouded by a desire to please clients.

‘‘Somebody has to do it,’’ Ms. Rutledge said. ‘‘In this business, if there isn’t somebody in the middle who is willing to tell the truth, then there is no basis in trust.’’

It has been a slow and arduous process.

In 2006, the U.S. Congress developed clear guidelines for the licensing of credit ratings agencies. Lawmakers said they hoped the new rules would encourage smaller players to jump into the industry and shake up the business, which had traditionally been dominated by stalwarts like Standard & Poor’s and Moody’s.

Still, the hurdles remain high, upstarts like R&R say. Applicants are required to furnish 10 letters from banks, funds or other institutions that have used their credit ratings to make investment decisions.

But customers can be reluctant to vouch for a fledgling credit ratings agency. Experts say that some companies may see little benefit, and even a potential liability, in revealing what can be a confidential business relationship. R&R, which has had dozens of clients, has been able to get only eight letters in more than a year.

One R&R client, Charles W. Gerber, the president of the boutique investment bank Triumph Global, turned down the firm’s request, citing the advice of a lawyer. In an e-mail, Mr. Gerber declined to elaborate on his relationship with the credit ratings company.

‘‘Customers may be happy to employ R&R, and pay some fees, but a public vouching may be more than the customer wants to do,’’ said Lawrence J. White, a professor at the Stern School of Business at New York University who has testified before Congress on credit ratings agencies. Some customers, he said, may ask, ‘‘What’s in it for me?’’

In the years since the rules passed, the makeup of the industry has stayed relatively unchanged. Nine credit ratings agencies have the government’s approval, compared with five before 2006.

Ms. Rutledge and Mr. Raynes remain undeterred. With R&R, they are aiming to compete with the giants, with the hope of becoming a company that a bank might ask to rate a security it sells. Mr. Raynes, who was trained as an engineer, employs an analogy from that field to describe a bank’s relationship with a credit rater.

‘‘An architect can design a building that is going to collapse. A civil engineer cannot afford to do that,’’ Mr. Raynes says. ‘‘That’s why they don’t like each other.’’

Ms. Rutledge and Mr. Raynes, who are also a married couple, have honed their philosophy over two decades in the business. They first met in the 1990s at a training class while working at Moody’s. Ms. Rutledge, who was based in Hong Kong at the time, says she was initially put off by Mr. Raynes’s messy handwriting, but she soon found him to be ‘‘the smartest’’ analyst at the firm. In those days, Moody’s was like a university, with an open exchange of ideas, they say.

By the late 1990s, they became disenchanted with the business. It was transforming, in Mr. Raynes’s view, into a ‘‘rollover shop,’’ whose independence was compromised. Moody’s, for its part, has insisted that the independence of its process has improved since the financial crisis.

The pair started R&R in 2000 and have paid the bills by offering a variety of services. They have written two textbooks on the makeup of structured securities. They have taught college courses and trained officials at the Federal Deposit Insurance Corp.

They have also become vocal critics of the flaws in the financial system. In early 2004, Ms. Rutledge spoke at an event sponsored by New York University at which she argued that the boom in complex securities like collateralized debt obligations had paralleled the events leading to the market crash of 1929. With home values soaring at the time, the reception to her warning was icy, she recalls.

Last year, Mr. Raynes appeared on CNBC and suggested that Jim Cramer, host of the show ‘‘Mad Money,’’ was ‘‘a public relations officer’’ for Goldman Sachs. Mr. Cramer, who had been discussing a big lawsuit by the Securities and Exchange Commission against Goldman, dismissed the charge, taking offense.

R&R, which operates out of a small office near Grand Central Terminal in New York, offers clients the same blunt talk.

The firm’s seven employees use custom-built software to predict defaults in portfolios of loans or to rate securitized investments. If a deal does not pass muster, they let their clients know.

‘‘We consider them our third-party independent advisers slash consultants,’’ said Magchiel Groot, a senior investment officer at Netherlands Development Finance, a public-private bank based in The Hague. ‘‘We present a case to them, and then we let them shoot at it.’’