Jules Kroll, founder of Kroll (KROL) and current principal of K2 Global Partners, plans to shake up the credit rating agency (CRA) sector, with the launch of Kroll Bond Rating this summer. The man credited with modernizing the intelligence and security sectors will use his analytical and consulting experience to go head to head with Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. His first target: mortgage-backed securities (MBS), a market segment that’s seen one issuance so far in 2010. “We need to pick the spots where the incumbents have had the greatest harm to their credibility and that’s mortgage-backed securities of a commercial and residential nature,” Kroll said in a televised interview with Fox Business. Instead of relying on the issuer paid model for running the CRA — a model Kroll said has been “condemned in an outright basis” — a consortium of institutional investors will own 30% to 40% of the company, and before investing in a product, will require a Kroll bond rating. Kroll said the range of potential investors include public pension funds, corporate pension funds, endowments and universities, with each owning a small segment of the company. Another difference with Kroll’s rating agency is that issuers will have to pay for the rating up front — a move Kroll said will cut down on so-called “rate shopping,” a practice blamed for many unworthy subprime MBS getting unwarranted triple-A ratings. As for the rating methods Kroll Bond Rating will use, Kroll said the company will rely less on predictive modeling, something he said other CRAs are over-dependent on. “They would make certain basic assumptions and feed the numbers into the system,” he said. “They did all their work based on what companies and institutions provided them.” “I’ve got my own approach, and that is basically due diligence,” he said. “We’re going to combine the skills of audit, the skills of diligence, along with the skills of rating and modeling in a much more robust analysis of what’s behind companies, structured products and financial institutions and really do the homework that investors need to see done.” After it breaks into the MBS rating market, Kroll said his firm will start rating other financial products, including municipal bonds, which he called “the next big tsunami that’s going to hit the street.” Write to Austin Kilgore. The author held no relevant investments.