If the trend continues, ratings firms could become a valuable counterweight to corporate management, Wall Street analysts—and even government regulators.[Isn't that what they were supposed to be in the first place????]

Take a recent S&P report that calculated the firm's own measure of capital levels at large banks. [He is referring to this article, "Banks' Capital Adequacy Ratios Need Improvement, S&P Says ", but hey, haven't I been saying that for quite some time while proffering significant analysis to buttress my opinion??? Here is an excerpt from that article, let me know if it sounds familiar in comparison to to the content in the side bar, "In its study, S&P took a swipe at widely-used measures of banks' health such as their tier one and leverage ratios, saying they are not consistently calculated or don't adjust for risks. "We do not believe that these two capital ratios, which are the most commonly used by market constituents, are sufficient to assess banks' risk-adjusted capital adequacy," S&P said. One difference between these measures and S&P's risk-adjusted capital model is the rating agency's inclusion of a higher capital charge against banks' trading books. Even after regulators move as expected to up these charges, S&P estimates its own model will still be significantly higher."]

Using its own approach, S&P calculated risk-adjusted capital ratios that were substantially lower than ratios determined by official regulatory approaches. This, of course, raises questions about the reliability of the official measures. [Again, old news. They should have been harping on this in 2007, as the better sources of alternative analysis had, ex. As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades and Is this the Breaking of the Bear?] Granted, the widely used Basel II capital regime is being made stricter. But even after such changes, S&P's approach could still be tougher, the ratings firm estimates.

Moody's also caused a stir this month with research showing that banks face a high level of debt coming due over the next three years. And a separate Moody's piece on heightened credit distress at companies involved in private-equity transactions drew ire from the industry. Meanwhile, Fitch made few friends, and perhaps lost revenue, by declining to rate repackaged securitizations of Alt-A mortgages. It cited volatility in the amount of past-due loans.

Will the ratings firms continue in this vein? That partly depends on whether enough independent-minded people have been drafted into top positions...

Welcome changes could be entrenched and extended if a tough ratings-firm bill in Congress becomes law.

In easy-money times, investors will tend to ignore skeptical research. But if the ratings firms' new-found rigor had been in place in 2005, the credit bubble may not have become as dangerous as it did. [Yeah, tell me about it.]

There is a lot of ground for the rating agencies to make up for before they save face. Remember the monolines ( A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton )???

click on any graph to enlarge it.

And then...

How about "Moody's Affirms Ratings of Ambac and MBIA & Loses any Credibilty They May Have Had Left" or Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility? Do you remember perpetual HPA (perpetual housing price appreciation) models from Fitch? If not, see Download a "Window" into Ambac's Problems. I could go on, but why?

I challenge the rating agency industry to take on the REITs next. The one that we are currently working on has more than half of its wholly owned assets underwater. When I mean underwater, I mean underwater. It has 100 plus LTVs and even those properties with no mortgages are worth less than they cost to acquire, yet they have investment grade ratings and are able to issue stock. Hmmmm...

I will be going into the REIT thing in detail in a later post.