Why the Ratings Agencies Flunked

Egan has long been an outspoken critic of what he calls "the issuer-sponsored ratings firms." He says his firm's ratings will have more clout in the market with the new designation, and he points to his track record. Egan-Jones was well out in front of the Big Three in issuing downgrades on Enron and WorldCom. Then, it was far ahead of the pack on the auto industry's woes, with early downgrades on General Motors and Ford (F Quote); it also was out front on the collapse of homebuilders like KB Homes (KBH Quote) and Pulte Homes (PHM Quote).

In a study on ratings performance conducted in 2003, the Federal Reserve concluded that "overall, it is robustly the case that Standard & Poor's regrades from BBB- moved in the direction of Egan-Jones Ratings' earlier ratings. It appears more likely that this result reflects systematic differences between the two firms' rating policies than a small number of lucky guesses by Egan-Jones."

A subsequent study by Stanford University and the University of Michigan said, "we believe our results make a strong case that the non-certified agency [Egan-Jones] is the leader and the certified agency [Moody's] is the laggard."

Egan gets the most publicity for his negative calls, but he claims he's also ahead of the curve on positive calls, noting that until eight months ago, most of his ratings were higher than S&P and Moody's.