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Ratings Agencies Get Tough, Wreak Havoc

Stocks in this article: MHP MCO C GS WFC JPM FMCC.OB

NEW YORK ( TheStreet) -- Ratings agencies Standard & Poor's and Moody's Investors Service (MCO) are attempting to get tough in the wake of the financial crisis, hoping to rehabilitate their seriously bruised reputations, say market watchers.

"The ratings agencies are engaged in some sort of campaign to restore their credibility," says Arturo Cifuentes, a professor at the University of Chile and former Moody's analyst who has testified before the U.S. Congress about the role of the ratings agencies in the subprime crisis. He points to recent threats to downgrade the U.S. sovereign rating, something he says "they should have done a long time ago," as a prime example of this campaign.

Ratings agencies have also drawn fire from European governments for aggressive actions to sovereign ratings of countries including Greece, Ireland and Portugal, actions that brought praise from commentators such as Floyd Norris in The New York Times.

This week, Standard & Poor's got people's attention when it declined to rate a $1.5 billion pool of loans backed by commercial mortgages, causing Goldman Sachs (GS) and Citigroup (C) to cancel the deal. S&P said in a press release it was reviewing its methodology due to the "discovery of potentially conflicting methods of calculation."

S&P then withdrew ratings on a separate $1.19 billion deal from Freddie Mac (FMCC.OB) that had been underwritten by Wells Fargo (JPM) and JPMorgan Chase (JPM), Bloomberg reported.

The decision drew fire from analysts at Morgan Stanley (MS)and Deutsche Bank (DB), according to Bloomberg .

The moves on the CMBS deals are highly unusual, says William O'Connor, a partner and Chair of the Financial Services Practice at law firm Crowell & Moring, who believes they, too, reflect an attempt by ratings agencies to restore their credibility after they were widely criticized for offering high ratings to low-quality loans in attempt to earn more fees.

Cifuentes, however, does not believe the S&P decision to review its methodology on the CMBS deals is especially unusual. He says ratings agencies are constantly changing their assumptions. For example, their asset correlation assumptions have changed numerous times in the last four years, he says.

Regardless, Cifuentes believes ratings agencies' efforts to improve their reputations will prove fruitless.

"In the PR arena their image is probably broken beyond repair," he says.

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