Given McGraw-Hill's insistence on maintaining a large dividend and Moody's increasing buyback abilities, Palmer thinks ratings agencies are being too cavalier about their capital. The prospect of a circular set of downgrades by competitors indicates agencies themselves may be concerned.

"The sooner the rating agencies acknowledge the legal threat they face, the better off they will be for preparing for all potential outcome," Palmer said in an interview Wednesday.

-- Written by Antoine Gara in New York

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