S&P, Moody's Face an 'Existential Threat'

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"It's a matter of time before they all disappear," Einhorn said of the rating agencies. A similar suit on a SIV called "Rhinebridge" that was rated by Fitch, Moody's and S&P may also go to trial after a Jan. ruling from Judge Scheindlin.

Investors should watch for a February trial on fraud charges leveled against Moody's to settle the score between Buffett -- Moody's largest shareholder -- and Einhorn. The suit could also be a leading indicator on whether the DoJ's claims against S&P or any other ratings agency bear fruit.

"We allege that, by knowingly issuing inflated credit ratings for CDOs (collateralized debt obligations) -- which misrepresented their creditworthiness and understated their risks -- S&P misled investors, including many federally insured financial institutions, causing them to lose billions of dollars," U.S. Attorney General Eric Holder said in a statement Tuesday.

In addition, "we allege that S&P falsely claimed that its ratings were independent, objective, and not influenced by the company's relationship with the issuers who hired S&P to rate the securities in question -- when, in reality, the ratings were affected by significant conflicts of interest," Holder added.

The DoJ's civil fraud charges were brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allows the government to seek civil penalties equal to the losses suffered by federally insured financial institutions. To date, the DoJ has identified over $5 billion in federal losses resulting from CDOs that were rated by S&P between March and October 2007, according to Holder.

"A DOJ lawsuit would be entirely without factual or legal merit," S&P said in a statement Monday. "It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market, including U.S. government officials, who in 2007 publicly stated that problems in the subprime market appeared to be contained."

-- Written by Antoine Gara in New York