Moody's Stabs S&P in the Back With a Near-Junk Rating

NEW YORK (TheStreet) -- Now that rating agencies are starting to doubt the viability of their peers as lawsuits on pre-financial crisis ratings move forward, the time of reckoning has come.

Late on Valentine's Day, Moody's(MCO) sharply cut the ratings of competitor Standard & Poor's (owned by McGraw-Hill(MHP) . It cited the company's increasing legal risks now that the Department of Justice is suing S&P on fraud charges and state attorneys general including Eric Schneiderman of New York appear to be ready to dig in for a legal fight.

Still, Moody's higher-ups aren't likely to admit it's in the same boat. The firm, after all, gave off-the-mark ratings to many of the real estate and structured securities at the heart of S&P's legal woes.

Such is life in the rating agency business, where some bullish investors and analysts expect federal and civil litigation to blow over, while others such as famed short seller David Einhorn may still have large bets on their eventual demise.

In Moody's downgrade of competitor McGraw-Hill, the agency cites the company's S&P unit and litigation tied to the DoJ's lawsuit from earlier in February. Moody's also notes an earnings-draining sale of McGraw-Hill's education business to private equity firm Apollo Global Management(APO) .

"The downgrade reflects the loss of earnings and business diversity that will result from the expected completion of the $2.5 billion sale of McGraw-Hill Education (MHE) to investment funds managed by affiliates of Apollo Global Management LLC (Apollo) as well as heightened litigation risks in light of the recent civil lawsuits filed against McGraw-Hill and its subsidiary Standard & Poor's Financial Services LLC (S&P) by the Department of Justice (DOJ) and various state attorneys general," Moody's writes.