Even as angry investors argued about the causes of the credit crisis in its aftermath -- was it lax regulation that caused the meltdown or too much government interference with the housing market? -- they agreed on at least one point. Credit rating agencies like McGraw-Hill's (MHP) Standard & Poor's and Moody's (MCO) were responsible for blessing piles of toxic assets with their highest-quality ratings and had horribly disserved investors.But now, as the economy shows signs of recovery, the fortunes of the major credit ratings are staging an unlikely reversal. Bond sales surged 41% to $1.2 trillion last year as companies rushed to take advantage of thawing credit markets. That means demand for ratings has also boomed, and both agencies delivered solid operating results recently.

On Thursday, Moody's reported fourth-quarter income of $101.9 million, or 42 cents a share, which came in a penny ahead of analyst expectations. Its shares, however, were off 5% after its forecasts came in short. S&P owner McGraw-Hill earlier reported earnings of 51 cents a share -- far ahead of the 40 cents Wall Street was expecting. One reason for the profit surge: Revenue at its credit markets services group grew by 19%.

Unlikely Combination of Events

But while more bread-and-butter ratings for corporate bonds have staged a comeback and calls for the agencies' demise by high-profile hedge fund managers like David Einhorn of Greenlight Capital (who was prescient in anticipating the collapse of Lehman Brothers and took a short position in Moody's in September) have not come to fruition, investors should take the results with a grain of salt.

For starters, the rush to issue debt followed the post-Lehman nuclear winter in the credit markets that's not likely to be repeated. Indeed, bond sales by companies outside the financial sector dropped 7% in January as looming concerns about sovereign debt made investors jittery and hammered the stock market as well.

The once-booming securitization business, meanwhile, remains moribund and shows no signs of returning to its past glory any time soon. Just $135 billion in asset-backed securities will be issued this year, not much more than the record low $125 billion issued in 2008 according to Barclay's Capital.

And while the agencies may have dodged a bullet in last month when a $100 billion lawsuit by investors accusing the credit raters of fraud was dismissed, lawmakers are currently working on regulation to make the agencies more accountable.

Disastrous Decisions

Although they're still standing, ratings agencies did irreparable damage to their credibility by sanitizing bad debt with high ratings during the credit bubble. Investors are unlikely to forget those disastrous decisions any time soon.

"Come to think of it, many of the spectacular failures during the crisis bore AAA ratings," Einhorn wrote in September, citing government-sponsored enterprises (Fannie Mae and Freddy Mac), insurers like AIG and companies like General Electric. "Investors who bought AAA-rated structured products thought they were buying safety, but instead bought disaster."

The consequences of those damaged reputation will linger even after the thaw in the once-frozen credit markets has passed.

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