This may yet become an excellent buying opportunity for investors. After all, Buffett was right that the two firms enjoy an entrenched duopoly. Regulatory changes in the post-2008 years have not increased competition in practice, and may not have even encouraged it in theory. Far higher costs in the areas of compliance have the effect of insulating the "Big Two" from smaller upstart competitors. And while both companies clearly assigned unjustifiably high ratings to many risky securities, it's not clear that increased competition would be a remedy. In fact, it could make it worse: more competition could prompt a race to the bottom, where agencies would be tempted - or almost forced - to gain market share by offering generous ratings.
At present, there are too many uncertainties, in the writer's opinion, to invest with confidence. For one, even the sharp decline in the companies' share prices are not fully accounting for the costs of an extended trial that could end in costly defeat. Though both companies have the financial strength to withstand penalties of $1-3 billion; the real question is what happens to their competitive position. If a duopoly - or an oligopoly with just 4 or 5 big players, where Standard and Poor's and Moody's lead the pack - remains intact, the future earnings power of both businesses will remain strong. The fact that the US government was willing to strike a deal suggests little interest in dismantling the status quo in the ratings industry. In fact, both companies are so deeply entrenched in the financial system that it may not even be possible to make radical changes. No government, corporation or any other large entity can issue debt without a rating, however ill-considered that rating may be. As the case proceeds, investors will be watching with great interest, for there may be an opportunity to buy one or both of the ratings powerhouses at a bargain-bin price.
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