It is very unclear what will be the final role and businessstrategy of the agencies. They have lost credibility, many of thesmartest and most experienced have left or will leave as soon asthey find a new job, they will soon be subject to the fear of thetort lawyers coming after them for any reason that can force apayoff to the lawyers, and they have competition. If there were notthe requirement to use investment grade ratings from ratingagencies imposed on pension funds and certain other investors, itis very likely that the rating agencies would simply go away.

There is now an internal layer of monitors in the agencieschecking to make sure the underwriters are doing it by the book andnot going out on a limb on anything. This makes working conditionsless than wonderful and it results in generally more conservativeratings than might otherwise be the case and might otherwise bewarranted. Similar to appraisers who always get it wrong on theupside and then over compensate and get it wrong on the downsidewhen there is a recession, raters are now being conservative. Ifyou know a tort lawyer is sitting there waiting for you to make anyjudgment that may prove later to be over optimistic, you will errto the conservative side. If you know Barney Frank and his band ofclowns on his committee will potentially drag you in front of thecameras for political theater, you will be overly conservative.Being overly negative can be as bad as being overly optimistic ifthe rating is too restrictive and the cost of capital resulting ishigher than it should be.

Blackrock and Pimco and others are now taking market share fromthe agencies as they are considered to be better analysts of thesecurities for investors such as insurance companies and others. Iexpect this trend will continue just as it did years ago withequity research when there was a major move away from the big wirehouses research groups who were found to have another axe to grind-mainly push the companies who were clients and IPO issuers of thefirm. The rating agencies never, to my knowledge, did anything likethe dishonest work of the investment banking research groups, butthe trend to use better quality research firms will be the samebecause the results of the past were unsatisfactory and ofteninaccurate.