The US government's $5 billion lawsuit against Standard & Poor's for exaggerating mortgage bond ratings in 2007 has cast a pall over the ratings industry and exposed its role in the financial crisis.
S&P competitors Moody's and Fitch find themselves potentially facing penalties after the Justice Department alleged S&P knowingly kept ratings on high-risk mortgage securities high in order to win revenues from issuers.
The Justice Department has not said whether it has the other two ratings agencies in its sights, but Moody's spent much of the week fending off questions about whether it faces similar action following the S&P suit.
The New York Attorney General has meanwhile launched an investigation into all three companies over their ratings prior to the 2008 crisis, sources close to the matter told AFP.
S&P parent McGraw-Hill's shares plunged 27 percent after the suit was filed, and Moody's dropped 22 percent for the week, underscoring the market's worry that the crackdown on S&P may be just the tip of the iceberg.
"Investors have been selling those stocks aggressively this week and keep doing so out of fear that the situation with the Department of Justice could get a lot worse in the future," said Wedbush Securities analyst Michael James.
"They think there is probably more bad news to come."
The government's case argues that S&P knowingly placed triple-A ratings on billions of dollars worth of mortgage-based financial securities even as the US housing market collapsed, misrepresenting their true credit risk.
Many of the top-rated issues cited in the suit were in default within one year or less. S&P exaggerated the ratings in part to please clients and keep issuer revenues high, the suit alleges. US Attorney General Eric Holder called S&P's conduct "egregious," saying "it goes to the very heart of the recent financial crisis."