One of the enduring frustrations of the financial meltdown -- for investors and investigators alike -- has been the almost-impermeable shield protecting the credit rating agencies. Moody's, S&P and Fitch gave their blessing to thousands of mortgage-backed securities that turned out to be dreck, yet they've succeeded in evading liability in all but a few cases involving private offerings and individual defendants. And since the rating agencies have won dismissals in early stages of cases against them, litigation hasn't even turned up much evidence of how the agencies arrived at the ratings they conferred upon mortgage-backed instruments.

That's about to change. On Tuesday, Manhattan state supreme court judge Eileen Bransten granted MBIA's motion for discovery against S&P and Moody's in the bond insurer's suit against Countrywide. The judge's three-page order won't put the rating agencies on the hook for liability -- they're third parties in MBIA's suit, not defendants -- but it will expose internal S&P and Moody's documents relating to 15 Countrywide securitizations that MBIA insured.

Moreover, Judge Bransten's ruling sets precedent in the multibillion dollar litigation between bond insurers and MBS issuers, so we're likely to see MBIA, Ambac, Syncora, and other monolines pressing for discovery against S&P, Moody's, and Fitch. That's bad news for the rating agencies, especially as they fend off a reported Securities and Exchange Commission investigation of their MBS evaluation practices.

MBIA and its lawyers at Quinn Emanuel Urquhart & Sullivan argued in a motion to compel discovery against S&P and Moody's that the "shadow ratings" the agencies gave Countrywide securities were crucial to MBIA's decision to insure the MBS offerings. "Internal documents from the rating agencies will reveal how they arrived at the shadow credit ratings and the extent to which these ratings were affected by Countrywide's representations regarding the characteristics of the underlying mortgage loans," MBIA asserted. "To the extent that Countrywide also provided the rating agencies with false and misleading loan-level information, the shadow ratings generated by the rating agencies would also be materially false and misleading. As such, the internal models, methodologies, and assumptions of the rating agencies are relevant to determine whether the shadow ratings provided by Countrywide to MBIA were false and misleading."

MBIA was so eager to get its hands on discovery from S&P and Moody's that it offered to bear the cost of the first round of document production, to fend off the rating agencies' argument that MBIA's request was overly burdensome. The rating agencies, in a joint opposition motion by S&P counsel from Cahill Gordon & Reindel and Moody's counsel from Satterlee Stephens Burke & Burke, also asserted that MBIA's discovery request was a "fishing expedition."

"What the rating agencies' analysts may have thought about (the underlying loan data), how they analyzed it, and what their analysts said to one another about it has no bearing on the outcome of this action," the S&P and Moody's brief says.

Judge Bransten offered only minimal explanation of her decision to grant MBIA discovery. MBIA, she wrote, had shown in its briefs and at the June 27 oral argument that "the requested documents directly pertain to Countrywide's alleged misrepresentations, MBIA's own due diligence toward the securitizations, and the reasonableness of MBIA's reliance on Countrywide's representations regarding the quality of the loans underlying the securitizations."

MBIA counsel Peter Calamari of Quinn Emanuelreferred OTC's call to an MBIA spokesman, who declined to comment. S&P and Moody's lawyers didn't respond to calls asking for comment, and the rating agencies didn't reply to e-mail requests.

(Reporting by Alison Frankel)