Wall Street pays the salaries of the ratings agencies, basically buying their high and spurious ratings, Wall St. makes a big mess of things, and then we the people pay for the clean up.The details of this corruption are laid out meticulously, as usual, by Taibbi in this Rolling Stone article. On the show Taibbi gave a brief run down on the much more detailed article. Internal emails from the rating agencies were well aware of this corrupt house of cards and they hoped they were well retired with their golden parachutes by the time this scandal hit the press. The people in charge of keeping Wall Street within bounds by requiring them and their products to be financially feasible in effect were paid to look the other way when those products were not only not feasible but incredibly destructive to the economy as a whole. On this Senator Carl Levin said: "It's like one of the parties in court paying the judges salary."
More specifically, the actual ratings analysts often said that Wall Street's products were junk and that they couldn't be rated very highly. So Wall Street went over their heads to the sales team, which don't actually think in terms of risk or the consequences of poor risk; they just want a sale that makes money for the firm and for them. Hence a good analyst is overruled by higher management whose sole purpose in life is profits above all else. And no, this is not like regressive paranoid stories with no basis in fact; the evidence is laid out in painstaking detail and this is what actually happened.
I know this story from the inside. I used to be a medical malpractice underwriter and worked for a number of insurance companies selling this product to physicians. My job was like those analysts in the rating agency, to analyze the risks of writing a policy and either charge the appropriate premium to handle the risks while making a profit, or outright declining to insure the worst risks. While most of my employers took seriously the risks and highly valued the underwriter's analysis, others were so bent on quick profits that they took terrible risks that I outright rejected. The ironic thing is that even following good underwriting guidelines those ethical companies made excellent profits, one of them even being now the biggest in the country after several acquisitions. But those unethical companies were not satisfied with good profits; their greed made them want outrageous profits at the expense of the market as whole to the detriment of their insureds and the taxpayers that have to clean up the mess they leave behind. Meanwhile they're off enjoying their golder parachutes.
Recall this post and the referenced cartoon video? See the accompanying text which pretty much lays out the scene like the above.
The rating agencies used to be paid by investors who wanted accurate information to make critical investment decisions. But now they are paid directly by Wall St. banks. And even after the crisis there have been no reforms to the above rating process; the banks still buy false ratings to do their dirty deeds. How is this possible unless the entire system is corrupt, including the government agencies whose job is supposed to be to protect the public? Sad news indeed.