By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace.It is great that the Times is bringing this issue to the public's attention as reform options are considered in Congress. It is important to understand that the mortgage crisis is not a failure of government, but in fact a failure of the market which the government is being asked to fix. One party's philosophy says that it is an appropriate role of government to account for and mitigate market failures. The other party's philosophy says that government is the problem and should be drowned in a bathtub.
Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.
But who was evaluating these securities? Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating.
Thus the agencies became the de facto watchdog over the mortgage industry. In a practical sense, it was Moody’s and Standard & Poor’s that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more. - The New York Times
We've tried the drowning philosophy for a couple decades now, and all it's gotten us is ruined infrastructure, illegal wiretaps, torture and financial crises. Perhaps it's time for a change?