These next two articles are part of a two part special investigation from Bloomberg, which Barry Ritholtz, at the Big Picture, calls "must reads:"
Bringing Down Wall Street as Ratings Let Loose Subprime Scourge 
By Elliot Blair Smith
Excerpt: "Frank Raiter says his former employer, Standard & Poor’s, placed a “For Sale” sign on its reputation on March 20, 2001. That day, a member of an S&P executive committee ordered him, the company’s top mortgage official, to grade a real estate investment he’d never reviewed.
S&P was competing for fees on a $484 million deal called Pinstripe I CDO Ltd., Raiter says. Pinstripe was one of the new structured-finance products driving Wall Street’s growth. It would buy mortgage securities that only an S&P competitor had analyzed; piggybacking on the rating violated company policy, according to internal e-mails reviewed by Bloomberg.
“I refused to go along with some of this stuff, and how they got around it, I don’t know,” says Raiter, 61, a former S&P managing director whose business unit rated 85 percent of all residential mortgage deals at the time. “They thought they had discovered a machine for making money that would spread the risks so far that nobody would ever get hurt.”
Relying on a competitor’s analysis was one of a series of shortcuts that undermined credit grades issued by S&P and rival Moody’s Corp., according to Raiter. Flawed AAA ratings on mortgage-backed securities that turned to junk now lie at the root of the world financial system’s biggest crisis since the Great Depression, according to Raiter and more than 50 former ratings professionals, investment bankers, academics and consultants.
“I view the ratings agencies as one of the key culprits,” says Joseph Stiglitz, 65, the Nobel laureate economist at Columbia University in New York. “They were the party that performed that alchemy that converted the securities from F- rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.” 
Gold Standard
Driven by competition for fees and market share, the New York-based companies stamped out top ratings on debt pools that included $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes between 2002 and 2007. As subprime borrowers defaulted, the companies have downgraded more than three-quarters of the structured investment pools known as collateralized debt obligations issued in the last two years and rated AAA.
Without those AAA ratings, the gold standard for debt, banks, insurance companies and pension funds wouldn’t have bought the products. Bank writedowns and losses on the investments totaling $523.3 billion led to the collapse or disappearance of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. and compelled the Bush administration to propose buying $700 billion of bad debt from distressed financial institutions.
McCain, Obama
“This is appalling,” says Douglas Holtz-Eakin, the former director of the Congressional Budget Office from 2003 to 2005 who is now a senior policy adviser to the presidential campaign of Republican Senator John McCain. “It is exactly the kind of behavior that has so badly hurt the financial markets.”
Senator Barack Obama, the Democratic nominee, said in a Sept. 15 interview, “There’s a lot of work that has to be done in examining the degree to which ratings agencies were involved in making some of this debt — some of the leverage taken on — look like it was much safer and less risky than it was.”
S&P, a unit of McGraw-Hill Cos., and Moody’s substituted theoretical mathematic assumptions for the experience and judgment of their own analysts. Regulators found that Moody’s and S&P also didn’t have enough people and didn’t adequately monitor the thousands of fixed-income securities they were grading AAA.
Raiter and his counterpart at Moody’s, Mark Adelson, say they waged a losing fight for credit reviews that focused on a borrower’s ability to pay and the value of the underlying collateral. That was the custom of community bankers who extended credit only as far as they could see from their front porch.… "
Continued here.
Failing Grades on Wall Street: Part 1 of 2.
