THE BURNED OVER DISTRICT

Not only did Moodys and Fitch and Standard & Poors get into bed with every investment bank in town, but they told them what to say so they wouldn't waste time.

The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds — companies and states, for instance — wouldn’t be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate.

But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings.

“There’s a bit of a Catch-22 here, to be fair to the ratings agencies,” said Dan Rosen, a member of Fitch’s academic advisory board and the chief of R2 Financial Technologies in Toronto. “They have to explain how they do things, but that sometimes allowed people to game it.”

There were other ways that the models used to rate mortgage investments like the controversial Goldman deal, Abacus 2007-AC1, were flawed. Like many in the financial community, the agencies had assumed that home prices were unlikely to decline. They also assumed that complex investments linked to home loans drawn from around the nation were diversified, and thus safer.

Both of those assumptions were wrong, and investors the world over lost many billions of dollars. In that Abacus investment, for instance, 84 percent of the underlying bonds were downgraded within six months.

But for Goldman and other banks, a road map to the right ratings wasn’t enough. Analysts from the agencies were hired to help construct the deals.

Funny thing about Wall St., they were in bed with each other and it was the rest of the country that got fucked.