Andrew Sullivan culls some insights on the credit crisis — specifically, the roles of investors, ratings agencies, and mortgage originators — from reader emails:
Go forth and read. (Spoiler: it was bad incentives.)
I found this email grimly amusing, in the same way that I find a trivial bug that took weeks to track down grimly amusing:
Once upon a time, agencies like S&P and Fitch were paid by people interested in buying the rated securities. But nowadays, the originator of the bond (or MBS or CDO or CDO squared) pays for the ratings. Since these agencies compete for business, a perverse incentive was introduced into the ratings system which distorted the legitimacy of their judgments. Add to that the truly oceanic complexity of many of the mortgage and credit-backed securities being floated, and you get a failed rating system in which special statistical analyses of a pile of faulty loans lead to excellent ratings. You get enough shit in a bucket and there’s going to be some gold in there somewhere.