Who's to Blame for the Economy? Rating Agencies

Each day this week, a different writer from TheStreet.com will made the case for why one of five prime culprits -- the banks, Congress, irresponsible home buyers, the Federal Reserve or the rating agencies -- is most to blame for the credit crisis and ensuing economic meltdown.

A good measure of who is responsible for getting us into this mess is looking at who got rich off of it. Bond ratings agencies certainly got their share of the take.

Moody's Investors Service (MCO Quote) saw its profits quadruple between 2000 and 2007 and had a higher profit margin than any other company in the S&P 500 for five straight years, according to opening statements from Henry Waxman, chairman of the House Committee on Oversight and Investigations, in a congressional hearing on the ratings agencies he held in October.

Investors in Moody's, Fitch Ratings and McGraw Hill Cos. (MHP Quote) unit Standard & Poor's made out like bandits during those years because they practically had a license from the government to print money. Throughout the 1990s, they were the only nationally recognized statistical rating organizations. While the Securities and Exchange Commission began letting other entities into this club in 2003, the big three had such a huge head start that they still dominated the scene.

Their revenues exploded in recent years, however, as the debt securitization market began to catch on. As banks like Citigroup (C Quote) and Merrill Lynch (since bought by Bank of America (BAC Quote)) bought up more and more bad loans and piled them into synthetic securities, they turned to the ratings agencies to give them triple-A ratings so they could be widely sold and distributed. The triple-A rating was important, because large institutional investors like pension funds and insurance companies that are barred from riskier investments needed its deal of approval to buy the securities. They had rules established by their investment committees and regulators, which prohibited them from buying securities with ratings below a certain threshold.