It's a pretty interesting read, but I want to pull out one little quote from the bit that Matt Y excerpted and take issue with it. Namely this:
There were a lot of contributors to the catastrophe, but one indispensable one is that the ratings agencies monetized their sterling reputations in an extraordinary fashion, and nobody in regulatory apparatus of government saw that this was happening, and what it might portend.
That's just not true. For example, you can hear audio from a Spring 2006 Banking Committee where Sens. Shelby (R-AL) and Jack Reid (D-RI) offering to give SEC Chair Chris Cox basically whatever he wants in terms of enforcement power to oversee credit rating agencies. Cox's response? More or less "no thanks." It's in this podcast at 49:43 (trying to track down the transcript...).
This quote from House Report 109-546 - CREDIT RATING AGENCY DUOPOLY RELIEF ACT OF 2006:
We have, finally, very strong apprehensions that this bill could allow history to repeat itself. In the wake of the savings and loan crisis, Congress put in place requirements that the capital held in portfolio by financial institutions must be of investment grade as determined by an NRSRO. We put this requirement in place because we found that a number of those institutions that failed did not maintain high-quality investments in their portfolios. This bill's failure to ensure that the ratings issued by NRSROs continue to be credible and reliable could one day create another regrettable situation whereby taxpayers would again need to finance a bailout.
The problem wasn't that the regulators were UNAWARE of the conflict of interest that drove an artificial inflation of the ratings of CDOs, the political appointees up to and including SEC Chairman Chris Cox simply didn't want to regulate them.