The rating agencies initially defended their AAA ratings by saying that default rates had been very low during the good years. No kidding. Did anybody think there might be bad years? “To look at the performance in good years as a predictor of what may happen in bad years is not a robust way to do a calculation,” says Hamilton.
“With the benefit of 20/20 hindsight, the rating agencies were asleep,” says Starr. As others have pointed out, everybody conspires during a bubble to keep the bubble going forever.
In his book Infectious Greed, Partnoy explained that banks snap up the ablest financial analysts, and the various funds get the second best. “To put it charitably,” said Partnoy, the analysts that wind up at the rating agencies are “not the sharpest tools in the shed.”
But the same could be said for the big Wall Street firms that sold the gelato bonds and the purported investors who bought them. The characterization, too, applies to the slick salesmen who peddled the exotic and predatory mortgages and some, if not most, of the home buyers who snapped them up. And what about the Federal Reserve and the federal regulators? They looked the other way as fraudulent lending proliferated.