When they weren't being pushovers, they were being incompetent. As the Financial Times reported last year, a computer glitch caused Moody's to incorrectly give a triple-A rating to billions of dollars of securities called constant proportion debt obligations. And then, when Moody's found out about the glitch, their methodology had conveniently changed, to allow these ratings to stay in place.
"They put their own interest in front of the public's interest, and anyone that relied on them was let down," says Jack Ablin, CIO of Harris Private Bank.
Some believe a way to address the conflict of interest the agencies face is to scrap the model in which they are paid by issuers. That is the model followed by Egan-Jones, a ratings agency started 12 years ago.
Egan-Jones founder Sean Egan has been an outspoken critic of his competitors for years, and his business is starting to grow, as investors frustrated with the big three ratings agencies have turned to his firm for research. Egan says Moody's, S&P, and Fitch are the chief reason for the current economic mess.
"You have to understand what has caused us to be in this crisis: at its heart it's a credit crisis," Egan says. "It's not as though we have a meltdown because of some smallpox disease, or people returning from the war and the economy declining by 20% because you don't need the war materials anymore."
Congressmen Gary Ackerman (D-N.Y.) and Michael Castle (R-Del.) introduced legislation last month that would place restrictions on the types of securities ratings agencies can rate. Their legislation will not attempt to address the compensation model, however.
Second Curve's Brown has a simpler solution.
"I think we should just blow 'em up," he says, noting that there is no nationally recognized ratings agency for equities, and for good reason. "Ratings are based on people, and people make mistakes."
Brown has a point. The ratings agencies missed Enron, they missed the subprime debacle, and they likely will miss the next financial disaster as well. Taking away their official status, on which insurance companies, pension funds and other large investors based their decisions, may help limit the damage.
It is hard to believe they'll be missed.