It's All the Credit Rating Agencies's Fault!

There are 3 major agencies in the US (world) that rate commercial loans based on the payment history, cashflow analysis, creditworthiness of the borrower - Moody's, Standard and Poor's and Fitch. What "grade" they give your debt is critical. The higher the grade you get, the lower your borrowing costs. Also, the higher the grade, the lower your costs to insure against default (remember CDS?). Here's what seems to have happened:

• The financial alchemists on Wall Street created a CDO.
• Then they sliced this up into higher and lower grade tranches.
• They somehow got the rating agencies to rate the highest grade tranche AAA! Remember these are still the lowest quite mortgages out there. It baffles me that some of the smartest credit cops would rate this junk AAA.
• Once these tranches are rated AAA, everybody in the world wanted to buy them, because of the promised high return.
• AIG got in on the CDS side as well, likely based off of the same ratings.

The point is that there is no way these tranches should have been rated AAA.