Almost no one disputes that the rating agencies played a major role in bringing on the financial crisis. To further investigate the mistakes they made, the Senate Committee on Homeland Security and Governmental Affairs held a hearing Friday where many rating agency representatives testified. There was also an enormous exhibits document (giant .pdf) referred to with facts and figures demonstrating the agencies' epic fail, along with scores of e-mails showing their misdeeds. The lessons learned were mostly those we already knew, however: the agencies suffered from deep conflicts of interest and not enough competition.
To see just how poorly a job the agencies did in rating mortgage-related securities, you need look no further than this chart, from the exhibits provided:
You should read this chart as their percentage of failure. In the 2006 and 2007 vintages, that means their ratings ended up being generally incorrect at least 90% of the time. How could they be so wrong? Because they didn't take into account that this could be a housing bubble (click on it for bigger image):
Amusingly, this exhibit appears to come from a Paulson & Co. presentation, the firm famous for betting against the housing market in 2007, and at the center of the Goldman-SEC case. What made the agencies ignore the historical trend line above and claim that the incredibly steep rise in prices was a new normal?