More On Mortgages

Further down in the New York Times article I referenced in the previous post is this paragraph:

During the boom years, S.& P. and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.

My emphasis added.  S&P can't be blamed for missing the housing market's decline.  I don't remember any experts predicting a housing decline to the levels we've experienced and the impact this decline would have on the greater economy and credit markets.  (I re-read my posts from 2006 and many included links and comments on the overvalued housing market.)   Anyone who didn't drink the housing Kool-Aid was considered a heretic and dismissed as an outlier.   This is not to excuse S&P, but its thinking was the same as every other big firm.  But really, the true reason behind the AAA ratings wasn't the housing market but the non-insurance insurance of credit default swaps that supported mortgage bonds.  The worthlessness of this protection is a large part of the story.