The ratings agencies are a big part of the problem. Most large institutional investors have funds that have specific investment guidelines, such as they won't invest in a bond that is below single a. By giving crap bonds a aaa rating, they allowed a lot of funds to invest in terrible paper. If the ratings agencies had done their job, they could have limited the fallout because fewer institutions would have purchased the lower rated bonds.
In my opinion the ratings agencies were central to the problem.
As if on cue:A Senate panel is blaming credit rating agencies for helping banks disguise the risks of investments they marketed.The Permanent Subcommittee on Investigations says in a report that the rating agencies relied on hefty fees from banks, which wanted them to rate risky investments as safe.
