The agencies argue that most investors still see them primarily as information providers. “I think it’s fine that people actually rely on ratings, but it’s not a recommendation to buy or sell. . . . We are just looking at the credit,” Clarkson says. And Moody’s claims that it has strong systems in place to prevent conflicts of interest. “There is no transaction or line of business that’s worth our reputation,” Clarkson says. S&P and Fitch, through their spokespeople, contend much the same thing.

But the agencies know that if they crack down too hard, by toughening standards, it won’t be good for business—theirs or their customers’. Securitization is the art of bundling loans and slicing them up into differently rated pieces called tranches. The investors in the lowest-rated—and potentially most-profitable—tranches take on the most risk, because they’re on the hook for the first losses. The tranches can then be sliced up again into new bundles. By this alchemical process, risky loans, such as subprime mortgages, can be converted into triple-A-rated securities. An investment bank’s goal is to have the highest percentage of its deals rated triple-A and to keep returns high for the investors who take on the lowest, riskiest tranches.

If the ratings agencies prevent the creation of a high percentage of triple-A paper, the deal won’t sell. The ratings agencies’ customers—the investment banks—will be unhappy, and the ratings agencies’ bottom lines will suffer. “Bankers get paid a lot of money. The ratings-agency people get pushed,” says a hedge fund manager who is betting that the securitization market will continue to sour. The agencies “never stopped to question” this, he says, “because they had zero economic risk.”

While the agencies haven’t entirely neglected the investors who ultimately buy these complex products, “the ratings agencies were very banker-, manager-, and market-friendly,” says Eileen Murphy, who, before taking a job on Wall Street, worked at Moody’s for five years, including three years as co-head of structured derivatives. “They spent a lot of time developing new methodologies. We can argue how that turned out. It was enlightened self-interest. They created a huge moneymaker for themselves.”

That’s putting it mildly. The value of new structured-finance deals hitting the market has grown 27 percent a year for the past four years, to more than $3 trillion in 2006, up from about $1.1 trillion in 2002. Today, the securitization market as a whole is worth about $11 trillion, according to the Japanese securities firm Nomura.

At an investor presentation in June, Moody’s showed that in 1992, it provided ratings on only three credit-­derivative products. By 2006, that had soared to 61.  And 23 of those had been introduced in the past two years. “This business enabled loans that have never been made before,” says Simon Mikhailovich, who runs a fixed-income hedge fund. “There’s fairly little ability to second-guess or independently establish whether the ratings are correct, because the complexity is so high.”

So how did the agencies help create the securities that are now causing so much trouble? A 2001 lawsuit sheds some light. In 1999 and 2000, the American Savings Bank of Hawaii asked PaineWebber, now owned by UBS, to create a product that would generate a higher return than it was getting through its typical, safe investment choices like municipal and corporate bonds. PaineWebber created a structure called a collateralized loan obligation, made up of the risky portions of other transactions. A French insurance company guaranteed A.S.B.’s principal. The bankers worked with Fitch, the ratings agency, to put the deal together. Moody’s also vetted it.

A.S.B. bought $83.5 million worth of the securities, but then federal bank regulators disallowed the purchase, unconvinced by the ratings that the investments were safe.  A.S.B. tried to return the securities to Paine­Webber, but the investment bank refused them. So A.S.B. was forced to sell the securities at a loss. It then did what firms do in such cases: It sued.