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Well, therein lies the rub.

Much of the debt market investor class has put an inordinate emphasis on the ratings agencies’ “analysis” of debt issues over the last decade. What was not make clear to the investing public was how thoroughly bought and paid for the ratings agencies became during the housing bubble.

THE question that so many debt investors failed to ask themselves was this:

“If AAA ratings are accorded to the sovereign debt of the US and perhaps only a handful of SP500 companies (less than 10 out of 500), and these bonds are traded in some of the most liquid markets in the world, then how is is that debt composed of a mish-mash of mortgages to people with FICO scores lower than 600, derivatives and opaque markets are rated AAA?”

There were two forms of risk in much of this debt that is now imploding: default risk and liquidity risk. These oh-so-very-sophisticated investors failed to understand either risk completely, but especially they failed to understand the liquidity risk, and are now paying for it. Still, the one nugget of common sense that should have prevailed here was “If AAA ratings are so difficult to obtain, then why are they putting them on paper backed by deadbeat borrowers?” That’s mere common sense, no background in finance is required here.

The thing that has to happen most is to take down the government recognized ratings agencies (S&P, Moody’s and Fitch’s) and create a market whereby the buyers of debt issues pay for ratings and the issuers have to take their lumps at the hands of the ratings agencies. The idea that we’re going to get objective evaluations of debt issues when the issuers are the ones paying for the ratings is insane.