Roger Lowenstein, the NYT's ace long-form business reporter, will dig deep into credit rating agencies in next week's magazine.  Probably nothing new to the Glom's readers, but Lowenstein sure knows how to break it all down:

In a practical sense, it was Moody’s and Standard & Poor’s that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more.
[snip]
The Securities and Exchange Commission, faced with the question of how to measure the capital of broker-dealers, decided to penalize brokers for holding bonds that were less than investment-grade (the term applies to Moody’s 10 top grades). This prompted a question: investment grade according to whom? The S.E.C. opted to create a new category of officially designated rating agencies, and grandfathered the big three — S.&P., Moody’s and Fitch. In effect, the government outsourced its regulatory function to three for-profit companies.
[snip]
Issuers thus were forced to seek credit ratings (or else their bonds would not be marketable). The agencies — realizing they had a hot product and, what’s more, a captive market — started charging the very organizations whose bonds they were rating. This was an efficient way to do business, but it put the agencies in a conflicted position.

And so on.  Of note, Lowenstein walks us through how Moody's gave a particular subprime mortgage security its investment grade, and he quotes Glom book clubber Frank Partnoy.

UPDATE: And here's SEC chair Christopher Cox's testimony before the Senate today on credit rating agencies.  Here's what the SEC has in mind for the agencies:

To strengthen accountability, the new rules that the Commission will soon consider may include requirements for enhanced disclosures about ratings performance. ....To enhance transparency, the Commission may soon consider new rules that would require the disclosure of information about the assets underlying the mortgage-backed securities, CDOs, and other types of structured finance products they rate. ....The rules that the Commission will soon consider may also include provisions designed to ensure that enhanced disclosure about a firm's ratings performance affords other credit rating agencies, including newly recognized NRSROs, an opportunity to identify flaws or opportunities for improvement on their competitor's approach, or to demonstrate to investors that their credit ratings perform better.

  After the jump, check out just how much downgrading of subprime products the credit rating agencies have done, according to Cox.

• As of February 2008, Moody's had downgraded at least one tranche of 94.2% of the subprime RMBS issues it rated in 2006, including 100% of the 2006 RMBS backed by second-lien loans, and 76.9% of the issues rated in 2007. Overall, Moody's has downgraded 53.7% and 39.2% of all of its 2006 and 2007 subprime tranches, respectively.¹
  
 
• As of March 2008, S&P had downgraded 44.3% of the subprime tranches it rated between the first quarter of 2005 and the third quarter of 2007.³  This included 87.2% of securities backed by second lien mortgages.²
  
 
• As of December 2007, Fitch had downgraded approximately 34% of the subprime tranches it rated in 2006 and in the first quarter of 2007. In February 2008, Fitch placed all of the RMBS it rated in 2006 and the first quarter of 2007 backed by subprime first lien mortgages on Ratings Watch Negative.⁴
   

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