The big rating agencies – Moody’s, Standard & Poor’s and Fitch – may not have lost any money in the credit squeeze, but they have taken their share of vitriol and blame. The charge against them is that, at best, they are idiots who misunderstood the risks of structured financial products and, at worst, that they cynically overrated bonds in order to increase profits. Yet if regulators are to intervene, it must be with a clear understanding of what went wrong with ratings and why.

All three credit-raters have been forced to downgrade a slew of US bonds backed by subprime mortgages, on which default rates have risen abruptly. The securities downgraded have included some rated triple-A, which is the safest rating possible and implies an extremely low probability of default.