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Today's Financial Crisis Inquiry Commission hearing on credit rating agencies promises to shed quite a bit of light on one of the most profitable and corrupt businesses in Corporate America. Rating agencies score huge profits regardless of how accurate their ratings prove, and thus never felt any serious pain from the financial crisis, despite the central role rating agencies played in the collapse.

The basic model for rating agencies like Moody's, Standard & Poor's and Fitch Ratings is a conflict of interest. These companies rate securities-- if a bank wants to package a bunch of mortgages into a security to sell to investors, the rating agencies stamp a rating on that security to indicate how safe the investment is. But Moody's et al do not get paid by the investors who use their ratings. Instead, they get paid by the banks that create and package the securities. That creates a clear incentive to inflate ratings in order to win more business from banks.

So not surprisingly, the rating agencies have a pretty terrible record. They slapped top-grade AAA ratings on trillions of dollars worth of mortgage-backed securities, only to watch those securities plummet in value and default like crazy when home prices started to decline in 2007.

Expect lots of discussion about the way whistleblowers at rating agencies were treated, and lots of damaging emails about rating agency top brass pressuring underlings to ignore clear signs of stress in securities they were rating.

But also pay close attention to the testimony of Berkshire Hathaway chief Warren Buffett. Buffett was once viewed as a financier who invested in quality firms and didn't hesitate to criticize major problems with the financial system. That reputation has been severely tarnished by the financial crisis and the following battle for financial reform-- Buffett spent decades criticizing the market for derivatives, but has since lobbied hard to protect his own derivatives interests. He's lobbied so hard, in fact, that Buffett's Senator, Democrat Ben Nelson of Nebraska, joined a Republican filibuster to block Wall Street reform.

Buffett has adopted a similar strategy on ratings. He's been very critical of rating agencies for years, all while owning a huge stake in Moody's, and making a killing off of it.

Nobody likes the rating agencies. Even staunch defenders of big Wall Street banks hate Moody's and Fitch and S&P because they provide a convenient scapegoat. But it's important not to loose sight of the fact that, even at their worst, rating agencies were essentially just acting as agents of the big banks. And despite this widespread animosity, rating agencies still hold a very prominent place in the global economy by rating sovereign debt. With Greece and Spain under intense budget pressure, rating agency downgrades of each nation's debt has a tremendous impact on bond markets and the ability of government's to finance basic public services. Moody's has been particularly nefarious in this respect, even threatening to downgrade U.S. government debt, despite no evidence of default, and heavy demand among investors for U.S. Treasury bonds.

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