I never understood what service companies like MBIA performed. If they could increase a bond's rating so the issuer could reduce his interest rate by say, 75 basis points and get a higher rating, how could the guarantor sell such insurance for say, 20 basis points? Who is wrong, the rating agencies, or the guarantor? Further, how can the rating agencies rate the guarantor's securities? How can the guarantors have AAA ratings, unless the rating agencies ratings of the underlying guaranteed bonds were wrong?
Why couldn't the bond owner reduce his risk by buying a diversified bond portfolio? I believed the premiums paid to financial guarantors either were pure waste since if push came to shove, the guarantors couldn't pay off and were just a Ponzi Scheme.
There is a fine post about the rating agencies at http://www.nakedcapitalism.com/ on 30 October.