One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good. One answer is that Wall Street was given access to the formulas behind those magic ratings â and hired away some of the very people who had devised them. In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. The major credit rating agencies, Moodyâs, Standard & Poorâs and Fitch, drew renewed criticism on Friday on Capitol Hill for failing to warn of the dangers posed by complex investments like the one that has drawn Goldman Sachs into a legal whirlwind. But while the agencies have come under fire before, the extent to which they collaborated with Wall Street banks has drawn less notice. The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds â companies and states, for instance â wouldnât be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate. But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings. âThereâs a bit of a Catch-22 here, to be fair to the ratings agencies,â said Dan Rosen, a member of Fitchâs academic advisory board and the chief of R2 Financial Technologies in Toronto. âThey have to explain how they do things, but that sometimes allowed people to game it.â There were other ways that the models used to rate mortgage investments like the controversial Goldman deal, Abacus 2007-AC1, were flawed. Like many in the financial community, the agencies had assumed that home prices were unlikely to decline. They also assumed that complex investments linked to home loans drawn from around the nation were diversified, and thus safer. Both of those assumptions were wrong, and investors the world over lost many billions of dollars. In that Abacus investment, for instance, 84 percent of the underlying bonds were downgraded within six months. But for Goldman and other banks, a road map to the right ratings wasnât enough. Analysts from the agencies were hired to help construct the deals. In 2005, for instance, Goldman hired Shin Yukawa, a ratings expert at Fitch, who later worked with the bankâs mortgage unit to devise the Abacus investments. Mr. Yukawa was prominent in the field. In February 2005, as Goldman was putting together some of the first of what would be 25 Abacus investments, he was on a panel moderated by Jonathan M. Egol, a Goldman worker, at a conference in Phoenix. The next month, Mr. Yukawa joined Goldman, where Mr. Egol was masterminding the Abacus deals. Neither was named in the Securities and Exchange Commissionâs lawsuit, nor have the rating agencies been accused of wrongdoing related to Abacus. At Goldman, Mr. Yukawa helped create Abacus 2007-AC1, according to Goldman documents. The safest part of that earned an AAA rating. He worked on other Abacus deals. Mr. Yukawa, who now works at PartnerRe Asset Management, a money management firm in Greenwich, Conn., did not return requests for comment. Goldman has said it will fight the accusations from the S.E.C., which claims Goldman built the Abacus investment to fall apart so a hedge fund manager, John A. Paulson, could bet against it. And in response to this article, Goldman said it did not improperly influence the ratings process. Chris Atkins, a spokesman for Standard & Poorâs, noted that the agency was not named in the S.E.C.âs complaint. âS.& P. has a long tradition of analytical excellence and integrity,â Mr. Atkins said. âWe have also learned some important lessons from the recent crisis and have made a number of significant enhancements to increase the transparency, governance and quality of our ratings.â David Weinfurter, a spokesman for Fitch, said via e-mail that rating agencies had once been criticized as opaque, and that Fitch responded by making its models public. He stressed that ratings were ultimately assigned by a committee, not the models. Officials at Moodyâs did not respond to requests for comment. http://www.nytimes.com/2010/04/24/business/24rating.html