Bet on it: The big three credit agencies, Moody’s, S&P and Fitch played “a crucial role in the epochal housing market collapse, affixing their most laudatory grades to billions of dollars worth of bonds that went bad in the subprime crisis,” says the NYT’s David Segal. They should be in jail, but they’re dodging the financial reform bullet, and getting away with murder despite their toxic rubberstamping of Wall Street’s speculative bubble-blowing that brought down the American economy, global markets, and cost the taxpayers trillions … just some slap-on-the-hand reforms and now they’re free to help Wall Street blow another bubble’n’bust … and bring down the world … again.

The solution is simple. But Congress is squeamish about the unintended consequences of over-regulating, afraid anything they’ll do could backfire, even make rating agencies more important not less.  What a bunch of wimps. Experts there’s a simple solution to cutting  the incentive to blow a new market bubble:

Instead of cajoling the Big Three into producing more accurate ratings, why not take away the special status of those ratings and make them less important? says Jonathan Macey, a deputy dean at Yale Law School and a member of a bipartisan task force that has conferred with lawmakers about rating agency reform. … There is worry that if Congress doesn’t think ambitiously now, it never will. Mr. Macey, who advocates rewriting the rules that now require nationally recognized statistical ratings organizations to bless countless deals, says that the ratings system as it currently stands encourages bubbles

‘You have to ask yourself this question, in any matter of financial reform: Does the change increase the chances of lemming like behavior?’ he said. ‘Because that is the root of all great busts. The price of tulips doesn’t soar because a newspaper says that tulips are undervalued. It soars because everyone is buying them. And that’s the problem with ratings. They turn investors into lemmings.’

But wait, there is a far better solution than trusting Congress: The cavalry’s coming! State Attorneys-General are riding to the rescue, just like Spitzer and other state AGs did during the Enron and mutual fund scandals five years earlier:

Dozens of lawsuits have been filed against the rating agencies, including a case filed on Nov. 20 by the Ohio attorney general on behalf of public pension funds. The Ohio suit, as well as the earlier suits, seeks billions of dollars in damages from the rating agencies and accuses the firms of negligence and fraud. When he filed his suit, Ohio’s attorney general, Richard Cordray, said that the ‘rating agencies total disregard for the life’s work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what’s wrong with Wall Street today.’ After the suit was filed, Richard Blumenthal, Connecticut’s attorney general, said he planned to join the suit and thought that a “coalition of states” would also jump on the legal bandwagon — a potentially grim development for the rating agencies, which could find themselves contending with a phalanx of state officials like the one that aimed at big tobacco in the 1990s.

Bottom line: We’re rooting for the state courts to go after these rating agency scammers. Anything Congress does is likely to strengthen the rating agencies’ role as Wall Street’s rubberstamper. As Lawrence J. White, an econ prof at NYU’s Stern School of Business put it: The proposed legislation is “misguided and wrongheaded because they will have the ironic effect of making the incumbents even more important” and “encrust the procedures already in place and discourage new business models.” But don’t hold your breath folks, even with billions in the law suits and some watered-down new laws, you can bet the rating agencies will be right back in there rubberstamping Wall Street’s new credit issues … and aggressively blowing the next bubble.