Why did rating agencies do such a bad job rating subprime securities?

As of February 2008, Moody's had downgraded at least one tranche of 94.2% of the subprime RMBS issues it rated in 2006, including 100% of the 2006 RMBS backed by second-lien loans and 76.9% of the issues rated in 2007. Overall, Moody's has downgraded 53.7% and 39.2% of all of its 2006 and 2007 subprime tranches, respectively. As of March 2008, S&P had downgraded 44.3% of the subprime tranches it rated between the first quarter of 2005 and the third quarter of 2007. This included 87.2% of securities backed by second-lien mortgages. As of December 2007, Fitch had downgraded approximately 34% of the subprime tranches it rated in 2006 and in the first quarter of 2007. In February 2008, Fitch placed all of the RMBS it rated in 2006 and the first quarter of 2007 backed by subprime first-lien mortgages on Ratings Watch Negative.