Yes, those are big institutional investors, eg. pension funds. It's not like there are only a handful of AAA investment options. And those investors don't onl

Yes, those are big institutional investors, eg. pension funds. It's not like there are only a handful of AAA investment options. And those investors don't only depend on these rating agencies. (They have their own fund managers, they have different divisions for different type/risk of assets - for example some dude going after risky VC type investments, a trader doing daytrading with stocks and other more liquid things [forex, derivatives <this is where the ratings come in>, money markets].) But they don't just blindly buy anything that has been rated AAA. In that sense the fact that rating agencies inflate ratings just means these big funds have more options to put on some more risk. Of course, investing always had and will have some gambling style part. Because yes, maybe some thing is doomed to fail, but ... if that's thing is very large [eg. all of housing, or all of mortgages] you'll have to either hedge that risk anyway (and/or basically short it), or go in long, set up saddle options, etc. And usually that what happens, and then eventually reality gets more complex and enough small unnoticed bad assumptions get built into the system that it starts to crumble. Naturally, it's not a great thing, because it has real world consequences. Funds go bust, projects get stopped, orders get stalled/cancelled, people are let go, families are stressed, health becomes at risk, lives are lost. Is there a better system? Well, so far not really. The problem is not that there are some sophisticated bets on new research & development, new real estate, new capacity expansion for some company, or even betting on people paying back loans OR getting a house, or even the securitization of this is not a problem. The problem is that US and a lot of other "modern societies" don't have sufficient support nets for when those bets fail and people lose their work.