As the housing market began to falter in 2006 and the risks embedded in Wall Street's giant collective bet on subprime mortgages became apparent, a sense of omen filled the corridors of Standard & Poor's and Moody's, the two big credit rating agencies. 'Rating agencies continue to create an even bigger monster -- the CDO market,' one S&P employee wrote in an internal e-mail message that December, referring to the collateralized debt obligations that later emerged at the heart of the financial crisis. 'Let's hope we are all wealthy and retired by the time this house of card falters.' Another S&P employee wrote in an instant message the following April: 'We rate every deal. It could be structured by cows and we would rate it.' A Senate panel will release 550 pages of exhibits on Friday -- including these and other internal messages -- at a hearing scrutinizing the role the two rating agencies played in the 2008 financial crisis. The panel, the Permanent Subcommittee on Investigations, released excerpts of the messages Thursday. 'I don't think either of these companies have served their shareholders or the nation well,' said Sen. Carl Levin, D-Mich., the subcommittee's chairman. In response to the Senate findings, Moody's said it had 'rigorous and transparent methodologies, policies and processes,' and S&P said it had 'learned some important lessons from the recent crisis' and taken steps 'to increase the transparency, governance, and quality of our ratings.' The investigation, which began in November 2008, found that S&P and Moody's used inaccurate rating models from 2004-07 that failed to predict how high-risk residential mortgages would perform; allowed competitive pressures to affect their ratings; and failed to reassess past ratings after improving their models in 2006. The companies failed to assign adequate staff to examine new and exotic investments, and neglected to take mortgage fraud, lax underwriting and 'unsustainable home price appreciation' into account in their models, the inquiry found. By 2007, when the companies, under pressure, admitted their failures and downgraded the ratings to reflect the true risks, it was too late. Large-scale downgrades over the summer and fall of that year 'shocked the financial markets, helped caused the collapse of the subprime secondary market, triggered sales of assets that had lost investment-grade status and damaged holdings of financial firms worldwide,' according to a memo summarizing the panel's findings. While many of the rating agencies' failures have been documented, the Senate investigation provides perhaps the most thorough and vivid accounting of the failures to date. A sweeping financial overhaul being debated in the Senate would subject the credit rating agencies to comprehensive regulation and examination by the Securities and Exchange Commission for the first time. The legislation also contains provisions that would open the agencies to private lawsuits charging securities fraud, giving investors a chance to hold the companies accountable. Levin said he supported those measures, but said the Senate bill, and a companion measure the House adopted in December, did not go far enough. 'What they don't do, and I think they should do, is find a way where we can avoid this inherent conflict of interest where the rating companies are paid by the people they are rating,' he said. 'We've got to either find a way -- or direct the regulatory bodies to find a way -- to end that inherent conflict of interest.' Although the agencies were supposed to offer objective and independent analysis of the securities they rated, the documents by Levin's panel showed the pressures the companies faced from their clients, the same banks that were assembling and selling the investments. 'I am getting serious pushback from Goldman on a deal that they want to go to market with today,' a Moody's employee wrote in an internal e-mail message in April 2006. In an August 2006 message, an S&P employee likened the unit rating residential mortgage-backed securities to hostages who have internalized the ideology of their kidnappers. 'They've become so beholden to their top issuers for revenue they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation,' the employee wrote. Lawrence J. White, an economist at the Stern School of Business at New York University, said he feared that the government's own reliance on the rating agencies had 'endowed them with some special aura.' The House bill calls for removing references to the rating agencies in federal law, and both bills would require a study of how existing laws and regulations refer to the companies. The addition of new regulations might inadvertently serve to empower the agencies, White said. 'Making the incumbent guys even more important can't be good, and yet that's the track that we're on right now,' he said. David A. Skeel,a law professor at the University of Pennsylvania, said the Senate bill 'basically just tinkers with the internal governance of the credit rating agencies themselves.' Ending the inherent conflicts of interest is 'more ambitious, but if you're ever going to talk about it, then this is the time,' Skeel said. He added: 'After Enron and WorldCom, everybody knew that the credit ratings process doesn't work very well, and nothing happened.' 