WHEN Standard & Poor’s, the bond-rating agency, lowered General Electric’s rating to AA+, from AAA, last week, many were shocked at the tarnishing of one of America’s most revered corporations. But the real scandal is how long it took S.&P. to make that minor change  and that the other major ratings firm, Moody’s, still hasn’t  even though G.E.’s dividend has been slashed by two-thirds and its stock price had fallen below $7, from nearly $40 a year ago.

Why, more than a year into the crisis, do regulators and investors continue to rely on ratings? No one has been more wrong than Moody’s and S.&P. Less than a year ago both gave high ratings to 11 of the largest distressed financial institutions. They put the insurance giant A.I.G. in the AA category. They rated Lehman Brothers an A just a month before it collapsed. Until recently, the agencies maintained AAA ratings on thousands of nearly worthless subprime-related securities.

The reason for this continued reliance on ratings is simple: bad regulation. We have seen up close how legal rules that depend on ratings pervert the process. One of us worked at Moody’s, and was a frequent in-house critic of how the agencies put troubled companies on artificial “watch lists” while they maintained overly optimistic letter ratings. The other of us worked in Morgan Stanley’s derivatives group, which designed risky structured products that nevertheless obtained high ratings. These deals were the ancestors of the highly rated subprime mortgage derivatives at the center of the crisis.

The trip down the dysfunctional regulatory path began after the 1929 crash, when Gustav Osterhus, an examiner at the Federal Reserve Bank of New York, proposed a system for weighting the value of a bank’s portfolio. He felt regulators needed to be able to express a portfolio’s “safety” with letter symbols.