The New York Times leads its front page with a report that cities and states are beginning to squawk at the system Wall Street has set up to rate the bonds they issue.

Wall Street almost always rates municipalities as far greater default risks than they are, increasing their cost of borrowing and lining the pockets of the monoline bond insurance industry and the hopelessly conflicted ratings agencies.

The Times story comes days after a Jesse Eisinger column in Portfolio dissected and eviscerated the municipal-bond-insurance business as a “racket.” If you want to know what the deal is with this industry, Eisinger’s column is the much better piece. We laud the NYT for going big with the story, but it’s low on hard numbers.

Portfolio says that since 1970, only about one in 1,000 municipal bonds went bad while one in ten corporate bonds did. Despite this (which is largely because of that awesome power known as taxation), cities and states are rated lower than corporations.

The municipalities’ credit ratings are too low. If rating agencies properly assessed them according to investors’ true risk of loss, muni bonds would have lower interest rates without the expense of insurance…

About two-thirds would probably be triple-A if they were rated with the same criteria used to rate corporate bonds.

The Wall Street Journal goes above the fold on its Money & Investing front with a good report on the high returns the turmoil is bringing to the normally staid municipal-bond market. It includes a telling stat: municipal bonds rated BBB have a default rate of 0.32 percent, about half that of corporate bonds given the top AAA rating.

Now that the firewall of the bond insurers has proven to be worth not much (despite ratings’ firms temporary reprieve last week), government officials are asking why they’re paying billions of dollars a year on $2.6 trillion in bonds to what is essentially a protection racket. The NYT:

“We are learning essentially that the emperor may have no clothes, that there is no real reason to require these towns to have insurance in many instances,” said Richard Blumenthal, the attorney general of Connecticut, who is investigating the ratings firms on antitrust grounds. “And it simply serves the bottom lines of the ratings agencies, the insurers or both.”

We couldn’t agree more with Eisinger that the implicit insurance requirements are out of line and with this essential point:

How the rating agencies handle municipalities really ought to be a bigger scandal. Think about it: Credit-rating agencies screwed up the mortgage-securities business because they were too lax in their ratings. They’re screwing up munis because they are too punitive. In both cases, they manage to benefit from their “mistaken” ratings.

The WSJ says Countrywide’s problems continue to accumulate. It takes a look on A2 at one of the mortgage company’s securities filings and finds It disclosed that fully half of the loans it holds are for homes in California and Florida. Whoa, Nellie! Those markets are the worst in the country and have a long way to tumble before they hit bottom.

Also, Countrywide borrowers were at least three months late on 5.4 percent of adjustable-rate mortgages, up big from the 0.6 percent rate of the year before. Twenty-seven percent of its subprime borrowers are at least a month late on their payments, up from 19 percent a year ago.

The Journal in a C1 Heard on the Street piece says commercial real estate is about to start hitting banks square on the jaw as prices begin to dip. The paper leans heavily on a Goldman Sachs report that expects values in the industry to tumble by a quarter or more by 2010 and that the fallout will last longer than that of the subprime debacle.

Wall Street’s big problem is it has $141 billion in exposure to commercial real estate, about $7 billion of which will have to be written down this quarter, according to Goldman’s estimate.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.