You're not wrong! And yet it seems very clear they did not know this. Which is pretty stupid, really...but being stupid isn't a crime.
(Plus...I mean, you were alive back then right? Did you make a ton of money betting against the housing market? If not, why not? Or if you were too young/poor, then do you know anyone who did?)
And therein rests your case. But you appear to be simply taking them at their word on this, to me. Unsophisticated observers will say, "Why would they do something so colossally stupid that it'd bankrupt their firm". But the person is not the firm. The person quite often can permanently enrich himself on the path to firm-wide dissolution.
Considering there was no product to bet against the housing market, your options are:
(1) Be a hedge fund manager of a large enough hedge fund to enter a custom derivative contract with a bank, to create the product (which is what those funds that made a ton of money betting against the housing market did)
(2) Have a few million for the minimum to investment in one the said hedge funds
So I'd say the answer for most people is "were too poor".
What I'm saying it that I don't think that claims that bankers, who are sophisticated players and experts in their field, didn't know what they were selling. They should have known those instruments were not of the quality they represented them to their customers. I don't think shifting the blame to the rating agency holds water. At the same time they were giving mortgages to people who wouldn't "normally" qualify and where the risk was obviously very high they were selling pieces of those mortgages as AAA rated securities. Doesn't pass the red face test in my books.