On September 27, 2002, after getting several questions from list
owners here, I called HOTMAIL to find out what was going on.  After
listening to their "ads" for a while I finally got through to someone.
Here is the note I sent to the owners who had asked about it here
(we saw this too because some of the owners were sending their error
mail to hotmail ;-):

--- (note from 9/27)

   I decided to spend some of ITS's money and wait on the phone for
hotmail support.  I talked to Jack there who said the
"554 Transaction failed" messages are Hotmail's fault and they
are working to fix them in the next few days.  They are bringing
on some more e-mail servers to try to help avoid the issue.

   I did make the point that they should be using a temporary /
retriable error code (e.g. 450 or something) but he said in the past
when they've done that then folks e-mail backed up (well duh - if you
have errors it's not good either way! ;-).  He said they've been
hit with lots of spam and are setting records on the millions (or
was it billions) of e-mail items handled each day.

--- (end of note from 9/27)

   As I recall he said they had a problem running out of threads
or something like that.

   Now, I still see only four mx handlers (mx1-mx4) so it doesn't
look like they have added the fifth cluster he was talking about
(or maybe it won't show up as mx5 but he kept talking about a
5th cluster).  I haven't noticed as many of the 554s lately but
I've seen some "550 Requested action not taken: mailbox unavailable".
I mostly just see the general LISTSERV(tm) errors though but I did
wonder if they changed the code thinking this was clearer. ;-)

   I still think they should return 450 (mailbox not available) or
451 (error in processing) if they can't handle the e-mail but then
I suppose all our queues would get longer (sigh).  But maybe the
recipients would notice their e-mail is late (they seem to be
more aware of that than if it is missing).

   marty