Where are the certs? If they're stored on the drive (as opposed to some special EEPROM area), wouldn't taking a full backup of the drive at the start of the modding process resolve that? If you didn't do that, you shot yourself in the foot. SID for the original XBOX won't install the softmod until you backup the C: drive (and possibly the EEPROM - I should test on a fresh HDD).
There's always been a general rule though, don't connect a modded XBOX to Live.
I have no problem with them banning modded XBOXes from Live, but if they're intentionally bricking them, they should be paying treble damages.
I did hear of one guy who got banned on an unmodded 360 where the DVD drive had been getting flaky. He eventaully opened it and found the cable wasn't connected tight and the connection was intermittent. For Microsoft to ban someone over their own manufacturing defect is ridiculous. What happens when they start overheating? Do errors that occur while on Live get the console banned?
I think MS is ultimately setting themselves up for huge liability losses here.
On the original XBOX, the only sane way to use it is modded and with a big HDD. Since the DVD drive is proprietary and prone to failure, ripping all the games you play to the HDD allows you to greatly extend the life of the DVD drive. (Not to mention greatly reducing load time)