Ok, just for the hell of it I took a Halo 3 backup and scuffed it up to make my own faulty media.
Using my own 8x variable speed firmware settings (8x/5x/2x), I can hear the drive speed changing as it tries to handle the read errors. I thought I had overdone the scuffs, but to my amazement, it actually loaded up (although it took a while, but that's to be expected). It's not much of a test, but I guess that's some validation.
To the guy who asked me to upload the firmwares, I can't do that, but there's nothing magical going on here. Just load up the firmware in any hex editor, I've documented the locations and settings.
Someone else asked if the modified speeds settings are detectable on Live. It's a fair question. The stock settings are obviously not a problem. If the stock settings are 12x/8x/5x then does that mean the drive never operates at 2x? If so, does that mean if your drive ever does run at 2x that Live would flag it? It's only the 2x speed that concerns me, because the other speeds are obviously ok. They wouldn't ban based on never reading at 12x because the drive is made to fallback to slower speeds when necessary.
But I think the simplest answer to whether this is safe on Live is that c4e knows a lot more than anyone else, and he obviously isn't concerned. That's good enough for me.