The whole firm should be dismantled over this, and people should be doing hard time. Every time I think I can't be shocked anymore, boom... Read this article and then ask yourself how this is even remotely possible given the consequences of the ratings assigned by Moody's to everything from corporate paper to municipal bonds, and the premiums associated with those ratings. http://www.bloomberg.com/apps/news?pid=20601087&sid=adTqUJU3rbKE&refer=home Moody's Falls Most in 9 Years on Probe of Aaa Computer Error By John Glover and Abigail Moses May 21 (Bloomberg) -- Moody's Investors Service plunged the most in nine years in New York trading as it conducts ``a thorough review'' of whether a computer error caused it to assign Aaa ratings to debt securities that later fell in value. Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit-default swaps, should have been ranked as much as four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign lower grades after correcting the error, the FT said. The allegations raise questions about internal controls at credit ratings firms as they face scrutiny from lawmakers and regulators for assigning their top grades to securities derived from loans to people with poor credit. U.S. Senate Banking Committee Chairman Christopher Dodd has flagged the potential conflict of interest between ratings firms and the banks that pay their fees, while the Securities and Exchange Commission is probing the way ratings are assigned. ``If it is true, does that mean other products haven't been rated correctly?'' said Puneet Sharma, Barclays Capital's head of investment-grade credit strategy in London. ``Will they be downgraded? It could lead to turmoil.'' Moody's dropped as much as $6.07, or 13.8 percent, to $37.83, the biggest fall since August 20, 1999. The shares were at $38.92 at 11:20 a.m. in New York, valuing the company at $9.5 billion. `Thorough Review' ``The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs,'' New York-based Moody's said in an e-mailed statement. ``We are therefore conducting a thorough review of this matter.'' Moody's has ``adjusted its analytical models on the infrequent occasions that errors have been detected,'' the statement said. ``It would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors.'' Banks created at least $4 billion of CPDOs, promising annual interest of as much as 2 percentage points above money-market rates combined with the highest credit ratings -- described a ``holy grail'' for investors by Bear Stearns Cos. strategist Victor Consoli in a November conference call. `Integrity' Moody's and S&P stripped CPDOs of their Aaa grades this year as rising defaults in the U.S. housing market caused the cost of credit-default swaps referenced by the funds to soar amid concern the economy might be plunged into recession. The subprime crisis caused banks including UBS AG and ABN Amro Holding NV to unwind their CPDOs, triggering losses of as much as 90 percent for investors. ``As far as CPDOs are concerned there shouldn't be a material impact'' because the securities have already been downgraded, said Andrea Cicione, a credit strategist at BNP Paribas SA in London. ``Of course there could be a reputational impact for Moody's.'' ABN Amro sold the first CPDOs in 2006, followed by banks including Lehman Brothers Holdings Inc. and Merrill Lynch & Co. CPDOs sell contracts on credit-default swap indexes and use the premiums to pay investors. If the perception of credit quality deteriorates, the cost of insuring the debt increases and CPDOs lose money. To make up for losses, the funds would typically increase their borrowing. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. Rating a CPDO involves making assumptions about the way the indexes of credit-default swaps will move, based on a limited history of the benchmarks. The U.S. index referenced by CPDOs was created in 2003; its European counterpart started in 2004.