Moody’s error gavetopratings todebtproducts

Discussion in 'Wall St. News' started by ASusilovic, May 21, 2008.

  1. Moody’s awarded incorrect triple A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, an Financial Times investigation has discovered.
    Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

    News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.
    Moody’s said it was “conducting a thorough review” of the rating of the constant proportion debt obligations - derivative instruments conceived at the height of the credit bubble that appeared to promise investors very high returns with little risk. Moody’s is also reviewing what disclosure of the error was made.

    The products were designed for institutional investors. In the recent credit market turmoil, those who still hold the products will have suffered some paper losses while others who have bailed out have lost up to 60 per cent of their investment.

    On discovering the error early in 2007, Moody’s corrected the coding glitch and instituted methodology changes. One document seen by the FT says “the impact of our code issue after those improvements in the model is then reduced”. The products remained triple A until January this year when, amid general market declines, they were downgraded several notches.

    In a statement to the FT, Moody’s said: “Moody’s regularly changes its analytical models and enhances its methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks. In addition, Moody’s has adjusted its analytical models on the infrequent occasions that errors have been detected.

    “However, it would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter.”

    Credit ratings are hugely important within the financial system because many investors - such as pension funds, insurance companies and banks - use them as a yardstick either to restrict the kinds of products they buy, or to decide how much capital they need to hold against them.

    The world’s other major credit agency, Standard and Poor’s, was the first to award triple A status to CPDOs but many investors require ratings from two agencies before they invest so the Moody’s involvement supplied that crucial second rating.

    S&P stood by its ratings, saying: “Our model for rating CPDOs was developed independently and, like our other ratings models, was made widely available to the market. We continue to closely monitor the performance of these securities in light of the extreme volatility in CDS prices and may make further adjustments to our assumptions and rating opinions if we think that is appropriate.”

    A "rating" agency failing in modeling ? Ha, ha, ha...good joke...:D :D :D
  2. What a load of contradictory crap. Paragraph 1: We fix things when we find something wrong. Paragraph 2: We can't actually publicly acknowledge our errors when we make them because that would mean we are liable for billions in damages.

    Who's the poor excuse for a securities attorney who wrote that verbiage? These type of people should go into the ditch digging business where their services will actually be appreciated.

    This type of crap just irritates me, and our capitalist culture does nothing about it but ... accept. (hey that sounds like our resignation to accept the politicians we have too)
  3. lol
    it wasn't us, it was the software

    oh really
  4. dont


    Classic stuff:D
  5. What a load of BS. It was supposed to be BBB but when we entered that in the computer it registered as AAA. I would say they would lose credibility with this story were it not for the fact that they have none left to lose.
  6. dont


    Why don't they put the program up on the net and we can input the data ourselves and see what rating we get?

  7. maxpi


    Do your own due diligence folks...... always :p
  8. Raul641


    if(moodys->revenueFrom(company) > kickbackThreshold) {
  9. LOL. Nice :)
  10. This is hilarious. Between this and the bullshit govt. economic data, I'm starting to take this market less and less serious. The fundamentals of this economy and this market are such crap, just blatant, window-dressed lies. This snowball is just getting bigger as we speak.
    #10     May 21, 2008