Posted on 07/09/2008 2:35:39 PM PDT by Ernest_at_the_Beach
Moody's, the ratings agency, is reviewing its computer models and setting up a central monitoring system after admitting that a bug led it to incorrectly grade several European mortgage debt instruments.
The agency admits that it incorrectly gave its highest AAA rating to about $1bn worth of European "constant proportion debt obligations". Triple-A ratings are required before many investors like pension funds are allowed to invest.
Following a review of its processes Moody's found that its staff had not acted to cover up the error with the modelling. But it found some members of the monitoring committee had broken Moody's code of conduct.
Moody's said: "Specifically, some committee members considered factors inappropriate to the rating process when reviewing CPDO ratings following the discovery of the model error. According to Moody's Code of Professional Conduct, a committee may consider only credit factors relevant to the credit assessment and may not consider the potential impact on Moody's, or on an issuer, an investor or other market participant."
The company has started disciplinary proceedings against some staff. It has reviewed all CPDO ratings. It is checking existing models and so far has found no errors. It will continue to independently monitor ratings.
But the FT, which first reported the bug, claims to have seen documents which reveal three dozen other bugs in a core computer model used to rate structured products. Moody's told the paper that the bugs related to beta versions of the application which was not used to actually rate any products.
Moody's is facing legal action from several investors, including the Teamsters Pension fund, for misrepresenting bonds which were dependent on sub-prime mortages. ®
By John Oates → More by this author
US and EC line up to kick ratings agencies
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The Securities and Exchange Commission probe into the ratings agencies - the firms which wrongly assessed how risky certain US mortgage-backed investments were - is calling for new rules to govern how the companies operate.
The SEC investigation found the agencies failed to deal with conflicts of interest because people were involved in selling the products, discussing fees for new ratings and doing the actual analysis.
The full report is due to be released later this week and will call for new rules, the FT reports.
The SEC is looking at Fitch, Moody's and S&P. The companies gave their highest AAA ratings to several structured debt products which came unstuck as US property prices began to fall. Investors like pension funds are only allowed to make AAA investments which are seen as almost risk-free.
Meanwhile, the EC is also calling for stronger regulation of the industry and is likely to support a compulsory register of ratings firms as well as independent regulation.
Charlie McCreevy, European Commissioner for Internal Market and Services, said he was unconvinced that voluntary regulation was working. He said that international cooperation was important but the steps already announced by the agencies did not go far enough.
McCreevy said: "The financial turmoil has prompted a reality check of the financial system. It has also emphasised the growing worldwide economic and financial interdependencies. In our efforts to strengthen the supervisory and regulatory framework we should therefore continue to adopt a global perspective."
McCreevy will introduce proposals for a register and external regulation of credit rating agencies in October. ®
Oops.
The all-time lamest excuse for ruining an economy. The folks at Moodys must have a favorite movie — the Blue’s Brothers — because they sound just like John Belushi apologizing to Carrie Fisher.
Investors: You miserable slug. You think you can talk you’re way out of this? You betrayed me.
Moodys: No, I didn’t. Honest. I ran outta gas. I had a flat tire. My computer had a bug and gave all this toxic waste a AAA rating! It wasn’t my fault!! I swear to God!!
I think Al Bore is using their computer to model the earth’s climate.
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