Moody's computer 'bug' caused over-optimistic credit ratings
Computer says yes!
Moody's saw its shares slide on opening this morning, after reports that the institutional rating firm had blamed bugs in its computer model for leading it to grade several debt parcels as almost without risk for investors.
The ratings firm announced a review of the way it changed its ratings methodology when the FT reported the problems this morning. Moody's shares slid over eight per cent when the markets opened today.
The problem dated back to 2006, and resulted in some products getting the top AAA rating when in fact they should have been as much as four ratings lower, according to the FT.
Senior staff were aware of the problem in 2007 and the code was changed, the paper said - but many products retained their rating until January of this year. Such ratings are vital because many institutional investors like pension funds can only invest in triple-A rated products.
The disputed ratings were mostly awarded to "constant proportion debt obligations" or CPDOs - essentially bundled products of debt which were structured in such a way as to apparently reduce the risk to almost nothing. But their dependence on credit markets meant CPDOs were the first to suffer when sub-prime mortages began to collapse.
Moody's is "conducting a thorough review", both of the ratings and of how much executives knew, according to the FT.
The company told the paper it regularly changed analytical models, but: "It would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors."
Rival rating agency Standard & Poor's awarded triple-A ratings to CBDOs before Moody's, but insisted it did the maths separately.
Moody's is already facing legal action in the US from groups including the Teamsters Union, who blamed Moody's for over-rating debt related to US mortgages.
Moody's was unable to comment at time of writing. ®
How all too convenient
There's a lot of concern and pending litigation surrounding ratings agencies' valuations of derivative products. Now it appears that the only public explanation of the errors in valuation is a simple coding error. Not anything the management could be responsible for, such as a culture of greed over accuracy. Hmmm.
Mine's the coat with the now-worthless AAA-rated debt in the pocket.
Software design flaw, as opposed to reckless greed and conspiracy you say?
Aw, poot, I thought this was an ROTM story with a teenaged AI which got a bit moody and decided to start messing around with people's credit records because it was bored...