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Moody's drafts in lawyers to probe ratings code 'screw-up'

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Ratings agency Moody's has confirmed it has started an external review of how it screwed up ratings for mortgage debt packages.

It has appointed law firm Sullivan and Cromwell to look at its European CPDO ratings, after the FT claimed that a bug in its computer model meant packages of debt were erroneously given AAA ratings.

The statement said:

Moody’s recognizes the seriousness of questions raised by today’s Financial Times article concerning the analytical models and methodologies used in our European constant-proportion debt obligation (CPDO) ratings process. The integrity of our ratings and rating methodologies is extremely important; as such, when the questions were recently raised to us, we retained the law firm of Sullivan & Cromwell and initiated a thorough external review of our European CPDO ratings process. Upon completion of the review, we will promptly take any appropriate actions.

Moody’s rated 44 European CPDO tranches, representing approximately $4bn in rated securities.

The FT also said that senior figures at Moody's were aware of the problem in early 2007, but the instruments were not downgraded until January 2008.

US Senator Charles Schumer called for the Securities and Exchange Commission to investigate the company yesterday, but the SEC suggested that might be a task for European regulators.

A spokeswoman for the Financial Services Authority told the Reg that ratings agencies were not really regulated in Europe, but were looked at by a European Union committee for pension and insurance regulation.

Constant proportion debt obligations or CPDOs were repackaged debt instruments based on mortgages. Moody's granted them AAA ratings, which means investors like pension funds consider them safe enough to buy. Rival rating agency S&P also rated CPDOs as all but risk-free too. Yesterday S&P insisted its ratings were evaluated separately.

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