SEC doesn't do a Moody
Credit rating allegations? Not our job
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The Securities and Exchange Commission is dropping an investigation into alleged fraudulent behaviour at ratings agency Moody's because it is not sure if it has legal jurisdiction over the company.
Moody's was accused of awarding wrongly high ratings to various constant proportion debt obligation notes - the infamous structured debt products which turned out to be not much more than bundles of dodgy US mortgages re-packaged to look like they were almost risk-free.
The SEC said: "Because of uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct, the Commission declined to pursue a fraud enforcement action in this matter."
The problem came to light when the FT got hold of internal documents showing Moody's had been aware it had been wrongly awarding AAA ratings.
The SEC Report of Investigation said that Moody's discovered in early 2007 that it was ramping up ratings by 1.5 to 3.5 notches. But the company decided not to take any action because it didn't want to damage its own reputation. Moody's at the time blamed a computer error.
The SEC said it was warning ratings agencies of the importance of proper internal procedures and controls to stop them issuing incorrect ratings.
The regulator said: “It is crucial that nationally recognized statistical rating organizations take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings.”
The SEC said new security laws meant it would have no problem taking action against a firm in future for failing to follow a proper methodology for setting ratings. It warned it would take anti-fraud action against companies within the US or whose actions would have an impact within the US.
Moody's issues ratings for all sorts of financial instruments including company bonds and even countries' sovereign debt. Some investors, like pension funds, can only invest in products with high, AAA ratings. ®
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COMMENTS
not so sure
Are you sure that information is being published by DnB? Unless you have a DnB membership it's a sales call and they should be asking you to join for $500+/year.
If your a member already and have a LLC/INC alot of the information collected is from credit and consumer reports.
I think they are just chatting it up with you to make you feel good fella.
i love it
the government doesn't know if it has jurisdiction over our food safety or ratings companies but one thing it knows is it could start up it's own police force larger than the military & better funded and also it can takeover your health care system.
it also knows it can bailout banks and corporations and takeover car companies.
hey, at least it knows where the boundaries are.
The creator of the derivates knew they were risky
"debt obligation notes - the infamous structured debt products which turned out to be not much more than bundles of dodgy US mortgages re-packaged to look like they were almost risk-free."
Well, actually, I read an interview of the main guy that developed the software that was used to make credit default swap derivatives. (There were some made before that, but they were built "by hand" and not very common -- this software automated things so they could churn out as many as they wanted.)
Basically, he told the company he worked for that they were using the derivatives wrong -- they were treating a 33% default rate over 100 years as meaning about 3% per year, and figured they were just lucky that the defaults were nearly 0 while they were trading them. He flat out told them, no, the default rate will be near 0 when the economy is good, and very high (20%+) when it's bad, that they're RISKY! They told him to piss off because they were making so much money. (Eventually the first firm fired him over it. Then he worked for a SECOND company, telling them the same thing, and THEY told him to piss off as well.) Then they acted all shocked when the default rate skyrocketed on them and basically bankrupted them. Frankly, the gov't should not have bailed these jerks out, other investment firms DID analyze these properly and avoid the risks.
He did point out during the interview, he didn't come out of this with any money -- most of his pay was in stock options, and even though he knew his options were going to become absolutely worthless eventually (since they were abusing derivatives) he was not allowed to cash in his stock options for some number of years, and by then they WERE absolutely worthless.
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