Moody's to fix sub-prime computer error

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. ®