Moody's Problem Isn’t the Bug

Sam Jones, Gillian Tett and Paul J Davies report that Moody’s (MCO) discovered a coding error in the model it used to rate CPDOs. The bug resulted in ratings for some CPDOs that were up to four notches too high.

The bug isn’t the problem, the rating model is. As the old man said regarding risk premiums (CDS) on bonds: that a "premium for risk is needed" is really an elliptical way of saying that payment of the full face of interest and principal is NOT to be expected on average.

Sources:
Moody’s error gave top ratings to debt products
Moody’s errs in rating debt products
Five facts about CPDOs
Financial Times reports that Moody’s made “coding error” on CPDOs: Fishknife comments at Creditflux