Moody's Has Some Explaining To Do

Not only do complex structured debt instruments seem to be beyond the understanding of many of those who buy and sell them, they also pose challenges for those who rate them. This would be the most charitable interpretation of the revelation in today’s Financial Times that Moody’s incorrectly rated “constant proportion debt obligations” higher than they should have. It does not explain why Moody’s was less than forthright in correcting the problem when it was discovered, according to the FT’s investigation.

On discovering the error early in 2007, Moody’s corrected the coding glitch and instituted methodology changes, the FT reports. One document seen by the FT says “the impact of our code issue after those improvements in the model is then reduced.” The products remained triple A until January this year when, amid general market declines, they were downgraded several notches.

In a statement to the FT, Moody’s said:

Moody’s regularly changes its analytical models and enhances its methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks. In addition, Moody’s has adjusted its analytical models on the infrequent occasions that errors have been detected.

However, it would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter.

More details are available via Alphaville. Felix Salmon at Portfolio.com distills the essence of the affair and makes the interesting point that the relationship between the FT and its Alphaville blog allows for more indepth coverage of such an arcane topic.

You couldn’t print all this kind of stuff in a newspaper, it would be far too technical and boring. But online you can put everything up.

Comments

[Chuck]

It's not the indiscretion that gets the politician in trouble, it's the Cover-Up that brings them down.
Find the problem.
Admit the problem.
Fix the problem.
and move on.

But if you try to cover it up, then lots of lawyers get very rich.