Glitch Blamed for Ratings Errors

A computer coding error led Moody's Investors Service to assign incorrect triple-A ratings to a complex debt product that are partially to blame for the current global credit crisis, according to the Financial Times.

In response to the story, Moody's e-mailed a statement  to the FT that it was conducting a "thorough review of this matter."

Ratings agencies are under scrutiny by regulators and politicians over the role they have played in the U.S. subprime mortgage crisis, and face allegations that they assigned ratings that were too high to bonds backed by poor-quality mortgages.

The FT said internal Moody's documents it had seen showed that ratings on so-called constant proportion debt obligations (CPDOs)  should have been up to four notches lower, and that the agency had discovered the error in its models early in 2007.

Moody's corrected the coding glitch at that time and instituted changes to its methodology, the FT said. The products remained triple-A until January 2008, when market turmoil led to hefty downgrades.

Standard & Poor’s, which was the first to award triple A status to CPDOs, told the FT it stands by its ratings.

Moody's said in an emailed statement: "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."