A problem with software coding led ratings firm Moody’s to incorrectly overrate billions of dollars of major debt products last year, reportedly causing investors to lose money as the markets tightened.
Moody’s top rating, called triple A, was given to billions of dollars worth of a complex debt product as a result of the problem, when the rating should have been lower.
The error was corrected in early 2007, but the products remained top rated until January this year. Internal documents at Moody’s showed that after the coding was corrected last year to better reflect market conditions, senior staff knew that the ratings should have been lower, according to an investigation by the Financial Times.
Some investors may have lost up to 60 percent of their investment, the FT wrote.
Agencies typically produce ratings using constantly updated software codes, but still require their analysts to sign off the ratings before they are presented to the markets. The software models examine product and market data from a range of sources before producing a result.
In a statement sent to Computerworld UK, a Moody’s spokesperson said the company was “conducting a thorough review” of the matter concerning the debt products, called constant proportion debt obligations.
The spokesperson added: “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 the 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."