Credit ratings agency Moody’s is starting disciplinary action for some of its ratings staff and executives, after a probe into a software error that incorrectly rated nearly $1bn (£500m) worth of a complex debt product.
At issue is how the agency handled a software modelling error that overrated CPDOs by up to four notches, affecting investor judgement and causing some to lose up to 60 percent of their money.
Moody’s has not yet confirmed reports in the Financial Times that the problem concerned a version of the company’s in-house CDOROM software, which rates the CPDOs.
The coding error was corrected in early 2007 to better reflect market conditions. However, internal Moody’s documents seen by the FT in May revealed that, despite the coding being corrected, products remained triple A rated until January this year following a change in methodology.
In a statement, Moody's emphasised that it was the employees, not the company's practices, that were to blame, and were was no evidence that the change of ratings methodology was an attempt to conceal the software bug. The investigation, conducted by law firm Sullivan & Cromwell, concluded that members of one of its ratings committees had breached their code of conduct by considering issues such as the impact on Moody’s and its investors, when setting models.
“Moody’s found ... that its personnel did not make changes to the methodology for rating European CPDOs to mask any model error," the agency said. “Moody’s, however, has concluded that members of a European CPDO monitoring committee engaged in conduct contrary to Moody’s Code of Professional Conduct. Specifically, some committee members considered factors inappropriate to the rating process when reviewing CPDO ratings following the discovery of the model error.”
Raymond McDaniel, Moody’s chairman, has said he was “deeply disappointed” by the conduct, and Moody’s was “taking immediate and appropriate action” to make sure there was no repeat of events.
“In this instance, monitoring committee members considered issues not relevant to the rating process in reaching their conclusions,” he said. The company said that according to policy its ratings committees “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”, when making their decisions and setting models.
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