Moody’s disciplines staff after £500m software code error

Credit ratings agency Moody’s is starting disciplinary action for some of its ratings staff and executives, amid a probe into a software error that incorrectly rated nearly $1bn (£500m) worth of a complex debt product.

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Noel Kirnon, the head of Moody’s structured finance business, will leave at the end of July for undisclosed reasons, the FT reported. He was not on the committee affected.

The company said it is strengthening policies, and improving rating and monitoring processes. It is taking steps, it said, “to enhance the independence of model verification and methodology review”. It added: “Verification of several models is already complete and no errors have been found.”

Analysts speaking to Computerworld UK recently questioned the effectiveness of some algorithms written by credit ratings agencies, as well as a lack of strong risk management that they said existed in some agencies.

CPDOs were introduced to the markets two years ago, and are so complex that agencies often require sophisticated algorithms to set ratings. But despite the sophistication of the software, algorithms and ratings still need to be signed off by senior staff.

It is not the first time that the use of computer algorithms has been questioned. Last year in an unrelated incident, Goldman Sachs had to spend £1.5 billion to bail out a hedge fund after computer models incorrectly read volatility in the financial markets.

Nor is it the first time observers have pointed out the importance of governance and staff monitoring in the financial industry. Last month, it emerged that Morgan Stanley’s IT systems were at the heart of a failure to prevent a rogue trader in London from costing the company $120 million (£61 million).

Earlier this year in an unrelated event, Societe Generale trader Jerome Kerviel ran up losses at the bank estimated at £3.6bn using his "in-depth knowledge" of the bank's fraud control systems to circumvent internal checks.

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