Ratings agencies Moody’s has initiated an external review of its ratings of $4bn of complex debt products after revelations that the agency had awarded incorrect ratings because of a bug in its computer models.
Charles Schumer, the New York senator, called Wedesday for the Securities and Exchange Commission to investigate the matter, which triggered a fall of 16 per cent in its share price. Mr Schumer also said, if a probe proved mistakes had occurred, that the US regulatory agency should impose “appropriate sanctions” in the form of fines.
The letter to Christopher Cox, SEC chairman, was in response to a report in Wednesday’s Financial Times that detailed how some senior staff at Moody’s knew in early 2007 that the ratings on products known as constant proportion debt obligations – complex derivative instruments conceived at the height of the credit bubble – had incorrectly received triple A ratings. Some of the CPDOs should have been rated up to four notches lower due to a computer coding error that was later corrected.
“The ratings inaccuracies that were disclosed are deeply troubling,” Mr Schumer wrote in a letter sent Wednesday. “However, the fact that Moody’s only downgraded these incorrectly rated products in January of 2008, nearly a full year after they became aware of the problem, is much worse, and is indicative of a culture of shirking responsibility that must end.”
Moody’s said Wedneday night: ”Moody’s recognizes the seriousness of questions raised by [the] Financial Times article concerning the analytical models and methodologies used in our European constant-proportion debt obligation ratings process.
“The integrity of our ratings and rating methodologies is extremely important; as such, when the questions were recently raised to us, we retained the law firm of Sullivan & Cromwell and initiated a thorough external review of our European CPDO ratings process. Upon completion of the review, we will promptly take any appropriate actions.”
Shares in Moody’s tumbled 16 per cent Wednesday in the wake of the news, dropping $6.99 to $36.91 – the biggest one-day fall since the agency was listed in 2000.
The SEC has already said it was not certain whether it had jurisdiction over the case.
