[KnowItAll]

Interesting item from FT.Com.

Moody’s awarded incorrect triple A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, an Financial Times investigation has discovered.

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.

Moody’s said it was “conducting a thorough review” of the rating of the constant proportion debt obligations - derivative instruments conceived at the height of the credit bubble that appeared to promise investors very high returns with little risk. Moody’s is also reviewing what disclosure of the error was made.

The products were designed for institutional investors. In the recent credit market turmoil, those who still hold the products will have suffered some paper losses while others who have bailed out have lost up to 60 per cent of their investment.

On discovering the error early in 2007, Moody’s corrected the coding glitch and instituted methodology changes. One document seen by the FT says “the impact of our code issue after those improvements in the model is then reduced”. The products remained triple A until January this year when, amid general market declines, they were downgraded several notches.

Behooves me to think that the math / financial geeks could not have spotted what seemed like obviously dodgy products and are busy hiding behind the "these were too exotic for ordinary humans to rate" nonsense.

FT Alphaville ? Blog Archive ? A CPDO rating explainer

FT Alphaville ? Blog Archive ? Moody’s linkfest

[lionrock88]

ha, this is unbelievable!

can't believe the indirect cause of the next potential global economic downturn is due to some bad code!

[KnowItAll]

what a lot of people have pointed out, S&P gave out similar 3A ratings. how much sales pressure was used? think about how the auditors certified accounting scams at Worldcon and MCI

[HKFella]

Originally Posted by KnowItAll

Worldcon

Is that a Freudian slip or the real nickname they got when it happened - which I somehow must have missed!!

[KnowItAll]

Not a slip ... was the nickname they ended up getting.

Meant Enron when I said MCI.

[freeier]

get rid of all the programmers in this world to ensure safety of the world going forward!!! start a campaign and petition!

wahahaha..

[HKFella]

After all the fuss and "advancement" over the years, it turns out that manual is best!! Wysiwyg (remember that acronym?).