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[AMAZING] Moody's Blames Debt Ratings on Computer Error

Discussion in 'BBS Hangout: Debate & Discussion' started by robbie380, May 21, 2008.

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  1. robbie380

    robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ)
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    wow...these guys really have some balls. re-****ing-diculous


    http://www.bloomberg.com/apps/news?...rbKE&refer=home


    Moody's Falls Most in 9 Years on Probe of Aaa Computer Error

    By John Glover and Abigail Moses

    May 21 (Bloomberg) -- Moody's Investors Service plunged the most in nine years in New York trading as it conducts ``a thorough review'' of whether a computer error caused it to assign Aaa ratings to debt securities that later fell in value.

    Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit-default swaps, should have been ranked as much as four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign lower grades after correcting the error, the FT said.

    The allegations raise questions about internal controls at credit ratings firms as they face scrutiny from lawmakers and regulators for assigning their top grades to securities derived from loans to people with poor credit. U.S. Senate Banking Committee Chairman Christopher Dodd has flagged the potential conflict of interest between ratings firms and the banks that pay their fees, while the Securities and Exchange Commission is probing the way ratings are assigned.

    ``If it is true, does that mean other products haven't been rated correctly?'' said Puneet Sharma, Barclays Capital's head of investment-grade credit strategy in London. ``Will they be downgraded? It could lead to turmoil.''

    Moody's dropped as much as $6.07, or 13.8 percent, to $37.83, the biggest fall since August 20, 1999. The shares were at $38.92 at 11:20 a.m. in New York, valuing the company at $9.5 billion.

    `Thorough Review'

    ``The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs,'' New York-based Moody's said in an e-mailed statement. ``We are therefore conducting a thorough review of this matter.''

    Moody's has ``adjusted its analytical models on the infrequent occasions that errors have been detected,'' the statement said. ``It would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors.''

    Banks created at least $4 billion of CPDOs, promising annual interest of as much as 2 percentage points above money-market rates combined with the highest credit ratings -- described a ``holy grail'' for investors by Bear Stearns Cos. strategist Victor Consoli in a November conference call.

    `Integrity'

    Moody's and S&P stripped CPDOs of their Aaa grades this year as rising defaults in the U.S. housing market caused the cost of credit-default swaps referenced by the funds to soar amid concern the economy might be plunged into recession.

    The subprime crisis caused banks including UBS AG and ABN Amro Holding NV to unwind their CPDOs, triggering losses of as much as 90 percent for investors.

    ``As far as CPDOs are concerned there shouldn't be a material impact'' because the securities have already been downgraded, said Andrea Cicione, a credit strategist at BNP Paribas SA in London. ``Of course there could be a reputational impact for Moody's.''

    ABN Amro sold the first CPDOs in 2006, followed by banks including Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

    CPDOs sell contracts on credit-default swap indexes and use the premiums to pay investors. If the perception of credit quality deteriorates, the cost of insuring the debt increases and CPDOs lose money. To make up for losses, the funds would typically increase their borrowing.

    Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

    Rating a CPDO involves making assumptions about the way the indexes of credit-default swaps will move, based on a limited history of the benchmarks. The U.S. index referenced by CPDOs was created in 2003; its European counterpart started in 2004.
     
    #1 robbie380, May 21, 2008
  2. Nuclear Yak

    Nuclear Yak Member

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    Yeah...

    I picked a bad time to start an internship at Moody's.
     
    #2 Nuclear Yak, May 21, 2008
  3. Baqui99

    Baqui99 Member

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    This is nothing by a cover your ass action by Moody's. You'll hear a similar story from S&P.

    Truth is that the actuaries and statisticians used data from the last 90 years or so to determine the % default/delinquent for the mortgage backed securities. Only problem was that they used prior data, but ignored the Great Depression and other crashes on the assumption that those events wouldn't reoccur. The U.S. has never had a housing meltdown like this in the past. As a result, they predicted only 2% of loans would default/delinquent, when in reality this percentage was much higher. AAA ratings were absolute BS from the start, so expect S&P and Moody's to spend some time in court.
     
    #3 Baqui99, May 21, 2008
  4. bnb

    bnb Member

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    I don't know. I remember pretty big crashes in California and elsewhere in the early 80's. And employement at the time, was not at the historically high numbers we have now.

    I'd say they simply dropped the ball. They were outsmarted by the investment bankers who packaged high risk, highly levered loans, into vehicles they didn't fully understand. (or who's risks they vastly underestimated). Very very lax lending practices. It was simply amazing how much money you could borrow, and on what terms. I was frequently counselling clients not to take the money they were offered, where previously, I'd been looking for ways for them to find more credit. The risk was there. The rating agencies just missed it -- so the cost of capital did not reflect the risks.

    They absolutely should be covering their asses. They deserve to be spanked.
     
    #4 bnb, May 21, 2008
  5. F.D. Khan

    F.D. Khan Member

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    Reviewing any asset class, risk/return metrics will always be skewed.
    Just as people felt that mortgage default rates could not skyrocket,
    people today feel that commodity prices are sustainable.

    To change one's metrics removes the discipline, and can lead to
    disaster. Irrational behavior is ironic because the more it occurs
    the more mainstream it becomes.

    "The emperor has no clothes"

    That being said, a ratings company is only as good as its reputation.
    If they show their ratings have a limited corellation to success, they
    will not be used. Though the market will fill this void, i'm sure the trial
    lawyers are licking their chops.
     
    #5 F.D. Khan, May 21, 2008
  6. No Worries

    No Worries Member

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    That being said, a ratings company is only as good as its reputation.

    So much for S&P and Moody. I guess it is time to short both like crazy? ;)

    Moody should fire everyone who made this **ckup possible, starting at the top. That would send the right message, no? Of they would never dream of that, even with golden parachutes aplenty.
     
    #6 No Worries, May 21, 2008
  7. robbie380

    robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ)
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    fire everyone? how about throw them in jail?
     
    #7 robbie380, May 21, 2008
  8. Baqui99

    Baqui99 Member

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    The housing market had brief periods of being down in the 80's. However, this time around (2003 - 2006) there was a mass influx of foreign capital flowing into the U.S. Sovereign funds from emerging market nations like China poured money into treasuries and other U.S. assets.

    Not only that, but there was a huge demand for investment grade fixed income instruments. Pension funds, endowments, and insurance companies for instance could only invest in AAA debt. Due to the shortage of these products, the rating agencies went ahead and assigned them AAA ratings. Not only that, but the securities were also insured by the likes of Ambac, etc via Credit Default Swaps. Problem is that the insurers only had liquidity to pay off like 5% of what they ensured.

    The financial contagion was huge this time around due to the "parallel banking system" whereby "John Jones" had his and thousands of other mortgages packaged and sold off by traunches. The subordinated traunches paid in excess of 200 bps over prime! Crazy. Anyways, those lower traunches were then packaged again into CDO's, and then into CDO squared. They could then be used as assets by which financial institutions could issue Asset Backed Commercial Paper. Commercial banks and S&L's buy the ABCP and issue new loans against them. So, the contagion spread throughout the banking system, affecting everyone along the way, and leading to the credit crunch and liquidity crisis of today.

    In response, you've seen the Fed expand its powers well beyond what they've ever done.
     
    #8 Baqui99, May 21, 2008
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