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Moody's shares plunge on ratings glitch
The ratings service is conducting a “thorough review” after a report said a computer error led Moody’s to incorrectly assign “AAA” ratings to securities worth billions of dollars.
Published: May 21, 2008 - 1:00 pm
On June 5, Moody’s Corp. will host an “Investor Day,” where top executives will be trotted out to talk about their outlook for the credit-rating agency.
They will have some serious explaining to do now that Moody’s is suffering through one of the biggest embarrassments in its 99-year history. The Manhattan-based company said Wednesday that it is conducting a “thorough review” after a report in the Financial Times
The abrupt drop shaved more than $300 million off the stake held by Moody’s largest shareholder, Warren Buffett’s Berkshire Hathaway Inc., which owns about a 20% of the company’s shares.
News of the computer glitch couldn’t have come at a worse time for Moody’s. The company, along with rivals Standard & Poor’s and Fitch Ratings, is already under investigation by the New York state Attorney General’s office over its wildly inaccurate “AAA” ratings for billions of dollars’ worth of subprime-mortgage bonds. Congress and the Securities and Exchange Commission are also scrutinizing the ratings agencies to see if they got too cozy with Wall Street investment banks or the issuers who pay them hefty fees to rate their debt.
The bonds rated incorrectly by Moody’s are called “constant proportion debt obligations,” which are highly-leveraged instruments marketed to sophisticated investors that supposedly offer high returns with little risk. CreditSights, which competes with Moody’s and S&P, described them as “chimerical beasts” in a November 2006 report, shortly after the first CPDO offering was sold.
“Though we cannot pinpoint exactly where the flaw in the rating methodology is, there are a number of things that give us grounds for unease,” CreditSights wrote.
Due the computer error, Moody’s rated about $4 billion of CPDOs as “AAA” when they should have been rated four notches lower. Even after the bug was discovered early last year and corrected, the Financial Times reported, Moody’s didn’t downgrade the securities until this past January.
link to the article:
http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20080521/FREE/238387364/1048&category=FREE&nocache=1
The ratings service is conducting a “thorough review” after a report said a computer error led Moody’s to incorrectly assign “AAA” ratings to securities worth billions of dollars.
Published: May 21, 2008 - 1:00 pm
On June 5, Moody’s Corp. will host an “Investor Day,” where top executives will be trotted out to talk about their outlook for the credit-rating agency.
They will have some serious explaining to do now that Moody’s is suffering through one of the biggest embarrassments in its 99-year history. The Manhattan-based company said Wednesday that it is conducting a “thorough review” after a report in the Financial Times
The abrupt drop shaved more than $300 million off the stake held by Moody’s largest shareholder, Warren Buffett’s Berkshire Hathaway Inc., which owns about a 20% of the company’s shares.
News of the computer glitch couldn’t have come at a worse time for Moody’s. The company, along with rivals Standard & Poor’s and Fitch Ratings, is already under investigation by the New York state Attorney General’s office over its wildly inaccurate “AAA” ratings for billions of dollars’ worth of subprime-mortgage bonds. Congress and the Securities and Exchange Commission are also scrutinizing the ratings agencies to see if they got too cozy with Wall Street investment banks or the issuers who pay them hefty fees to rate their debt.
The bonds rated incorrectly by Moody’s are called “constant proportion debt obligations,” which are highly-leveraged instruments marketed to sophisticated investors that supposedly offer high returns with little risk. CreditSights, which competes with Moody’s and S&P, described them as “chimerical beasts” in a November 2006 report, shortly after the first CPDO offering was sold.
“Though we cannot pinpoint exactly where the flaw in the rating methodology is, there are a number of things that give us grounds for unease,” CreditSights wrote.
Due the computer error, Moody’s rated about $4 billion of CPDOs as “AAA” when they should have been rated four notches lower. Even after the bug was discovered early last year and corrected, the Financial Times reported, Moody’s didn’t downgrade the securities until this past January.
link to the article:
http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20080521/FREE/238387364/1048&category=FREE&nocache=1
