Wednesday, May 21, 2008

Moody's Begins Internal Probe On Ratings

Actually, I was thinking of the headline "Moody's probes self" because that's basically what's going on:

Moody's Investors Service said it's conducting ``a thorough review'' after the Financial Times reported that a computer error was responsible for Aaa ratings being assigned to complex debt securities that slumped in value.

Banks obtained the highest grades in 2006 and 2007 for constant proportion debt obligations, funds sold in Europe that used borrowed money to speculate on an improvement in credit quality. 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.

Some senior staff at Moody's were aware in early 2007 that CPDOs rated Aaa the previous year should have been ranked as many as four levels lower, the FT reported today, citing internal Moody's documents. The firm adjusted some assumptions to avoid having to assign lower grades, the paper said.

``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.''

Here's what really happened.

Moody's figured out they made more money by giving AAA ratings to everything. In addition, Moody's clients probably performed a lot of "alternative negotiations". For example, client X held a "meeting" with Moody's in a strip club "gentleman's retreat" and offered "special incentives" for certain ratings. Or when a client found out they wouldn't get a AAA rating, they called the president of Moody's and threatened to pull their business at which time the president of Moody's chewed out the analyst who then magically gave the company a better rating (imagine that).

The ratings agencies are incredibly culpable regarding the current mess we're in. The idea they can objectively investigate themselves is laughable at best and criminal at worst.