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[CPDO rating error] CPDOs’ triple A failure

The FT’s investigation into Moody’s rating of CPDO has shown that:

  • Moodys made an error in its mathematical code used to assign a rating to CPDOs. The error was discovered in early 2007, but it appears that investors in the bonds and clients were not informed.
  • Several CPDOs produced by ABN Amro had already been rated, and many more - from a whole range of other banks - were in the pipeline. Moody’s put the rating of these nascent CPDOs on hold.
  • Discussions on what to do about the error were led by some of the most senior staff in Moody’s European structured finance business. Although the CPDO rating committee, comprising senior staff and analysts, discussed the coding error, it does not appear to have discussed whether the issue should be - or was - disclosed to clients or investors.
  • The committee did discuss “methodological changes” which were implemented simultaneously with the code correction.
  • Documents show that three methodological changes were proposed, but only two were adopted. The third was ditched because it “did not help the rating.” Of the two changes which were made, the document states: “the impact of our code issue after those improvements is then reduced.”
  • After the changes were made, Moody’s resumed the rating of CPDOs, and continued to award triple A ratings to CPDOs.

Article Series - CPDO rating error

  1. FT Alphaville exclusive: Moody’s error gave top ratings to debt products
  2. Moody's statement to the FT
  3. A CPDO rating explainer
  4. CPDOs' triple A failure
  5. Buffett doesn't blink
  6. US senator Schumer's letter to Cox
  7. Moody's Confirms External Review of European CPDO Rating Process (Statement)
  8. Moody's on ratings watch negative
  9. Moody's CEO makes statement
  10. Moody's hopes to put CPDO errors behind it
  11. Cox responds to Schumer
  12. S&P admits modelling flaw
  13. Moody's ousts structured finance head, admits breaches to code of conduct

This entry was posted by Sam Jones on Wednesday, May 21st, 2008 at 11:45 and is filed under Capital markets. Tagged with . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. May 23   18:34 Posted by Integrity Research» Blog Archive » A bug in the Moody’s black box? [report]

    […] New York - Earlier this week, the FT reported the disturbing news that “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”. Even worse, investors and clients were not informed when the error was discovered, and the code was corrected simultaneously with a methodological change. To say that this is an embarrassment is an understatement. Moody’s shares have fallen by nearly a quarter since the news broke, and certain legislators, smelling blood in the water, have begun to circle around this case. Ironically enough, S&P has placed Moody’s on ratings watch negative, and it’s possible that we will see lawsuits and regulatory action. […]

  2. May 22   21:56 Posted by THE NEW REPUBLIC | Blogs [report]

    […] Moody's (about which I've posted a few times) has announced that "The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions"…blah, blah, blah.  Actually, there are three full Financial Times articles (one in the lead position on the front page), two of which authored were authored by a trio (Sam Jones, Gillian Tett and Paul J. Davies) and the other written by the last of the three alone explaining how a computer error at Moody's sparked the international calamity attached to Constant Proportion Debt Obligations (CPDOs).Yeah, yeah, and the same error was made at Fitch's and S&P.  And, beyond these, MBIA (about which I've also posted and in which I have confessed that I hold a sizable short stake, despite an accusation in Barron's that I haven't) and its compatriot fakers and exploiters like Ambac somehow trusted the ratings and for a while made zillions off them until…well, you until things began to collapse.This scandal has been known to some investors on Wall Street (among them Pershing Square management, on whose board I sit) which have been sounding the alarum for as long as five years and even more broadly two. Under duress and panicked by Barney Frank and Chris Dodd, Moody's has begun a review of its evaluating methodologies. But Moody's and the other companies in cahoots with it have on several occasions announced studies of their procedures.  This is "promises, promises" and about utter contempt for the ordinary investor public and mortgagee who got snared in the euphoria. […]

  3. May 21   18:18 Posted by Research Recap » Blog Archive » Moody’s Has Some Explaining To Do [report]

    […] More details are available via Alphaville. Felix Salmon at Portfolio.com distills the essence of the affair and makes the interesting point that the relationship between the FT and its Alphaville blog allows for more indepth coverage of such an arcane topic. “You couldn’t print all this kind of stuff in a newspaper, it would be far too technical and boring. But online you can put everything up.” […]

  4. May 21   12:25 Posted by Monkey [report]

    This is your moment Sam - the day you graduated from PM Apprentice to Siralun himself. To quote Star Wars: The circle is now complete! Bask in it and be sure to milk some US college speaking engagements out of it if you can. They pay well - just ask Cherie, Tony or Clinton

    Hell, do a Peston and get the BBC to commission a 45 minute ’special’ called ‘The Ratings Game: Glitch In The System’.

    Seriously Sam if I dont hear that you are living on a luxury yacht moored off the Monaco coast by the end of the year I will be terribly disappointed.

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