Wednesday, May 21, 2008

Feeling moody about malpractice

The role/duty/purpose of ratings agencies is to properly rate, not to guarantee, risk. So, if they've properly rated risk and risk happens, then, not their fault.

But what if they negligently bugger the rating?

Sam Jones doesn't raise the question, but does point out the possible factual situation in an FT article written in collaboration with Gillian Tett and Paul J Davies, "CPDOs expose ratings flaw at Moody’s" and then goes on to toot his horn in FT Alphaville (as you would):

FT Alphaville exclusive: Moody’s error gave top ratings to debt products

Credit ratings are hugely important within the financial system because many investors - such as pension funds, insurance companies and banks - use them as a yardstick either to restrict the kinds of products they buy, or to decide how much capital they need to hold against them.

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.... [A]fter a computer coding error was corrected, their ratings should have been up to four notches lower.


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