|10-22-2008, 03:26 PM||#1|
Join Date: Jul 2001
Location: Hot Springs, Ouachitah
Moody's fraudulant ratings
« In the wind-power biz, beware giving some stocks a whirl | Main | Woeful mix: Oil rampages while the Fed begs to hold still »
Bond grader Moody's stock dives on fear of ratings fraud
11:23 AM, May 21, 2008
People have become very suspicious of the major bond rating companies in the wake of the sub-prime mortgage crash and the number of AAA-rated securities that really weren’t.
They’ll have more reason to be suspicious now: Moody’s Investors Service stock is down more than 14% today after London’s Financial Times reported that a bug in the firm’s computer models caused Moody’s to award "incorrect triple-A ratings to billions of dollars worth of a type of complex debt product."
According to the FT report, "Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple-A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower." Yet the ratings were maintained at AAA.
At issue are ratings on so-called constant-proportion debt obligations, investment vehicles that borrowed heavily to bet on credit-default swaps. (Swaps, in turn are a way to bet on, or hedge against, companies defaulting on their debt.) Trying to understand CPDOs will make your brain explode, but suffice to say they were designed by Wall Street’s rocket scientists to pay investors high returns at what appeared to be low risk.
That’s exactly how many sub-prime mortgage bonds were structured, of course. Whoops.
Moody’s stock was down $6.40 to $37.50 at about 11:15 a.m. PDT. Investors are petrified that the company could be charged with fraud. Interestingly enough, Moody's biggest shareholder is none other than Warren Buffett's Berkshire Hathaway Inc.
Brokerage Jefferies & Co. cut its rating on the stock to "underperform" from "buy" today, saying the FT report means that "the litigation threats facing Moody's are far more serious" than had been expected.
The FT says Moody's said in a statement that the company "regularly changes its analytical models and enhances its methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks. In addition, Moody’s has adjusted its analytical models on the infrequent occasions that errors have been detected.
"However, it would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter."
UPDATE: Moody's issued another statement late in the day. Read it here.
Permalink | Comments (4) | Save/Share Save/ShareDigg | Delicious | Reddit | Google | Mixx | Newsvine | Yahoo | Facebook TrackBack
TrackBack URL for this entry:
Listed below are links to weblogs that reference Bond grader Moody's stock dives on fear of ratings fraud:
Aren't investment Banks paying fees to get the rating in the first place? We are going to feel this mess for years to come. Investment Bankers creating exotic products and the rating agencies raking millions of dollars to get them to the end result. Oh what risk? $800K purchase price, 1% loan amount, 100% financed, No Income No Asset, previous renter paying $1,000 per month...Approved!
Posted by: Hugo King | May 21, 2008 at 03:58 PM
There are rouges in every organization. Moody is not perfect. That is why one should not look at recommendations as the Bible and question everything that concerns money. Of course, most investment analysts are lazy and do not want to rock the boat.
Posted by: Charles Hopfl | May 21, 2008 at 04:03 PM
Are you STILL a member of the liar's club? Next, S&P and Fitch will have to 'fess up to their share of the Wall Street pyramid scams. Analytical standards and company policies are meaningless in the context of hyper-complicated financial derivatives devised by extremely intelligent greedy thieves. All the games at Enron were just a preview of the ongoing meltdown. I would rather take my money to Vegas, Atlantic City, Monte Carlo or Macau. At least we know what the odds are.
Posted by: Bill | May 22, 2008 at 08:01 AM
I am sick to death of hearing that financial derivatives are too complicated for anyone to understand. I'm not as stupid as the press seem to think I am.
Posted by: Bob Throllop | May 22, 2008 at 12:08 PM
|10-22-2008, 03:29 PM||#2|
Join Date: Oct 2003
In a hearing today before the House Oversight Committee, the credit rating agencies are being portrayed as profit-hungry institutions that would give any deal their blessing for the right price.
Case in point: this instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal on 4/5/2007:
Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right...model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.
A former executive of Moody's says conflicts of interest got in the way of rating agencies properly valuing mortgage backed securities.
Former Managing Director Jerome Fons, who worked at Moody's until August of 2007, says Moody's was focused on "maxmizing revenues," leading it to make the firm more "issuer friendly."