Moody’s (MCO) and other credit rating agencies have been slammed for failing to spot the meltdown in subprime and other bonds. Moody’s reputation took an even more embarrassing blow today, when the FT reported that a “computer error” resulted in European CPDOs (constant proportion debt obligations) getting triple A ratings they didn’t deserve:
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.”
And if it is, in fact, true that Moody’s “adjusted assumptions to avoid having to assign lower grades,” fraud lawsuits are probably forthcoming.