Shaky Ratings

Somebody leaked Moody's secret to the Financial Times: Moody’s shares tumble on rating error. This whole story is just chock full of juicy goodness:

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.

This has "lawsuit" written all over it. I'm sure the SEC will also have lots of fun.

In a statement to the FT, Moody’s said: “Moody’s 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.”

Who's going to pay for ratings after this?

Suddenly the market is worried about ratings again. They should be: the partially flooded sections of the U.S. dollar have been filling up with losses over the last couple of months. Most market participants have been ecstatic that the losses have not spread, but now they are starting to worry that the losses will spill over again. The banks still have huge losses in their portfolios related to fictitious ratings.

They will. However, the best way for Moody's to save face is actually to stubbornly stick to their false ratings. However, the lies are becoming more and more transparent, and eventually, Moody's will be forced to slash ratings by regulators.