New York (HedgeCo.Net) – Credit rating agency Moody’s said on Tuesday that it would probe deeper into why its staff incorrectly rated approximately $1 billion of complex debt securities.
While it was thought to be a computer error that caused the discrepancies in ratings, an external investigation by Sullivan & Cromwell revealed that some members of a key ratings committee violated certain codes of conduct while dealing with constant proportion debt obligations, or CPDOs. An expose produced by the Financial Times originally shed light on the errors.
“I am deeply disappointed by the conduct that occurred in this incident,” said Moody’s CEO and Chairman Raymond McDaniel. “The integrity of our rating process is core to Moody’s values and is essential to the market.”
CPDOs were awarded the highest "Triple A rating" when they first appeared in 2006. It then came to be known that they were actually associated with risky instruments. Moody’s insists that the error was not intentional. Some investors who snatched up CPDOs lost over half of their capital.
Following the subprime fallout last summer, Moody’s, Fitch and Standard & Poor’s have downgraded hundreds of billions worth of debt, creating substantial losses for investors and causing the implosion of several hedge funds.
Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net
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