US senator calls for inquiry into alleged cover-up by Moody's

A PROMINENT US senator has called for an investigation after revelations that computer errors resulted in debt ratings agency Moody's erroneously awarding top-notch AAA ratings to billions of dollars of complex debt products. The correct rating should have been up to four notches lower.

"Internal" Moody's documents apparently show that the agency knew of the coding error in early 2007. It is alleged that the agency instituted changes in its methodology at the same time that they corrected the coding glitch, thereby ensuring that "the impact of our code issue after those improvements in the model is then reduced". Furthermore, documents allegedly show that three methodological changes were proposed but only two were adopted, the third being binned because it "did not help the rating".

The products, which promised high returns with little risk, kept their AAA status until they were downgraded at the beginning of this year. Institutional investors who held the products have lost up to 60 per cent of their investment.

In a letter to the Securities and Exchange Commission (SEC), New York senator Charles Schumer described the ratings inaccuracies as "deeply troubling", adding that "the fact that Moody's only downgraded these incorrectly rated products in January of 2008, nearly a full year after they became aware of the problem, is much worse, and is indicative of a culture of shirking responsibility that must end."

Connecticut attorney general Richard Blumenthal said that he is investigating the agency for "potential fraud" as a result of a possible "cover-up" on the matter.

Berkshire Hathaway top gun Warren Buffett, who owns almost 20 per cent of Moody's stock, is not panicking. "I would doubt very much that any events of any one day will permanently change the franchise value of Moody's," Buffett said. Investors were less sanguine, with Moody's stock plunging 16 per cent on Wednesday, its worst one-day fall since 1999, and another 10 per cent in early trading yesterday.

Moody's and other credit rating agencies were already under fire from legislators and regulators for giving top rankings to subprime mortgage related securities that have collapsed in value. James Chanos, one of Wall Street's most prominent short sellers, shorted Moody's last year, protesting that it is "integrated into the whole underwriting cycle of structured finance" and is "no longer a referee on the playing field, they are actually playing at this point".

Moody's said it would be "inconsistent" with their standards "to change methodologies in an effort to mask errors" but promised a "thorough external review".