The carpenter and his tools

It's a poor carpenter who blames his tools for a shoddy job.

May 21 (Bloomberg) -- Moody's Investors Service said it's conducting ``a thorough review'' after the Financial Times reported that a computer error was responsible for Aaa ratings being assigned to complex debt securities that slumped in value.

In an up market the glitch is called a "feature." In a down market the glitch is called a "bug."

Banks obtained the highest grades in 2006 and 2007 for constant proportion debt obligations, funds sold in Europe that used borrowed money to speculate on an improvement in credit quality. The subprime crisis caused banks including UBS AG and ABN Amro Holding NV to unwind their CPDOs, triggering losses of as much as 90 percent for investors.

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'sdocuments. The firm adjusted some assumptions to avoid having to assign lower grades, the paper said.

Senior staff was aware of the problem, but when the moneytrain is rollin' few are brave enough to point out that the wheels look loose and might be in danger of falling off.

`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.''

Rest easy Puneet, surely this is an isolated incident.

Moody's and Standard & Poor's stripped CPDOs of their Aaa grades this year as rising defaults in the U.S. housing market increased the cost of credit-default swaps referenced by the funds by as much as 670 percent in the past year.

Guess there's no penalty for piling on at this point.

``The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs,'' New York-based Moody's said in an e-mailed statement. ``We are therefore conducting a thorough review of this matter.''

I love it when hookers talk about integrity, especially when they still have lastnight's mascara and lipstick smeared all over their face.

Moody's has ``adjusted its analytical models on the infrequent occasions that errors have been detected,'' the statement said. ``It would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors.''

Computer glitches aside, it never ceases to amaze me how these supposedly brilliant builders of analytical models account for the possibility of a black swan event occurring by just tossing out the possibility. And since Wall St. is ruthlessly efficient when it comes to sucking up all the best talent that money can buy, it occurs to me that the programmers working for ratings agencies are not necessarily the best and brightest.