Moody's coding error boosted CPDO ratings -FT

LONDON, May 21 (Reuters) - A computer coding error led Moody’s Investors Service to assign incorrect triple-A ratings to a complex debt product that came to mark the peak of the credit boom, the Financial Times said on Wednesday.

A Moody’s spokesman declined to comment immediately on the report. The FT said Moody’s said it was conducting a thorough review of the ratings.

Ratings agencies are under scrutiny by regulators and politicians over the role they have played in the U.S. subprime mortgage crisis, and face allegations that they assigned ratings that were too high to bonds backed by poor-quality mortgages.

The FT said internal Moody’s documents it had seen showed that ratings on so-called constant proportion debt obligations (CPDOs) should have been up to four notches lower, and that the agency had discovered the error in its models early in 2007.

Moody’s corrected the coding glitch at that time and instituted changes to its methodology. The products remained triple-A until January 2008, when market turmoil led to hefty downgrades.

The ratings agency issued a statement to the FT, saying: “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.”

CPDOs take leveraged bets on credit derivatives indexes such as the iTraxx Europe ITRAC5EA=GFI. They were designed to pay investors very high coupons -- around 200 basis points over Libor -- and yet gain very high ratings.

Dutch bank ABN AMRO pioneered the structure in 2006, calling it “the most exciting development in the credit market for several years.”

But the triple-A ratings assigned by Moody’s and Standard & Poor’s generated controversy, with both Fitch Ratings and DBRS saying they could not justify assigning such high ratings.

Credit market participants too questioned whether the structures were too good to be true.

The extreme market volatility early this year caused very sharp falls in the values of the instruments, and led Moody’s and S&P to cut their ratings on the instruments as fears built that investors would end up losing money on them.

Reporting by Richard Barley; editing by Rory Channing