June 13, 2008 / 10:49 AM / 10 years ago

S&P reveals error made in CPDO rating model

LONDON, June 13 (Reuters) - Standard & Poor’s said on Friday it had discovered an error in a model for rating complex debt products, but the mistake did not lead to any changes in the transactions’ ratings.

S&P said the error had been found in a trial version of one of its models that had been used to rate five public constant proportion debt obligations (CPDOs).

S&P said it had disclosed the situation to the U.S. Securities and Exchange Commission.

“In responding to an SEC inquiry regarding our CPDO, CDO and RMBS ratings and models, S&P was pleased to report an external review found no erroneous rating assigned as a result of an error in a model,” the rating agency said in a statement. “This error did not result in a ratings change and was caught and remedied by our ratings process.”

Ratings agencies have come under fire over their role in the U.S. mortgage crisis, with allegations that they assigned ratings that were too high for bonds backed by poor quality mortgages.

The Financial Times reported last month that a coding error in a Moody’s Investors Service computer model caused some CPDOs to be assigned a rating four levels higher than merited, and that Moody’s did not correct the error quickly.

Moody’s said last week that an external investigation by law firm Sullivan & Cromwell into the possible rating error was ongoing.

REGULATION

CPDOs take leveraged bets on credit derivatives indexes such as the iTraxx Europe. They were designed to pay investors very high coupons — around 200 basis points over Libor — and yet gain very high ratings. (For a FACTBOX on the structure, please double click on [ID:nL21354169].)

Regulators are looking at ways to improve disclosure and transparency at ratings agencies.

U.S. regulations proposed on Wednesday would require credit rating firms to reveal more information about their ratings for structured finance products, which include the riskier investments linked to the subprime mortgage crisis.

Part of the plan by the SEC requires a new, separate rating scale for structured products and calls for stricter disclosure requirements and business practices for credit rating firms.

Ratings agencies also struck a pact last week with New York’s attorney general to change the way they charge fees for reviewing mortgage-backed securities.

The accord was reached with Moody’s Corp’s (MCO.N) Moody’s Investors Service, McGraw-Hill Co’s MHP.N Standard & Poor’s and Fimalac SA’s LBCP.PA Fitch Ratings, aimed at strengthening the independence of ratings agencies.

Under the old fee system, the agencies had a financial incentive to assign high ratings because they only received fees if a deal was completed. Under the new agreement, the firms will receive payments for service even if a deal is not completed. (Reporting by Natalie Harrison, editing by Will Waterman)

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