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Wednesday, 9 July 2008

Moody’s to check on accuracy

According to the FT, "Moody’s is moving to re-examine the accuracy of all its computer models and place them under a centralised monitoring system after it formally acknowledged earlier this week that a glitch had appeared in one such mathematical model used to rate complex products.
Moody’s will also introduce a standardised protocol for fixing computer errors in the future – rather than letting individual units deal with problems, as at present, officials say."

It says a lot about today's financial markets that bonds could have been issued AAA ratings by mistake and nobody batted an eyelid. A good banker or credit officer can tell whether an asset should have a gold-plated rating just by it's "smell".

OK, I will say it. The rating agencies have been given far too much credence in the past. I remember a Swiss rolling stock leasing company being given a AA rating and the basis of its lease portfolio, all good credits. The trouble was, the bond term was for 15 years and the leases ran for a maximum of 3. The agencies expected they would be renewed because that was what had happened in the past. A bit of a big ask if you ask me. You can run all the models you like but this sort of rating is just hocus pocus.