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Thursday, 2 September 2010

White collar crime is alive and well, and that's OK with the SEC

Now I will be the first to admit, as something of an old fogey in the matter of risk and credit analysis, that I have never been a fan of the modern vogue for delegating a lot of risk analysis to the rating agencies, who to use the vernacular expression, "have no skin in the game", but it gets worse when it turns out that these so called experts get things wrong.

But I call it downright fraudulent when the rating agencies knowingly hide their mistakes and thereby mislead the market, which is exactly what Moody's did in 2007.

According to the SEC, a Moody's analyst discovered in early 2007 that a computer coding error had overstated by 1.5 to 3.5 notches the value used to determine Moody's credit ratings for certain constant proportion debt obligation notes. Nevertheless, shortly afterwards in a meeting in Europe, a Moody's rating committee voted against taking responsive rating action, in part because of concerns that doing so would harm Moody's business reputation.

So that's alright, then. The markets can go hang because it might hurt Moody's to tell the truth, while some paper that is worth nothing more htan a AA- has an uncorrected AAA label slapped on it. Meanwhile the SEC who issued this statement, say that they won't prosecute because the fraud took place in Europe - but hang on, Moody's is a US based group, and are you tellling me that Moody's senior management didn't read the minutes of their European rating committee?

Worse still are you telling me that there is no internal audit that might have picked up on the issue?

And do you really think that the investment banks running the particular issues weren't just a little surprised when their paper came back with a rating justifying a yield 50bp finer than they had expected?

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