Moody's goof causes flawed AAA ratings

Moody’s (MCO) is in hot water once again. The Financial Times reported Tuesday that the agency mistakenly assigned a triple-A rating to billions of dollars in complex debt, due to a bug in its computer models. When Moody’s discovered the error, the FT reports, the agency changed its rating methodology, allowing the debt to retain its coveted top rating until a downgrade earlier this year. Moody’s said such a change would be “inconsistent with Moody’s analytical standards and company policies” and added it is reviewing the matter.

The errors in Moody’s ratings of constant proportion debt obligations, or CPDOs, are only the latest problem to surface at the rating agency. Connecticut’s attorney general said earlier this month he was looking into apparent conflicts of interest in Moody’s rating of a newly formed municipal bond insurance company, Berkshire Hathaway Assurance, which is run by a big Moody’s shareholder, Warren Buffett’s Berkshire Hathaway (BRKA). And of course Moody’s and rival S&P are widely seen as having played a leading role in the inflation of the housing bubble, through their willingness to put triple-A ratings on debt backed by risky subprime loans. Moody’s shares have had a nice bounce off March’s panic lows, but the good will was gone Wednesday, as the stock plunged 13%.