WASHINGTON - Federal lawmakers and Securities and Exchange Commission officials reacted with concern to a Financial Times article yesterday that claimed Moody's Investors Service incorrectly assigned triple-A ratings to billions of dollars of complex financial products because of a computer glitch and then did not correct the ratings when the glitch was discovered.
Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Committee's panel on capital markets, said that the SEC should investigate the allegations and "take appropriate action to hold all parties accountable" if these products were sold to American investors. Moody's is suggesting the products were only sold to European investors. Kanjorski also urged Moody's to "come forward immediately to explain its actions and clarify what happened."
Meanwhile, SEC chairman Christopher Cox told reporters at a meeting on mutual fund rules that, while the SEC might not have jurisdiction over financial products sold in Europe, the SEC's ongoing review of the nationally-recognized credit rating agencies will focus on these kinds of issues generally.
Cox and Kanjorski made the remarks after the Financial Times published an article that said it had conducted an investigation that found Moody's incorrectly assigned triple-A ratings to billions of dollars of "constant proportion debt obligations" because of a computer coding error. The ratings should have been up to four notches lower, the Financial Times said. Moody's officials new about the problem in early 2007 and later fixed the coding error and instituted methodology changes, but the triple-A ratings remained in effect until January of this year when, amid general market declines, they were downgraded several notches, according to the newspaper.
A CPDO is a type of credit derivative.
In a statement issued yesterday, Moody's said it "recognizes the seriousness of questions raised by" the article said. The agency said it has "retained the law firm of Sullivan & Cromwell and initiated a thorough external review of our European CPDO ratings process," adding: "Upon completion of the review, we will promptly take any appropriate actions."