Slashdot Mirror
Coding Flaws Caused Moody's Debt Rating Errors
An anonymous reader writes "The Financial Times has the story that billions in incorrect AAA ratings given out by Moody's were the result of a coding error in its computer models. 'Internal Moody's documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.'"
The problem is that the credit agencies used past data for new types of asset backed securities. While this works with most asset backed securities, the use of CDOs and MBSs caused a perfect storm. They assets they were backed up with were housing values and the AAA ratings they had made them very popular, inflating the housing values. When the housing values took a nosedive, there were no assets to back up these securities.
This isn't a trivial issue. False AAA ratings are what have caused the global credit crunch and mortgage crisis. For those who aren't familiar with a AAA rating, it is considered as good as a US government bond. It is a very hard rating to get and only 8 US companies are rated AAA by all of the credit agencies.
In my opinion, there is a very strong need for regulation of the credit agencies. If they didn't allow for CDOs and MBSs to get AAA ratings, this credit crunch and likely recession wouldn't have occurred.
I worked in a predatory lending clinic for the last few months (as part of my last semester of law school).
In many of our cases, the buyers didn't lie at all. Instead, the broker modified income and employment information on the application forms it sent to the lender, sometimes forging applications entirely
Lenders, for their part, turned a blind eye to obviously suspicious information (like a security guard making $80,000/year).
This worked for both lenders and brokers in the short term because the broker was only interested in getting more business written and the lender would quickly sell the obviously flawed mortgage to someone else.
Of course, all of this resulted in a lot of borrowers getting approved for products they couldn't afford. Why did they apply for such products? Because brokers often flatly misrepresented the terms of the products.
The incentive to get business done at any cost was a major cause of the outright fraud that underlies the current housing crisis. Borrowers are not totally blameless, but lenders and brokers were the really evil parties here.
Very possible.. banking coders tend to be rather cowboy-ish in my limited experience of Investment Banking companies in the UK and Australia.
In a short 5 week stint in an investment bank in Australia I was shocked at the way my manager at the time would order the DBA to "just authorise" some SQL query he'd written on the production database.
The idea of having a DBA authorise a query on the production databases was to prevent stupid things from happening.. but all too often I saw these safety systems bypassed at a human level.
If you want reliable safe systems, I'd bet on telecommunications companies rather than banks.