When A Computer Glitch Mucks Up Bond Ratings

from the what-do-you-do dept

Interesting story in the financial world, as the Financial Times reported that Moody’s, the big name in the bond rating business, may have incorrectly rated certain bonds as Aaa, its highest rating — given only to a class of bonds that will almost never default. Apparently, the incorrect ratings were due to a computer glitch (always a convenient scapegoat). However, more troublesome is the Financial Times’ claim that it has seen documents suggesting that Moody’s execs were aware of the error last year and didn’t do much to change the incorrect ratings. This is troublesome, as it would be a big hit to Moody’s reputation — which is its biggest asset. Of course, when you rely on a single source (or a single algorithm) to rate bonds, this sort of thing is bound to happen eventually — and extracting yourself from the resulting mess is always going to be tricky. It makes you wonder if there aren’t better ways to rate bonds, that don’t have a single point of failure.

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Comments on “When A Computer Glitch Mucks Up Bond Ratings”

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Jaded Investor says:

Conflicts of interest

“The problem was an incredibly bad, arguably incompetent, algorithm design which made some very bad assumptions about the relevance of the data it was using.”

The fact that other ratings agencies came up with similar bogus ratings casts serious doubt on the “computer error” spin. “Computer error” is the business equivalent of “The cat ate my homework”.

It seems more likely that the problem arose because the ratings agencies were paid large sums of money to come up with the “right” ratings.

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