Posted on 01 Jul 2008
The owner of the second-largest credit ratings company, Moody's Corp., ousted the head of its structured finance unit and said employees violated internal rules in assigning ratings to last year's worst performing securities.
In a statement distributed today, some Moody's Investors Service staff breached rules for ranking European constant proportion debt obligations, bonds backed by derivatives. Noel Kirnon, who oversaw the credit policy committee, is also leaving the company, Moody's said in a separate release. Banks sold at least $4 billion of CPDOs, as the securities are known, obtaining Aaa ratings.
U.S. and European regulators are tightening rules for Moody's, Standard & Poor's and Fitch Ratings after the companies provided top rankings on securities backed by U.S. subprime mortgages that lost as much as 80 percent of their value. Moody's said today that employees, not the company's practices, were to blame.
"I am deeply disappointed by the conduct that occurred in this incident,'' Chief Executive Officer Raymond McDaniel said in the statement.
ABN Amro Holding NV created the first CPDO in 2006, promising investors returns of as much as 2 percentage points above money-market rates combined with the highest ratings. Moody's and S&P stripped CPDOs of their top grades this year as the worldwide credit crunch that triggered $400 billion of write-downs and losses on Wall Street caused the value of the securities to tumble by as much as 90 percent.
Moody's said on May 21 that it began a review of its CPDO ratings after a report by the Financial Times said some senior staff were aware in early 2007 of a computer error. The glitch gave the top Aaa rating to CPDOs that should have been ranked as much as four levels lower, the FT said. Moody's altered some assumptions to avoid having to assign lower grades after fixing the error, the FT said.
Moody's, which is 19.6 percent owned by Warren Buffett's Berkshire Hathaway Inc., fell 1 cent to $34.43 in New York Stock Exchange composite trading at 11 a.m. The stock is down 45 percent over the past year.
Moody's hired law firm Sullivan & Cromwell to conduct the review.
The firm found that Moody's personnel didn't make changes to the methodology for rating European CPDOs to mask any model error, Moody's said today. The monitoring committee did engage in ``conduct contrary to Moody's code of professional conduct,'' the ratings company said.
Under those guidelines, a committee may only "consider credit factors relevant to the credit assessment and may not consider the potential impact on Moody's, or on an issuer, an investor or market participant,'' Moody's said.
Employees involved face disciplinary proceedings that may include termination, Moody's said.
Kirnon will leave the company July 31 and will be replaced on a temporary basis by Andrew Kimball, 58. A search for a permanent replacement is under way, Moody's said. Moody's didn't give a reason for Kirnon's departure.
Richard Cantor, 50, will take over as chief credit officer and chairman of the company's credit policy committee.