GaudiaRay writes:
As I posted on the news thread below, on this same topic, take a second to reflect on the criminality of these actions:

"Aren't any of these revelations proof of criminality?

Are they all so naive and blemish free that there is no "intention" to be found anywhere?

Here "Intention"; come here boy.

Or is this not evidence of "reckless" behavior?

Reckless is criminal, too.

Absurdity taken to beyond, and climbing."
GaudiaRay | 05.21.08 - 8:26 am | #

James Bednar writes:
Interesting that this is being passed off as a "bug".

This doesn't sound like a bug at all. The ratings model worked exactly as developed, no bugs. Unfortunately, the assumptions built into the model were wildly unrealistic.

This isn't a bug, it's a bad model.
James Bednar | Homepage | 05.21.08 - 8:26 am | #

RayOnTheFarm writes:
The implication there is that Moody's had a computer bug (but their model was otherwise intact) and that S&P was handing out AAA like candy on Halloween.

I can see part of this happening, simply because they were operating in an era where making a mistake on the upside was less of a problem than giving a downside rating that the security didn't deserve.

Times changed tho.
RayOnTheFarm | 05.21.08 - 8:27 am | #

12th Percentile writes:
Raises the old "feature or a bug" question?

Anyway, Paulson said the credit crisis is over. And he has a better track record than Meredith Whitney, right?
12th Percentile | 05.21.08 - 8:28 am | #

halpmeh writes:
wow this is really blatant, how can they expect anyone to buy that?
halpmeh | 05.21.08 - 8:28 am | #

RayOnTheFarm writes:
It also implies that Moody's had shit for a software QA department.

"You mean they didn't perform QA on that mega-spreadsheet that pulled data from a database in Timbuktu ?"
RayOnTheFarm | 05.21.08 - 8:30 am | #

kett82 writes:
Dear T,

A “computer bug”…!?? What? You mean that ratings for millions of dollars of business is based on one…one!...model projection??! No independent second review? I find that hard to believe.

And, I thought I was careless in my methods…

Best regards,
kett82 | 05.21.08 - 8:32 am | #

Tanta writes:
The implication there is that Moody's had a computer bug (but their model was otherwise intact) and that S&P was handing out AAA like candy on Halloween.

Right. But Moody's gets busted and S&P does not.

We notice that the storyline is not "S&P's model is so absurdly optimistic that Moody's had to screw up its own model in order to match S&P's ratings."
Tanta | 05.21.08 - 8:33 am | #

Matt writes:
Nice try, but the real problem, easily detectable, is that the ratings industry is a semi-monopoly. Hence, some of us, looking at the distribution of ratings and the limited number of raters did conclude that the ratings outcome were cyclic. They would be high for a number of years, then change to a set of lower values for a number of years. You have to integrate ratings values over the 16 years American economic cycle, making rating essentially useless.
Matt | 05.21.08 - 8:34 am | #

scav writes:
veddy interesting. Although it also sounds as if it might be sloppy code-testing. They "tested" the code by seeing if it was in-line with the S&P results rather running a more extensive series of hypothetical cases that would establish it accurately reflected the logic it was supposed to embody. That would rhyme with quick-testing your model to establish it replicated the housing prices of 2001-2004 and forgetting that prices could ever decline. Of course, now that Moody's has laid claim to the Bug In The Code excuse first, S&P has got to come up with its own rationale.
scav | 05.21.08 - 8:34 am | #

GaudiaRay writes:
The argument, "honest business mistake", if this were an isolated incident, would certainly be entitled to "equity" by a judge.

But there's a pattern, isn't there? Hasn't the recent refusal to downgrade the bond insurers yet another "honest business mistake"?

There's a core issue appearing like red welts on a chicken pox sufferer that keeps popping up. It's a simple childhood-derived dynamic that's not only prevalent but apparently dictates the response of all the publics concerned, including the Dept of Justice and the AG's everywhere. They won't challenge apparent, in-their-minds-legitimate, authority.

Therein lies the crux of this matter; this is imo not a one-off singularity event. All the ratings are suspect, at best.

Buying due diligence by subscribing to a ratings company and then rubber-stamping the reports has been the decision of many financial entities who will now charge the stupendous losses resulting from this behavior to millions of J6P's and thousands of now, consequentially, ersatz rich.
GaudiaRay | 05.21.08 - 8:34 am | #

RayOnTheFarm writes:
The other implication (unspoken, but remotely possible) is that Moody's *might* have been mis-rating stuff that didn't make it out the door with AAA.

Has a ratings agency ever done the equivalent of "we're going to restate all ratings back to 2006" ?
RayOnTheFarm | 05.21.08 - 8:37 am | #

Ginger Yellow writes:
I'm not sure what your second statement implies, Tanta. Given that the rating on these products is derived from assumptions about spread volatility, presumably they had different assumptions - Moody's (post "bug fix", pre-methodology change) assumptions didn't result in a AAA rating. S&P's did. It's not that surprising - Fitch's and DBRS's assumptions didn't give AAA ratings either.

As for your first sentence, ugly doesn't begin to describe it.
Ginger Yellow | 05.21.08 - 8:37 am | #

Aheadofthecurve writes:
I remember a year or two ago, it came out that some movie studio hired a "critic" to rate their movies. Needless to say, in his humble opinion, every one was the greatest epic since "Citzen Kane".

Tanta, perhaps you should hire someone to rate your blog?
Aheadofthecurve | 05.21.08 - 8:38 am | #

GaudiaRay writes:
AAAA
GaudiaRay | 05.21.08 - 8:39 am | #

VennData writes:
I'm calling a bottom in software bugs, feel free to continue coding.
VennData | 05.21.08 - 8:40 am | #

Aheadofthecurve writes:
Gaudia-How much did she pay you for that?
Aheadofthecurve | 05.21.08 - 8:42 am | #

Tanta writes:
Moody's (post "bug fix", pre-methodology change) assumptions didn't result in a AAA rating. S&P's did. It's not that surprising - Fitch's and DBRS's assumptions didn't give AAA ratings either.

So you are saying that three models--Fitch, DBRS, and (corrected) Moody's--didn't come up with AAA but S&P did. And this is "not surprising." Does that mean we've all just gotten used to the idea that S&P's ratings are inflated, and the only useful question to ask is why Moody's tried to get in on that game?

I freely admit I know very little about CPDOs and rather hope it stays that way. I am all in favor of Moody's getting busted for having not copped to this "error"--if indeed that is what it was--sooner. I simply received the impression from the FT article that S&P was getting a pass on its assumptions.
Tanta | 05.21.08 - 8:46 am | #

Anonymous writes:
Unlike the rest of the commenters in this thread, I believe Moody's excuse of computer bug. The ratings are based on how much companies pay Moody. Insufficient "tips" from companies shouldn't been awarded with AAA!
Anonymous | 05.21.08 - 8:51 am | #

charlie writes:
Does this open the door for a bazillion dollar lawsuit against Moody's?
charlie | 05.21.08 - 8:58 am | #

mack writes:
Smells like a legal strategy.

End game: "Yes, there were mistakes. No, it wasn't a conspiracy."
mack | 05.21.08 - 9:00 am | #

Bloddy fingers writes:
Conspiracy of Liars. Financial innovations consist of improvisations on the truth and personal honor. Pays well though...
Will these erroneous ratings prompt an industry wide review; will ratings be downgraded? Probably not as pressure from CDS holders and the fragility of a system built on falsehood can no longer sustain the pure light of truth.
Tell all the Truth but tell it slant
Success in Circuit lies
Too bright for our infirm Delight
The Truth's superb surprise
As Lightening to young Children eased
With explanations kind
The Truth must dazzle gradually
Or every man be blind---
Yes got the slant part, but the "tell ALL the truth" or even SOME of the truth is gonna be tuff.
Bloddy fingers | 05.21.08 - 9:00 am | #

stuart writes:
Conspiracy of Liars, absolutely. Foreign Central Banks continue to pump money though into our markets..so who cares.
stuart | 05.21.08 - 9:02 am | #

scav writes:
I don't necessarily disbelieve the bug, I fully believe they, like most other modern corporations, do cheap-as(s)-possible testing that is at best symbolic. This lean and mean dogmatic paradigm is leading to anorexia and it's not the fat that's being cut, its the heart and major organs.

Being a bear of little brain, I am far more disgusted by they're having supposedly found this situation approximately a year ago and it's bubbling out now. A Pox on all their houses. Those that abandoned standing by their Class 4-A vaporings to instead acknowledging mummified "Hey! Congratulate us on our Cheap Practices!" cockroaches and those clinging to their sinking AAAA vaporings.
scav | 05.21.08 - 9:03 am | #

DownSouth writes:
Why do you economist types keep beating around the bush? Isn't the evidence overwhelming?

What we have here is the classic confidence trick, and the ratings agencies played the role of shill:

"Sometimes con men rely on naive individuals who put their confidence in get-rich-quick schemes, such as 'too good to be true' investments...
The confidence trickster often works with one or more accomplices called shills, who help manipulate the mark into accepting the con man's plan."

http://en.wikipedia.org/wiki/ Con...onfidence_trick
DownSouth | 05.21.08 - 9:03 am | #

GaudiaRay writes:
Charlie, someone here can comment further. I've concluded the rating agencies are like tip sheets at the race track. You buy 'em and you take your chances. They're an authorized free speech, opinions provider. These touts are not responsible for what they conclude!

The real, responsible parties are the fund and portfolio managers who cleave to their touts the way whores do to their pimps.

For the many who use them, it's apparently a victimless crime.
GaudiaRay | 05.21.08 - 9:05 am | #

Ginger Yellow writes:
"So you are saying that three models--Fitch, DBRS, and (corrected) Moody's--didn't come up with AAA but S&P did. And this is "not surprising." Does that mean we've all just gotten used to the idea that S&P's ratings are inflated, and the only useful question to ask is why Moody's tried to get in on that game?"

What I mean is that it's not surprising that different agencies came up with different results, given that CPDO ratings depend almost entirely on assumptions about future spread volatility. So I wasn't sure why you had a "hard time" with the idea. Now that in itself should have been a good reason not to give them a triple-A rating. S&P's assumptions were clearly wrong, and the fact that other agencies were so adamant that CPDOs don't come close to AAA should have made them reconsider their confidence in their assumptions.

Furthermore, yes I do think the Moody's angle is much more interesting. S&P screwed up. Badly. But we knew that. This Moody's situation is far more serious.
Ginger Yellow | 05.21.08 - 9:07 am | #

grizz writes:
Software has bugs, many make it into production. But even accepting that this was the reason, modeling software that routinely gave ratings 4 levels too high should be easily caught by anyone who actually wanted to do so. Blaming this on a software bug is pathetic.
grizz | 05.21.08 - 9:08 am | #

RacerX writes:
Is there any scorecard to tell how often a rating agency's forecast is accurate?
RacerX | 05.21.08 - 9:09 am | #

TheFinancialNinja writes:
Anybody notice that CIFG (a monoline) was downgraded to JUNK yesterday? The market didn't put up much of a fuss, but the CDS's on MBIA (MBI) and Ambac (ABK) quickly melted up.

Remember, if the rating are are bullshit, what happens to the monolines that wrapped them? >evil grin<

CIFG, MBI, ABK and Moody's: The Computer's Made Us Do It
TheFinancialNinja | Homepage | 05.21.08 - 9:10 am | #

Pondering the Mess writes:
The only "bug" is that the scam of ever-inflating housing and asset prices was not able to continue. With the wind taken out of that nice wealth transfer game, they suddenly realized that their "model" wasn't worth anything, which didn't matter back when they were making a fortune passing crud out the door with AAA stamped on it. Wait - let me guess - their model assumed "housing always goes up!"

Naturally, inline with the rest of the crooks, instead of being honest and encouraging price discovery, they sat on the problem for year until caught, and now say, "Oops - we haven't been doing our jobs, but thanks for the cash!" Right... and S&P continues to rate everything doubleplusgood, since THAT makes sense!
Pondering the Mess | 05.21.08 - 9:11 am | #

Anonymous writes:
as usual people who should be responsible are merely passing the the buck off to the next level down......the
QA people.

I bet if it went the other way it wouldn't be a S/W bug since programs have a hard time collecting the bonus attributed to such 'errors'

Total BS....

Ciao
MS
Anonymous | 05.21.08 - 9:12 am | #

Ginger Yellow writes:
I should note that one of my reporters had articles questioning CPDO ratings back in April and June last year.
Ginger Yellow | 05.21.08 - 9:13 am | #

DownSouth writes:
GaudiaRay writes:

"The real, responsible parties are the fund and portfolio managers..."

This is why this is more complicated than the traditional confidence trick. The supposed "mark" was not managing his own money, but somebody else's money.

So was the "mark" (fund or portfolio manager) really a mark, or was he a shill?
DownSouth | 05.21.08 - 9:14 am | #

Tim writes:
What are the implications for the CDS market if the bond insurers fail?
Tim | 05.21.08 - 9:18 am | #

Anonymous writes:
"Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit."
Gordon Gekko
Anonymous | 05.21.08 - 9:25 am | #

DD49 writes:
The lawyers will be all over this. So lot's more write-offs and downgrades coming. Wonder what the Street will come up with to paper over this news?
DD49 | 05.21.08 - 9:27 am | #

Tanta writes:
So I wasn't sure why you had a "hard time" with the idea.

I think we're on the same page. I was not having a hard time with the idea that the ratings differed. I was having a hard time with the idea that the last word in the article was devoted to that sanctimonious crap from the real outlier: S&P.
Tanta | 05.21.08 - 9:28 am | #

Elvis writes:
This has an eerily familiar feeling to gov't statistics. When is the gov't going to come out and say we've been in a recession for six months now, but the computer program had glitches?
Elvis | 05.21.08 - 9:28 am | #

Aheadofthecurve writes:
I like Gordon Gekko, He saved me a bundle on my car insurance.
Aheadofthecurve | 05.21.08 - 9:28 am | #

Matt writes:
Thank goodness two wrongs make a right!

Right?
Matt | 05.21.08 - 9:32 am | #

s0mebody writes:
Wait - let me guess - their model assumed "housing always goes up!" -Pondering

Fitch's model did assume this.
s0mebody | 05.21.08 - 9:32 am | #

Ginger Yellow writes:
"The lawyers will be all over this. So lot's more write-offs and downgrades coming. Wonder what the Street will come up with to paper over this news?"

Pretty much all the early CPDOs have now cashed out (typically with 90% losses). Any that haven't will be very near their cash out levels. I wouldn't expect any more writedowns as a result of this.
Ginger Yellow | 05.21.08 - 9:34 am | #

RussianRoulette writes:
Was it a Microsoft Vista Program? That I could understand and have sympathy for, not much else.
RussianRoulette | 05.21.08 - 9:35 am | #

Alo writes:
I laughed like a fool on the train this a.m. when I read this on bloomberg. I sense someone is getting close to the rotten ratings-agency core, and they are doing a bad job of scrambling to 'splain said rottennness.

Blaming the computer means never having to say you're sorry.
Alo | 05.21.08 - 9:35 am | #

GaudiaRay writes:
GingerYellow: "...yes I do think the Moody's angle is much more interesting. S&P screwed up. Badly. But we knew that."

Are you an apologist for S&P?
IMO, they staff with among the stupidest people I've ever encountered, for the past 45 years that I've been reading their reports. Shallow, backward looking, rock skippers. They were, they are, and they will be.

Engaging in how they arrived at AAA is entering their world of sophistry. Istead, look at them always as people who cannot look at the present and determine that 2 + 2 = 4. Just because S&P is an institution doesn't make its backend flow anything other than what it has always been.

Maybe the B-schools are truly at fault because my experience there has been that for all the rigorous, independent analysis, nobody I recollect, challenged the unstated assumption that S&P and the other raters were doing a trustworthy job. I was among the few who really read their publications, seeking investment insight...not just past-fact education. They never had it...never. So, why would anyone then or now trust their ability to determine a "rating" of any instrument?

It's the weakmindedness of the investment pool managers that's slaughtered the investment naive.

(An aside, after Jerry Tsai brought out the Manhattan Fund and economically gored hundreds of thousands of innocent people led to that fund via Merrill and its ilk, I've never trusted any of them, ever.)
GaudiaRay | 05.21.08 - 9:35 am | #

fraud writes:
Money talks!

http://en.wikipedia.org/wiki/Fraud
fraud | 05.21.08 - 9:36 am | #

Ginger Yellow writes:
"Are you an apologist for S&P?"

Of course not. I'm just saying it's old news. When you consider that most CPDOs have now defaulted, it's not that interesting to say they didn't deserve a triple-A rating. Evidence of revising a methodology to artificially maintain an incorrect rating is a bit more interesting, no?
Ginger Yellow | 05.21.08 - 9:38 am | #

doom writes:
Something similar happened to my friend, who bought a property 100% financing using a Ninja loan.

His computer had a bug and because of that, he can't make his payments now. What a shame.
doom | 05.21.08 - 9:39 am | #

Independent Accountant writes:
Why are you surprised? Have you ever heard of a Big Four CPA firm criticizing the work of another Big Four firm? They never work for the plaintiffs' bar against their
brothers".
Independent Accountant | Homepage | 05.21.08 - 9:41 am | #

GaudiaRay writes:
GingerYellow, what's to support the fact that S&P itself is not laden with computer glitches? They rated those AAA. Again, the analysis of way too many of these entities is sorely questionable. If the food sucks at both restauarants, who cares if one buys kosher meats and the other doesn't.
GaudiaRay | 05.21.08 - 9:42 am | #

Alo writes:
LOL, doom
Alo | 05.21.08 - 9:43 am | #

Andrew writes:
I build complex spreadsheet models for a living. The field is completely anarchic. My company is one of the very few (to my knowledge) which attempts to put a disciplined framework around some of our spreadsheets, but you have, essentially, lots of end user developers out there.

My guess with the Moody's model (if it was a spreadsheet) is that you had adaptations of existing models being made to analyze new products. I would not be in the least surprised if this was being done by multiple analysts in many geographically separate departments, possibly off a semi-official or official template type model.

The actual spreadsheet jockeys at many firms tend to be relatively junior, and are very rarely people with formal software development training. It's an entry level assignment for MBAs: as they rise up a firm, they drop this kind of work thankfully, and no genuine organizational capability is built up.

Even if it were the case that Moodys had a very robust modeling capability, the interaction between a model's results and the intuition and experience of people asking the questions is a tricky question. If there is an expected "right answer," analysts often get pressed to adjust the inputs to supply it.

Of course, it would be better if, after careful testing, unexpected results were subject to careful analysis to see where they came from. Models, implemented properly, are simply rigorous thinking: with complex problems, careful thinking can be very helpful. Unfortunately, careful thinking is in short supply, not only in the finance industry.
Andrew | 05.21.08 - 9:44 am | #

Alo writes:
This reminds me of the supermarket computers' scanner "errors" that always ring up higher prices.
Alo | 05.21.08 - 9:45 am | #

hittites writes:
FT had to do some digging to uncover this "bug." The financial media on this side of the Atlantic never seem to have the time for such serious work.
Instead of being a mouthpiece for WS, if they took their responsibility a little more seriously, they might make a little less money but serve the public better. Or is that not one of their goals?
hittites | 05.21.08 - 9:46 am | #

Mook writes:
Engaging in how they arrived at AAA is entering their world of sophistry. Istead, look at them always as people who cannot look at the present and determine that 2 + 2 = 4. Just because S&P is an institution doesn't make its backend flow anything other than what it has always been.

That's kind of my take on the situation, too. I find Moody's behavior to be much more 'headline-worthy' in this situation than S&P's.

In effect, S&P was the hot girl (or let's say guy, to avoid incurring the wrath of Tanta) in your chemistry class who couldn't rub two brain cells together, but who got an A-minus at semester end because he shamelessly flirted with Prof. Spinster.

Moody's was the plain Jane (or 98-pound nobody in this case) who wasn't sure he could pull an 'A' on wits alone, so instead of hitting the books harder he decides to spend some extra time batting his eyes at the prof after class, too.

The rest of the class takes S&P's grade inflation for granted and shrugs it off, but laughs behind their textbooks at the behavior of 'that pathetic Moody'.
Mook | 05.21.08 - 9:48 am | #

Ginger Yellow writes:
"GingerYellow, what's to support the fact that S&P itself is not laden with computer glitches? They rated those AAA. Again, the analysis of way too many of these entities is sorely questionable. "

Because like I say, the rating is based heavily on assumptions. If you're assumptions are way off, as they were in this and other cases, you don't need a glitch to get a triple-A rating.

All this focus on the "bug" is misguided in my opinion. What's important is what they did or didn't do when they found out about it. If the FT's reporting of the internal documents is right, there was serious malfeasance.

"If the food sucks at both restauarants, who cares if one buys kosher meats and the other doesn't."

Are you saying there's no difference between an honest, if stupid, mistake and outright fraud?
Ginger Yellow | 05.21.08 - 9:49 am | #

RayOnTheFarm writes:
All this focus on the "bug" is misguided in my opinion. What's important is what they did or didn't do when they found out about it. If the FT's reporting of the internal documents is right, there was serious malfeasance.

Translation: Our assumptions were within expected guidelines, but the bug generated results that looked better than they should have. Moody's needs to come clean and (possibly) restate the ratings (which could precipitate a spat of lawsuits).
RayOnTheFarm | 05.21.08 - 9:55 am | #

Room_641A writes:
Why is there even a debate about the accuracy of these agencies' models?

The conflict of interest between the RA's and their clients is insurmountable.

Even if the models were originally valid. The models don't assign the ratings. The executives do. Just like my models don't drive my company's decisions, our politicians...I mean our executives do.
Room_641A | 05.21.08 - 9:56 am | #

sterlingerl writes:
hittites writes:
...The financial media on this side of the Atlantic never seem to have the time for such serious work. Instead of being a mouthpiece for WS, if they took their responsibility a little more seriously...

Sigh, depressing isn't it. The intellectual laziness and banal dearth of curiosity is really a disgrace. The Amercian MSM has now fixated on the price of oil as if it alone is the root of all evil in the financial markets and it is impossible to get a decent assessment of what is going on, except on the blogs and in the foreign news media.
sterlingerl | 05.21.08 - 9:56 am | #

GaudiaRay writes:
Andrew: "the interaction between a model's results and the intuition and experience of people asking the questions is a tricky question. If there is an expected "right answer," analysts often get pressed to adjust the inputs to supply it."

Moreover, the MBA's who end up on outfits like S&P, Moody's, etc, are not the best apples in the first place.

Incapacity to independently engage in rigorous thinking; incapacity to identify areas of question, to see reality; fear that the nail that sticks up will get hit (a la Red China, up through early 1990's); incredibly self-serving, similar people acting as their managers and senior officers, advanced from the ranks...and what do you expect will be the reliability of that work product?

Remember Enron? I hired an AA acctnt who quit them prior to that bruehaha, and he was insistent the managers' approaches were to avoid the tough questions. Anyone can audit a rock. They blatantly, and silently, refused to look at the context. How can one expect better from the ratings agency salary-slaves? We gotta be real.

But the prosecutors have a policy challenge. They legislators have sold out; someone must step up or the systme will continue. It's not a difficult question; it's choosing the road to travel by that's the core issue here.

Nobody should care one iota about the losses of those who depended on S&P, et al. Everyone should ask whether or not the prosecutors can do something to change the work environment. (When China hung their FDA director, I'll bet that was effective. Might the kinder, gentler approach be more successful here in the US?)
GaudiaRay | 05.21.08 - 9:56 am | #

daveNYC writes:
On discovering the error early in 2007, Moody’s corrected the coding glitch and instituted methodology changes. One document seen by the FT says “the impact of our code issue after those improvements in the model is then reduced”. The products remained triple A until January this year when, amid general market declines, they were downgraded several notches.

If they knew that they had made a mistake on previous ratings and did nothing to correct them (until the products totally imploded) then they are going to get hammered in a lawsuit.

It also implies that Moody's had shit for a software QA department.

Possibly, but it's very difficult to test quant models. Usually the people who know enough about the business to determing if the output makes sense are going to be the same people who wrote the model in the first place.
daveNYC | 05.21.08 - 9:56 am | #

dr digits writes:
This just confirms what folks here have been saying all along and what the reality of the situation refutes.

It's just picking sh#! out of pepper seeds trying to determine why, but an educated guess tells me it's partly due to the fact that they are backward looking and biased in their historical view.

When all of the variables are changing, and new ones are emerging, how does the model becomes nothing more than a wag?

dd
dr digits | Homepage | 05.21.08 - 9:59 am | #

Worried writes:
The 'bug' here is not really in the computers but in the mind of a person who believes you can look at a complex thing like a pool of mortgages attached to houses with 'house conditions' and different people with different 'paying abilities and then when this whole thing is merged together in some product of unimaginable complexity a rating can be assigned on the basis of a computer model that can only look at scoreable details.

Lunacy rather than software with bugs.

The whole thing is so left brained it hurts.
Worried | Homepage | 05.21.08 - 10:01 am | #

Sippn writes:
I just discovered their model:


Assumptions:
Manhattan condo=$5 mil+ = A
Fees generated from good ratings > A
Formula:
If ____ fees > cost of A, then x=AAA.

XX00
Sippn | 05.21.08 - 10:05 am | #

Ginger Yellow writes:
Worried, CPDOs have nothing directly to do with subprime mortgages. They reference credit default swaps of financial institutions or corporate entities. Obviously, it was the subprime crisis that caused the massive, sustained spread blowout which brought down CPDOs, but there's no analysis of mortgage pools in a CPDO rating.
Ginger Yellow | 05.21.08 - 10:05 am | #

ed in texas writes:
Next week we find out that S&P had run their ratings calculations on an old mechanical tabulator that evidently had a ferret caught up in the gears...(dem weasels is evawhere)
ed in texas | 05.21.08 - 10:10 am | #

Worried writes:
"Obviously, it was the subprime crisis that caused the massive, sustained spread blowout which brought down CPDOs, but there's no analysis of mortgage pools in a CPDO rating."

Isnt that part of the problem?

The model for CPDO or XYZ does not fully account for the world as we know it.
Worried | Homepage | 05.21.08 - 10:13 am | #

CathyG writes:
Was there ANYBODY involved in housing borrowing and lending in the last three years who managed to maintain their integrity?
CathyG | 05.21.08 - 10:14 am | #

En Fuego writes:
To my knowledge, all CPDOs were implemented with the on-the-run investment grade credit indices. No mortgage products or high-yield credits were ever used.

Believe it or not, the fundamental underlying principal of CPDO wasn't absolutely awful. It was just like the "double-down when you lose" strategy in blackjack. When losses were incurred the CPDO was supposed to lever up until it reached a predetermined leverage cap. If credit spreads are mean-reverting then you eventually get paid off -- you just need a big enough bank roll to handle the volatility.

The problem is that you had to START at the leverage cap in order to reach the crazy coupons initially shown by ABN-AMRO ( L+200 ). Ultimately, this initial leverage of 15x really screwed the pooch. A more realistic coupon would have substantially lowered the leverage. In fact, if you do a little historical analysis you discover that CPDOs with lower initial leverage would have survived this crisis just fine.

The only problem is that nobody wanted a safer CPDO back then. All the investors cared about was their 200bps and AAA rating.
En Fuego | 05.21.08 - 10:17 am | #

JD writes:
At first I was going to say that it was sad that this news would change nothing and that companies would continue to use Moody's and S&Ps ratings. But then I realized that although it is pathetic that one big dysfunctional bureaucracy would blindly rely on another big dysfunctional bureaucracy, it is more comical than sad.
JD | 05.21.08 - 10:19 am | #

Shnaps writes:
Did Moody's also jigger with the Haloscan comment counter?
Shnaps | Homepage | 05.21.08 - 10:19 am | #

sterlingerl writes:
From Portfolio.com
(and Tanta you are mentioned...)

Moody's Blues
by Portfolio Staff May 21 2008
Computer error led to triple-A rating.

The credit-rating agencies have come under fire for being asleep at the wheel as the credit quality of mortgages deteriorated while the Wall Street securitization machine roared on.

As Roger Lowenstein detailed recently in the New York Times Magazine, Moody's and Standard & Poor's "are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more."

To the accusations of willful blindness in the pursuit of profits, a new culprit for the blunders of ratings agencies can be added: computer error.

Sam Jones, Gillian Tett, and Paul Davies of the Financial Times today deliver a stunning report on how a mistake in coding at Moody's led to triple-A ratings being incorrectly assigned to billions of dollars' worth of a type of complex debt product.

Moody's discovered the glitch early in 2007, the paper reports, but the products—constant proportion debt obligations—remained triple A until January 2008.

Felix Salmon calls it a "scandal."

But The Wall Street Journal, strangely, in following the Financial Times, seems to play down the story nearly to the point of pooh-poohing it.

Yves Smith on the Naked Capitalism blog says, "while banks have rogue traders, it appears rating agencies have rogue computer models."

Tanta on the Calculated Risk blog is disturbed by the implication in the Financial Times report that Moody's may have tweaked its computer model to arrive at the same ratings as Standard & Poor's in order to keep business as a "second opinion."

Moody's says it is "conducting a thorough review" of the rating of the derivatives.
sterlingerl | 05.21.08 - 10:20 am | #

Tanta writes:
Did Moody's also jigger with the Haloscan comment counter?

No, I think that was the PPT.
Tanta | 05.21.08 - 10:23 am | #

En Fuego writes:
One other thing for you ratings wonks out there. The big game in CPDO ratings evaluation was NOT spread levels or volatility. It was all about the rolldown of the index. If I recall correctly, S&P allowed an assumption of 7% rolldown. If you changed that from 7% to %5 then you could loose your AAA rating in a hurry.

When we ran into the credit crunch the curves for CDX and ITraxx flattened up considerably. ( We've gone through a couple of rolls now with flat curves. ) As a result, the rolldown went from ~7% to ~0%. That caused some CPDOs to hemmorage cash and hit their triggers.
En Fuego | 05.21.08 - 10:24 am | #

Ginger Yellow writes:
I don't think the FT plays down the story at all. Indeed, it makes the central point far more clearly than Salmon does - it's not the model error, it's the methodology revision.
Ginger Yellow | 05.21.08 - 10:25 am | #

GaudiaRay writes:
At Moody's, there must be one person, or one team, who is responsible for the QA integrity of their computer conclusions.

It's that point entity/person who should be identified and questioned. The point safety review procedure failed. Why and how are the starting questions. "On what else?" might be interesting as well.
GaudiaRay | 05.21.08 - 10:30 am | #

JP writes:
Exclusive! Here is the code in all of it's glory:

#!/bin/perl
#
# Code to calculate CPDO ratings.
#

print "AAA";
exit(0);
JP | 05.21.08 - 10:32 am | #

calvert writes:
I don't understand why this story isn't making bigger waves - I would have thought Moody's would be down 20%. Do people think it is ok to suppress ratings errors?
calvert | 05.21.08 - 10:32 am | #

Jack Staub writes:
Let's not confuse a software bug for institutional incompetence. This is very bad.
Jack Staub | 05.21.08 - 10:35 am | #

Mike2 writes:
As someone that works in software development, there's nothing I love more than a customer that comes back and demands a fix for a "bug" when the results of the system they approved aren't what they wanted after all.

If this bug report came into me, I'd stamp it "as designed" and call it good.
Mike2 | 05.21.08 - 10:36 am | #

Shnaps writes:
JP - that was bril!
Shnaps | Homepage | 05.21.08 - 10:37 am | #

Anonymous writes:
Andrew,
I believe the model is the Moody's CDOROM (which btw is licensed for free - I think the firm I used to work for had a copy). The model is not a spreadsheet per se. It's a spreadsheet combined with a C++ library (windows dll?) which runs a Montecarlo simulation.
The assumptions for European deals are different than US - try getting them to explain where they came up with some of those assumptions.
Anonymous | Homepage | 05.21.08 - 10:37 am | #

Anonymous writes:
JP,

You forgot "if (time(0) < 1211346000)" before the print statement.
Anonymous | 05.21.08 - 10:38 am | #

ba_lurker writes:
What boggles the mind is that S&P, Fitch and Moody's still matter. For some reason they are still getting business and investors still care about their ratings !
ba_lurker | 05.21.08 - 10:39 am | #

manu06 writes:
Garbage in, garbage out. But of course they knew
the assumptions were garbage.
manu06 | 05.21.08 - 10:44 am | #

James Bednar writes:
Exclusive! Here is the code in all of it's glory

You give them too much credit, I think it is more along the lines of:

10 Print "Security Rated: AAA"
20 Goto 10
James Bednar | Homepage | 05.21.08 - 10:46 am | #

Zero writes:
Truism: The extent to which software is broken matches the extent to which it was not tested.

If Moody's testing methodology was comparison with S&P results, then that particular goal would be met and all others abandoned.

(What would be particularly ironic would be if S&P was seeking to match Moody's too! Stranger things have happened, reinsurance cycles for example.)
Zero | 05.21.08 - 10:55 am | #

mp writes:
All of this proves that American banking is transparent, like a cesspool.
mp | 05.21.08 - 11:04 am | #

threetorches writes:
Simply put, it is all about "plausible deniability."

Is it theoretically possible that, oh say, a computer bug caused this?
If so, then you have your answer. As Bart Simpson would say, that's my story and I'm stickin' to it.

My shoe was untied, the rope was frayed, the handlebars were loose, and it was really windy that day; the phone system was down, the post office lost it, there was a gas leak, and we were given bad intel in the first place; the batteries died, they didn't include a manual, and then a dog ate it; so IT WAS NOT MY FAULT.

You see, there was really nothing I could do.
threetorches | 05.21.08 - 11:06 am | #

Expat writes:
I have worked for major oil companies, finance companies, and investment banks. They are all fairly corrupt, collude when possible, cheat, lie, bribe, and steal.

Many people don't accept the concept of a massive conspiracy (BLS inflation, 9-11, or the credit bubble) because they claim there are too many people and too many possible leaks.

Conspiracies can be passive, unofficial, and coincidental. Each party is acting illegally or immorally and may or may not be aware that others are.

I believe that Wall Street and Washington slimed their way into a massive coincidental conspiracy. When everyone needed the gears to keep turning, it did not require overt statements or payments to Moody's to maintain ratings. Moody's was already deep in it. They had let AAA standards slip already. The final "error" was a minor tweak and small final step on the road to utter corruption.

The banks knew the ratings were bullshit but could not afford to question them. The government knew as well but did not want to ruin the Great Expansion. And so it went.

None of this is shocking. What is shocking is that all we can do is write about it on these blogs. Are we powerless? It feels like it.
Expat | 05.21.08 - 11:10 am | #

sterlingerl writes:
It seems people are finally taking notice and Moody's stock is down more than 13%.
sterlingerl | 05.21.08 - 11:11 am | #

RussianRoulette writes:
i'd say were at about 5 bullets in the chamber's now.
RussianRoulette | 05.21.08 - 11:12 am | #

Punditry writes:
I'm afraid to say, that if the blog is now being overrun with programmers , the economy is much worse off than the MSM has proclaimed.
Punditry | 05.21.08 - 11:14 am | #

VoiceFromTheWilderness writes:
It's the first steps in a complex dance of litigation defense. You see since software is legally free of liability, if Moody's can convincingly blame it's problem on software, they may be legally free from liability.

Moody's isn't stupid compared to S&P (who made the same rating), rather they are smart -- they've gotten a defense together that might work.

Well, might. It's pretty obvious this crowd isn't buying it, and the problem with the independent controls (S&P and others) giving the same rating, suggests that it wasn't a bug at all. As was correctly pointed out by many on this comment thread.
VoiceFromTheWilderness | 05.21.08 - 11:18 am | #

cd writes:
The big problem is the fed has some of this stuff but they don't seem to mind..
cd | 05.21.08 - 11:21 am | #

Ginger Yellow writes:
The Fed does not have any CPDOs.
Ginger Yellow | 05.21.08 - 11:34 am | #

Sippn writes:
OF COURSE they tweaked the computer models. . . as a youngen, I was directed to make subtle changes to IRR models by those who benefited. . . why would I know better than a VP?
Sippn | 05.21.08 - 11:50 am | #

John Stark writes:
You can't make this stuff up.
John Stark | 05.21.08 - 11:54 am | #

sdtfs writes:
CathyG writes:
Was there ANYBODY involved in housing borrowing and lending in the last three years who managed to maintain their integrity?

Yes, I have mine in a box downstairs. It's crying used to wake me up at nights but a little more sound insulation allowed me to ignore it.
sdtfs | 05.21.08 - 12:17 pm | #

Andrew writes:
Anonymous at 10:37pm wrote:

"I believe the model is the Moody's CDOROM (which btw is licensed for free - I think the firm I used to work for had a copy). The model is not a spreadsheet per se. It's a spreadsheet combined with a C++ library (windows dll?) which runs a Montecarlo simulation."

OK. Assuming that Moody's model did indeed have some incorrect code (which is very likely), it could have been lurking just about anywhere, most likely in a proprietary module in the background.

Writing good code is very very hard to do, particularly in a fast moving environment where complex structures are being changed and tweaked all the time.

But there are two other issues connected to this. The first is the one that's gained most attention: that Moodys tweaked the assumptions to get back the answer they wanted when alerted to the bust. I doubt that anyone reading this blog is "shocked, shocked" to learn this happened.

The more stunning aspect for me (learning about CPDOs for the first time) is that ANYONE out there was ready to go along with the idea that you could get 200 BPs of free return for no additional risk, simply by leveraging the heck out of your investment.

Like I said earlier, models are the execution of rigorous thinking. This proposition is, on the face of it, absurd. An honest inquiry into what was going on should have started with the most skeptical frame of mind, rather than an accommodative one. But in a bubble, the reverse tends to be true.
Andrew | 05.21.08 - 12:26 pm | #

CathyG writes:
Maybe their modeling was outsourced?

I'd like to see someone who has a knack for numbers model how many foreclosures, bankruptcies, domestic violence cases, juvenile delinquents, homeless, addicts, and suicides this is all going to cost us.
CathyG | 05.21.08 - 12:50 pm | #

Emma Anne writes:
"It wasn't me. It was the one-armed man!"

What does shock me a little is that people who lost a lot of money aren't furious about this. I see what expat is talking about regarding a passive conspiracy, and it makes sense - while everyone is making money from it. But why aren't they at each other's throats now?
Emma Anne | 05.21.08 - 1:17 pm | #

4runner writes:
Of course their software included bugs. It's damn near impossible for software of any complexity to be completely bug free.

More interesting is how did they respond when they found the bug? Why did this take so long to come out?
4runner | 05.21.08 - 1:28 pm | #

Ginger Yellow writes:
" I see what expat is talking about regarding a passive conspiracy, and it makes sense - while everyone is making money from it. But why aren't they at each other's throats now?"

Give them time. It only came out this morning. That said, they've still only got themselves to blame - the spread was 200bp for a reason, and Fitch and DBRS both said loudly that the structures weren't triple-A.
Ginger Yellow | 05.21.08 - 1:41 pm | #

Canadaman writes:
CathyG writes:
Was there ANYBODY involved in housing borrowing and lending in the last three years who managed to maintain their integrity?

______________________________________

I think this will go down as one of the greatest experiences of GroupThink on a massive scale.........well there was that thing called the Tulipmania as well
Canadaman | 05.21.08 - 1:47 pm | #

FatalException writes:
This is the second story today that screams "class action."

Marking this post with a mere "Yikes" tag is like marking a post on the bombing of Dresden with an "Ouch" tag.

Is there no "OMFG!!" tag?
FatalException | 05.21.08 - 1:48 pm | #

No Frog Speak writes:
Bug? I don't need no stinkin bug!

How to take Moody's to the cleaners:

1) Identify and get interviews with the IT staff at Moody's. Find out who wrote the specifications, who did the writing, get their documentation, get the development team, get the programmers. If it's offshore, particularly, and still important anyway, get their email stream. Get their billing hours to the project. Get their development schedule, get their backup tapes, get their test suite and data, get their production steps. Identify the algorithm that did the evaluations. Determine its authorship and its users -- programmer/user/department/report readers/data access. Determine the user that set the specification for handling the data.

2) if by now you don't have a smoking gun, get smarter people, you haven't a clue.

3) Expect to find a black box routine that says, "n mortgages at sum(m) rates = good good good plus here's our fee calculation and print
'AAA' certificate for corp_name_here"

Standard & Poor's? And they are expected to tell the truth about what?

How many investments have to go sour on AAA ratings before these companies are judged worthless frauds?
No Frog Speak | 05.21.08 - 2:00 pm | #

Moral Hazard writes:
No such thing as a good model.

Fake good models, yes, thousands of them.
Moral Hazard | 05.21.08 - 2:39 pm | #

GaudiaRay writes:
Today, observed by Jim Sinclair at jsmineset.com:

Jim Sinclair’s Commentary

If a financial entity is found guilty of committing a crime there is no corporate shield for the officers and directors. Civil litigation is akin to sending the defendants a bill for damages.

Sub-prime lawsuits to rise as regulators probe Wall Street
Cardiff de Alejo Garcia
21 May 2008

Litigation involving securities and mortgage fraud in the US is expected to climb this year as Wall Street draws more scrutiny from investors and regulators for its role in the sub-prime crisis.

According to an April report from accountants PricewaterhouseCoopers, plaintiffs last year filed 37 sub-prime related federal securities litigation cases, mostly in the second half of the year.
GaudiaRay | 05.21.08 - 3:26 pm | #

GaudiaRay writes:
Remember the line, "If everyone else is running around in a panic, and you're not, you've got a problem."

Moody's didn't see it that way.

No matter what happens, one cannot shake or burn "intelligence" into the minds of those with IQ's below 110. They're who they are.

The culprits are the money managers who knew damn well what they were doing; just as did the plutocrats and aristocrats when they bought Papal Indulgences in the past.

Prosecute those guys, or at least demand an IQ test before hiring them.

Remember that idiot relative in Florida who was in charge of their billion buck pension plan who killed the governments invested in it? If his IQ is over 105, I'd be shocked.
He was incompetent. He was appointed and the nameless people who appointed him are the cause of that minor billion buck fiasco.

Rinse and repeat, thanks to the US university education system. Spitzer liked the bimbo whore from FL, and the schlock debt dealers loved the whore from FL too. Good goin', FL.
GaudiaRay | 05.21.08 - 3:34 pm | #

Berserker writes:
one "Bug" equals how many "Kerviels"???
Berserker | 05.21.08 - 11:19 pm | #