Moody’s computer crediting ratings wrongly attributed AAA ratings to nearly $1 billion in debt, inadvertently causing the debt to show that they yielded high returns while offering low risk of loss. The computer malfunction occurred in 2007 and Moody’s repaired the error. They did not, however, change the debt’s triple-A rating due to possible repercussions that would obviously damage the company’s highly esteemed reputation.
According to the SEC, the investigation was dropped due to “jurisdictional limitations,” meaning that the debt notes were released in Europe, which was beyond the SEC’s scope of operations. Now, a recently passed law allows the SEC to file suit against credit rating firms when they’re involved in fraudulent business practices outside territorial boundaries.
Three ratings services–Moody’s, Standard & Poor’s and Fitch Ratings–issue letter grades to complex securities that help investors determine whether to take on the risk. The higher the rating, the lower the risk. However, Congressional investigation show that the ratings services gave high grades to risky notes, including subprime mortgage securities.
The rating agencies claim that they’ve restructured their operations, and that they issue opinions on debt security, and investors need to rely on other sources besides their ratings.