The US Securities and Exchange Commission should move swiftly to get to the bottom of a reported coding error at Moody's Investors Servicethat may have led to incorrect ratings of some complex European debt products, a senior Democrat told Reuters.“I think they should act quickly,” Sen. Charles Schumer of New York said in an interview. “The revelations about Moody's have been really troubling.”
“I don't want to give them (SEC) a timeframe, but they have to move fast because when there's no confidence in the fairness of the credit rating agency, it hurts the entire economy,” added Schumer, who is co-chairman of Congress' Joint Economic Committee.
Shares of Moody's, which is already under fire over its role in the US subrime mortgage crisis, closed 6.5% lower at $34.51 on Thursday on the New York Stock Exchange, after losing about 16% the previous day.
The Financial Times business newspaper reported on Wednesday that Moody's wrongly assigned triple-A ratings to complex European debt products called constant proportion debt obligations, or CPDOs.
Moody's said it rated 44 European CPDO tranches totaling about $4 billion. It said it also hired a law firm to conduct an external investigation into why the coding error in a computer model caused the products to be given a rating four notches higher than they merited.
The revelations prompted calls from US lawmakers to explain the reported error and urged the SEC - the industry's regulator - to investigate what went wrong.
Schumer also urged the SEC to impose sanctions against Moody's if the commission can verify the firm covered up the error for a year after company officials learned of it and if the error impacted US investors.
Rep. Paul Kanjorski, a Pennsylvania Democrat who chairs a House Financial Services Subcommittee on Capital Markets studying the industry's recent practices involving the US subprime market, has said Moody's needs to explain itself.
But SEC Chairman Christopher Cox said because the activities involve products in Europe, it is unclear if US securities regulators have jurisdiction over the matter.
The SEC, which is responsible for ensuring that credit ratings agencies make adequate disclosures, is separately considering whether additional industry rules are needed.
US investor Warren Buffett's Berkshire Hathaway Inc investment firm holds a 20% stake in Moody's.
At the end of a European tour, Buffett said on Thursday anyone found responsible for wrongdoing should leave Moody's. “If people did the wrong thing, then they should go,” Buffett said at a news conference in Milan. (Reuters)