Moody’s Corporation admitted that several of its workers violated the company’s code of conduct when they overrated some securities known as constant proportion debt obligations (CPDOs).
The code requires Moody’s analysts to consider only “credit factors relevant to the credit assessment and may not consider the potential impact on Moody’s, or an issuer, an investor or other market participant.”
Critics have alleged that Moody’s and other ratings firms bowed to pressure to overrate a variety of securities over the past few years.
Moody’s Falling Share Price
Moody’s rated 44 European CPDOs that totaled about four billion dollars. A statement from Moody’s noted that the employees’ misconduct affected 11 CPDOs totaling almost $1 billion.
Along with competitors Standards & Poor’s and Fitch Ratings, Moody’s has already been receiving intense scrutiny for its role in the current credit crisis, and this latest news adds to Moody’s woes. Their share price fell 2.4 percent in the afternoon trading on the day of the announcement about the employees’ termination, and the share price is down approx. 45 percent since July 2007.
Policymakers in both the U.S. and Europe are investigating how Moody’s gave high ratings to securities that were far riskier than was acknowledged, eventually resulting in hundreds of billions of dollars in losses.
Constant Proportion Debt Obligations (CPDOs)
CPDOs are an investment vehicle selling insurance protection on corporate debt. CPDO investors are betting, in effect, that companies will not default on their bonds and loans. When the cost of insurance rose last year, CPDO investors suffered significant losses.
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