A Forex View From Afar

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The Sub-Prime Bug

Written by A Forex View From Afar on Wednesday, May 21, 2008

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One of the biggest miracles, and unanswered questions, of the last Quarter was how some complex derivate debts could receive Triple A rating, when they worth no more than a few cents per dollar

It seems that a partial answer has been revealed this week; a bug in Moody’s rating software made possible the misleading rating of debt products, from speculative grade to investments grade. It seems the error was discovered somewhere at the begging of 2007, but kept away in a hidden file.

The ratings were later corrected, but only half a year later. It’s quite interesting that the complex debt could carry such a high rating for such a long period of time, and nobody lifted any eyebrow, or could be bothered to lift their head from the trough that was being gorged on. It begs a question; since the initial discovery of the rating-failure why did so much time pass before measures were taken?

More interesting is that the complex debt security, named CPDO, needed 2 rating company's approval in order to be quoted. The other AAA ratings were awarded by the S&P, which even now stands by their decision when that paper is worth anything at all.

As a note the U.S. T-Bills and Bonds have AAA rating, and there are a lot of Countries that don’t have such a rating, American debt is first class, so the rating agency says. Further reading about the CPDO can be done here

This is a week full of surprises. After finding out exactly how the U.S. CPI is calculated, now we find out how the ratings business works. All that is left to find out this week is the Fed’s M3, or amount of money in circulation, and we will have a high-quality week. Mind you, that will never happen, there is no way that Fed will spill the beans on that, most would be horrified at what is beinb printed compared to the debt, and compared to the Reserves.

"The cost of producing Money Supply data is prohibitive"- The U.S. Federal Reserve.

"Wise Men learn more from Fools than Fools can ever learn from Wise Men"- TheLFB.

FT Alphaville exclusive: Moody’s error gave top ratings to debt products

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