Murphy’s Law holds that if you are a ratings agency and you have coding errors in your computer models, of course that does not mean some financial products are given ratings that are too low. Because that would be easy to correct. Instead, the products are given ratings that are up to four notches too high – and, upon noticing it, who are you to disinvite someone to the Triple-A party? What one investigative report is now claiming a certain ratings agency knew as far back as early 2007…and didn’t fix.

Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, a Financial Times investigation has discovered.

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.

Moody’s said it was “conducting a thorough review” of the rating of the constant proportion debt obligations – derivative instruments conceived at the height of the credit bubble that appeared to promise investors very high returns with little risk. Moody’s is also reviewing what disclosure of the error was made.

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