Sunday, June 8, 2008

Moody's CDO Ratings Are Cause For Concern

Even as Moody's Investors Service was handing out triple-A ratings last year on a huge number of securities tied to mortgages, a senior Moody's analyst involved in rating them was warning about the housing market and asking if the ratings were too optimistic.

In late 2006 and early 2007, the Moody's Corp. unit continued to rate new collateralized debt obligations even as the analyst, Eric Kolchinsky, aired his concerns to his colleagues and boss, people familiar with the matter said. It wasn't until October 2007, with mortgage defaults soaring, that the Moody's unit downgraded hundreds of CDOs, resulting in billions of dollars in losses for investors.

Had Moody's officials agreed with the analyst's view sooner, some of the CDOs issued last year likely would have been assigned lower ratings, which might have prevented them from being sold. That could have spared investors some of the misery they've suffered now that more than 75% of all structured-finance CDOs issued in 2007 have been downgraded, causing their values to plummet.

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