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Glitch makes risky investment look safe

Ashley Milne-Tyte May 21, 2008

Glitch makes risky investment look safe

Ashley Milne-Tyte May 21, 2008


KAI RYSSDAL: There’s no such thing as a risk free walk down Wall Street. You can get the next best thing, though, if you stick to what’re called AAA-rated investments. Those are the credit ratings that Moodys and S&P hand out to companies or bonds they’ve, theoretically, evaluated. That “theoretically” was in there on purpose. Because we saw this item in the Financial Times today.

The paper says a computer glitch at Moody’s gave one immensely complicated kind of mortgage backed security that coveted AAA when it should have been rated much lower. And Moody’s kept it there for a year. From New York, Ashley Milne-Tyte reports.

ASHLEY MILNE-TYTE: Moody’s cut the ratings of these exotic securities early this year when the market turned south. It says it’s reviewing what happened last year.

Marilyn Cohen is president of Envision Capital Management. She wonders whether we’ll hear more stories like this.

Marilyn Cohen: I have no confidence to believe it’s just a one-off. I mean, all this time later, we find out now, as the credit meltdown is still evolving? This business model that they have is broken.

She says the ratings agencies need to operate in a much more transparent way.

Gary Shilling is an economic consultant and investment advisor. He’s not surprised the computer glitch and its consequences got pushed under the carpet. After all, he says, they occurred when the market for such products was still healthy.

Gary Shilling: The reality is that when a speculation is running on the upside nobody really cares much about anything that is going to discredit it, everything is viewed optimistically.

The agencies are already under attack. Shilling says there’s a conflict of interest when agencies are paid by the banks whose products they rate. And he says they overrated many subprime securities. He says this revelation is another blow to their reputation. And he thinks they’ll try to make up for it by going overboard in the other direction.

Shilling: Now they are going to join all the other negative forces in saying no to even very credible securities. In other words, their first instinct is going to be to downgrade, not to upgrade.

And that, he says, could rattle the whole bond market, which is much bigger than the stock market.

In New York, I’m Ashley Milne-Tyte for Marketplace.

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