Moodys Busted for Manipulating CDO Ratings

http://www.bloomberg.com/apps/news?pid=20601087&sid=atxKM4_PXZVM&refer=home

Nearly $500B has been wiped out so far by the housing market debacle and the associated CDOs, the financial paper that sold the worthless mortgages. The entire sales process depended on a validation performed by neutral ratings firms like Moodys.

As recently as 2007, Moodys was giving high quality ratings to issues that Joe Sixpack knew were bad. Either the Wall Street analysts were severely out of touch with reality or something else was going on. That 'something else' was fraud. Turns out, the fix was most definitely in.

"The firm adjusted some assumptions to avoid having to assign lower grades..."

Deliberately fudging the data to drive a higher review is fraud. Sadly, this fraud - if wider in scope - has led to billions of dollars in losses and worse.

I'm really not surprised. A few weeks back I noted the peculiar timing of the latest round of ratings reviews by Moodys and the S&P. The timing of their release was a bit too coincidental for me: they waited until after the end of the quarter, when banks had closed their books. Had they released days sooner, all hell would have broken loose because the lenders would have had to scramble to cover the suddenly lower value CDOs.

In the meantime, expect more reviews to lead to suddenly lowered ratings on other bonds. A lot more turmoil ahead for the financial sector.