Page last updated at 00:29 GMT, Thursday, 22 May 2008 01:29 UK

Claims of wrongdoing hit Moody's

US home for sale
Trading debt products was popular until the slump in the US housing market

Shares in US credit rating agency Moody's Investor Services have tumbled almost 16% after a newspaper report suggested it mislead investors.

The Financial Times reported that the New York firm wrongly assigned premium credit ratings to complex pools of debt, which were actually worth less.

Moody's said it was conducting a thorough review into the matter.

Ratings agencies, including Moody's, are already under scrutiny for their role in the world financial crisis.

Lawmakers and some investors have criticised the agencies for giving upbeat assessments of investments made up of bundles of debt that included US sub-prime mortgages, which are offered to homebuyers with inferior credit ratings.

The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised
Moody's spokesman

As higher interest rates squeezed these mortgage holders ability to meet their repayments, so this triggered heavy losses on the investments they were linked to.

Billions of dollars have been wiped off bank balance sheets as a result and in response, they have increased lending rates to consumers, triggering a housing slump on both sides of the Atlantic.

'Integrity of ratings'

Moody's shares shed almost $7, or 15.9%, to $36.91 after the Financial Times report, which suggested that a glitch in a Moody's computer model caused certain European debt products to be rated as much as four levels lower than the triple-A rating they were awarded.

The newspaper reported that the error was discovered in early 2007 and changes to the methodology were introduced, but the products kept their AAA rating until January 2008, when the freeze in the credit markets led to downgrades.

A Moody's spokesman said: "The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised."

US legislators, including Democrat Senator Charles Schumer, have urged the financial regulator, the Securities and Exchange Commission (SEC), to launch an investigation into whether Moody's failed to disclose crucial information, which may have led to the inflation of its stock price.

The SEC said that as the ratings were given out by Moody's European arm, it may lack the necessary jurisdiction to get involved.

The regulator is deliberating whether additional industry regulations are needed to prevent a conflict of interest that arises from the fact that the fees of the credit rating agencies are paid by the very financial institutions whose bonds they assess.

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