'The Securities and Exchange Commission today issued a report cautioning credit rating agencies about deceptive ratings conduct...'

'The Securities and Exchange Commission today issued a report cautioning credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.'

Read more at the SEC's site.

The worrying part, albeit written in the language beloved of 'regulators' worldwide and so sounding mild is this:

'According to the Report, an MIS analyst discovered in early 2007 that a computer coding error had upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for certain constant proportion debt obligation notes. Nevertheless, shortly thereafter during a meeting in Europe, an MIS rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact MIS's business reputation.

MIS applied in June 2007 to be registered with the Commission as an NRSRO. The Report notes that the European rating committee's self-serving consideration of non-credit related factors in support of the decision to maintain the credit ratings constituted conduct that was contrary to the MIS procedures used to determine credit ratings as described in the MIS application to the SEC.

In the Report of Investigation, the Commission makes clear that credit rating agencies registered with the SEC must implement and follow appropriate internal controls and procedures governing their determination of credit ratings, and must also take reasonable steps to ensure the accuracy of statements in applications or reports submitted to the SEC.

The Report cautions NRSROs that, when appropriate, the Commission will pursue antifraud enforcement actions against deceptive ratings conduct, including actions pursuant to the Dodd-Frank Act provisions regarding conduct that physically occurs outside the United States but involves significant steps or foreseeable effects within the U.S.

Under Section 21(a) of the Securities Exchange Act of 1934, the Commission may investigate violations of the federal securities laws and at its discretion "publish information concerning any such violations." David Frohlich, Margaret Cain, Roger Paszamant, and Dean Conway conducted the SEC's investigation. The Commission acknowledges the assistance and cooperation of foreign regulatory authorities in Europe in this investigation.'

In other words (those of Alex Masterley in fact:

'a Moody's analyst discovered in early 2007 that a computer coding error had upwardly impacted by 1.5 to 3.5 notches the model output used to determine Moody's credit ratings for certain constant proportion debt obligation notes. Nevertheless, shortly thereafter during a meeting in Europe, a Moody's rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact Moody's business reputation.

So that's alright, then. The markets can go hang because it might hurt Moody's to tell the truth, while some paper that is worth nothing more than a AA- has an uncorrected AAA label slapped on it. Meanwhile the SEC who issued this statement, say that they won't prosecute because the fraud took place in Europe - but hang on, Moody's is a US based group, and are you tellling me that Moody's senior management didn't read the minutes of their European rating committee?

Worse still are you telling me that there is no internal audit that might have picked up on the issue?

And do you really think that the investment banks running the particular issues weren't just a little surprised when their paper came back with a rating justifying a yield 50bp finer than they had expected? '

Credit rating agencies making mistakes and not reporting them, investment banks not picking up the mistakes made despite employing experts to spot such problems and finally a regulator incapable of regulating; reassuring isn't it?