Moody’s concedes ethics lapse

Moody’s Corp. ousted a senior executive Tuesday and said employees violated ethics guidelines in assigning top ratings to complex securities that subsequently lost as much as 90% of their value.

The company said May 21 that it was reviewing how it rated some European constant proportion debt obligations, a type of bonds backed by derivatives, after a newspaper report said some senior staff members were aware in early 2007 that a computer error gave top ratings to issues that should have been ranked as much as four levels lower. Moody’s reportedly altered some assumptions to avoid having to assign lower grades after fixing the error.

Moody’s said Tuesday that some employees engaged in “conduct contrary to Moody’s code of professional conduct” when considering whether to downgrade the securities after discovering the error. The employees may be fired, the company said.

“I am deeply disappointed by the conduct that occurred in this incident,” Moody’s Chief Executive Raymond McDaniel said in a statement.

Internal guidelines say the company may consider only “credit factors relevant to the credit assessment and may not consider the potential impact on Moody’s,” the firm said.

Shares of Moody’s fell 51 cents Tuesday to $33.93.

Noel Kirnon, head of the company’s structured finance unit, which rates securities such as mortgage-backed bonds, is leaving the company July 31, Moody’s said. It didn’t give a reason for his departure.

Regulators are tightening rules for Moody’s, Standard & Poor’s and Fitch Ratings after the firms gave top grades to mortgage-backed securities that later tumbled in value.

Kirnon, 47, will be succeeded on a temporary basis by Andrew Kimball, 58.

Kirnon was also head of Moody’s credit policy committee. Richard Cantor, 50, will assume that role.