Moody's ousts structured finance head

Moody���s, owner of the second-largest credit-ratings company, ousted the head of its structured finance unit and said employees violated internal rules in assigning ���Aaa��� ratings to last year���s worst performing securities.

Some Moody���s Investors Service staff breached rules for ranking European constant proportion debt obligations, or CPDOs, the company said in a statement distributed on Tuesday. In a separate release, Moody���s said Noel Kirnon, who also oversaw the credit policy committee, is leaving the company.

US and European regulators are tightening rules for Moody���s, Standard & Poor���s and Fitch Ratings. Lawmakers such as Congressman Barney Frank demanded tougher regulation, saying ratings companies misled investors by providing top rankings on subprime-related securities that lost as much as 80% of their value. Moody���s said on Tuesday that employees, not the company���s practices, were to blame.

���I am deeply disappointed by the conduct that occurred in this incident,��� chief executive officer Raymond McDaniel said in the statement.

Moody���s said on May 21 that it began a review of its CPDO ratings after a report by the Financial Times said some senior staff were aware in early 2007 of a computer error. The glitch gave the top ���Aaa��� rating to CPDOs that should have been ranked as much as four levels lower, the FT said.

Moody���s altered some assumptions to avoid having to assign lower grades after fixing the error, the FT said. Moody���s fell 34 cents to $34.10 in New York Stock Exchange composite trading during opening trade. The stock is 25% since the FT report.

Moody���s hired law firm Sullivan & Cromwell to conduct the review. The firm found that Moody���s personnel didn���t make changes to the methodology for rating European CPDOs to mask any model error, Moody���s said on Tuesday. ���The monitoring committee did engage in ���conduct contrary to Moody���s code of professional conduct,��� the ratings company said.

Under those guidelines, a committee may only ���consider credit factors relevant to the credit assessment and may not consider the potential impact on Moody���s, or on an issuer, an investor or market participant,��� Moody���s said. Employees involved face disciplinary proceedings that may include termination, Moody���s said.

Kirnon will leave the company July 31 and will be replaced on a temporary basis by Andrew Kimball, 58. A search for a permanent replacement is underway, Moody���s said. Moody���s didn���t give a reason for Kirnon���s departure. Richard Cantor, 50, will take over as chief credit officer and chairman of the company���s credit policy committee.