The business stories that matter, by Fortune's Colin Barr
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May 21, 2008, 5:15 pm

Moody’s reviewing its missteps

Moody’s (MCO) has hired lawyers to handle an external review of its handling of a questionable debt-rating move. The New York-based ratings agency said it hired Sullivan & Cromwell to review its European constant proportion debt obligation, or CPDO, ratings process. The announcement comes after Moody’s shares plunged 16% in trading Wednesday on a Financial Times report that Moody’s had misrated some CPDOs and then, when it found the error, changed its ratings criteria so it didn’t have to downgrade the paper.

“Moody’s recognizes the seriousness of questions” raised by the article, the company said in a press release issued after the market closed. The questions appear particularly serious because they seem to substantiate the case that critics have been making about Moody’s and rival S&P in the wake of the housing bust - that they allowed their business interests to dictate how they rated debt, to the detriment of investors who use the ratings to decide what they can and can’t buy.

“Upon completion of the review,” Moody’s said Wednesday, “we will promptly take any appropriate actions.” Unfortunately, it may be a little late for that.

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Colin Barr covers business and finance for Fortune.com. Previously he was an editor at TheStreet.com and author of the weekly Five Dumbest Things on Wall Street column, and an editor at Dow Jones Newswires.
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