Ratings agency Moody's has admitted that it incorrectly graded several European mortgage debt instruments because of a computer bug.

The agency admits that it incorrectly gave its highest AAA rating to about $1bn worth of European "constant proportion debt obligations" (which are basically about placing bets on credit risks),
opening the way for normally conservative pension funds to invest, reports the Financial Times. In other words, it gave an impeccable rating for garbage and investors took a bath.

Moody;s claims it was an isolated incident but the FT begs to differ. It says it has seen documents showing that over the past three years, there have been 36 additional computer bugs in the model used to rate most structured products.

Worse still, there is now evidence that staff knew about the bug but covered it up, Staff have been ousted, but it's not over yet, reports Management Today. And it has further shattered the credibility of the agencies. How could anyone trust them now?

"The problem is that these instruments have become so incredibly complex that you need incredibly sophisticated computer models to work out their value - and these are always liable to bugs. Moody's has promised to overhaul its process to stop this happening again, but it may be a case of shutting the gate after the horse has bolted: next time some clever banker comes up with a tricksy new financial instrument, who's going to believe the ratings agencies now? Nobody with any sense."