The FT reported last Tuesday that ‘bugs’ in the computer model used by Moody’s the rating agency, were responsible for over-valuing certain ‘assets’ – actually parcels of debt. The foolish computer, which should have known better, rated these debt packages as AAA – i.e as safe as houses, certain to be repaid, and therefore without risk to the pension funds etc. that can only invest in AAA-rated financial products. Now it turns out that these packages of debt contained little time-bombs, threats of non-repayment…and were a lot riskier than old clever-clogs the computer imagined.
The law has very precise definitions of deception for those intending to obtain a pecuniary advantage from deceit:”To deceive is …to induce a man to believe that thing is true which is false, and which the person practising the deceit knows or believes to be false.” (J. Buckley in Re London and Global Finance, 1903.)
J. Buckley clearly lived in a computerless world. How does the law apply if the person practising the deceit is actually a ‘whizzkid’ computer confined to the back office? Dickens’ Mr. Bumble was right: the law is an ass, and takes no account of the hard and selfless work done by computers rating the fancy debt products ‘structured’ so skilfully by financiers in hedge funds and investment banks.
Furthermore: do you think that when Moody’s charged a very high fee to these hedge funds for the AAA rating …do you think the hard-working computer got a slice of the action? Course not. Those would have gone to ‘sales’ in the front office, and ‘risk management’ in the middle office. Our whizzkid would not even have had a bonus.
And when pensioners find their pension funds have made losses on risky investments, and that their pensions are worth less than expected, who do you think they will sue? Moody’s? No, not guilty m’lud. The smartest kid on the computer block? Aw shucks, that just would not be fair.