Sept. 4 (Bloomberg) -- Moody's Investors Service said it may cut the ratings of 854 million euros ($1.2 billion) of constant proportion debt obligations after disclosing a second error in the way it assesses the securities.

Moody's review was ``prompted by the identification of a coding error in a model used for monitoring CPDOs,'' the New York-based firm said in a statement today. Moody's will probably downgrade the affected CPDOs by one or two levels, it said. The securities were sold by banks including ABN Amro Holding NV, JPMorgan Chase & Co. and Lehman Brothers Holdings Inc.

Moody's ousted the head of its structured finance unit two months ago, saying employees broke rules by failing to change the way CPDOs were assessed after discovering a fault in its rating model. Moody's awarded the top Aaa ratings to at least $4 billion of the securities, funds backed by credit-default swaps, before they lost as much as 90 percent of their value.

``This highlights the problems that Moody's and the other ratings firms had in modeling structured credit,'' said Jeroen van den Broek, head of investment-grade credit strategy at ING Bank NV in Amsterdam. ``That's why they wound up giving Aaa ratings to deals that should never, ever have received them.''

U.S. and European regulators are tightening rules for Moody's, Standard & Poor's and Fitch Ratings after the companies provided top grades to securities backed by U.S. subprime mortgages that triggered more than $500 billion of writedowns and credit losses at Wall Street institutions.

Ratings Review

The latest error ``was modest but material, so that's why we're reviewing the ratings,'' Richard Cantor, chief credit officer at Moody's, said in a telephone interview from New York. A major fault would have led to mistakes in the grades that an analyst would spot immediately, he said.

Moody's is carrying out a review of all its major ratings models and has set up a group of experts to supervise their creation, testing and monitoring, Cantor said. Even so, ``no vetting process will ever eliminate every error,'' he said.

Moody's Corp., the parent of the ratings company, fell as much as 71 cents, or 1.7 percent, to $40.54 and was at $40.57 at 11:50 a.m. in New York Stock Exchange Composite trading. The stock has risen 14 percent this year.

ABN Amro created the first CPDO in 2006, promising investors top-ranked bonds with returns of as much as 2 percentage points above money-market rates.

Moody's is reviewing CPDOs rated between A3, its seventh- highest credit ranking, down to B1, four levels below investment- grade status.

CPDOs sell contracts based on indexes of credit-default swaps, contracts conceived to protect bondholders against default. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

To contact the reporters on this story: Neil Unmack in London nunmack@bloomberg.net; John Glover in London at johnglover@bloomberg.net

Last Updated: September 4, 2008 12:21 EDT