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Class 4- Group 3 – Case 1
1 | P a g e
Cases in Business & Society
‘Moody’s Credit Ratings & the Subprime Mortgage Meltdown...
Class 4- Group 3 – Case 1
2 | P a g e
Answer the DiscussionQuestions
1. Putting pressure on mortgage lending Moody’s is wr...
Class 4- Group 3 – Case 1
3 | P a g e
Fill in forms
Stakeholder Benefits Cost
Ethical
yes/no
CEO
Good compensation, in 200...
Class 4- Group 3 – Case 1
4 | P a g e
Union
(UMW)
Changed the between bond
issuers and rating agencies.
Ratings strongly i...
Class 4- Group 3 – Case 1
5 | P a g e
Conclusion
The mortgage-related securities at the heart of the crisis could not have...
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'Moody’s Credit Ratings & the Subprime Mortgage Meltdown’

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Case in Business & Society:
"Moody’s Credit Ratings & the Subprime Mortgage Meltdown"

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'Moody’s Credit Ratings & the Subprime Mortgage Meltdown’

  1. 1. Class 4- Group 3 – Case 1 1 | P a g e Cases in Business & Society ‘Moody’s Credit Ratings & the Subprime Mortgage Meltdown’ Summary In the late 2008, the world faced the worst financial crisis (also called as the Great Recession of 2008-2009) since the Great Depression of the 1930s that was a result of the Subprime Mortgage Meltdown in United States starting in mid-2007. Billions of dollars’ worth of securities backed by their mortgages had plummeted in value, straining the balance sheets of venerable Wall Street investment banks. Although the causes of the financial crisis were complex and many parties also had a portion of responsibility, some analysts questioned the accuracy of the ratings and the critical role in widening financial crisis played by “Big Three” ratings agencies - Moody's Investors Service, Standard & Poor's (S&P), and Fitch Ratings. The world’s financial markets relied heavily on Moody’s and other credit rating agencies in evaluating the safety of bonds-debt issued by governments, companies, investment banks and public agencies. Millions of investors rely on Moody’s ratings, along with other its competitors for independent and objective assessments about the risks of various fixed-income investments. As one of the leading and the oldest credit rating agencies in the world, Moody’s Corporation (Moody’s) – founded in 1909 by John Moody, broke the trust of the investors as well as lost its outstanding total return during 2000-2006 periods because of the bursting of the housing bubble in the US. The rating structured financial products, such as RMBSs (Residential mortgage-backed securities) that became particular popular in the early 2000s, proved to be highly lucrative business for Moody’s. At that time the pool of money was growing – money available worldwide to purchase stocks and bonds, many classes of assets were becoming less attractive to investors; therefore, RMBSs became increasingly attractive to the world’s investors. However, mortgage lenders and leaders of the investment banking firms were willing to weaken the tradition standards used to qualify borrowers to take on borrowers - with poor credit, low-paying jobs, few assets and no money to put down, which were known as subprime. Meanwhile, the risky mortgages of RMBSs were not reminded. Consequently, some banks and mortgage companies became particularly aggressive in pushing loans on poorly qualified borrowers in addition to increasing numbers of homeowners realized that they owned more that their home was worth – that means, their mortgages became worthless and the value of securities based on them swooned. When the problem was beginning to become obvious since July 2007, the solution of Moody’s was to begin train downgrades which poured in the criticism that “the rating agencies got it wrong.”
  2. 2. Class 4- Group 3 – Case 1 2 | P a g e Answer the DiscussionQuestions 1. Putting pressure on mortgage lending Moody’s is wrong. In fact, Moody was only assessed loans and its risks. However, Moody was the leverage to profitability problems without thinking about its consequences. Moody cannot just blame the economic crisis, which itself must be responsible. 2. Stakeholders have benefited from the work of Moody's homebuyers they do not qualify for traditional mortgages. Also, those who have benefited from the bad credit rating that Moody's assessment of investors. Wall Street also benefited greatly because thousands of packaged loans and sold them to investors such as banks Lehman Brothers and Merrill Lynch. The benefit from the commissions for selling risky loans come with high costs is the broker. 3. Moody’s have conflict of interest because they were paid by the firm that were organizing and selling the debt to investors. He was getting $11 for every $10,000 the security was worth. He is also a public traded company causing them to compete with other rating agencies to increase their market share. 4. He was responsible for investors losing money on securities that they gave an appropriate rating. Mortgage securities are very complex. Government regulation and policy encouraged lenders to give subprime loans to people. Initially many stakeholders benefited from Moody’s high rating including shareholders, institution investor, and investment banking companies. 5. To prevent a recurrence of something like the subprime mortgage meltdown, the steps can be taken that are:  The lender should take the form of guarantees to ensure the loans they are not on the list of risks.  The government should require banks to be more transparent in the rankings investors and banks subprime.  The credit rating agency should have oversight division standings to get the standard result ranking
  3. 3. Class 4- Group 3 – Case 1 3 | P a g e Fill in forms Stakeholder Benefits Cost Ethical yes/no CEO Good compensation, in 2007, CEO – Raymond McDaniel earned total compensation of $7.4 million Working under a lot of pressure, have to protect reliable reputation (protecting the integrity of credit) and ensure profit for company Yes Managers Good compensation Increased pressure to increase revenues and improve share- holder returns, yes Board of Directors Good compensation Need to win the business and maintain market share, also square the circle within bounds of the code of conduct yes Shareholders Have benefited from the work of Moody’s homebuyers, share value rose 354% over a 5-year period Some cases, giving decision can make disadvantages for company yes Employees Can have some internal information after that they can have profit by their investment Working under a lot of pressure to collect and analysis information of companies yes Customers Receive a share of the income flowing from the homeowners’ monthly payments. Base on the rating credit, they can take benefit from right investment Affected by eventual downturn of the market or so their investments were less value than had originally. yes Local community Institutions, governments, and individuals who invested in RMBSs benefited, since these securities typically paid interest rates above those paid by other investments with comparable investment grade ratings during 2004-2007. Investors lost around $7 trillion in the market value of their assets yes
  4. 4. Class 4- Group 3 – Case 1 4 | P a g e Union (UMW) Changed the between bond issuers and rating agencies. Ratings strongly influenced the market value of the bond, issuers had a strong incentive to shop for the best possible rating Decision need to be fair, objective and accurate yes Government regulators (2005) OCC considered new regulations that would have limited risky mortgages OCC bought only one enforcement action related to subprime lending (2000-2006) yes Environment The companies have more investors and easy to borrow money so the business create more profit the economic environment also develop The recession can greatly shifted the behavior of customers, suppliers, creditors and stakeholders of the firms yes
  5. 5. Class 4- Group 3 – Case 1 5 | P a g e Conclusion The mortgage-related securities at the heart of the crisis could not have been marketed without the power hand of Moody’s and other credit rating agencies. Investors relied on the credit rating agencies, often blindly. In some cases, they were obligated to use them because of the lack of necessary and reliable information to invest. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked have across markets and firms. Furthermore, the interest conflicts of charging the issuers for ratings from large credit rating agencies since the 1970s along with their highly level of power in ratings have questioned the accuracy as well as the companies’ code of conduct after the Great Recession.

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