Carolina Pad Case Study

Topics: Subprime mortgage crisis, Bond, Debt Pages: 2 (821 words) Published: February 3, 2014
What did Moody’s do wrong, if anything?
Legally, Moody’s did nothing wrong. But Moody’s, through it rating system, enabled other agencies to provide loads to individuals that were not qualified all in the name of financial gain. Was Moody’s at fault, no, was the financial system that Moody’s was part of, flawed – absolutely, yes. The issue that that Moody’s needed to address was how ethical were their decisions as a company as their revenue grew from $564 million in 1999 to nearly $2.3 billion in 2007 – an increase of nearly 75% in 8 years. Does a company’s ethical duty exceed legal obligation? Which stakeholders were helped and which were hurt, by Moody’s actions? The companies that provided the securities in exchange for favorable ratings were the stakeholders that benefitted the most. The case study also mentions that Moody’s charged 11 basis points ($11 for every $10,000 in value) for RMBS (residential mortgage backed securities) due to the complexity of the security, which is higher than the typical 4.25 basis points for traditional corporate bonds which makes Moody an obvious stakeholder as well. The more RMBS’s that were issued and sold by lending institutions to investment houses, the more Moody would make as it rated each transaction. The investors, such as Merrill Lynch and Lehman Brothers were the ones that were hurt the most as the investments they purchase, quickly were devalued as homeowners defaulted on loans they could not afford. You could probably include the homeowners receiving these loans as well since they, technically, did nothing wrong other than applying for and receiving money for a home they could not afford. Did Moody’s have a conflict of interest? If so, what was the conflict, and who or what were the principal and the agent? What steps could be taken to eliminate or reduce this conflict? The bond rating system did not work in this instance. Moody’s built its company on rating bonds, beginning with rail road bonds, in...

References: Lawrence, Anne T and Weber, James (2014) Business and Society, Stakeholders,
Ethics, Public Policy McGraw-Hill Publishing
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