mood case
Jiahui Chen
Susan Finnerty
BUS101 K
2014/9/11
Moody’s Credit Ratings and the Subprime Mortgage Meltdown
1.What did Moody’s do wrong, if anything?
Moody’s committed no crime or infraction. Moody’s had decreased its ratings on lots of mortgage-backed bonds causing them to underestimate essential risks in these securities.
2.What stakeholders were helped, and which were hurt, by Moody’s actions?
There are so many stakeholders benefited, they are shareholders, institution investors, and investment banking companies.
The institutions which provided these securities. One Moody’s employee indirectly described the competitive pressures, which led to the lapses in the ratings systems, the investors, placing great confidence in the quality of Moody’s credit ratings, received these securities with the full belief that the ratings attributed to them were analytically sound and unbiased in any way.
3.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?
Yes. The firms that were organizing and selling the debt to investors paid Moody’s. Moody’s was getting 11 dollars for every 10,000 dollars the security was worth. It is also a public traded company causing them to compete with other rating agencies to increase their market share. Enforcing rating standards and having greater transparency with investors could have eliminated this conflict.
4.What share of the responsibility did Moody’s and its executives bear for the financial crisis, compared with the homebuyers, mortgage lenders, investment bankers, government regulators, policymakers, and investors?
The credit ratings agencies, despite the contention that they are not financial advisers, are remiss to believe that institutional investors do not look to their determinations as trusted and valued resources. While they may legally be capable of denying their culpability
Susan Finnerty
BUS101 K
2014/9/11
Moody’s Credit Ratings and the Subprime Mortgage Meltdown
1.What did Moody’s do wrong, if anything?
Moody’s committed no crime or infraction. Moody’s had decreased its ratings on lots of mortgage-backed bonds causing them to underestimate essential risks in these securities.
2.What stakeholders were helped, and which were hurt, by Moody’s actions?
There are so many stakeholders benefited, they are shareholders, institution investors, and investment banking companies.
The institutions which provided these securities. One Moody’s employee indirectly described the competitive pressures, which led to the lapses in the ratings systems, the investors, placing great confidence in the quality of Moody’s credit ratings, received these securities with the full belief that the ratings attributed to them were analytically sound and unbiased in any way.
3.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?
Yes. The firms that were organizing and selling the debt to investors paid Moody’s. Moody’s was getting 11 dollars for every 10,000 dollars the security was worth. It is also a public traded company causing them to compete with other rating agencies to increase their market share. Enforcing rating standards and having greater transparency with investors could have eliminated this conflict.
4.What share of the responsibility did Moody’s and its executives bear for the financial crisis, compared with the homebuyers, mortgage lenders, investment bankers, government regulators, policymakers, and investors?
The credit ratings agencies, despite the contention that they are not financial advisers, are remiss to believe that institutional investors do not look to their determinations as trusted and valued resources. While they may legally be capable of denying their culpability