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Moody’s Credit Ratings and the Subprime Mortgage Meltdown

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Moody’s Credit Ratings and the Subprime Mortgage Meltdown
Moody’s Credit Ratings and the Subprime Mortgage Meltdown

Table of Contents

Introduction……………………………………………….3

Background………………………………………………..4-10

Analysis……………………………………………………10-12

Conclusion…………………………………………………12-13

References………………………………………………….14

In the early-2000s, Moody’s, one of the leading credit rating agencies in the world, evaluated thousands of bonds backed by so-called “subprime” residential mortgages—home loans made to those with both low incomes and poor credit scores. When housing prices began to fall in 2006, the value of these bonds disintegrated, and Moody’s was compelled to downgrade them significantly. In late 2008, several commercial banks, investment banks, and mortgage lenders that had been profoundly involved in the subprime market failed. In the wake of these implosions, credit stagnated, consumer confidence plummeted, and job losses increased across the globe. Although the financial crisis had many roots, some analysts felt that Moody’s and other credit rating agencies had played a large role by underscoring the inherent risks in mortgage-backed securities. The actions taken by Moody’s and other credit rating agencies broke no financial laws, posing the question, is what is legal necessarily ethical? This case study will draw historical information, including documents released by Moody’s in connection with a Congressional hearing in October 2008, to search for the causes of the financial crisis and Moody’s role in it. It will then ultimately explain how corporations, governments, and society can improve the integrity and efficiency of the credit rating industry to decrease the risk of financial crises in the future.
Moody’s had been founded in 1909 by John Moody, who got his start as an errand boy at a Wall Street bank. After noticing the growing popularity of corporate bonds, Moody realized that investors longed for a source of trustworthy information about their issuers’ creditworthiness. By 1918, Moody and his first



References: Lawrence, A. Weber, J.(2011) Business and Society, Stakeholders, Ethics, Public Policy, 13th Edition. New York: McGraw-Hill/Irwin The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Washington, DC: U.S. Government Printing Office. January 2011. pp. xxv; 221–222, 226. Becker, Bo; Milbourn, Todd (2011). "How did increased competition affect credit ratings?". Journal of Financial Economics 101 (3): 493–514. Ratings in structured finance: what went wrong and what can be done to address shortcomings?". CGFS Papers (Committee on the Global Financial System) United States Senate Permanent Subcommittee on Investigations (13 April 2011). "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse". Majority and Minority Staff Report. Committee on Homeland Security and Governmental Affairs. pp. 6, 57. Financial Crisis Inquiry Commission, Testimony of Raymond W. McDaniel, 7

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