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Cause and effects of subprime mortgage crisis
Subprime mortgage crisis of 2008
Cause and effects of subprime mortgage crisis
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Originated by John Moody in 1909, the Moody’s rating system provides investors with grades to evaluate the creditworthiness of securities to sell to investors. Like we discussed in class, there are nine grades that range from least risky to most risky (“Ratings Definitions,” 2014). Prior to late 2007, Moody’s was a highly trusted rating company. In December 2007, the U.S. entered the third longest recession in its history. According to Britannica, the crisis in the American housing market eventually caused the entire economy to collapse. Mortgage dealers issued mortgages to unqualified families with unfavorable terms (Havermann, n.d.). Companies like Moody’s came into the picture when it was time to rate these mortgage-backed securities. If housing prices continued to rise, …show more content…
Moody’s went so far as to promote those employees that gave the highest ratings to the most securities and reprimand those that questioned the legality and ethics behind the new structure (Hall, 2009). According to Mark Froeba, senior vice president of Moody’s structured finance group, Moody’s (the spinoff of Dun & Bradstreet) began in 2000, and from day one, its goal was to switch the culture from a conservative, accuracy and quality based culture to a business-friendly, dishonest culture (Hall, 2009). It is not uncommon for ratings to change over time, but it is uncommon for AAA ratings to switch to junk the next day. Moody’s profits soared from 2000-2006 because it would rate the securities how investment banks wanted to see them, and most were backed by the unfavorable mortgages (Hall, 2009). As a consequence of the subprime market collapsing, credit rating agencies, such as Moody’s, were required to downgrade many of the high-risk home loan securities (Levin, n.d.). This was a major shock to the global financial
This memorandum shall provide an in depth analysis of Target Corporation’s performance for the most current for the year 2014. To obtain a better understanding of Target Corporation’s performance the following categories shall be addressed: Preliminary analytical procedures, Accounting policy efficiency and reliability, Evaluation of Disclosure Controls, Evaluating Company’s technology system and its Risks, Substantive Procedures, Payout ratio in the Target Corporation financials, Fraud Considerations and Extended Procedures.
Costco Wholesale Corporation was an uncommon type of retailers called wholesale clubs. These clubs differentiated themselves from other retailer by requiring annual membership purchase. Especially in case of Costco, their target market is wealthier clientele of small business owners and middle class shoppers. They are now known as a low cost or discount retailer where they sell products in bulk with limited brands and their own brand. The company is competing with stores like Wal-Mart, SAM’s, BJ’s, and Sears. The case begins with an individual shareholder, Margarita Torres, who first purchased shares in 1997 and who is trying to evaluate the operational performance of the business in order to make a decision rather or not purchase more shares
Leading up to the crisis of the housing market, borrowers got mortgages without understanding the terms. Banks were giving out loans to people the banks weren't sure could pay the money back. The closer to the crisis, the higher the frequency of illegitimate loans and mortgages. Because there were so many mortgages on houses that could not be paid back, millions of mortgages were foreclosed on, and the houses we...
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
The Dodd-Frank Wall Street Reform and Consumer Protection Act’s policies haven’t really been implemented to the extent that regulators would have liked. Although the legislation takes many steps in addressing systematic risks in the United States financial system and improving coordination among regulators, some critics believe that alternative options might have been more effective. The coming years will give us a better understanding of how well the Dodd-Frank Act addressed these concerns.
The last step that should be followed is determining the relative value of the bond, in contrast to the agency determined rating. Comparing the credit statistics of the company to those of the industry peers, will result in a true sense of the ratings. Analyze on the indenture (terms and conditions) of the bond: its covenants, corporate structure, security and redemption features. Finally, the company should examine the pricing of the bond in relation to alternatives in the same industry, and to bonds in other industries with comparable ratings and credit statistics.
It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
Mullard, M. (2012). The Credit Rating Agencies and Their Contribution to the Financial Crisis. The Political Quarterly, 83, 77-95
Third Star Financial Services is an “un-banked” business that was built from a foundation of several money transfer operations that can be transact through an agent or an online facility since 1996. Third Star’s goal and objective is to develop and implement an enterprise architecture platform for the organization that is more streamlined and leaned with consistent policies and procedures throughout the company. A consolidated, centralized and standardized single version of the business structure and a modernize technology that can provide ease and flexibilities to their new and existing customers, in addition to their support staff and management teams.
Moody's actions have caused affected just about everyone involved. However, some are more affected than others. His actions benefitted himself greatly and they got a significant payout from the credit ratings. One could debate mortgage lenders also was also helped from Moody's actions. For one yes, they were able to make a profit from the mortgages they were giving out. Requirements dropped, and the criteria has changed to better fit the amount of people they wanted to be homeowners. Even though this has given them a short-term profit, it did not account for long-term results. Ultimately in the long run, it has negatively impacted them. Investors being so heavily reliant on Moody's credit ratings was also affected from Moody's actions.
Moody's Analytics, 2011. An Introduction to TTC Public Firm EDF Credit Measures, s.l.: Moody's .
In terms of looking at how credit rating agencies affected the market as a whole, they played a role within the mortgage crisis as they gave way to a real estate credit bubble. The mortgage crisis seems to have b...
During the past year Wells Fargo, a well-recognized bank of the United States, has been trying to clean its name and the mess it got itself into, when it was brought to the public that the bank was involved in generating fraudulent checking and savings accounts for its clients without their knowledge or their authorization. “The way it worked was that employees moved funds from customers' existing accounts into newly-created ones without their knowledge or consent”
Mortgage loans are a substantial form of revenue for the financial industry. Mortgage loans generate billions of dollars in the financial industry. It is no secret that companies have the ability to make a lot of money by offering a variety of mortgage loan products. The problem was not mortgage loans but that mortgage companies were using unethical behavior to get consumer mortgage loans approved. Unfortunately, the Countrywide Financial case was not an isolated case. Many top name mortgage companies have been guilty of unethical behavior. Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin (Nation, 2010).
Before we start, we would like to briefly introduce the definitions of Supply Chain and Supply Chain Management (SCM).