Moody's Corporation Case Study

1937 Words8 Pages
The Case Of Moody’s
Moody’s credit rating and the subprime mortgage meltdown.
Case summary "Moody’s Corporation, often referred to as Moody's, is an American business and financial services company, the holding company for Moody's Investors Service (MIS), an American credit rating agency", and Moody's Analytics (MA), an American provider of financial analysis software and services. Moody’s is the oldest credit rating agency in the world, founded in 1909. Moody's focus business model was in the area of rating bonds for businesses, especially the possibility of their return. This rating then allowed investors to evaluate the risk of their chosen efforts. However, eventually, Moody's business model changed. They began rating more than just
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They chose to allow their credit ratings to be bought by the highest bidder. This allowed for mortgage lenders to essentially become bottom-line driven in pushing the envelope to issue more and more loans. Instead of being enticed with the return capital from clients purchasing favorable reviews, Moody’s could have taken a more ethical and responsible approach to the increasing trouble on the horizon. With WaMu and Washington Mutual pressing their agents to issue more and more subprime loans, the number tripled from 11% in 2003 to 33% in 2005. Moody had a conflict of interest conflicting when he was in competition with other credit rating agencies like S&P and Fitch, so in order to get the leaders to use their services, Moody's had to lower the ratings. The main conflict was that the same institution that issued the bonds it rated paid Moody’s. The core of Moody’s business was rating the safety and security of the bonds issued by companies, government, and the public agencies. Moody’s main goal was to satisfy the issuer of the bonds who naturally would seek the highest possible rating, by doing this could conflict with the interest of the investors who will seek a naturally accurate rating. Also, Moody’s was asked to rate the creditworthiness of various tranches of the mortgage-backed security. Where invested had no idea how to assess the safety or security because most products…show more content…
It needs to be part of the process starting with the mortgage and carrying through to the investors. The structure of the credit rating industry should be evaluated and public policy made as to what will and will not be done and how each step will be carried out. Public policy will have to be in every part of the process to ensure that each step is transparent enough to see when something is fishy or unbelievable. The management policies and practices will have to revert to those of the pre- "housing for everyone fad". The policies will have to ensure the person can qualify for the loan, and possesses the necessary credit, down payment and income to prevent the default on the loan. Rating companies like Moody's need to tightly regulate and revert back to the company that cannot change for the ratings they are giving. Then, it would be of no benefit to lying about the ratings because they would have nothing to gain. It will take everyone doing something to ensure no more subprime meltdowns Now once lenders are able to establish that a person can within good reason payback their loan, we still to keep people from making profits against debts. This is where the issue began in the first place. In a normal situation, if a person takes out a mortgage from a bank, defaults on the loan, the bank keeps the home and can resell it later etc. And it should stop between those two
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