Carolina Cobos – June 2016
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Moody’s Credit Ratings and the Subprime Mortgage Meltdown
1.a. Case Summary
This case discussed the causes of the 2008 financial crisis pointing to the critical role played by
Moody’s corporation and other credit rating agencies. Founded in 1909, Moody’s began rating
bonds for businesses, specifically analyzing the investment’s return. Over time, Moody’s core
business model changed. In the 2000s, they began rating the creditworthiness of the mortgage-
backed securities. These instruments are a mixture of subprime and low risk mortgage notes, and
carry higher fees and points of interest than traditional corporate bonds. The sale of these bonds
led to an increase in the amount of money dumped into pensions and hedge funds. As a result,
demand for these securities increased as mortgage lenders were pressured into lending to low–
qualified buyers housing. Over time, owners were failing in their loans and the real estate market
in the U.S.A collapsed, leading to foreclosures, mortgages delinquencies, and the devaluation of
housing related securities.
1.b. Interest, concerns and power of the key stakeholders.
Stakeholder
Interests
Power
Borrowers
–Find better rates/deals
-Be able to pay debts
-Boycotting
-Stop making payments
-Legal power: Suit for damages
Lenders /Investment
banks
-Generate loan volume
-Want high rates
-Economic power
-Refuse credits
-Control market
Credit rating
agencies/competitors
-Collect debts and Interests
-Receive payments
-Win the business and maintain market share
-Maintaining rating quality
-Can place the financial system at risk
-Informational power: access to valuable data
Investors
-Receive accurate information from credit rating
agencies
-Receive satisfactory return of investment
–Don’t having rating downgrades
-Purchasing from competitors
-Legal power: Suit for damages
Government
-Promote economic development
-Promote social improvements
-Allowing or disallowing commercial activity
Adopting regulations and laws
-Political power: legislations, regulations,
Carolina Cobos – June 2016
lawsuits
Top Managers
-Generate more revenue for their companies
-Receive high bonuses/rewards
-Manipulate or change the business strategies
1) Borrowers considered “high risk”, were taking advantage of the new opportunity to have loans
with bad credit. They have the power to stop paying the fees and create economic disruptions in
lenders. Also, those customers affected such as the retired community have the power the suit for
damages.
2) Lenders originated mortgages to customers with doubtful ability to repay the loans.
Investment banks purchased securities based on the mortgages, whose value was dependent on
