The Sub-Prime Mortgage Meltdown

A Case Study on the Subprime Mortgage Meltdown

Carlos Davila

BA350 Business and Society

Prof. Bonnie L. Adams

June 13, 2015

Abstract

This case study aims to shed some light on events leading up to the mortgage meltdown and subsequently the financial crisis suffered in the US in the mid 2000’s. First, the study will show what Moody, the leading credit rating agency in the world, did wrong to facilitate the financial crisis. Next the study will show which of the stakeholders were hurt and which were benefited by Moody’s actions. The next piece of information the study will show, what many see as a major cause of the crisis, the conflict of interest that exist between the rating agencies, financial agencies and the bottom line profits and if there is any way that this can be prevented. Based on the information at hand the report will show which of the stakeholders Moody’s execs, home buyers, mortgage lenders, investment bankers, government and investors share the responsibility for the crisis suffered by the country. Lastly the study will show what, if anything, can be done to prevent the events leading up to the meltdown.

A Case Study of the Subprime Mortgage Meltdown

In order to understand what happened during the financial crisis of the mid 2000’s it is important to understand who the major player was, Moody’s Investor Services/Analytics. Moody’s is one of the 3 major credit rating companies in the United States. What Moody’s first and foremost purpose is to evaluate and rate bonds for businesses in specific the likelihood that the bonds will yield returns for investors. The ratings provided by Moody’s allowed investors to make “educated” decisions on the risks they were about to take. Although Moody’s main arena was the business bonds, they quickly recognized the potential brought on by residential mortgage backed securities.

In the case of the mortgage meltdown Moody’s was hired to rate on bonds comprised of securities bundled together and...