Moody’s Credit Ratings and the Subprime Mortgage Meltdown

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

What did Moody’s do wrong, if anything?

Legally, Moody’s operated as such within the confines of the law, and therefor did not actually break any laws or infractions. Moody’s was operating as any “boiler-room” cultured company would have operated at the time due to the high profitability that enabled this to happen. Moody’s violations were more in the Corporate Social Responsibility spectrum. A corporation should act in a way that enhances society and its inhabitants and be held accountable for any of its actions that affect people, their communities, and their environment. Although Moody’s observed a trend in the declining quality of mortgage-backed securities as early as 2003, they stated that it was not their job to instill preventative measures within the securities market because their ratings were simply their opinions. When the SEC granted Moody’s Nationally Recognized Statistical Rating Organization (NRSRO) designation, it allowed them to enter into a regulatory role and could then charge clients for favorable credit ratings. When the market bubble burst, this broke the trust between Moody’s and their investors.

Which stakeholders were helped, and which were hurt, by Moody’s actions?

Before the market collapsed, there were many stakeholders who were benefitting handsomely, such as shareholders, institution investors, and investment banking companies. Homebuyers that would not have traditionally qualified for a mortgage now found themselves able to secure loans far outside their actual capabilities. Organizations that benefitted the most were the ones providing mortgage-backed securities (MBS) to investors. Mortgage brokers were also beneficiaries that received commissions for selling high-risk, high fee loans.

Those that were hurt the most were the homebuyers who saw their homes lose value and could not sell or refinance due to the quantity of subprime defaults. MBS investors...