Ethics and the Subprime Mortgage Meltdown
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Ethics and The Subprime Mortgage Meltdown
The article “Justice Department Investigating Moody’s for Pre-Crisis Ratings” covers some of the issues surrounding Moody’s and the bond that this agency backed. In the mid-2000s, Moody’s, the leading credit rating agency in the world, evaluated thousands of bonds backed by “subprime” residential mortgages—home loans made to people with low incomes and poor credit. When housing prices began to decline in 2006, the value of several of these bonds collapsed, and Moody’s was forced to reduce these mortgages abruptly. In late 2008, several commercial banks, investment banks, and mortgage lenders that had been heavily involved in the subprime market failed. In the aftermath of these mortgage failures, credit froze up, consumer confidence in the lending market plummeted, and job losses occurred across the global economy. Although the financial crisis had many causes, some analysts believed that Moody’s and other credit rating agencies had played a key role by underestimating the risks characteristic of mortgage-backed securities.
In my opinion, Moody’s did not do any illegal, but the company did not act ethically. Since Moody’s did not falsify their reports and investors did not have to invest in mortgage-backed securities (MBS), Moody’s cannot be fully blamed for the collapse of the financial market, but there is a clear performance-expectations gap that all MBS stakeholders felt that Moody’s should have filled. When Moody’s realized that residential mortgage-backed securities were unsafe to invest in, Moody’s had a social responsibility to warn MBS stakeholders and future investors about this public issue. Moody’s CEO McDaniel did say that Moody’s tried to warn investors, but no one wanted to listen. Also I believe that The Office of the Comptroller of the Currency (OCC) should have pushed more enforcement actions instead of backing down because lenders and banks lobbied against enforcement actions. If the US Treasury put out a warning and lenders and banks pushed the OCC away, it should make investors question some things.
Stakeholders of Moody’s were definitely helped. For example, the CEO of Moody’s, Raymond McDaniel, “earned total compensation of $7.4 million” (Lawrence & Weber, 2017, p. 505). MBS stakeholders had financial success at first as MBS bonds grew greatly in 7 years from $94 to $196 trillion (p. 505). When the MBS started to fail, these same investment companies were circling the drain and stock in Moody’s was dwindling. Moody’s may have made money at the start of the MBS boom, but in the