Case1_Moodys - Case 1: Moodys Credit Ratings and the...

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Case 1: Moody’s Credit Ratings and the Subprime Mortgage MeltdownTEACHING NOTE FOR:MOODY’S CREDIT RATINGS ANDTHE SUBPRIME MORTGAGE MELTDOWNThis case illustrates the following themes and concepts discussed in the chapters listed:Theme/ConceptChapterStakeholder analysis1Ethics and ethical reasoning4Organizational ethics and the law5Public policy8Government regulation of business8Shareholder rights14Executive compensation14Case Synopsis:In the mid-2000s, Moody’s, the leading credit rating agency in the world, evaluated thousands ofbonds backed by “subprime” residential mortgages—home loans made to people with lowincomes and poor credit.When housing prices began to decline in 2006, the value of many ofthese bonds collapsed, and Moody’s was forced to downgrade them steeply.In late 2008,several investment banks, commercial banks, and mortgage lenders that had been heavilyinvolved in the subprime market failed.In the wake of these failures, credit froze up, consumerconfident plunged, and job losses deepened across the global economy.Although the financialcrisis had many causes, some analysts believed that Moody’s and other credit rating agencies hadplayed a key role by underestimating the risks inherent in mortgage-backed securities.The casedraws on publicly available data, including internal documents released by Moody’s inconnection with a Congressional hearing in October 2008, to explore the multiple causes of thefinancial crisis and Moody’s role in it.It challenges students to consider how businesses,governments, and society can better assure the integrity of the credit rating industry.Case 1-1
Case 1: Moody’s Credit Ratings and the Subprime Mortgage MeltdownTEACHING TIP: VIDEOS AND PODCASTSSeveral videos and podcasts are available that may be used with this case.They include thefollowing:On August 30, 2007, the NewsHour with Jim Lehrer (the PBS news program) ran a report byeconomics correspondent Paul Solman, entitled “Risky Subprime Market Sends Ripplesthrough Financial World.”In the segment, Solman interviews an economics professor, whoexplains subprime mortgages and securities backed by them.The segment is available asstreaming video from PBS at:On March 21, 2008, the NewsHour with Jim Lehrer ran another report by Solman, entitled“Examining the Roots of U.S. Economic Woes.”Solman uses some clever dime-store propsand interviews with several experts to explain how $200 billion or so in bad housing debtprecipitated a worldwide financial crisis.The segment is available as streaming video fromPBS at:The instructor may wish to show some or all of these two PBS segments in class.

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Term
Fall
Professor
Gough
Tags
Business Law, Subprime mortgage crisis, Moody, subprime mortgage meltdown, Moody s credit

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