Case 1: Moody’s Credit Ratings and the Subprime Mortgage Meltdown TEACHING NOTE FOR: MOODY’S CREDIT RATINGS AND THE SUBPRIME MORTGAGE MELTDOWN This case illustrates the following themes and concepts discussed in the chapters listed: Theme/Concept Chapter Stakeholder analysis 1 Ethics and ethical reasoning 4 Organizational ethics and the law 5 Public policy 8 Government regulation of business 8 Shareholder rights 14 Executive compensation 14 Case Synopsis: 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 many of these 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 heavily involved in the subprime market failed. In the wake of these failures, credit froze up, consumer confident plunged, and job losses deepened 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 inherent in mortgage-backed securities. The case draws on publicly available data, including internal documents released by Moody’s in connection with a Congressional hearing in October 2008, to explore the multiple causes of the financial 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 Meltdown TEACHING TIP: VIDEOS AND PODCASTS Several videos and podcasts are available that may be used with this case. They include the following: On August 30, 2007, the NewsHour with Jim Lehrer (the PBS news program) ran a report by economics correspondent Paul Solman, entitled “Risky Subprime Market Sends Ripples through Financial World.” In the segment, Solman interviews an economics professor, who explains subprime mortgages and securities backed by them. The segment is available as streaming 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 props and interviews with several experts to explain how $200 billion or so in bad housing debt precipitated a worldwide financial crisis. The segment is available as streaming video from PBS at: The instructor may wish to show some or all of these two PBS segments in class.
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- Fall '09
- Business Law, Subprime mortgage crisis, Moody, subprime mortgage meltdown, Moody’s credit