Moody’s changed their business model and took advantage of the public, and investors; basically everyone involved. They became complacent of their reputation and no longer work towards the best interest of their clients. As a former Moody’s executive put it “things became a lot more bottom line driven (Lawrence & Weber, p.456).
The stakeholders that benefited through Moody’s actions were top executives, managers, investors, and some bank employees that were rewarded after they’ve succumbed to the pressure of giving loans to unqualified borrowers. Those that were affected by moody’s selfish acts were the homeowners who were giving loans without qualifications, those that were misinformed or not well informed. It’s hard to say the banks were affected by Moody’s actions because I believe knew potential of those risks and benefited from them for a while. Therefore, we can’t necessarily say the banks were affected.
I believe Moody’s had conflict of interest because, the company pressured sales agents, lenders and bank employees to produce more loans at any cost to fill the appetite of its investors as mention in the book (p.460). Everyone’s concern was about how much profit they bring in to the company instead of the financial well being of borrowers. In order to reduce this conflict, less pressure needs to be put on agents to close a large number of mortgages (Lawrence & Weber, 2011). With the increased pressure from individuals that are higher up, these agents were closing mortgages for individuals that were not qualified. By reducing the number of sub-prime mortgages that are issued, a situation like this can be avoided in the future. Another thing that may be beneficial is to issue more fixed-rate mortgages. With fixed rate mortgages, homeowners can get into the routine of paying a set amount for the loan period and not have to worry about their mortgages going up after the first three or four years like with variable rate mortgages.
Moody’s and its executives bare a greater responsibility for the financial crisis when compared with the others involved. The Residential Mortgage Back Security (RMBS) model Moody’s used was flawed. Instead of improving the system, this model contributed to the demise of the housing market. Moody’s was using this model to attract investors at unsafe costs (Lawrence & Weber, 2011). The investors were unaware of how risky their investment actually was. They based their investment on the RMBS amount that Moody’s provided (Lawrence & Weber, 2011). If Moody’s disclosed more data to its investors, these investors would not have made their investment into such a venture. While investors were making a blind investment,