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Ethical Reasoning – Assessment
1. The moral and ethical dilemma in question is whether Moody’s acted in their own self interest
by willfully providing misleading credit rating in order to maximize their revenue.

a) Moody’s credit rating provided the primary means of valuing RMBS and other structured
financing investments. By willfully manipulating the credit ratings, the company
contributed to the subprime mortgage meltdown.
b) Moody’s, as the perpetrators of the manipulation of credit rating aimed at increasing
their revenue base by facilitating a higher uptake of structured finacing absed on their
ratings.
c) The unique circumstances in this matter is that the investors, credit rating agencies and
bankers contributed to the subprime mortgage meltdown by downplaying the risks
involved in subprime loans.

2. Structured financing products are complex. In order for investors to assess the risks and returns
relative to these products, they had to rely on the services of credit rating agencies such as
moody’s. since the credit agencies were in competition with each other, the agency with the
highest number of clients was seena s the most competent. This led to a situation where the
agencies were willing to manipulate their ratings to increase the number of clients they had.

3. List and describe the stakeholder’s involvement.

a) The main stakeholders in the meltdown were as follows. First there were the
Homeowners. They took up mortage loans from bankers. The second group of
stakeholders were bankers. They provided loans and maortgaets to homeowners,
combined the loans into structured financeing products and made them available to
investors. The investors took up the structured fincjing products offered by the banks
with the aim of making money from them. Credit rating agencies rtaed the structured
financing products with the aim of assisting the investors to make the best investment
decision.
b) The best case scenario for homeonwers was access to finances in the form of
manageable loans which they could repay easily. The worst case scenario was losing
their homes as a result of their inablility to service their mortage. The best case scenario
bankers involved a high loan repayment rate. Coupled with the structured financeing
products, they would have access to more money which would be given out as loans. In
the owrst case scenaripo, they were left with unserviceable loans, forcing them to
foreclose on the property of the loan defaulters. The best case scenario for the investors
was an increase in their investment portfolio. At worst they would have lost their
investments. Credit rating agencies would have experiences a best case scenario in the
form of higher client confidence iin their rating, leading to more revenue for them. A
worst case scenario would have been if cleintds lost confidence in their rating, leading to
a loss of revenue.
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Case Name/Number:
c) The risks to moody credit rating agency as the perepetartor was the loss of investor
confidence in their rating, leading to loss of revenue and even collapse of the agency.
The risks for the homeowner was loss of their homes as a result of foreclosure. The
bankers faced the risk of unserviceable loans, leading to costly and time consuming
foreclosing processes. In the event of massive loan default, the banks risked collapse.
Investors risked losing their investments as a result of poor investment decisions.

4. The key traditional moral and ethical issues that apply to the Subprime mortage center around
willful deception manipulation of information to take advantage of the trust accorded to the
agencies.Taking advantage of the ignorance of clients for the pupose of sself gain is unethical,
immoral and frowned upon in almost all spiritual, religious and societal structures. It is
unacceptable for people accorded trust to lie and manipulate their trustees for self-benefit.
5. A negative outcome of the deception was massive societal upheaval. A lot of families were
rendered homeless, businesses, including banks collapsed and unemployment rates soared. On
the positive side, the government was able to device legislation to seal the loopholes that
allowed bankers and large investors to take advantage of ordinary citizens.

6. One approach would be to audit the credit ratings of the agencies. The second would be to
enforce standards meant to minimize subprime loans lending while the third would be to
provide safety nets in the form of insurance for investors to minimize the damage loss of
investments made to the economy.

7. Auditing the credit ratings of the agencies would prove most effective. Auditing the credit ratings
would minimize the chances of willful deception on the part of agencies since those with faulty
ratings would be highly penalized. This would discourage the practise.

8. The investors would have access to accurate information with which to make investment
decisions and the banks would not be under pressure to give subprime loans. Home owners
would not be exposed to high risk loan options, leading to a healthier, happier society.
9. To implement the course of action, all credit rating agencies would be required to have a self-
regulating code which outlines the best practices in their industry. They would also be required
to disclose their Rating processes in order to minimize the risk of conflict of interest.The self-
regulating code, supervised by an independent credit rating body would ensure constant review
and adjustments of practices in the industry . this would create a measure of flexibility aimed at
keeping up with changes in the economy while ensureing that rating agencies don’t take
advantage of their privileged position to enrich themselves.