read the "Focus on Ethics"Article on the pic and answer the following question:What ethical issues could arise because companies or governments issuingdebt-not investors-pay NRSROsto rate those instruments?

FOCUS ON ETHICS in practice "Can Bond Ratings Be Trusted?" Nationally Recognized Statistical Rat- debt boosted the value of outstand- ing Organizations (NRSROs), or credit- ing mortgage-backed securities to 2006 Standard & Poor's email that pro- rating agencies, provide investors with independent assessments of a over $11 trillion by 2008, or 35% of claimed "Let's hope we are all wealthy and retired by the time this house of debt issuer's ability to make sched- U.S. bond market debt. This trend cards falters."* Others pointed to a uled interest and principal payments. made the business of rating MBSs very lucrative, perhaps leading flawed system whereby the issuer of NRSROs assess corporate bonds, gov- NRSROs to overlook potential flaws in the debt instrument, not the investor, ernment bonds, municipal bonds, and their default-risk models. From 2000 pays the NRSRO. But these explanat debt obligations backed by collateral, to 2007, MBSs accounted for nearly tions cannot tell the whole story- such as mortgage-backed securities half of Moody's rating revenues; in several large financial institutions that (MBSs). Broadly speaking, all NRSROs 2006 alone, Moody's awarded a paid for ratings of complex MBSs were use the same approach for evaluating "AAA" rating to an average of 30 undone by their own holdings when a debt instrument-feed quantitative those ratings turned out to be inflated. MBSs every day. But when home Moreover, ratings inflation did not data and qualitative judgments into a prices across the U.S. started to tum- extend to the traditional bread-and- statistical model, then use the result- ble in 2007, the flaws in the models of butter of the business-corporate ing default probability to award a let- default risk became apparent as home bonds-despite the fact issuers also ter grade on a continuum from mortgage defaults soared. Ultimately, pay for those ratings. "extremely unlikely" to "almost cer- Moody's had to downgrade 83% of tain." Moody's, Standard & Poor's, the $869 billion in MBSs rated AAA in What ethical issues could arise and Fitch dominate the credit- 2006. The fallout from widespread because companies or govern- ratings business, accounting for nearly MBS "ratings inflation" brought down ments issuing debt-not inves- 95% of the market. The reputations of two of the nation's largest investment tors-pay NRSROs to rate those the Big Three-each has been in busi- banks-Bear Stearns and Lehman instruments? ness over 100 years-make their rat- Brothers-and contributed to the ings highly coveted. But the Great worst recession since the Great Why do you think NRSROs inflated Recession of 2007-09 tarnished those Depression. ratings for new complex MBSs but In the post-game analysis, many not traditional corporate bonds in reputations. The pre-recession housing boom blamed fraud for the ratings inflation, the run-up to the Great Recession? and strong demand for highly rated as suggested by an internal December "From House Committee on Oversight and Government Reform