(Corrects value of drop in stocks in 17th paragraph.)
Douglas Peterson’s highest priority as the new president of Standard & Poor’s will be to restore confidence in the credit-ratings process amid criticism over how the firm handled the downgrade of the U.S. and new probes into how it evaluated mortgage bonds.
“S&P is in crisis mode,” said Richard Torrenzano, a former member of the management committee at the New York Stock Exchange and now chief executive officer of the Torrenzano Group in New York. “They’re going to have to set and state public standards for their ratings, and they will need to bring in outside experts to help set standards. They’re in for a rough time in the barrel over the next six to nine months.”
Peterson, Citibank NA’s chief operating officer, is taking over as president of S&P from Deven Sharma, 55, who will leave at the end of the year to “pursue other opportunities,” S&P’s parent McGraw-Hill Cos. said in an e-mailed statement late yesterday. Peterson, 53, will start Sept. 12 and Sharma will work on the company’s strategic review in the meantime.
S&P’s Aug. 5 decision to reduce the U.S. to AA+ from AAA roiled global markets and boosted demand for Treasuries, helping to send the yield on the 10-year note, the benchmark for home mortgages and car loans, to a record low 1.97 percent.
The New York-based company, which was blamed in an April Senate report for helping fuel the credit crisis, was criticized by the world’s most successful investor, Warren Buffett, who said the U.S. should be “quadruple-A.” The cut conflicted with Moody’s Investors Service and Fitch Ratings, which kept their AAA grades.
Since 2008, “we have strengthened our governance and control framework by reviewing the quality and performance of our ratings and identifying areas for improvement; developing and enhancing the criteria we use to rate issues and issuers; interpreting and applying new regulations so we meet compliance requirements; and identifying and reporting on key areas of risk,” Edward Sweeney, a spokesman for S&P, wrote in an e-mail.
S&P downgraded the U.S. even after Treasury Department officials told the firm it had overestimated future national debt by $2 trillion. The company said the error didn’t affect its decision, and based its conclusion on the U.S. government becoming “less stable, less effective and less predictable.”
The U.S. Senate Banking Committee is looking into the downgrade decision, a committee aide briefed on the matter said Sept. 8. The aide declined to be identified because he wasn’t authorized to discuss the matter publicly. The Securities and Exchange Commission is scrutinizing the method S&P used and whether the firm properly protected the confidential decision, a person with direct knowledge of the matter said Aug. 15.
The U.S. Justice Department is probing S&P and Moody’s over ratings of mortgage-backed securities, according to three former employees who said last week they were interviewed by investigators. The former employees asked for anonymity because the investigation is ongoing. The inquiry is a civil matter, two of them said.
The probe is the latest of dozens of government investigations and investor lawsuits targeting S&P and Moody’s over the top grades they assigned to bonds backed by subprime mortgages. The Financial Crisis Inquiry Commission called them “key enablers of the financial meltdown.”
Congress and regulators are discussing ways to implement the Dodd-Frank Act, which contains provisions aimed at reducing the role of ratings firms in the financial system and creating more competition in an industry dominated by S&P, Moody’s and Fitch. In an April report, a Senate panel said the credit raters engaged in a “race to the bottom” to stamp inflated grades on mortgage-backed securities.
“The bigger risk that he’s going to have to deal with obviously is political,” Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co., said of Peterson’s hiring. “The government is implementing Dodd-Frank, trying to figure out how to reduce reliance on ratings, and the Europeans are looking at the same issues.”
The Dodd-Frank law, passed last year, directs bank regulators such as the Federal Reserve to avoid using credit ratings in making rules such as bank capital requirements. Regulators have yet to comply with that provision, in part because they are searching for an alternative way to judge bonds.
Sharma, who was named president of S&P in August 2007, will exit as McGraw-Hill faces mounting pressure from some of its shareholders to separate into four units. Jana Partners LLC and Ontario Teachers’ Pension Plan, which together own a 5.2 percent stake, presented a plan Aug. 22 to split the company, saying it has “consistently underperformed its potential” and is trading at “a sizable discount.”
S&P said it started the process for replacing Sharma before its downgrade of the U.S., after overseeing a split of the company into a credit rater and McGraw-Hill Financial.
“Deven assisted us with the creation of these two high- growth segments and was then ready for new challenges,” Terry McGraw, chairman, chief executive officer and president of the company, said in a statement. “Accordingly, we began a process to identify a new leader for S&P.”
In downgrading the U.S., S&P said lawmakers failed to meet targets for reducing the budget deficit. The market value of global stocks tumbled by $761 billion between Aug. 5 and Aug. 12, according to data compiled by Bloomberg. The S&P 500 Index (SPX) swung by at least 4.6 percent in the four trading days following the change. Gold rose 5 percent.
Buffett, the billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc. said the decision doesn’t reflect the inability of the U.S. to pay its debts.
Peterson was approached by McGraw-Hill in March, a person with direct knowledge of the talks said. He was CEO of Citigroup Japan from 2004 to 2010 and was hired by the New York-based investment bank out of business school 26 years ago, according to an internal memo outlining his departure, whose contents were confirmed by Shannon Bell, a Citigroup spokeswoman in New York.
Peterson, who has an undergraduate degree in mathematics and history from California-based Claremont McKenna College and a MBA from the Wharton School at the University of Pennsylvania in Philadelphia, began his career in Argentina as a corporate banker and became Citigroup’s country manager in Costa Rica and then Uruguay, according to the memo.
McGraw said last month the company is conducting a strategic portfolio review after announcing in June plans to sell its broadcasting group. Sharma will work on the review until December. In November, S&P was divided between McGraw-Hill Financial and the credit rating service. With the split complete, Sharma is “ready for new challenges,” the company said in a statement.
“Today, S&P is a stronger company, whose 1,300 global analysts are sharply focused on the quality, independence and transparency of S&P’s research and analytics,” McGraw said.
Sharma holds a bachelor’s degree from the Birla Institute of Technology in India, a master’s degree from the University of Wisconsin and a doctoral degree in business management from Ohio State University. He joined McGraw-Hill in January 2002 from consultants Booz Allen Hamilton, where he was a partner.
He was appointed president in August 2007, one month after S&P started lowering its ratings for hundreds of mortgage-backed securities, acknowledging that notes it originally deemed safe were now worth little.
S&P’s revenue rose 10.4 percent to $1.7 billion in 2010, from $1.54 billion a year earlier, Bloomberg data show.