Standard & Poor’s, the ratings company that downgraded the U.S. AAA credit ranking for the first time, will replace President Deven Sharma with Citibank NA Chief Operating Officer Douglas Peterson.
Sharma, 55, 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. Peterson, 53, will take over 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. credit rating to AA+ roiled global markets and boosted demand for Treasuries, sending the yield on the 10-year note, the benchmark for home mortgages and car loans, to a record low 2.03 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.
“It looks like he’s being helped out the door,” Noel Hebert, a credit strategist at Mitsubishi UFJ Securities USA Inc. in New York, said in a phone interview. “If it was a planned retirement, it should have been handled in a different way.”
$2 Trillion Error
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.”
S&P said the U.S. failed to meet targets for reducing the budget deficit. “The fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” the company said in a statement after markets closed on Aug. 5.
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 swung by at least 4.6 percent in the four trading days following the change. Gold rose 5 percent. While S&P said the U.S. was less creditworthy, investors snapped up Treasuries, driving up prices and sending yields to record lows. Yields on the bonds fell 21 basis points to 1.174 percent, according to Bank of America Merrill Lynch’s U.S. Treasury Master index.
Belgium, New Zealand
Buffett, the billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc. said the decision doesn’t reflect any inability of the U.S. to pay its debts.
Nobel Laureate Paul Krugman said there was no reason to take the downgrade seriously. “In those rare cases where rating agencies have downgraded countries that still had the confidence of investors, they have consistently been wrong,” he wrote in an Aug. 7 New York Times column.
S&P kept an A- rating on Iceland until Oct. 6, 2008, when the country’s government was forced to guarantee all domestic bank deposits after its currency plunged. The company reaffirmed its AAA rating for Lehman Brothers Holdings Inc.’s financial products unit on Sept. 12, 2008, three days before the bank failed. It downgraded Bear Stearns Cos. to BBB on March 14, 2008, two days before JPMorgan Chase & Co. agreed to buy the failing securities firm.
The new rating puts the U.S. on the same level as Belgium, which hasn’t had a government since June 2010, and New Zealand, and above Japan and China. Under S&P’s definitions, debt rated AA+ is barely different from AAA securities and shows that a borrower’s ability to “meet its financial commitment on the obligation is very strong.”
U.S. Vice President Joe Biden told Bloomberg News in an interview on Air Force Two on Aug. 22 that he was disappointed by the downgrade “and pleased that they were the only outfit that did it.”
The Wall Street Journal and Financial Times already reported Sharma’s replacement.
Peterson was approached by McGraw-Hill in March, a person with direct knowledge of the talks said. He was chief executive officer 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.
Sharma, who joined S&P in 2007 as the global credit crisis was unfolding, 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 group, 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,” Harold McGraw III said in a statement. “Accordingly, we began a process to identify a new leader for S&P.”
Since Aug. 5, the day of the downgrade, McGraw-Hill’s shares have lost 11 percent compared with a decrease of 6.3 percent for the S&P 500 Index, according to data compiled by Bloomberg. McGraw-Hill’s stock rose 0.1 percent to $37.04 yesterday.
“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-Hill said.
The Securities and Exchange Commission is scrutinizing the method S&P used to cut the U.S.’s credit rating and whether the firm properly protected the confidential decision, a person with direct knowledge of the matter said Aug. 16.
Chief Executive Officer Terry 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. After the split, Sharma is “ready for new challenges,” according to the statement.
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 grew 10.4 percent to $1.7 billion in 2010, from $1.54 billion a year earlier, Bloomberg data show.
“Since Sharma came in, he has done little to enhance the credibility or reputation of the ratings agency,” Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co., said by phone. “Given the recent downgrades, it appears their operational management and ratings modeling have not been meaningfully strengthened.”