It’s tempting to read the resignation of Deven Sharma, who stepped down as president of S&P Monday night, as an admission that the rating agency goofed in downgrading the United States’ sovereign rating from AAA to AA+, even as Fitch and Moody’s maintained America’s top grade. Warren Buffett said the U.S. should be rated “quadruple A.” The Treasury department complained that S&P overestimated the nation’s future debt by $2 trillion. Timothy Geithner said that the S&P decision shows “a stunning lack of knowledge about basic U.S. fiscal budget math. And I think they drew exactly the wrong conclusion from this budget agreement.”
Guess Sharma and Geithner won’t be hanging out at any holiday parties. If the S&P downgrade was indeed a mistake, it was an expensive one. In the week after the Aug. 5 S&P downgrade, according to Bloomberg, the market value of global stocks tumbled by $7.6 trillion. Sharma, a former Booz Allen Hamilton consultant who has headed S&P for the past four years, might not be trumping this fact on his newly-polished resume. So you’re the guy who cost the world $7.6 trillion in wealth? You’re hired!
However, the fallout from the downgrade alone wasn’t responsible for this move. McGraw-Hill, S&P’s parent company, had said that it has been searching for Sharma’s successor since the start of the year, after Sharma oversaw S&P’s split of its credit rating services and its financial advisory arm, rebranded McGraw-Hill Financial. Still, Sharma’s tenure atop the controversial ratings company was far from a success. “Well, he came in in 2007 as the financial crisis was starting to unfold,” says Joshua Rosner, managing director of Graham Fisher & Co, a research firm. Rosner has closely studied the work of the rating agencies, and been critical of them. “There was a recognition that the agencies had failed in the rating of structured products, like mortgage-backed securities,” Rosner says. “He was tasked with repairing the image of S&P in the capital markets. Four years later, S&P’s reputation is worse than it was when he took over.”
The credibility of S&P, and all the rating agencies, took an enormous hit when they gave sub-prime junk AAA-ratings, thus helping create the bubble that caused the 2008 financial meltdown. The Justice Department is investigating those ratings, and the SEC is also probing whether S&P selectively leaked information about the U.S. downgrade before the official announcement. Should the hiring of Douglas Peterson, the chief operating officer of Citigroup’s retail and commercial lending unit, to replace Sharma offer any hope that S&P can restore its reputation? After all, Peterson has troubleshooting experience. After Citi’s private bank in Japan was accused of violating securities law, then-Citi CEO Charles Prince installed Peterson as his company’s front man to handle the scandal. Peterson and Prince were called upon to testify before Japan’s upper house of Parliament, where they offered bows of apology. The Japanese government stripped the unit’s operation license, but Peterson helped rebuild Citi’s presence in Japan before the financial crisis knocked it down again.
Don’t get your hopes up, says Rosner. “The problem is not about the leadership role,” Rosner says. “We’ve just long-asked rating agencies to do something that they couldn’t. When it comes to sovereign ratings, there’s no real way to put everything into quantifiable objective boxes. These ratings are opinions, and they should really be treated like the opinions of any sell-side analyst. It’s just an opinion, as valid as mine and yours. No one should be required to listen to me.”