Does S&P's Shiny New CEO From Citi Mean Change? Not a Chance
Standard & Poor's (MHP) public image has taken a hammering of late, what with the U.S. sovereign credit rating downgrade coming on the heels of a Department of Justice investigation into the rating company's practices in mortgage-backed securities. You know, those cute little derivative products that helped push the entire world's economy into a pit.
So what is S&P going to do about it? Why, replace its CEO, of course. It's a common corporate strategy. But given that this is Wall Street, the new chief executive will be ... former Citibank (C) COO and troubleshooter Douglas Peterson. Uh, right. What S&P needs is what all the rating companies need: a fundamental overhaul of how it does business. But that's not going to happen, and the company didn't hire someone who has done that before.
The ratings cesspool
S&P is getting flack not because of the downgrade, but because no one in his or her right mind trusts any of the bond rating agencies, including Moody's (MCO) or Fitch (FIM.PA). Just last week, former Moody's senior analyst William Harrington spilled the beans, accusing the company of "everything from tailoring its securities ratings to suit financial industry clients to lying to lawmakers about the company's actions," as my BNET colleague Alain Sherter wrote.
Rating agencies have a fundamental conflicts of interest problem. S&P, Moody's, and Fitch all charge bond issuers to rate them. In 2005, Moody's admitted that its appraisal and rating fees ran between $1,500 and $2.4 million. Somehow, it doesn't seem likely that the prices have come down since -- nor that the other rating agencies charge significantly less.
The issuers rarely walk away because many institutional investors must seek minimum credit ratings on bond investments. Skip a rating, and your company finds it impossible to court the big dollars. If the rating is too low, you're in the same position as though you didn't get one in the first place. That's why companies pressure the agencies for better ratings and why, at Moody's at least, management allegedly co-opts rating decisions to keep clients happy and paying.
And yet, the rating agencies insist that nothing untoward is occurring. Newly out S&P CEO Deven Sharma recently said of the company's U.S. downgrade:
It should reinforce to investors and the marketplace broadly that we make the calls on the credit risk as we see it, to the benefit of investors.Ah, but which investors? Those considering a given bond, or those that have stock in S&P's parent, McGraw-Hill, and want to see S&P earn higher revenue?
Looking for a reformer, at least in name
S&P picked Harrington because he's had to clean up messes before, like when Citigroup's Japanese operations were accused of securities laws violations. Eventually, Japan's Financial Services Agency required the operations to close.
In that case, Harrington's main job was to prevent the problem, and stench, from spreading abroad to Citi's holdings in other countries. But that's a far different experience than what S&P really needs.
S&P's issue is not an overseas division run amok, but the basic way in which it and other rating agences operate is unsustainable. Until S&P and McGraw-Hill are ready to fix that, changes at the top will be window dressing and nothing more.
Related:
- Economic Paranoia: Did S&P Downgrade U.S. As a Preemptive PR Move?
- Former Moody's Exec Details Sleaze Within Credit Rating Firm
- 6 U.S. Downgrade Dangers for High Tech
- At a glance: The US credit downgrade
- S&P Downgrade: Does it Matter?
- Top 6 Ways a U.S. Credit Rating Downgrade Could Cost Americans
- S&P Downgrade: The Real Risk Is in Europe, Not the U.S.
Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.
Twitter FacebookDisclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
