Standard & Poor's Dumps CEO Deven Sharma

by John M. Curtis
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Copyright August 24, 2011
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      Firing its 55-year old CEO Deven Sharma, Standard & Poors began the first step in fixing its tainted credibility after downgrading U.S. credit Aug. 5.  When S&P dropped U.S. credit, it sent shockwaves through Wall Street, plunging the Dow Jones Industrials 634 points, the sixth largest drop in U.S. history.  Shockwaves were also sent through the executive suite at S&P’s parent company McGraw Hill, realizing the damage created by its wholly owned subsidiary.  Since the downgrade, S&P has been in full-on crisis mode, facing a series of Securities and Exchange Commission and Justice Dept. probes for its role in the national 2007-08 financial meltdown.  Instead of recognizing its mistake Aug. 5, S&P went out on a limb, justifying its decision.  Neither Moody’s nor Fitch’s rating agencies concurred with S&P, who based much of their decision on Washington’s political gridlock. 

            Replacing Sharma with Citbank NA’s chief operating officer Douglas Peterson is no guarantee that S&P can rehabilitate its image.  While S&P pretends Sharma’s departure was unrelated to his decision to lower U.S. credit, changing CEOs was the best first step in the rehab process.  Peterson can’t waste too much time justifying past mistakes.  He must hit the ground running by rescinding Sharma’s decision.  Any good leader must adapt to ever-morphing circumstances now requiring S&P to admit it made a mistake.  Correcting mistakes is no disgrace.  Executives at McGraw Hill must make clear to Peterson his role of fixing past mistakes.  Without reversing Sharma’s decision, Peterson will find himself in the same boat.  Billionaire investor Warrant Buffet denounced S&P’s downgrade, telling Investors Business Daily that he’d give the U.S. a quadruple-A-rating, if it were available.

            At the time of the downgrade, the Treasury Dept. tried but failed to convince S&P that it had overestimated $2 trillion in U.S. debt.  While any rating agency can make mistakes, downgrading U.S. credit required more than internal consultation.  S&P should have consulted carefully with the White House, Congress and other credit ratings services.  If there were any doubts, like there was with Moody’s and Fitch’s, S&P should have given the U.S. government the benefit of the doubt.  Probing the decision, the U.S. Senate Banking Committee is looking into what went haywire with S&P’s downgrading decision.  Justice Dept. investigators are looking into S&P’s AAA ratings on financially-strapped U.S. companies, including rating Bear Stearns a AAA rating only one day before the company went under, bought by J.P. Morgan Chase at fire-sale prices.  There’s no doubt about S&P’s arbitrariness.

            Peterson’s first order of business should involve calling a meeting of his executive committee, consulting with his board and that of McGraw hill and expeditiously reversing the downgrade.  “The bigger risk hat he’s going to have to deal with obviously is political,” said Joshua Rosner, an analyst with New York-based research firm Graham Fisher & Co.  “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.” Pretending that Sharma’s ouster was part of S&P’s strategic plan totally ignores the damage he’s done to S&P and the parent company.  “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,” said McGraw Hill, stating exactly the opposite and ignoring the damage from the downgrade.

            S&P neither showed quality, consistency, independence nor transparency during the downgrade.  Since the downgrade, S&P has refused to release the names and positions of the analysts who voted to drop the U.S. credit rating from AAA to AA+.  If two other respected credit rating agencies disagreed with S&P’s downgrade, something went haywire with the analytics or politics interceded.  Peterson has all the right credentials, including a degree from Wharton and extensive foreign banking experience, but he must do more than make excuses.  He must step up and admit S&P miscalculated when it downgraded U.S. credit.  “Deven assisted us with the creation of these two high-growth segments and was ready for new challenges,” said Terry McGraw, Chairman and CEO of McGraw Hill.  McGraw has to stop blowing smoke and admit S&P’s CEO badly blew it.

            McGraw hill did the right thing tossing Sharma out for what amounts to an unforgivable mistake. Fallout from the downgrade will haunt S&P for years to come unless Peterson takes the necessary steps to reverse the mistake.  More excuses from McGraw Hill only exacerbate an otherwise disastrous situation.  With the Securities and Exchange Commission and Justice Dept. looking into S&P’s role in the 2007-08 financial meltdown, Peterson should put his cards on the table and explain how the mistake was made.  When global markets lose $7.6 trillion between Aug. 5 and Aug. 12, McGraw Hill and S&P need to put firewalls and safety checks into place to prevent another catastrophic blunder.  More consultation with the White House and Congress is mandatory before any credit agency downgrades the U.S. government.  Anything less would be entirely irresponsible.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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