After taking over as president of Standard & Poor’s in 2007, Deven Sharma has been looking at strengthening the rating agency’s processes which took a hit following the sub-prime crisis. Today, as the world economy seems headed towards a revival, Sharma spoke on what went wrong, what is being done to make up for it and how the recovery process is panning out.
After France, is the recovery in Japan indicative of a global revival?
While Asia will recover faster, all the major economies are bottoming out. The third quarter should see some pick up and in 2010 we will be in better shape.
Yes, but it is large economies like Japan and the US that will drive global growth.
While India and China may not become the locomotive for recovery, they are strong contributors of growth. In fact, India, China and Brazil account for about $5 trillion of gross domestic product (GDP) which is not small.
How sustainable is this recovery?
We think the recovery for now will move up but on a slower pace. There are some grey areas that needs to be looked very carefully. Consumer sector (credit side) and commercial mortgage sectors are under pressure. Most important, fiscal debt has built up in many countries. It needs to be seen how will the governments will exit out of that.
What is your expectation from Pittsburgh (where the G20 summit will happen next month)?
After the crisis major economies of the world are in business as usual. There is a desire for continued coordination but no execution and outcome. I think for that the Financial Stability Board and the IMF have to frame an execution mechanism in Pittsburgh.
Rating agencies now say rating is just an ‘opinion’. Why then should we take you seriously?
Point taken. But we rate $32 trillion of debt, of which subprime was just $2.5 trillion. That has had disappointing ratings.
What went wrong?
Our assumption on the correction in the housing market did not pan out. The level of declines turned out to be more severe than our assumptions. We did not assume as strong a relationship between different housing markets as it was.
Could you have stopped this?
The liquidity was very highly leveraged and when liquidity went out, it brought things down in a severe manner.
Did analyst misjudge the risk?
They did understand how the risk was building. In 2006, we analysed how the mortgage risk was getting more problematic and in April 2006 we changed our analytics methodology. But the change was not enough. We did not assume the situation will change dramatically.
Was there a way that you could have discovered the level of damage in 2005?
We went back to check that and there was no way we could have done that.
Was there a fault?
While we have done our own review, SEC (Securities and Exchange Commission) did a check. The report clearly highlighted a few areas that we need to strengthen but they did not find any fault at our end .
What steps have you taken?
We have separated the analysts business from the commercial function. We have separated three function from each other — ratings, quality and criteria fixing. We have created an ombudsman so that if anybody has any question on the integrity then they can contact.