The timing is terrible. So is the scale of the error — all of $2 trillion. And as far as implications go, the removal of Deven Sharma as president of Standard & Poor’s (S&P) — an agency that rates corporate as well as sovereign debt — raises issues of political intolerance in the land of the last superpower. In less than three weeks after S&P downgraded the US debt to AA+ from Triple-A status, Sharma’s resignation has been accepted. “There is no relation between the US downgradeand Mr Sharma’s departure,” S&P vice president marketing and communications Catherine Mathis said in an emailed response.
The $2 trillion error that changed the US’ debt to GDP ratio — an important aspect of risk on the bonds the country issues — to 79% from 87% in 2021 did not have any bearing on the S&P downgrade. “The company said it looks at three to five years, not 10. The government feels the country’s paper is a longer-term instrument. So, it could be over a difference of opinion — and not facts — that Sharma has lost his job. Four years after the agencies lost credibility over whether the ratings they gave were ‘opinions’ or ‘facts’, they have come to haunt the business, all over again.
Of course, the press release words it beautifully, almost as if it’s doing Sharma a favour. “Deven Sharma,” it said, “will take on a special assignment working on the company’s strategic portfolio review until the end of the year when he will leave the company to pursue other opportunities.” This apparent face-save is underlined with graceful words from Harold McGraw III, chairman, president and CEO of The McGraw-Hill Companies, that owns S&P.
Having interviewed both men, I found they live by their beliefs and share an intellectual honesty about the business. When I met the gentle and completely transparent Sharma in August 2009, the ratings industry was emerging from the 2007 crisis of confidence. Ratings are an ‘editorial opinion’, the agencies had said in their defence, forgetting the conflict of interest between their principals (companies that got their debt rated) and their profits. The allegations against the industry were that it did not take an independent view of the complex products that companies sold in the market leading to the ongoing credit crisis, the biggest since the Great Depression.
Why should we take you seriously, I had asked Sharma. “Point taken,” he said. “But we rate $32 trillion of debt, of which subprime was just $2.5 trillion. 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.” And risk? “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.”
In November 2010, as part of US President Barack Obama’s delegation, I asked McGraw III the same question. “I’m sorry you feel that way,” he said when I asked him why credit rating agencies had shirked their responsibility in the subprime crisis. “We budgeted for a 15% fall in property prices because that was the worst decline in the past 30 years. But the market crashed by 40% on average.”
By taking the blame on their chins, both Sharma and McGraw III, showed courage and a desire to bring change. Unfortunately, Sharma’s untimely sacking has put bigger question marks around the credibility of not only S&P or McGraw III, but on the way the capitalists system works in the land where it has been perfected. Had this happened in 2007, nobody would have raised any questions.
But today, it is happening in the land of a superpower whose financial and political wrinkles are beginning to show, on a system whose sense of justice and fairness is being questioned, over a regulatory architecture that’s crumbling.