As Business Report outlines, “STANDARD & Poor’s (S&P), the ratings agency that downgraded the US’s AAA credit rating for the first time, will replace president Deven Sharma with Citibank chief operating officer Douglas Peterson.”
Set to step down at the end of this year, Sharma oversaw what was arguably the S&P’s most controversial move in August, downgrading the United States from its AAA rating to AA+. As a newly-anointed AA+, The U.S. joined such countries as Spain and Bermuda in credit rating.
And while the move to kick Sharma to the curb will inevitably make the markets (and America First! crowd) feel vindicated, the shift in power still doesn’t fix what ails the S&P specifically and the ratings system generally.
Some background: S&P, like its “brethren” ratings agencies of Moody’s and Fitch Ratings, is a ratings agency that bestow upon both public and private entities ratings that range from AAA-D (technically, Not Rated also exists), which in turn indicate long-term credit-worthiness. The markets (and public, obviously), in turn place, and pardon the pun, a great deal of stock in these ratings, taking them as holy valuations from the mount.
Here’s the problem: who pays for these ratings? THE VERY ENTITIES BEING RATED. That’s right: say you’re, par example, Halliburton Co. As CEO, you can literally go, cash in had, to the 3 separate central ratings agencies and say (threaten?), “Whichever one of you rates me highest, gets my cash.” The richer the company or country (or, of course, local government or municipality), the more prejudiced the rankings.
In short, rankings can be (and often are) bought. This is what we call the pay-for-play system.
Ergo, while S&P’s change in its top ranks represents s a feel-good move for the markets, it does precious little to reform a rotting system. In order to restore order and/or integrity to the ratings system, one of two things must happen:
1) Either the top ratings agencies evolve into (at least semi) public entities, exempt from the financial and economic pressures of (i.e. paychecks that come from) the private markets (therefore lending a “legitimacy” to the ratings);
2) Or the markets (and public) step back and take a healthy, educated view of the ratings system, and price and value output accordingly, understanding that, yes, bias exists on both the customer (i.e. company, etc.) and vendor (ratings agency) sides of the ratings equation.
In short, without either an internal or external adjustment to the ratings system infrastructure, no correction in leadership will ever result in any substantive change.
Margaret Bogenrief is a Partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]