S&P President Deven Sharma Explains New Evaluation Actions
Thursday, February 07, 2008SUSIE GHARIB: Standard & Poor's announced today big changes in how it evaluates financial products. The ratings agency says improving four key areas will better serve the public. It wants beefed up governance establishing a watchdog to ensure the integrity of the ratings process. Better analytics will also play a role enhancing the quality of its ratings analysis and opinions. The firm will provide more and better information to the public, clarifying the level of risk in an investment. And it wants to better educate market players about what a credit rating is and is not. Critics say the reform doesn't go far enough; one even called it window dressing. Erika Miller sat down with S&P's President Deven Sharma today and began by asking him what prompted the agency to make these changes.
DEVEN SHARMA, PRESIDENT, STANDARD & POOR'S: S&P is announcing a number of actions today because we believe we can bring more transparency to the marketplace. And with more transparency, we believe it will bolster the confidence of the credit and capital markets and investors.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Are these changes a direct response to criticism that S&P has been asleep at the wheel, slow to spot trouble, slow to react to it?
SHARMA: We went and talked to a number of market participants, investors, other issuers. We went to the regulators, central banks, treasuries around the world and got a lot of input from a number of people and came up with this set of actions because we believe these actions are important in bolstering confidence in the marketplace but providing more transparency. We believe it is the right thing to do for the marketplace and the right thing for us to do for the business.
MILLER: Are these changes substantive or is this just window dressing to try and placate regulators in the U.S. and in Europe who are very critical of what's happened?
SHARMA: These actions are very meaningful. And if I might just take one or two examples to show you the depth of these actions. For example, there have been questions about perceptions around the independence of our issuer-paid model. And so an example, one of the things we want to put into policy is analyst rotation. That every five years we are going to rotate our analysts so that there is no question that long-term relationships sometimes build up and people become easy (ph).
MILLER: How do today's changes address conflict of interest allegations that S&P analysts are too close to the companies that they rate?
SHARMA: We have a number of very stringent practices and policies around maintaining independence. One of the things we're going to do is make it transparent to the public by having an external firm, like an external audit firm come and take a look at us, review us, and show that our practices and our policies and our independence are working and then we will make the results of the review public.
MILLER: But analysts will still rely solely on information provided by the company that's paying them to rate the securities that they are looking at, right? They are not going to be relying on their own opinions of what might happen and risks that others are bringing up in the marketplace?
SHARMA: The analysts take the data from the company because they have to provide the data on their particular issuance. Secondly then they will look at a lot of benchmarks. And these benchmarks are built up based on a historical data and the market-based data. And then they look at a lot of what is going on in the market environment and market conditions. So they take these three or four data points and then apply their judgment and expertise to come up with the answer.
MILLER: Will it be harder to get a AAA rating? Will it be easier to lose one?
SHARMA: It will be as hard as it always was. And it will be as easy as it was to lose the ratings. We've always made rating changes based on the best available information we have. So when the information changes, we take action on it.
MILLER: Do you think investors have a misperception about what a bond rating is and how they should be using it to evaluate various securities?
SHARMA: I think the investors inferred more from the ratings than it was designed for. The ratings is designed to address probability of default. And perhaps the investors had begun to infer that it would give them also information on market risk factors. And so by education program, we will hopefully investors will better understand what a ratings means and when to use the ratings.
MILLER: Mr. Sharma, thank you very much.
SHARMA: Thank you.
