Deven Sharma, Head of S&P, Stepping Down

November 1, 2011 by · Leave a Comment
Filed under: Financial Crisis, General 

The parent company of Standard & Poor’s (S&P), McGraw-Hill Cos., announced that Deven Sharma, president of S&P, will be replaced by Douglas Peterson. Mr. Peterson is currently the Chief Operating Officer of Citibank N.A. Prior to that position, Mr. Peterson was CEO of Citigroup Japan.

While with Citigroup, Mr. Peterson established a reputation as a leader who is able to handle government scrutiny, improve business standards, and repair damaged reputations.

Mr. Sharma will be staying with the company as an advisor until the end of the year. The reason given for the change is that Mr. Sharma, who joined the company in 2006, is “ready for new challenges.”

During his tenure, Mr. Sharma separated S&P’s data, pricing and analytics business from its rating business. No mention was made in the announcement about how S&P downgraded the U.S. debt under Mr. Sharma’s watch, a move that was stridently criticized by the administration and was not followed by the other two major ratings agencies. Nor was there any mention of the ongoing Justice Department’s investigation into whether S&P improperly rated mortgage-backed securities while Mr. Sharma was president.

Standard & Poor’s Predicts Unsustainable Debt

March 25, 2011 by · Leave a Comment
Filed under: Financial Crisis, S&P, The Ratings System 

In a recently published report by Standard & Poor’s Ratings Services, “Global Aging 2010: An Irreversible Truth,” government debt of countries with advanced economies could reach over 300% of GDP within 40 years.

It is the opinion of Standard & Poor’s that the aging population could dramatically impact the prospects for economic growth while simultaneously facing greater budgetary pressures from increased age-related spending.

To counter this trend, the rising debt, and the negative impact on sovereign debt ratings, European governments have been attempting to make budgetary adjustments and to reform pension and health-care systems. These measures have been facing fierce union protests in France, Greece and most recently Italy.

In their press release, Standard & Poor’s quotes their own credit analyst Marko Mrsnik as saying, “No other force is likely to shape the future of national economic health, public finances, and national policies as the irreversible rate at which the world’s population is growing older. The projected deterioration in public finances between now and 2050 is particularly significant in advanced economies, whereas many emerging market sovereigns outside of Europe will have a slightly more positive trajectory. In these cases population aging is projected to take place against the background of relatively higher economic growth than in advanced sovereigns. However, as the emerging sovereigns develop, with associated widespread changes to the social fabric, government welfare spending may grow faster than GDP as has been the trend in advanced economies during the last half of the 20th century.”

French Unions Plan Pension Protest

January 12, 2011 by · Leave a Comment
Filed under: Financial Crisis, The Rating Agencies 

To avoid the credit problems that have plagued Greece, Portugal, Italy and others in the European Union, France is taking steps to scale back its generous pension program.

The credit rating agency Moody’s recently noted that pension reform is critical to France trimming the public deficit so it falls within the 3%-of-GDP limit specified by euro zone treaties. To maintain its good credit ratings, the country needs to demonstrate that it can implement fundamental reforms to help reduce its public deficit.

Proposals that will go before France’s parliament in September include raising the minimum retirement age from 60 to 62 and increasing the age at which workers can retire with full benefits from 65 to 67.

French unions do not like the proposals and are taking steps to cause legislators to support their position. Seven unions are calling on members to stage a “day of massive strikes and demonstrations” on September 7th, the day Parliament will begin to discuss proposals. Unions claim that employees will unfairly bear the cost of pension reform.

Fitch Worries About Unrated Debt

November 15, 2010 by · Leave a Comment
Filed under: Financial Crisis, The Rating Agencies 

The number of high profile companies that have been selling unrated bonds or structured securities has been growing since the credit collapse in 2008. Formerly unrated investments were the purview of high-risk junk bond issuers.

The Wall Street Journal quoted Peter Sack of Credit Suisse’s mortgage-backed securities structuring group as claiming, “Two years ago, deals like this would have been inconceivable…Now they are a viable option.”

Whereas getting a risk appraisal from the leading ratings agencies was once automatic, in the wake of the credit crisis many of their ratings were shown to be unreliable. This has rattled investor confidence to the point that in some instances issuers have concluded that their evaluations are superfluous or worse, worthless.

As long ago as August 2009 Bob Kunze-Concewitz, chief executive of Italy’s Gruppo Campari, was quoted as saying, “Our reputation is good….I don’t think a rating would have mattered that much.”

Fitch Ratings – London in a recent report warns investors about the risk of unrated issues.  They also indicate that approximately half of the non-rated issuers in 2009 could have been investment-grade.

Japan Addresses Threat of Lower Bond Ratings

November 12, 2010 by · Leave a Comment
Filed under: Financial Crisis, The Rating Agencies 

In response to rating agency warnings of lower bond ratings, among other pressures, Japan’s budget strategists announced a 10% across-the-board spending cut for all ministries and agencies. They also said that this was only the first step in an all-encompassing budget overhaul.

Their goal is to cut more than 1 trillion yen ($11.42 billion) from the new fiscal budget that takes effect in April while still making more funding available for stimulus programs without going over their self-imposed 71 trillion-yen annual policy-spending limit.

Japan’s debt is the world’s highest among developed industrialized nations. If left unchecked, the debt could easily breach 200% of GDP. Yet the worldwide recession has created a difficult challenge for Japan with competing policy needs: to both significantly cut debt while maintaining stimulus for a delicate economic recovery.

The anticipated cuts will likely not impact grants to local governments and social security payments. The government will be holding open debates to decide how to allocate funds.

Japan’s Debt Problems Continue

November 8, 2010 by · Leave a Comment
Filed under: Financial Crisis, The Rating Agencies 

It is anticipated that Japan’s ruling party’s poor showing in recent elections will lead to political gridlock that could thwart Japan’s efforts to gain control of the largest debt-to-GDP ratio in the industrialized world.

Standard & Poor’s is rating Japan long-term local and foreign currency debt AA, both with a negative outlook; however Moody’s and Fitch ratings are slightly more positive and are providing a stable outlook for both debts.

At the end of their fiscal year in March – Japan’s public debt was nearly twice the size of its economy, 883 trillion yen ($9,960 billion), or 192% of its GDP.

In comparison, Italy and Greece’s sovereign debt is estimated to be 115% of their economies, Germany’s is 72%, and the U.S.’s is 53%. The average for the world is 56% of GDP.

Indonesia’s Transformation Garners Attention

October 29, 2010 by · Leave a Comment
Filed under: Financial Crisis 

A few months ago, Standard & Poor’s raised Indonesia’s credit rating to BB from BB-, two levels below investment grade. London-based Standard Chartered Plc now predicts Indonesian debt will reach investment grade by 2012.

“Indonesia after the financial crisis was where Greece is today,” says Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney, which oversees the equivalent of $90 billion. “The transformation has been amazing.”

Indonesia’s currency, the rupiah, gained 10.4 percent against the U.S. dollar in the 12 month period that ended on May 21, making it the best performer among 26 leading emerging markets. Now, the challenge for Western investors is to decide whether Indonesia’s $234-billion stock market is overheated. Indonesian shares have outperformed those of all their rivals.

Former Ratings Officials Testify Before FCIC

Eric Kolchinsky, Moody’s former managing director in charge of rating subprime mortgage securities, testified before the Financial Crisis Inquiry Commission. He told of how superiors pressured analysts to increase market share. He said that bankers seeking reviews for their mortgage securities took advantage of this by giving rating agencies no time to conduct proper reviews of the securities.

“That was the problem,” said Mr. Kolchinsky. “I said I needed three or four weeks to research the deal, but because bankers knew we could not walk away from a deal, they sent the documents three or four days before closing or even after closing.”

FCIC Chairman Phil Angelides, former state treasurer of California, remarked that, “The very system didn’t allow you to say no to a whole market slice.” Moody’s could have said no. They chose to rate. This is corporate responsibility, not ratings shortfalls.

Senate Passes Historical Financial Overhaul Bill

September 15, 2010 by · Leave a Comment
Filed under: Bond Regulation, Financial Crisis, The Rating Agencies 

The biggest overhaul of U.S. financial regulations since the Great Depression was passed by the Senate in a 59-39 vote. The legislation addresses the regulatory gaps and speculative trading practices that are believed to have contributed to the 2008 financial market crisis.

One of the provisions in the bill establishes a new regulatory body for credit rating agencies. The self-regulatory organization will assign credit-rating agencies to provide initial credit ratings of financial packages. The measure is aimed at preventing institutions from shopping for the best rating.

The Senate bill must now be reconciled with the House version.  It is projected that these negotiations will be completed in the upcoming weeks and that the bill will be available for the President’s signature before the Fourth of July holiday.

EU Promises New Regulations for Ratings Agencies

September 6, 2010 by · Leave a Comment
Filed under: Financial Crisis, The Rating Agencies 

Following the European Union’s (EU) $1 trillion deal to ease the financial crisis in Greece that also threatened other member nations, Michel Barnier, the EU’s financial markets chief, said that he will push for new legislation to increase competition among rating agencies, which is believed by many to have aggravated the Greek debt crisis.

Barnier said the agencies did not consider sufficiently that Greece is a member of and backed by the European Union.  “Analyzing the ratings of Greece, which is part of a solidarity group, is not the same as assessing the rating of an isolated country,” he said.

New legislation governing the ratings agencies is now at the top of the list of new rules that the EU plans to develop and implement this year.

“We have to measure the effects of the legislation that will be implemented this year,” Barnier also added that the sector lacks transparency and competitiveness. “There are too few agencies in too few hands,” he said. “We’ll work with the players of the sector to increase competitiveness.”

Great plan. If you don’t like the outcome, change the rules.

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