Subprime woes force S&P to replace chief

Standard & Poor's named Deven Sharma to replace Kathleen Corbet as president after lawmakers and investors criticized the credit rating company for failing to judge the risks of securities backed by subprime mortgages.

McGraw-Hill Cos., the parent of Standard & Poor's, said in a statement yesterday that Corbet, 47, resigned to spend more time with her family. Her exit isn't related to the current credit- market turmoil, Steven Weiss, a New York-based spokesman for the company, said in an interview. Sharma, 51, is executive vice president of investment services and global sales.

S&P and Moody's Investors Service failed to downgrade bonds backed by loans to borrowers with poor credit until July, when some had already lost more than 50 cents on the dollar. McGraw- Hill shares have dropped 26 per cent this year on concern that the rout in the credit markets may crimp new debt sales, and US Senate Banking Committee Chairman Christopher Dodd said yesterday credit rating companies must explain why they assigned ``AAA ratings to securities that never deserved them.''

``We may see more management shuffles in the coming months amid charges the ratings agencies have been asleep at the switch,'' said Tim Condon, head of research at ING Groep NV in Singapore.

McGraw-Hill shares rose 48 cents to $50.27 yesterday in New York Stock Exchange composite trading. Moody's Corp., parent of rating company Moody's Investors Service, fell 95 cents to $45.09, and is down 35 per cent this year.

French President Nicolas Sarkozy called this month for a probe into rating companies and EU Financial Services Commissioner Charlie McCreevy plans to review management, conflicts of interest and resources of the companies.

The firms did ``great damage,'' Dodd, a Connecticut Democrat seeking his party's presidential nomination, said yesterday, adding he wants to examine the ``special status'' that allows credit rating companies more access than investors to information about public companies.

Sharma has a strategy and consulting background rather than financial markets experience. He joined McGraw-Hill in 2002 from Booz Allen & Hamilton, a management consulting firm, where he served as a partner and advised companies on strategy, branding and sales management for 14 years, according to a biography provided by S&P on its Web site. He also worked for Dresser Industries Inc. and Anderson Strathclyde.

He's a graduate of Birla Institute of Technology in India and received a masters degree from the University of Wisconsin and a doctoral degree in business management from Ohio State University.

``Deven Sharma is a very skilled executive with global experience and knowledge,'' McGraw-Hill's Weiss said. ``We remain very positive about the long-term trends that drive demand for S&P's credit ratings, index services, equity research and other data products.''

Credit-rating companies may be successfully sued by investors who have lost money on subprime-mortgage securities and other similar bonds, according to a May study by Rosner and Joseph Mason, an associate finance professor at Drexel University in Philadelphia.

S&P's credibility was eroded last week when it slashed the ratings on two mortgage-backed securities funds to junk from AAA in one day. Some of the ratings on $3.2 billion of debt issued by funds set up by Solent Capital Partners LLP in London and Avendis Group in Geneva were cut by as much as 17 levels to CCC. By S&P's own definitions, the ratings firm's assessment went from ``extremely strong'' to ``currently vulnerable to nonpayment.''

The slump in the value of mortgage-backed securities has threatened hedge funds that borrowed from international money markets to invest in the instruments.

Basis Capital Fund Management Ltd., the Australian investment company that hired Blackstone Group LP to sell assets, this week sought bankruptcy protection for its second-biggest hedge fund, which held high-yield corporate and structured credit securities, including mortgage-backed bonds and collateralized- debt obligations.

Short interest in shares of Moody's and McGraw-Hill has soared this year, a sign investors are betting their earnings will suffer. Short interest in McGraw-Hill has tripled since February to about 6.1 million shares. The short interest on Moody's has increased about ninefold in the same period to 31 million shares, data compiled by Bloomberg show.

McGraw-Hill and Moody's have declined partly on concern that subprime mortgage defaults will slow demand for ratings of collateralized debt obligations.

S&P earns fees for rating so-called structured notes, helping borrowers put together debt securities in a way that will get the highest possible credit rankings while allowing managers of the securities the most profit, according to Charles Calomiris, the Henry Kaufman professor of financial institutions at New York's Columbia University.

McGraw Hill in its accounts doesn't break out the revenue generated by S&P's different areas of activity. Moody's Corp., the parent of S&P's largest rival, does and last year made 43 percent of total revenue, or $884 million, from rating structured notes, according to Neil Godsey, an equity analyst at Friedman, Billings, Ramsey Group Inc. in Arlington, Virginia. In 2001, the business made less than a third of that figure, or $274 million.