S&P president: Why I'm still hopefulFebruary 6, 2012: 8:54 AM ET
Douglas Peterson, the president of Standard & Poor's, talks about European downgrades, ratings agency regulation and why he left an investment bank to run a firm trying to restore its reputation.
FORTUNE -- When Douglas Peterson, the new president of Standard & Poor's, talks about his firm, he repeats the words quality, integrity, and expertise over and again. S&P is on the brink of "a tremendous opportunity to grow," says Peterson, largely due to the excellent work produced by the company's global team of 1,300 analysts. "One person doesn't make this firm great," he says. "The quality and the value of the work flows from the team." In Peterson's estimation, S&P is an exciting place for serious-minded people.
It is hard to reconcile Peterson's version of S&P, a division of McGraw Hill (MHP), with the popular perception of the firm among journalists, politicians, policymakers, and market pundits. S&P, along with fellow ratings agencies Fitch and Moody's (MCO), were pilloried for giving bonds made of subprime mortgages top credit ratings. This error in judgment that since been used to discredit opinions issued by the agencies, including the recent, high-profile downgrades of U.S. and European sovereign debt. Countless editorials have questioned whether regulations should continue to use ratings as a benchmark. S&P and Moody's are being investigated for the roles they played in the financial crisis. And regulators are hard at work trying to make new rules for the companies that could, among other things, make it harder for them to use the first amendment to deflect lawsuits.
Peterson's challenge will be two-fold, the first being to avoid another disastrous ratings stumble. The groundwork for the first task was laid by S&P's ex-president, Deven Sharma, who stepped down last September. Sharma led the company through the most painful period in its 152-year history and overhauled the firm's criteria and methodologies. Peterson says the company will not drift much from the strategic course set by his predecessor.
But it is generally accepted inside and outside the firm that Peterson was hired to help S&P burnish its reputation and repair its relationships with regulators and governments. The 53-year-old former Citigroup (C) executive made a name for himself as a go-to troubleshooter. Most recently he helped Citi repair relationships with regulators in Japan, where the bank's reputation had been damaged by money laundering accusations. Peterson is a soft-spoken mathematics major who looks like the love child of Colin Firth and Anthony Edwards and is unlike many hard-charging Wall Street executives. During our recent conversation at S&P's Manhattan headquarters, he was unfailingly optimistic, gentle, and gracious. He is a Wharton grad, but with no swagger. He comes across as a reasonable man.
But the task ahead is much larger than cleaning up a bank division's mess in Japan. Peterson is fighting a global war of opinion at a company that is reviled by politicians from Tokyo to Paris to New York, and he's doing his best to stave off regulation that could impair S&P's business model. And while he puts up a staunch defense of his company, he is unwilling or unable to talk specifics when it comes to how he will improve the company's reputation.
Fortune caught up with Peterson upon his return from Davos, Switzerland, where he was a first-time attendee at the World Economic Forum. Below are edited excerpts:
While you were in Davos, kind of feedback did you get about S&P?
Basically everybody had a question or thought about S&P and, generally speaking, they fell into three buckets. Some people were very well informed and thoughtful, and they thought that the rating agencies have played a constructive role in following through on their mandate, which is to provide forward-looking credit opinions.
There were others who were not happy with the downgrades and wanted to give me their thoughts about why we were too late or why we shouldn't be doing downgrades during the financial crisis.
Then there were people who were generally interested in the state of markets and how we were being regulated. In sessions I often heard the question, what does this mean for ratings agencies?
Did you feel that S&P is still somewhat under siege in terms of public opinion? There are regulators and politicians making statements almost every day that no one should listen to the ratings agencies anymore.
We hear from investors and issuers that they do value our opinions. I don't talk about politicians. I have no comment on that.
Another common refrain is that S&P's actions on European sovereign debt are meaningless because the market didn't respond. What do you think of the idea that the market and ratings need to be aligned?
We provide an opinion of creditworthiness based on facts and figures and information that is available at that time. It's never been said that we are a substitute for the trading environment or for market intelligence. We look at the ability and the willingness of a borrower to pay. That is what credit ratings are designed for.
And yet people still doubt whether S&P can offer reputable ratings.
We ensure that we have the highest quality in the work that we do, and that goes to the root of our criteria and methodology, our work processes and our people. People are the differentiating factor. We don't make cars or planes. The value we create comes from the quality of our people and the quality of our methodologies.
How do you compete with investment banks, which pay much more, for talented people?
One of the things most attractive things about working at S&P is the quality of our analytical work. If you work at a bank, trading, underwriting, and lending are the core businesses. Here, the core business is analytics, so it appeals to people who want to be at a firm that is global, that covers multiple asset classes, and that just does analytical work.
What did you take away from your discussions at Davos?
One positive takeaway was that people had a firm understanding that things need to get done and there was a high level of recognition and understanding about how the impact this could have on other parts of the world. A lot of countries from outside of the eurozone are asking for speed, and everyone understands that these types of crises -- whether you go back to the emerging market crises or the U.S. crisis of a few years ago -- have to get to resolutions and to solutions.
If you can't fuse monetary policy and devalue your currency, then all of a sudden you have to find other ways to become more competitive or more integrated.
So within the eurozone there is a lot of discussion about cultural differences between member countries and why the initial integration did not go as far or as fast as expected. Reconciling cultural differences has to be the next level of integration, and what I would call some of the barriers to further integration were discussed a lot, especially things like different attitudes about pensions, retirement age, health care, and what people like to call structural reform, meaning tax and fiscal policy.
What is your sense for the regulatory proposals floating around for the ratings agencies?
The proposals are still very wide-ranging, which makes sense because this regulation is fairly new. In banking, they are discussing Basel III, but there isn't much regulation that wasn't included in Basels I and II . The solvency plan for insurers also had a predecessor. With ratings agency regulation, there is a lot less history.
Long before I got to S&P, the firm began a very robust dialogue with policy makers to help frame a new approach towards the integrity and the management of the ratings agencies. I want to continue that proactive dialogue as we look at the shape the ratings industry will take within the financial services industry.
One thing that I'm focused on are proposed regulations that impact the independence of ratings decisions. I want ratings agencies to develop, manage, and be responsible for their processes, not the regulators. I think that certain proposals in Europe would potentially have those regulators in approving ratings processes and methodologies; and we're looking at them carefully.
Why did you leave banking to lead a credit ratings firm?
I spent most of my career as an international banker, and I look at global markets. As we see more integration of global trade and global capital flows, I understood that there would be a lot of opportunity for the work of ratings agencies -- research, forecasting, and publishing ratings -- to grow globally, alongside investment and capital and trade flows. We can grow in the United States and Western Europe, as markets evolve, fewer people rely on banks for loans, and capital markets expand. And we can grow in emerging markets that are just now starting to develop things like pension funds and insurance markets with more institutional investors.
A critical success factor for S&P is to provide global coverage that is has the same consistency, quality, and integrity so that our ratings and research can be used as benchmarks.
By the end of this year, McGraw-Hill will split, and S&P will be the driving force behind the newly formed McGraw-Hill Financial. Do you feel there is even more pressure now for S&P to perform well?
I don't see it like that. McGraw-Hill Financial is going to be a very attractive set of companies that have an some amazing opportunities for growth.
Terry McGraw, the long time head of McGraw-Hill, will run McGraw-Hill Financial. He is also nearing retirement age. Are you in line to succeed Terry McGraw?
I wouldn't think of it in that sense. I was hired to do my role at S&P. We have a lot of work to do and there is a lot of opportunity. That is why I am here.
Have you been in touch with Jana Partners, the activist hedge fund that pushed McGraw-Hill to split?
I have not spoken with Jana. The board of directors and senior management decided for strategic reasons, and to take advantage of market opportunities, to split the company.
How does your perspective, coming from banking, help S&P?
This isn't about one person. This is a team. What is most critical and most important and most impressive is that S&P has 1,300 talented analysts in 23 countries that cover every asset class, every industry, and every region using a robust and thorough methodology. The quality and the value of S&P flows from that team.
You won't see a big change in the company. I just plan to take advantage of these very interesting opportunities for growth. Even though markets have been rough the last few years, the global dynamics that I mentioned before -- growing capital markets, emerging market economies that need to develop capital markets -- are going to be good for S&P.