An executive who has tackled some huge problems at Citigroup prepares to lead S&P through rocky times. He faces tough times, an uncertain future and the possibility of a big payday.
FORTUNE -- When Doug Peterson becomes president of Standard & Poor's this September, he'll inherit a series of headaches that few would envy. S&P is under fire from politicians for downgrading the United States from AAA to AA+. The Department of Justice is investigating the company for giving subprime mortgage securities top ratings just before they imploded. And regulators are trying to find ways to make it easier to sue ratings agencies, as well as make them less importantin the grand scheme of financial markets.
But Peterson has built a reputation as an executive who can handle government scrutiny, improve business standards and even repair a firm's deeply damaged reputation.
Peterson was appointed chief executive of Citigroup (C) in Japan in 2004, the same year that the country's Financial Services Agency ordered Citi to shut down its local private bank for improper trading practices and engaging in transactions that could be associated with money laundering. The bank was banned from participating in government bond auctions and from accepting foreign currency deposits from new customers. The FSA told the press that Citi gave profits "undue importance" and cultivated a "law-evading sales system that disregards the laws and regulations of Japan."
Then-CEO Charles Prince sent Peterson to figure out and fix what had gone wrong, to repair relations with the government and to bring the strategically important division back to life. Peterson cleaned house and overhauled the division, winning over regulators. The bank went on to list on the Tokyo Stock Exchange and acquire Nikko Cordial, Japan's third largest broker.
"When you're all alone in a country, it's not just about revenues and profits," says Ajay Banga, who served as the head of Citi's Asia Pacific region from March 2008 to August 2009 before becoming the CEO of MasterCard. "It's about managing the franchise with governments. It's about answering to your employees and guiding them. It's about being in the political and regulatory spotlight. [Peterson] is no stranger to this and his experiences in Japan and Latin America will hold him in good stead."
Peterson, who declined to speak with Fortune, was quoted in a press release as saying: "I look forward to leading the S&P team and continuing to expand the company around the world by building on its many strengths."
Peterson seems like just the kind of executive that activist investors would want to see at the head of S&P. In a presentation filed with the Securities and Exchange Commission, Jana Partners and Ontario Teachers, shareholders agitating for change at S&P's parent company McGraw-Hill (MHP), said that S&P needs an "independent oversight figure" who can navigate the business through "an increasingly complex global regulatory environment and heightened public focus."
Peterson is described by current and former Citi employees as extremely methodical and process-oriented, traits that speak to his roots as a math major at Claremont McKenna College. And he is extremely well liked at Citi. He is known for not making enemies at a bank that, like many Wall Street firms, has long had an entrenched political culture complete with fiefdoms, cliques, and power struggles. And he has want Banga calls a high EQ. "He is always polite, even when he doesn't agree with you," Banga says.
"Doug's enthusiasm and great nature have made him a mentor and friend to many over the years," Gene McQuade, the CEO of Citibank, wrote in an internal memo that was circulated announcing Peterson's departure.
Citi hired Peterson in 1985, fresh from Wharton's MBA program, and he worked his way up from corporate banking role in Argentina to country manager in Costa Rica and then Uruguay. (He met his Argentinean wife, with whom he has two sons, while working in Latin America.) After Citicorp and Travelers merged in 1998, Peterson oversaw the integration of their respective audit teams. He was then appointed chief auditor of the combined group in 2001.
But whether Peterson will be a success at S&P is still up for grabs, in large part because the business is in flux. Even if he can help repair S&P's credibility, he must work through investigations and lawsuits that could drag on for years. The results of these legal actions could greatly change the landscape for ratings agencies and their legal liabilities vis-a-vis ratings.
Regulators and politicians are also working to take ratings out of regulations, which would be another game changer for S&P. Rules governing the fixed income securities that banks and institutional investors can hold, and in what amounts, rely on credit ratings. And the only ratings that count are those from Nationally Recognized Statistical Rating Organizations (NRSROs), of which Moody's, Fitch, and S&P are the dominant global firms, giving them a pseudo-regulatory role and a sea of customers who must use ratings. (New York Times columnist Thomas Friedman famously told Jim Lehrer that there were two superpowers in the world -- the United States and Moody's.) Even S&P's outgoing president Deven Sharma told Fortune that regulations should not mandate the use of ratings.
Taking ratings out of the system could greatly decrease the power and influence that the big three ratings firms have over Wall Street, and possibly impair their earnings power. But that sort of mass overhaul still seems a long way off, points out ratings watchers like Larry White, a professor at NYU's Stern School of Business.
While Peterson is inheriting a difficult situation at S&P, the move could prove very lucrative for him. No succession plan has been announced, or even speculated upon, for McGraw-Hill's 62-year-old CEO Terry McGraw. It is possible that Peterson would be a possible successor. After all, he would be running the company's most lucrative division, and has a broad array of managerial experience at a massive organization.
Moreover, Jana and Ontario Teachers are pushing for a break up of McGraw-Hill into four separate businesses: education, media, indexes, and ratings. If S&P is spun off, Peterson would suddenly rise from respected division head to the chief executive of a standalone, influential, and highly profitable Wall Street firm. (McGraw has balked at the idea of so drastic a move.) If Moody's, which was spun out of Dun & Bradstreet in 2000, is any indication, S&P shareholders could stand to reap the benefits of a split. Moody's shares rose nearly 40% a year after their initial public offering. Five years later, the stock had tripled. The value of executive stock options soared, enriching executives.
S&P and Moody's don't agree on the creditworthiness of the United States. Is their dispute unusual?
Standard & Poor's on Friday night slammed the U.S. economy and its political system, lowering the nation's AAA credit rating for the first time in history. Rival credit rating agency Moody's dissented, reaffirming its Aaa rating while placing the country on negative credit watch.
Some analysts have been making hay of the discrepancy, particularly as a MOREDan Primack - Aug 8, 2011 10:46 AM ET
Political gridlock and fiscal bloat aren't the United States' only problems.
Those are the issues that prompted Standard & Poor's to raise a red flag over the U.S. credit rating Monday, certainly. But there's a third factor worth considering: the risk that the U.S. economy could crash, bringing down the financial sector yet again and forcing everyone but Jamie Dimon (right) and Lloyd Blankfein to dig deep into their pockets to prop it MOREColin Barr - Apr 18, 2011 2:22 PM ET
Don't look now, but the rating agency just issued a report with this headline:
Municipal Risk For Rated U.S. Banks Appears To Be Contained
You might have thought no one in the financial markets would ever use that word with a straight face after Fed chief Ben Bernanke's March 2007 testimony before Congress on the subprime crisis. As you may recall, he said [emphasis is mine]:
Although the turmoil in the subprime mortgage market has MOREColin Barr - Mar 31, 2011 2:29 PM ET
Credit ratings agencies play a significant role in whether or not a company -- or a country -- falls into fiscal catastrophe. For now, they're all leaving Japan alone.
The three largest credit rating agencies have said that it's too early to decide whether the recent earthquake will lead to downgrades for Japanese sovereign debt. Fitch rates Japan AA, S&P AA-, and Moody's Aa2 and all three will remain unchanged for now.
The MOREKatie Benner - Mar 16, 2011 12:34 PM ET
Even stock market bulls are feeling a little cowed by the events in Japan – though not to the point where they are pulling in their horns.
One of the loudest voices for a stock market rally, David Bianco of Bank of America Merrill Lynch, trimmed the low end of his expected first-half trading range for the S&P 500, saying the catastrophe in Japan raises the chances U.S. companies won't hit MOREColin Barr - Mar 16, 2011 10:24 AM ET
Cleaning up the mortgage mess isn't getting any cheaper.
The banking industry could find itself picking up a $60 billion tab for souring home loans, Standard & Poor's Ratings says in its latest report on so-called mortgage putbacks.
When S&P last looked at the issue in November, it said the six biggest U.S. lenders faced $43 billion in mortgage-repurchase costs. That was itself up from July's estimate, which held that the leading MOREColin Barr - Feb 8, 2011 12:48 PM ET
The ubiquitous Wall Street analyst hopes to launch a ratings agency, hiring up to 650 analysts at an average salary of $225,000. But what about her methodology?
When Meredith Whitney said last fall that she would build a rating agency to rival the Standard & Poor's/Moody's duopoly, the news was accompanied by few details.
The prominent analyst said her firm, Meredith Whitney Advisory Group, currently provides ratings (on a subscription basis) comparable MOREKatie Benner - Feb 3, 2011 11:51 AM ET
In the nothing succeeds like failure department, Moody's is up 7% today on news that it cashed in big time on Wall Street's fourth-quarter bond-peddling boom.
Moody's (MCO) raised its 2010 earnings forecast by 9%, citing "robust fourth quarter bond market issuance benefiting Moody's Investors Service, and accelerated completion of software projects for customers of Moody's Analytics."
With Thursday's rally, both Moody's and McGraw-Hill (MHP), the operator of the rival rating agency MOREColin Barr - Jan 6, 2011 12:18 PM ET
Contrary to what you might have thought over the past week or two, every country in Europe isn't in danger of an imminent downgrade.
So says Standard & Poor's, which affirmed France's triple-A rating Thursday. The rating agency cited French belt-tightening progress and a political environment that it says is "stable and oriented toward prudent economic policies."
The rating agency said it expects the economy to grow slowly but surely in 2010 MOREColin Barr - Dec 23, 2010 2:47 PM ET
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