S&P downgrade proves absurd as investors prefer assets in U.S.

NEW YORK ― Four months after Standard & Poor’s stripped the U.S. of its AAA credit rating and said the world’s biggest economy was no longer the safest of borrowers, dollar-denominated financial assets are doing nothing but appreciating.

Government bonds have returned 4.4 percent, the dollar has gained 7.6 percent relative to a basket of currencies, and the S&P 500 Index of stocks has rallied 1.7 percent since the U.S. was cut to AA+ from AAA on Aug. 5. The cost for the nation to borrow has fallen to record lows since S&P said the U.S. was no longer risk-free, with the average monthly yield in November on 10-year notes below 2 percent for the first time since 1950.xxDemand for American assets is increasing as consumer confidence, manufacturing and employment show the U.S. is strengthening as Europe struggles to save its currency union and the developed world weakens. U.S. gross domestic product will expand 2.19 percent next year, compared with 1.55 percent for the Group of 10 nations, Bloomberg surveys of economists show.

“The U.S. is our favorite market,” Hiromasa Nakamura, a bond investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of about $42 billion, said in a telephone interview. “The level of debt is high but I think they will deal with it,” he said. “Financial dislocations are continuing and investor money is flowing to the reserve currency, the U.S. dollar.”

When it lowered the U.S. rating, S&P, the world’s largest provider of credit analysis, said the failure up to then of Democrats and Republicans to agree on budget cuts made the U.S. less creditworthy, downplaying the country’s ability — unlike individual European nations — to print as much money as it needs to pay its debts. Congress cleared a $1 trillion spending bill on Dec. 17 that lawmakers called a bipartisan compromise.

“It is the ability to print one’s own currency to pay government bond investors back under any circumstances that makes a government bond a government bond, i.e. a (credit) risk- free asset for hold-to-maturity investors,” Elga Bartsch, the chief European economist at Morgan Stanley in London, said in a report this month to clients.

Investors have looked past S&P’s warning even as government borrowing surpasses $15 trillion for the first time and the budget deficit exceeds $1 trillion for a third year.

SEC finds failures at credit raters, including Standard & Poor’s, Moody’s, Fitch

WASHINGTON ― Securities and Exchange Commission staff found “apparent failures” at each of the 10 credit rating agencies they examined, including Standard & Poor’s, Moody’s, and Fitch, the agency said on Friday in its first annual report on credit raters.

The SEC sent letters outlining the staff’s concerns to each of the ratings firms and demanded a remediation plan with 30 days, an agency official said in a conference call with reporters.

The SEC staff said concerns include failures to follow ratings methodologies, failures in making timely and accurate disclosures and failures to manage conflicts of interest.

The SEC’s report was required by last year’s Dodd-Frank financial oversight law.

The staff report did not single out by name any credit-rating agency for questionable actions, but it did describe specific problems it found.

Two of the three largest firms, for example, did not have specific policies in place to manage conflicts of interest when rating an offering from an issuer who is also a large shareholder of the firm.

The industry is dominated by Moody’s Corp, McGraw-Hill Cos Inc’s Standard & Poor’s and Fimalac SA’s Fitch Ratings.

One of the large firms, the report said, did not have effective procedures in place to prevent leaks of ratings before they are published, the report said.

One of the three firms also failed to follow its methodology in rating certain asset-backed securities, was slow to discover, disclose and fix the errors, and may have let business interests influence its mistakes, the report said.

The report said the SEC has not determined that any of the findings constituted a “material regulatory deficiency” but said it might do so in the future.

“We expect the credit rating agencies to address the concerns we have raised in a timely and effective way, and we will be monitoring their progress as part of our ongoing annual examinations,” said Norm Champ, deputy director of the SEC’s Office of Compliance Inspections and Examinations.

Congress first empowered the SEC to closely regulate ratings firms in 2006, and the Dodd-Frank law gave the agency even greater powers over the industry.

Credit raters have been widely criticized for fueling the financial crisis by giving top ratings to subprime mortgage securities that collapsed in value as the housing market cooled.

On Monday, McGraw-Hill disclosed that the SEC might charge its S&P unit with breaking securities laws over ratings it gave a package of securitized mortgages in 2007.

SEC Enforcement Director Robert Khuzami told Reuters this week that the agency faces hurdles proving wrongdoing at credit-rating agencies, pointing to the complexity of the cases and the industry’s strong legal defenses. But he added that it would not stop the agency from probing possible misconduct.

S&P replaces president with Citibank exec after U.S. downgrade

NEW YORK ― The chief of Standard & Poor’s will step down next month, to be replaced by a senior Citibank executive, in a move announced a few weeks after the credit rating agency downgraded U.S. government debt and sparked a row with Washington.

S&P’s parent, McGraw-Hill Companies Inc, said on Tuesday that Deven Sharma, who has served as S&P president since 2007, would step down on Sept. 12, to be succeeded by Citibank chief operating officer Douglas Peterson.

“S&P will continue to produce ratings that are comparable, forward looking and transparent,” McGraw-Hill said in a statement, adding that Sharma would work on a strategic portfolio review for the group until leaving at year-end.

The U.S. downgrade on August 5 helped lead to the biggest sell-off in share markets since the global financial crisis three years earlier and sparked a row with the U.S. Treasury over some of the agency’s calculations in arriving at the new rating.

The U.S. Justice Department is also investigating the ratings agency over its actions on mortgages leading up to the 2008-2009 crisis, a source familiar with the matter told Reuters last week.

But The Financial Times, which first reported the news of Sharma’s resignation, quoted unnamed sources on Tuesday as saying his departure was unrelated to the downgrade or the Justice Department investigation.

The board of McGraw-Hill Companies made the decision to replace Sharma at a meeting where it also discussed its ongoing strategic review on Monday, the Financial Times said.

McGraw-Hill directors and executives met on Monday with Jana Partners LLC, a hedge fund, and the Ontario Teacher’s Pension Fund to hear their arguments that the company should be broken up.