Standard & Poor's, the ratings company that downgraded theU.S. AAA credit ranking for the first time, will replace PresidentDeven Sharma with Citibank NA Chief Operating Officer DouglasPeterson.

Sharma, 55, will leave at the end of the year to “pursue otheropportunities,” S&P's parent McGraw-Hill Cos. said in ane-mailed statement. Peterson, 53, will take over Sept. 12 andSharma will work on the company's strategic review in themeantime.

S&P's Aug. 5 decision to reduce the U.S. credit rating toAA+ roiled global markets and boosted demand for Treasuries,sending the yield on the 10-year note, the benchmark for homemortgages and car loans, to a record low 2.03 percent. The NewYork-based company, which was blamed in an April Senate report forhelping fuel the credit crisis, was criticized by the world's mostsuccessful investor, Warren Buffett, who said the U.S. should be“quadruple-A.” The cut conflicted with Moody's Investors Serviceand Fitch Ratings, which kept their AAA grades.

“It looks like he's being helped out the door,” Noel Hebert, acredit strategist at Mitsubishi UFJ Securities USA Inc. in NewYork, said in a phone interview. “If it was a planned retirement,it should have been handled in a different way.”

$2 Trillion Error
S&P downgraded theU.S. even after Treasury Department officials told the firm it hadoverestimated future national debt by $2 trillion. The company saidthe error didn't affect its decision, and based its conclusion onthe U.S. government becoming “less stable, less effective and lesspredictable.”

S&P said the U.S. failed to meet targets for reducing thebudget deficit. “The fiscal consolidation plan that Congress andthe Administration recently agreed to falls short of what, in ourview, would be necessary to stabilize the government's medium-termdebt dynamics,” the company said in a statement after marketsclosed on Aug. 5.

The market value of global stocks tumbled by $7.6 trillionbetween Aug. 5 and Aug. 12, according to data compiled byBloomberg. The S&P 500 Index swung by at least 4.6 percent inthe four trading days following the change. Gold rose 5 percent.While S&P said the U.S. was less creditworthy, investorssnapped up Treasuries, driving up prices and sending yields torecord lows. Yields on the bonds fell 21 basis points to 1.174percent, according to Bank of America Merrill Lynch's U.S. TreasuryMaster index.

Belgium, New Zealand
Buffett, thebillionaire chairman of Omaha, Nebraska-based Berkshire HathawayInc. said the decision doesn't reflect any inability of the U.S. topay its debts.

Nobel Laureate Paul Krugman said there was no reason to take thedowngrade seriously. “In those rare cases where rating agencieshave downgraded countries that still had the confidence ofinvestors, they have consistently been wrong,” he wrote in an Aug.7 New York Times column.

S&P kept an A- rating on Iceland until Oct. 6, 2008, whenthe country's government was forced to guarantee all domestic bankdeposits after its currency plunged. The company reaffirmed its AAArating for Lehman Brothers Holdings Inc.'s financial products uniton Sept. 12, 2008, three days before the bank failed. It downgradedBear Stearns Cos. to BBB on March 14, 2008, two days beforeJPMorgan Chase & Co. agreed to buy the failing securitiesfirm.

Peterson, Sharma
The new rating puts theU.S. on the same level as Belgium, which hasn't had a governmentsince June 2010, and New Zealand, and above Japan and China. UnderS&P's definitions, debt rated AA+ is barely different from AAAsecurities and shows that a borrower's ability to “meet itsfinancial commitment on the obligation is very strong.”

U.S. Vice President Joe Biden told Bloomberg News in aninterview on Air Force Two on Aug. 22 that he was disappointed bythe downgrade “and pleased that they were the only outfit that didit.”

Peterson was approached by McGraw-Hill in March, a person withdirect knowledge of the talks said. He was chief executive officerof Citigroup Japan from 2004 to 2010 and was hired by the NewYork-based investment bank out of business school 26 years ago,according to an internal memo outlining his departure, whosecontents were confirmed by Shannon Bell, a Citigroup spokeswoman inNew York.

Company Split
Peterson, who has anundergraduate degree in mathematics and history fromCalifornia-based Claremont McKenna College and a MBA from theWharton School at the University of Pennsylvania in Philadelphia,began his career in Argentina as a corporate banker and becameCitigroup's country manager in Costa Rica and then Uruguay,according to the memo.

Sharma, who joined S&P in 2007 as the global credit crisiswas unfolding, will exit as McGraw-Hill faces mounting pressurefrom some of its shareholders to separate into four units. JanaPartners LLC and Ontario Teachers' Pension Plan, which together owna 5.2 percent stake, presented a plan Aug. 22 to split the group,saying it has “consistently underperformed its potential” and istrading at “a sizable discount.”

Since Aug. 5, the day of the downgrade, McGraw-Hill's shareshave lost 11 percent compared with a decrease of 6.3 percent forthe S&P 500 Index, according to data compiled by Bloomberg.McGraw-Hill's stock rose 0.1 percent to $37.04 yesterday.

SEC Scrutiny
The Securities and ExchangeCommission is scrutinizing the method S&P used to cut theU.S.'s credit rating and whether the firm properly protected theconfidential decision, a person with direct knowledge of the mattersaid Aug. 16.

Chief Executive Officer Terry McGraw said last month the companyis conducting a strategic portfolio review after announcing in Juneplans to sell its broadcasting group. Sharma will work on thereview until December.

In November, S&P was divided between McGraw-Hill Financialand the credit rating service. After the split, Sharma is “readyfor new challenges,” according to the statement.

Sharma holds a bachelor's degree from the Birla Institute ofTechnology in India, a master's degree from the University ofWisconsin and a doctoral degree in business management from OhioState University. He joined McGraw-Hill in January 2002 fromconsultants Booz Allen Hamilton, where he was a partner.

He was appointed president in August 2007, one month afterS&P started lowering its ratings for hundreds ofmortgage-backed securities, acknowledging that notes it originallydeemed safe were now worth little.

S&P's revenue grew 10.4 percent to $1.7 billion in 2010,from $1.54 billion a year earlier, Bloomberg data show.

“Since Sharma came in, he has done little to enhance thecredibility or reputation of the ratings agency,” Joshua Rosner, ananalyst at the New York-based research firm Graham Fisher &Co., said by phone. “Given the recent downgrades, it appears theiroperational management and ratings modeling have not beenmeaningfully strengthened.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.