Turmoil at Standard & Poor’s

Bloomberg reported today that Standard & Poor’s (S&P) president, Deven Sharma, will be leaving his post at the end of the year.

You never know for sure if a chief’s departure is politically-driven or voluntary, but the timing and details of this one definitely argue for the former. For example, his replacement will start in mid-September, whereupon Sharma will be assigned to a “strategic review” detail. Against the background of the nasty political fallout that followed S&P’s questionable downgrade of the U.S. government’s credit rating, it would appear that Sharma took a big gamble and lost.

And the firm’s recent actions under his leadership (in addition to its credit rating missteps under prior leaders) have tainted its reputation and credibility. In other words, they’ve done real damage to shareholders, employees, and other stakeholders, and possibly everyone who has been impacted by the USG downgrade.

Of course, in our view, the downgrade was a non-issue for markets. But if it enables or motivates U.S. policymakers to tighten when they shouldn’t be, then Sharma and S&P will be responsible for significantly more suffering that they are today.

As for its reputation, the damage done to can be seen in the scrutiny that recent whipsaw changes in S&P’s rating on Google’s stock are being subjected to:

Standard & Poor’s upgraded Google’s stock on Monday, giving it a “hold” rating, reversing its much-debated downgrade the prior week.

S&P had slapped Google with a Sell rating — the only such bearish call on the Internet giant’s stock among almost 40 analysts tracked by Thomson Reuters I/B/E/S — after a surprise August 15 announcement that it will buy Motorola Mobility Holdings Inc for $12.5 billion…

Shares of Google have fallen more than 10 percent from their closing price before the deal was announced, trading just a whisker below $500 in the afternoon, compared to the Dow Jones Industrial Average’s roughly 3 percent drop during the period.

But while several analysts adjusted targets on Google’s stock price following news of the deal, no other firm appears to have downgraded Google’s stock, according to Thomson Reuters data.

Another misstep? Doesn’t sound like it (emphasis added):

Scott Kessler, the head of technology sector equity research at S&P, said the sell-off in Google’s stock following the Motorola news had brought its share price down to the $500 target that he set for Google when he downgraded the stock.

“It’s very hard for us to say sell this stock when it’s trading below its target price,” Kessler told Reuters in an interview on Monday.

The fact that the back-to-back Google downgrade and upgrade came from S&P Equity, whose parent’s unprecedented downgrade of United States sovereign debt this month roiled global markets and prompted discussion, made the move all the more striking.

The fact that the moves came from S&P is probably the only reason anyone’s reporting on it!

Kessler acknowledged it was unusual to see a stock’s recommendation change so quickly. But he said the move was consistent with S&P’s approach to equity research.

“If we made a change to our fundamental commentary or the target price, that would understandably be a little curious,” he said.

And so what sounds like reasonable analysis and a second ratings change based solely on prive movements (markets have been extremely volatile of late) has to be explained to the media, most likely to several news outlets, costing people, teams, and departments at S&P time and resources.  

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