TESTIMONY OF DEVEN SHARMA
STANDARD & POOR'S
THE COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
UNITED STATES HOUSE OF REPRESENTATIVES
OCTOBER 22, 2008
WASHINGTON , Oct. 22 /PRNewswire/ -- Mr. Chairman, Mr. Ranking Member, Members of the Committee, good morning. My name is Deven Sharma . I am the president of Standard & Poor's ("S&P") and I am pleased to appear before you today. These are unprecedented times and I appreciate the opportunity to participate in the discussion today about the ongoing global credit situation as well as S&P's nearly century-long history of publishing ratings, the steps we are taking to improve our processes in light of recent events and our role in the financial markets. Hopefully, this and other important dialogues happening around the world will lead to actions that strengthen the effective functioning of the capital markets, which are so important to our economic growth.
We at S&P appreciate the seriousness of the current dislocation in the capital markets and the challenges it poses for the American and global economies. Let me state upfront that we recognize that many of the forecasts we used in our ratings analysis of certain structured finance securities have not been borne out. We have reflected on the significance of these events and are committed to doing our part to enhance transparency and confidence in the markets. We are making several changes in our business which I will discuss at greater length later in my testimony.
Most of the ratings that have been the subject of significant attention, including our ratings on securities backed by subprime mortgages, were issued prior to the second half of 2007. There have been a number of significant developments since then that bear on our rating process, including:
For many decades, S&P has effectively served the global capital markets with high quality, independent, and transparent credit ratings. Those ratings represent an opinion about the creditworthiness of issuers and their debt. They primarily speak to the expected likelihood of default, although they can include other factors such as recovery upon default. Credit ratings are useful to investors, but it is important to recognize and appreciate how they should be used. S&P's ratings do not speak to the market value of a security or the volatility of its price, and, critically, ratings are not recommendations or commentary on the suitability of a particular investment. We have long strived to make these limitations clear, but, as discussed in more detail below, recent events, including the apparent use of credit ratings by market participants in ways for which they were not designed, suggest the need for us to be even more aggressive in communicating with the market.
S&P has a long tradition of -- and a strong cultural commitment to -- integrity and professionalism. Our core mission is to provide the markets with quality, independent analysis. Three of the more important measures we employ to promote independence and analytical rigor are:
Market participants and regulators alike have observed that our ratings have historically performed remarkably well. We have been in this business for over one hundred years and studies on rating trends and performance, which are available on our Web sites www.sandp.com and www.ratingsdirect.com, have repeatedly confirmed that S&P's ratings -- whether of corporate debt, municipal bonds, structured finance, or the like -- have been highly effective in informing the markets about both deterioration and improvement in credit quality. That legacy -- which is our most valuable asset -- has been challenged by recent events.