Standard & Poor's president makes an abrupt departure

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The Independent Online

The president of Standard & Poor's, the world's biggest credit-rating agency, has stepped down with immediate effect amid growing controversy about the role that ratings agencies have played in the global credit crisis.

An S&P spokesman said the resignation of Kathleen Corbet, announced yesterday, had "absolutely nothing" to do with the turmoil in the markets. "Kathleen stepped down to pursue other professional opportunities and to spend more time with her family," he said. Her exit was nonetheless seen as the latest instance of a scalp claimed by the meltdown in credit markets.

The European Commission opened an investigation last month to determine if S&P and Moody's, two of the world's top ratings groups who worked closely with banks to rate the financial instruments now at the centre of the crisis, had conflicts of interest. Politicians on both sides of the Atlantic have lambasted the agencies for not sounding the alarm earlier.

At a speech in Tokyo, the German chancellor, Angela Merkel, said: "It is not acceptable that wrong risk assessment in one place has to be paid for by the entire global community ... If we look at how the mortgage crisis happened, we have often experienced that what was rated highly in the end turned out to be much more unstable."

The German government orchestrated a ¿24bn rescue for a pair of regional banks laid low by the crisis. The US Federal Reserve chairman, Ben Bernanke, pledged in a speech yesterday to "act as needed" to keep it from infecting the wider economy.

Critics argue that the agencies should have given stern warning of the dangers lurking in instruments like residential mortgage-backed securities, which are bonds that package up mortgage loans and use the repayments to pay investors. The market for such instruments exploded in recent years as banks eagerly bought up millions of US home loans, repackaged them and then sold them on.

They found a surfeit of willing buyers in the form of hedge funds and other large institutions, many of whom invested on the assumption that the bonds they were buying carried a certain amount of risk as implied by the ratings bestowed by the agencies. A wave of defaults on American "sub-prime" loans – those granted to borrowers with patchy credit histories – vastly undercut the value of many of these instruments, setting off a snowball effect that has spread throughout global debt markets and slowed the bloodstream of money markets to a trickle.

The S&P spokesman said that the agency began warning of default risks as long as two years ago. However, it did not carry out major downgrades until July, when it slashed the ratings of about 500 residential mortgage-backed securities. By then though much of the damage had already been done. S&P strained to point out that the downgrades it did only reflected about one per cent of the $563bn worth of residential mortgage-backed securities that it rated in the 15-month period between the last quarter of 2005 until the end of last year, when the market was at its most active.

Ratings agencies earn large fees for rating such bonds. That and their close relationships with the banks has led to the public questioning of whether they can be trusted as independent arbiters of value. The S&P spokesman vehemently defended the company's methods. He said: "As part of rating process, we engage in open dialogue with bond issuers so that we can make informed opinions. Reputation and integrity are our most valuable long-term assets, so it is in our utmost interest to make fair, objective and independent ratings opinions."

Ms Corbet was appointed president in April 2004. She has been replaced by Devan Sharma, an executive vice-president.