McGraw Hill Rearranges The Deck Chairs

McGraw Hill (MHP) announced that the president of its Standard and Poor division has fallen or has been pushed onto her sword and has left the company. The New York Times reported that Kathleen Corbet, president of the credit rating company Standard & Poor’s, resigned after lawmakers and investors criticized the company for failing to judge the risks of securities backed by subprime mortgages.

She will be replaced by Deven Sharma, executive vice president for investment services and global sales. Ms. Corbet is leaving to spend more time with her family and her exit is not related to the current credit-market turmoil, a McGraw-Hill spokesman, Steven Weiss, said.

Why do companies even bother to say stuff like that. S&P laid out a lot of credit ratings which did not hold and they have some serious problems. Politicians are raising concerns, regulators scratch their heads and investors have lost money.

The credit rating system is broken and just replacing one top officer is not enough. Mr. Sharma will report to Harold McGraw III, chairman, president and chief executive officer of The McGraw-Hill Companies. He will now have a more global focus. But if the product is broken taking it globally will not help. The global gambit will only raise the problem up to higher levels.

New Credit Ratings are issued at one point in time. Just before investors are about to buy. Once you are in, revised credit ratings are more of a rear view mirror issue. Credit Ratings are available to anyone who cares to read them and therefore do not offer any advantage to any one investor group. So while there is justified criticism that the ratings were not downgraded in a timely fashion, the downgrade would not have been actionable. Once the risk has been repriced you are still in the same boat. Its the boat you no longer like if the truth be known.

The credit rating system did not protect the market from Enron and it certainly did not protect the market from sub prime slime. The credit rating system is inadvertently entrenched by regulatory requirement that requires investments to be within certain investment rating grades. The business is then automatically driven into a few rating agencies.

The market needs to do its own homework more frequently. Billions have been lost on so called investment grade or better credit. McGraw Hill cannot cover the tab so do not even bother to sue for negligence.

Most of the problems are with the so called exotic structured issues. Financial engineering is collapsing in onto itself. My suggestion is to adopt a higher level of caveat emptor and return to the basics. Blocking and tackling if you follow football. When you forget those skills you get creamed.