Standard & Poor's, along with Moody's Investors Service and Fitch Ratings, downgraded billions of dollars structured transactions in the summer of 2007, resulting in a wave of criticism. So when Deven Sharma was named S&P president on Sept. 1 of that year, he kicked off a reform program that continues today.

The agency officially announced its reforms in February 2008. One of its first moves was to develop a rotation policy for ratings analysts who were seen as having developed overly cozy relationships with the companies whose debt they rated. Lead analysts for corporate ratings began rotating away from issuers every five years, while analysts leading structured ratings began rotations after reaching a defined level of issuance. "We looked to other industries for best practices, including different approaches for rotating personnel," said Edward Sweeney, an S&P spokesman.

S&P then began reviewing criteria and methodology for rating securities affected by the credit crisis, including RMBS, CMBS and CDOs, and generally made it more difficult for those types of securities to receive 'AAA' ratings, Sweeney said. Around the same time S&P split its analysts into essentially three groups: one that develops the ratings methodologies, another that applies them to rate bonds, and the quality review team that double checks the product. The "quality" team was a new, independent group with S&P's ratings business.

Additionally, for each rating S&P proceeded to define the level of economic stress the credit should be able to endure; for example, a single-B credit should withstand a normal economic environment but could be downgraded in a severe recession comparable to winter 2009. S&P also tried to make all of its ratings comparable to one another in terms of the risk they represent, whether for a Japanese covered bond or a Eurobond.

- John Hintze

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