John Chambers ’77, managing director of Standard and Poor’s Ratings Agency and the chairman of the Sovereign Ratings Committee—which downgraded the United States credit rating last August—visited campus last week as part of the Global Financial Crisis symposium. Chambers spoke at two events on Tuesday. He held an informal conference in the Career Development Center on how an English and Philosophy major got into the finance industry and gave a lecture in JRC 101 on the European crisis, entitled ”Dislocations in the Euro-area: A fiscal or external problem?”. Chambers sat down with the Scarlet & Black to discuss his background at Grinnell, his experience in finance, and the decision to downgrade the credit rating of the country.
You spoke earlier about your unique path into the financial industry. Could you tell me a little about what attracted you to the financial industry coming from your background in English, philosophy, and liberal arts?
The honest answer is that they were going to give me a job. So we should probably start with that. Back then I was working in a commercial bank and one of the attractions was that I was going to be doing international work and I always wanted to do international work. In fact, that’s what came about. In that initial job I went to twelve different countries in Europe and 60 percent different cities. That was a lot of fun. I got to use my French and I got to learn a whole different field of which I knew nothing about and that was fun in itself. And it wasn’t routinized.
I would have thought that your work would be more routine considering you’re doing the same job just in different countries?
All of the clients were a bit different. Part of what I did initially had an aspect of credit to it but also had an aspect of selling the bank’s products, which were clearing services—the bank acted as a clearing agent for European banks. I was selling those services. The bank had a pretty good market share, which always makes it easier. That was all fun. Back then, just as now, the world economic order was upended. You had very high inflation rates. Voelker came in and raised the policy rates to unheard of levels. The inter-bank offer rate exceeded 20 percent at one point. There was a lot of market turmoil and it was interesting to be—in a small way—in the center of that. And I was living in New York at that time; I love New York and it gave me an opportunity to live there.
Twenty percent seems absolutely mind boggling to me.
Well you have to think of it in terms of real rates. Real rates would still have been very high but they would have been 6 or 7 percent [stripping out inflation].
How did your non-financial background help you? How did it hinder you, considering the pretty complex issues facing you?
As I said at our conference today [at the Career Development Office], I was helped by the fact that I knew how to read, I knew how to write, I knew how to argue a position. It was extremely helpful to me that I learned French. The French department sponsored me for a language assistant job in France. If it hadn’t been for that, I’m sure I wouldn’t have gotten a job for a bank that was partly owned by a French and Belgian bank. In terms of the hindrance, it would have been easier going through the bank’s training program if I had a background in this stuff. But you know, you can learn all of this stuff. It’s not impossible to learn it.
You mentioned MBA executive courses but you’ve never taken a full-length Economics course?
Don’t confuse MBA courses and economics. I haven’t taken a normal MBA although I’ve taken executive MBA programs and I teach individual seminars at the Darden School [the business school of the University of Virginia]—individual classes within a seminar. But that’s a different [lower] order of magnitude than an economics degree. I don’t have an economics degree, no.
Could you speak a bit about the major financial decision that everyone was talking about last summer that downgraded of the U.S. credit rating. How did that decision happen—what was the process like for deciding the U.S. credit rating?
Our analysis breaks down into five areas: One is the political setting. One is the income and economic structure and the growth prospects. Another is the fiscal accounts, the debt stocks, the contingent fiscal liabilities. Another is monetary policy. The last is the external accounts—the balance of payments and the international investment position [IIP]. Parts of the U.S. credit profile haven’t changed that much. The external profile, if anything, has gotten a little bit better because the current account has narrowed and the IIP has more or less stabilized. If you look at the monetary policy settings, there’s very low inflation expectations; credibility of monetary policy is very high. The Fed successfully avoided a deflation trap. The U.S. is a high-income country and its growth prospects have been hurt by the damage done by the financial crisis but they’re still probably better than those of many other high-income countries. So it really came down to two areas and they’re related. Those would be the fiscal side and the politics. Aristotle used to talk about ultimate causes and proximate causes. The ultimate cause was the U.S. not having a medium-term fiscal framework that was credible, with no prospect of getting one. We had the Bowles-Simpson Committee [the National Commission on Fiscal Responsibility] deliver what I thought was a robust plan and this administration distanced itself from it. That was a lost opportunity. After that, along with the budget that came down in February of that year, we went to negative on the outlook and indicated that over a year or so the rating could come down. At the time, we knew there might be problems with raising the debt ceiling but we never imagined that they would reach the proportions that they did in the summertime. Which led us to go on Credit Watch in the middle of July and then the downgrade in August. The government came within about eleven hours of a major cash-flow problem. This simply doesn’t happen with AAA governments that we rate. That revealed a level of dysfunction that we thought wasn’t compatible with an AAA-rating and that was the proximate cause.
How are your views looking back on that decision now, in terms of what happened afterwards and do you have a better outlook for the future of American politics?
We said at the time we thought the Budget Control Act would be respected. We had low expectations for the fiscal committee, having seen what went down with Bowles-Simpson, and that’s been vindicated. We do think the sequestration mechanisms will be respected although I’m slightly less confident about that now than I would have been a month ago. So that’s pretty much all in line with what we thought. The latest CBO [Congressional Budget Office] numbers have been revised to the worse, for the debt trajectory, even though the growth was a little bit better than what I thought it was going to be. Our assumption is that the Budget Control Act holds. So unless they really go out of the way to water it down, we have little expectation that much is going to move on the credit front between now and the election, regardless of who wins the election. Things can happen in November or December, again, regardless of who wins, in that funny interregnum you have between either the Obama administration’s first and second term or the end of the Obama administration and the Republican term. Some of those, in kind of a funny ad hoc way, could deliver some progress on the fiscal consolidation. So there could be upside surprises that could stabilize the rating at the AA+ level. But you could have downward surprises too, either self-inflicted or spill over effects from Europe.
I read that some countries have taken as long as 18 years to come back?
Australia is that one. And some countries don’t make it at all. Not all countries have come back. But some do.
Australia’s doing quite well right now.
They are but they never really had an external adjustment. So their external position is very weak, actually, which is a bit odd because they’re in the middle of a commodity boom. But the fiscal side looks quite strong. Although one thing we’ve learned from this latest crisis is that fiscal is just as often an output as an input.
Speaking of other countries. You said earlier that you’ve been to 92 countries. By my calculations if the Sovereign Ratings Committee analyses 128 countries, you’ve got 36 more to go.
Some of those were for my prior employers, but many of them were for S&P.
Are you going to try and make it to all 128?
I’d like to, but I can’t always convince others that that’s a good use of my time. I like going and seeing places I haven’t seen.
What’s next on your list?
I don’t talk too much about governments that we’re going to see that are in the ratings process, but I can tell you where I have public speaking engagements that would be in the public record. I’m giving a speech in Singapore on the 15th of March for the Investment Management Association of Singapore. In the beginning of April, I’ll be on a panel at the Boao Forum for Asia, which is China’s response to Davos. They’ve invited me for that. The speech I’m giving tonight has been adapted from a speech I gave in Beijing a couple months ago, which was translated in Chinese. I guess they liked the speech because they invited me to give another one at this conference.
Returning to Grinnell, we talk today about the 1960s and 1970s as being tumultuous times in the college’s history—times of major changes. What was it like to be here from 1973-1977?
I came in fall of ’73 and graduated in 77. The Vietnam War had already wound down, so a lot of the tumultuous times were related to the later years of the war. You might recall that the student protests didn’t really start in earnest until after the draft deferment was ended. And then of course things really spiraled out of control after Kent State. But those were things that were happening while I was in high school, not while I was here. When I came, I’m certain it was much easier to get in than it is now. Just about anybody who applied would have gotten in—that’s probably changed—although it was a self-selection process and a lot of people dropped out after the first year. The college had standards, after all. I suspect they weren’t that much different. The student body was smaller—we didn’t have these additions to North Campus, so it would have been maybe 75% of the size it is now. I suspect that the politics haven’t changed. It was very left then and I suspect it’s still very left now. The Iowa enrollment, because of those tumultuous years, had fallen off sharply. You had a lot of non-Iowans here, including me—I came from Kansas. Not all of the buildings were here. Darby Gym was here. The Physical Education Complex was here. You didn’t have the science center. The arts center was much smaller back then. The Forum was the center of the community.
Have you noticed any striking changes on campus besides new buildings?
Just from walking around, no, not really. I wouldn’t have much of a way of knowing. The college is in much stronger financial shape right now, thanks to the endowment. The ratio of tuition to overall expenses has probably deteriorated. Faculty relations are probably more harmonious than when I was here, because the faculty didn’t get along with the president at the time, A. Richard Turner. He got along perfectly well with the students, by the way, and he was a fine scholar, but the faculty didn’t like him, for probably entirely justifiable reasons. You can ask them about that. It was a great place to come. I came from a public school in Kansas, which was perfectly fine, but my real intellectual development was here. I got a lot of personal attention from profs, who would sit down and correct my papers, teach me how to write, teach me how to think, not humiliate me in front of other people when I would say something stupid, which I probably did fairly often. The proof of it is that I would have had 32+ classes here; I can probably name almost every professor I had. I went to Columbia to get my masters in English. I can name some of those profs, maybe a third, but of the rest–I’ve forgotten who they were.
That’s a great testament to Grinnell.
I think so.
