Credit-Rating Agencies: Enron Misled Us

Officials of Wall Street credit-rating agencies told Congress on Wednesday that Enron executives misled them about partnerships used to conceal massive debt. Senators criticized the agencies for not more closely questioning Enron's finances.

Two of the officials said Enron's former chairman, Kenneth Lay, called them when the energy trading company was seeking a higher credit rating. One reported calls to his agency from former Treasury Secretary Robert Rubin, a top executive of Citigroup, one of the banks that lent hundreds of millions of dollars to Enron, and from Richard Grasso, chairman of the New York Stock Exchange.

Nothing came of the calls, said John Diaz, a managing director of Moody's Investors Service, during testimony before the Senate Governmental Affairs Committee.

Leah Johnson, a spokeswoman for Citigroup, said later that investment bankers at Citigroup might have tried to include Rubin in a call to Moody's, but he was never connected.

Senators asked why the three big credit-rating agencies maintained high ratings for Enron even as its stock plummeted last year, up until four days before its bankruptcy filing Dec. 2. In a similar way, many Wall Street financial analysts recommended that investors buy Enron stock almost until it went under.

Another issue under debate after Enron's collapse is the role of accounting firms.

Harvey Pitt, chairman of the Securities and Exchange Commission, told a House panel Wednesday that legislative proposals being considered should not limit big accounting firms from providing consulting and other services to companies whose books they audit.

His predecessor, Arthur Levitt, and critics of the accounting industry have insisted that allowing accounting firms to do both auditing and consulting for the same clients creates potential conflicts of interest.

Lawmakers and regulators dissecting the biggest corporate failure in U.S. history are examining the role played by Moody's, Standard & Poor's and Fitch Ratings. Their grading of companies' creditworthiness is closely watched by the markets and can determine whether banks and other financial institutions invest in a company.

"You can put people out of business," Sen. Joseph Lieberman, D-Conn., the committee's chairman, reminded representatives from the agencies.

One of the questions that has arisen: whether the agencies' delay in lowering Enron's rating was due to pressure from investment banks that were trying to put together a merger with a rival energy company Dynegy to rescue Enron last fall.

The agency officials said the investment-grade rating that was retained for Enron was based on the assumption the merger would go through and would bring a cash infusion to Enron.

The complex web of partnerships, improperly buttressed by Enron stock, ultimately brought down the Houston-based company.

Moody's Diaz said Enron executives lied to his agency in the fall of 1999 about the partnerships. He said Enron was pushing for an upgrade of the rating of its long-term debt and gave Moody's information on its finances that company executives described as a comprehensive, "kitchen sink" disclosure.

"We now know that material information was missing" and that Enron failed to disclose the existence of three of the partnerships, Diaz said.

Furthermore, based on what has become known recently about Enron, he said, "Much of the information that was provided was inaccurate."

After Moody's reviewed the information the company provided, the agency upgraded the long-term debt in March 2000.

"I feel as if you weren't as aggressive as you should have been," Lieberman told the agency witnesses. "Why didn't you press harder for more information?"

Said Ronald Barone, a managing director of Standard & Poor's: "This was not a ratings problem. It was a fraud problem. ... We're not forensic accountants."

The Securities and Exchange Commission, which is pursuing a civil investigation of Enron and its former auditor, the Arthur Andersen accounting firm, also is examining the role of the credit-rating agencies.

SEC Commissioner Isaac Hunt told the committee that the market watchdog agency will examine thoroughly the role of the credit raters. Despite their power, the SEC allows them to police themselves.

In November, Citigroup's Rubin, Treasury secretary under President Clinton until mid-1999, called Treasury's undersecretary for domestic finance to seek his intervention on Enron's behalf. At the time, the rating agencies were poised to downgrade Enron's status.

Spokesmen for Lay and Grasso could not immediately be reached for comment Wednesday.