Credit-rating agencies, the independent securities analysts that pass judgment on a company's financial fitness, saw signs of Enron (news/quote)'s deteriorating finances by last May. But the agencies — Moody's Investors Service, Standard & Poor's and Fitch Ratings — did little to warn investors until at least five months later, long after more problems had emerged and Enron's slide into bankruptcy had accelerated.
The role of the rating agencies, which are unregulated and consider themselves publishers rather than self-regulating professionals like accountants or lawyers, has come under scrutiny since Enron filed for bankruptcy protection in December.
Some people involved in the Enron debacle have asserted that the rating agencies share some of the blame. Joseph F. Berardino, the chief executive of Arthur Andersen, told a House committee on Tuesday that Congress should examine the actions of the agencies, saying that they "played a significant role" in Enron's failure.
Also this week, Harvey L. Pitt, chairman of the Securities and Exchange Commission, testified that the agency was "looking at how rating agencies perform," given their "enormous impact on the stock market."
Yesterday, a government official who spoke on the condition of anonymity said that the S.E.C. was specifically interested in whether the rating agencies delayed lowering Enron's credit ratings because of pressure from investment bankers, who at the time were seeking to hammer out a merger to rescue Enron.
The rating agencies say they did not, and they have vigorously defended their actions, contending that their assessments of Enron's financial health accurately reflected the information they were given. That information, in the end, was deceptive, as Enron's subsequent disclosures and its restatements of its financial results make clear, the rating firms say.
"We're not advisers, and we're not insiders," Charlie Brown, general counsel for Fitch Ratings, said in an interview. "We don't have any special relationship with the companies we rate. It's unclear to us what anyone thought we ought to have done differently."
But officials of Moody's (news/quote), Standard & Poor's and Fitch also said that well before the general public suspected wrongdoing at Enron, they were aware that trusts related to Enron had made financial commitments which were tied in part to Enron's own stock price. These commitments, which could come into play in several ways, obligated Enron to pay large sums to investors in related trusts and partnerships.
The agencies knew about the commitments, and similar triggers in other financial vehicles related to Enron, because they issued ratings on the bonds and notes sold by the trusts, known as Osprey and Marlin.
The commitments required Enron to make huge payouts to investors in the trusts if certain events occurred. By May 5, Enron's stock price had fallen below $59.78, fulfilling one of two criteria that could require the company to repay $2.4 billion to investors in Osprey trust.
By Sept. 5, another stock-price trigger level, this one related to $915 million in debt owned by investors in the Marlin trust, was pierced when Enron shares fell and remained below $34.13.
Not until mid-October, however, did the three credit-rating agencies begin to warn investors of Enron's deteriorating condition, and not until Nov. 28, just days before Enron filed for Chapter 11 bankruptcy protection, did they lower their debt ratings below "investment grade." That action, when Enron's share price was below $4 and other companies had all but stopped trading energy contracts with Enron, met the second requirement, putting into effect the fatal clauses in the company's financial commitments.
Since Enron's bankruptcy filing, the rating agencies have weathered criticism that they were too slow to lower their ratings.
"We knew about the triggers," said Ronald M. Barone, a managing director in the utilities and energy group at Standard & Poor's. But the declines in stock price by themselves were not sufficient to cause the firm to lower its rating on Enron, he said.
"There were debt ratings on top deliberately so it would not be caught up in any overall market downfall," Mr. Barone said, adding that the quality of Enron's credit was the "ultimate trigger."
That said, Standard & Poor's, as well as Moody's and Fitch, has told investors that it now intends to pay more attention to the role that triggers play in a company's financial outlook. Although none of them claim that they did not know about the Enron triggers, the agencies have also called for companies that issue debt to be more diligent in disclosing the existence of triggers in their bond offerings.
Rating agencies are not regulated by the S.E.C., but their actions carry great weight in the financial markets. Many investment firms, including most mutual fund managers, make reference in their sales materials to the agencies' ratings. For example, most money market funds say they will invest only in notes that are rated at a certain, usually low, level of risk. Many mutual and pension funds are prohibited from owning or buying debt that is rated below a certain level.
While the three rating firms have vigorously fought any attempt by the agency to regulate their business, they do receive some special privileges. The rating agencies asked for and received an exemption from Regulation FD, a S.E.C. rule that restricts the selective disclosure of material of nonpublic information by companies with publicly traded securities.
This week, Mr. Pitt, the S.E.C. chairman, raised the possibility that the commission would look more closely at how the firms arrive at their ratings.
Representatives of the three rating agencies said they had not been contacted by the S.E.C. for information about their opinions on Enron's creditworthiness. But a government official who spoke on the condition of anonymity said the agency planned to assess whether anything changed in the procedures used by the agencies to rate Enron debt.
Specifically, the agency is interested in reports that Wall Street bankers put pressure on Moody's not to lower its rating while a possible merger between Enron and Dynegy (news/quote), a smaller competitor to Enron, was being discussed in early November.
Bloomberg News reported on Nov. 9 that senior officials at two investment banks had called Moody's that day after learning that the rating agency was planning to lower its assessment of Enron bonds to junk, or below-investment grade, status. The banks stood to earn millions of dollars in fees related to their advice to the acquisition partners.
Later that day, Moody's cut its rating on Enron's long-term debt, but it stopped short of demoting the bonds below investment grade. With its investment-grade status intact, Enron forestalled the activation of the financial trigger that would have made it liable for the large payouts and which also would have allowed Dynegy to back away.
A Moody's official said that any conversations it had with officials representing the investment banks that day were consistent with the rating agency's usual practices.
Fran Laserson, a vice president at Moody's, said that the more important point in its consideration of Enron's debt was that it was relying on information provided by the company. But, she said, "we're looking at a situation here where nearly everything provided to us was deemed to be unreliable."