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Friday, 1 February, 2002, 10:03 GMT
Heat grows on rating agencies
Enron, Houston
Who should have sounded the alarm bell for investors?
By BBC News Online's Orla Ryan

A suspicious mood has settled on Wall Street in the wake of the Enron bankruptcy.

The collapse of the company feted by investment bankers and politicians has led many to question why no one saw it coming.

As the US Congress debates the role of those who kept the energy giant company, attention is also turning to the credit-rating agencies.

The Enron collapse has highlighted the role of these agencies, who provide guidance to investors on a borrowers' creditworthiness.

"Lots of people were there at the time beyond auditors. There were rating agencies reporting up to a very short time before the collapse of Enron," Andersen UK's managing partner John Ormerod told the BBC's World Business Report.

While Andersen's excuses may seem lame, as the auditor tries to deflect attention from its own role, other critics are making similar noises.

Blame game

The analysis provided by rating agencies is influential in determining the interest rates that borrowers pay on their debt.

Rating agencies such as Moody's, Standard & Poor's and Fitch grade borrowers - both companies and countries - as to their creditworthiness.

Person outside Nasdaq marketplace
How much attention do markets pay to rating?

For much of October and November, Enron had been in financial difficulties but the major agencies only downgraded Enron to "junk" status on 28 November.

If they were doing their job properly, surely they should have acted sooner?

"They [Enron] had evolved from an energy company to a broker and as a result in the context of a financial institution or a broker that loses confidence, these things can happen relatively quickly," Fitch's chief credit officer Bob Grossman said.

His view - that they acted quickly in a fast-changing situation - is echoed by the other agencies.

Volatile markets and recessionary times means it is likely that future ratings changes will either be "more dramatic than in the past" or more sudden, he added.

Who knew what

Moody's dismisses suggestions they were in a better position to know than other analysts.

"Largely, the financial information on which we base our ratings is publicly filed information," Moody's Fran Laserson said.

"We also have meetings with the issuers, who may choose to share issues with us, it is up to them, they will choose their level of disclosure," she added.

The three big agencies have already indicated that they are looking at tweaking the way they do business.

Even as the job descriptions are being tweaked, Fitch's Bob Grossman is clear that agencies provide "leadership."

But in rumour-driven markets, prices rise and fall, and it can seem that rating agencies take their lead from traders, rather than the other way around.

"If they are only reacting to changes of risk that markets have already priced in, they become less useful," Bank of America's Juliet Sampson said.

The agencies - more highly visible than other analysts and hence more vulnerable to criticism - cannot be seen to be reacting to market whim.

Deja vu

The tricky point for the agencies is that we have been here before.

The rating agencies also faced criticism for acting too slowly at the time of the Asian and Russian crises.

Bank of America's Ms Sampson believes that country rating changes have less impact than before, partly due to "a loss of credibility in the last round of crises" in Russia and Asia.

For some investors, the agency's word is a rubber stamp and nothing else.

"Most city analysts don't think much of rating agencies is the truth of the matter they use rating agencies as an insurance device," one seasoned market watcher said.

"If things go sour, the pension fund adminstrator can say we checked with the rating agency and they gave it a clean bill of health, in other words it is not our fault."

See also:

10 Jan 02 | Business
Q&A: Enron's plight
29 Jan 02 | Business
Enron scandal at a glance
14 Jan 02 | Business
Audit giants called to account
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