- The Washington Times - Thursday, March 21, 2002

Wall Street's top ratings firms yesterday said Enron Corp. executives lied to them to keep them from finding out about $4 billion in hidden debts that led to the company's collapse in the fall.

Under fire for failing to alert investors about the energy giant's impending bankruptcy, Moody's Investors Service and Standard & Poor's Corp. said they repeatedly asked Enron executives for information about Enron's numerous off-book partnerships, but the company did not tell them the truth.

"Day by day, it becomes ever clearer that Enron, far from providing anything like complete, timely and reliable information to Standard & Poor's, committed multiple acts of deceit and fraud," Ronald M. Barone, a managing director at the credit agency responsible for rating Enron, told the Senate Governmental Affairs Committee.

John Diaz, managing director at Moody's, said Enron provided the agency with what it called "kitchen sink" information about its partnerships in fall 1999, but it failed to disclose the existence of three of the partnerships that led to the company's downfall.

"We now know that material information was missing," he said, and "much of the information that was provided was inaccurate."

Legislators said the credit agencies, which gave Enron an investment-grade rating until four days before its Chapter 11 bankruptcy filing Dec. 2, should have been more aggressive in ferreting out information about Enron's complicated finances and did not do their duty to protect investors.

"None of the watchdogs barked," said committee Chairman Sen. Joseph I. Lieberman, Connecticut Democrat. "The credit raters despite their unique position to obtain information unavailable to other analysts were no more astute and no quicker to act than others."

Mr. Lieberman particularly faulted an Enron analyst at Standard & Poor's, who in two television interviews in October and November while the company was in a downward spiral vouched for Enron's creditworthiness and dismissed the serious accusations that had prompted a Securities and Exchange commission investigation of its off-book financings.

The confidence that the Standard & Poor's official placed in Enron at the time influenced other analysts on Wall Street to maintain a "buy" rating on Enron's stock, compounding the harm to investors, Mr. Lieberman said.

Given the rating firms' history of doing little to warn investors at critical times of crisis, Mr. Lieberman said, Congress is investigating whether they should be regulated. His concerns were echoed by SEC officials.

"Yesterday, the commission voted to commence a formal inquiry of rating agencies and their regulation," commission Chairman Harvey Pitt said separately in testimony before the House Financial Services Committee.

Commission member Isaac Hunt Jr. told the Senate panel, "It is an appropriate time and in the public interest to re-examine the role of rating agencies in the U.S. securities markets."

But the ratings firms portrayed themselves as victims, like everyone else. They said the company did not tell them about the Chewco and Raptor partnerships that concealed more than $1 billion in losses and forced Enron to restate its earnings in October.

In presentations Enron made about the partnerships to the ratings agencies in October 1999 and January 2000, company executives also failed to mention the financial interests that Chief Financial Officer Andrew Fastow and his deputy, Michael Kopper, had in those partnerships.

At the January meeting, Enron Treasurer Jeffrey McMahon went so far as to assert that Wall Street perceptions about the partnerships were wrong, Mr. Barone testified.

Mr. McMahon in his presentations to Standard & Poor's described as a "myth" rumors that the partnerships hid "massive amounts of debt." He added that undisclosed details of the partnerships would "not materially change the financial profile of Enron."

Fitch Ratings director Ralph G. Pellecchia said Enron portrayed the partnership deals as hedge transactions that shifted risks to sophisticated investors, and thus did not require full disclosure.

Since Enron already had $8 billion to $10 billion of debt that had earned it Standard & Poor's lowest investment-grade rating, Mr. Barone said disclosure of Enron's $4 billion in hidden debts would have had "enormous" implications for its rating.

Enron persistently sought a higher rating, but the agency insisted on rating it below other companies of its size, he said.

Moody's, in anticipation of yesterday's hearing, issued a report warning that more than 50 of the world's largest companies including Halliburton, Boeing and Pepco might find themselves in the same position as Enron if they fall into financial trouble.

Those companies could have their bank lines of credit canceled just when they need it, like Enron did in the days before its bankruptcy, because their credit contracts contain clauses that enable banks to opt out if the companies' financial condition worsens, Moody's said.


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