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Investors turn cool on the rating game

The Enron saga showed vividly how credit rating agencies can be key players in the endgame facing a stricken corporation. That's a disquieting role for the agencies, which present themselves as mere observers. But downgrades, by setting off forced selling, can push troubled companies over the edge. How did investors come to rely so heavily on ratings and what do they intend to do about it?

In the melee that surrounds the sinking of Enron, accusations continue to fly. Much of the criticism is aimed at a management team that seemed to see proper financial disclosure as an optional extra. But investors are also critical of the lack of early warning signals from the credit rating agencies. They are easy targets. True, Enron is - or was - a company whose dealings were of baffling complexity. But if anyone could have seen through the fog it was surely the agencies with their supposed hotline to the boardroom of each rated issuer. Most striking though is not the failure of Moody's Investors Service and Standard&Poor's to predict Enron's slide - arguably they were duped too - but the extent to which the agencies were drawn into the company's troubles. They were not detached, critical observers of the drama but participants in it.

As investigations into previous mis-statements of Enron's financial position began, and as it grasped at the hope of an acquirer coming to the rescue, its fate became inextricably bound up with its credit rating. Clifford Griep, chief credit officer at S&P explains: "We expected the deal with Dynegy to get done and we maintained the [investment grade] rating as long as we believed that."

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