“After the collapse of Enron, the nation’s rating agencies were hauled before Congress and over the coals by many who claimed they failed to warn investors of problems at Enron and dozens of other businesses. Now the same agencies are being criticized for just the opposite — that they are too quick to downgrade companies at the slightest hint of trouble, adding more turmoil to already volatile markets,” writes Leslie Wayne in today’s New York Times.

“If the pendulum had swung to an overly soft view of corporate health, critics now say the agencies have become too strict. ‘I’m stunned by how ratings agencies have switched from being docile to all of a sudden being proactive,’ said Jack Hersch, a partner in Cypress Management, a San Francisco hedge fund specializing in distressed securities. ‘And in doing that, they are creating problems where none may have existed.’ “

“Problems are just what the skittish markets do not want. When Vivendi, for example, announced a $12 billion loss last Wednesday for the first half of the year, Standard & Poor’s, a unit of the McGraw-Hill Companies, cut the company’s long-term corporate rating to junk and said further downgrades were possible. By day’s end, all the bad news pushed Vivendi’s shares down by an additional 25 percent.”

“Whatever the merits of the Vivendi decision, some investors say that actions by the ratings agencies are often too precipitous. ‘All of a sudden the markets are hitting air pockets, where bonds can drop 20, 30, 40 points right away,’ said Glenn Reynolds, chief executive at CreditSights, an independent research firm in New York. ‘A company can go from triple B to single B to default in short order. It comes from all the regulatory scrutiny they were under.’ “

“Christopher Mahoney, chairman of the credit policy committee at Moody’s Investors Service, defends his agency’s actions, saying that most ratings downgrades have been limited to two troubled sectors — telecommunications and merchant energy. Besides, he said, his firm had a responsibility ‘to call them as we see them,’ regardless of the consequences.”

” ‘We are not like a regulator who says soothing things at times of difficulty,’ Mr. Mahoney said. ‘We obviously bend over backwards not to be irresponsible. But that does not mean we can forebear. We are obligated to be honest about what our opinions are, even if our opinions may be disruptive. We don’t seek to be disruptive, and we appreciate that the corporate bond market is currently in turmoil.’ “

“In some cases, Moody’s has rated a company, only to downgrade it as little as two months later. ‘Some issuers have gone a long way in a short time frame,’ Mr. Mahoney said. ‘Obviously, we don’t like that.’ “

“Mr. Reynolds, of CreditSights, though, said swift downgrades could set off a “nightmare scenario” in which the downgrades become a self-fulfilling prophecy. Should a downgrade occur at a time when a company is refinancing debt, its borrowing costs would suddenly rise, further impairing its financial health. Banks, too, can change the terms of credit lines, demanding that downgraded companies pledge more assets or sell assets, potentially jeopardizing a company’s ability to regain financial stability.”