“America’s major credit-rating agencies are expected to try to explain at a Congressional hearing on Wednesday how they failed to detect more quickly the problems at Enron, with at least one firm saying that Enron executives explicitly lied about three partnerships that helped hide the debts that were instrumental in the company’s collapse,” writes Richard Oppel in today’s New York Times.

“The rating agencies, which publish reports that evaluate a company’s financial position and assign ratings to its debt that investors use to judge the risk of default, have come under sharp criticism for their performance. They continued to rate Enron’s debt as suitable for investment even as its financial situation deteriorated last November.”

“The hearing on Wednesday before the Senate Governmental Affairs Committee will be the first public forum at which the agencies have the opportunity to explain in detail the reasons for their evaluations of Enron. Other Congressional committees are investigating the issue and may hold hearings later. The chairman of the Securities and Exchange Commission, Harvey L. Pitt, also said last month that it was ‘looking at how rating agencies perform.’ “

“It is not clear whether the scrutiny will lead to significant changes in how rating agencies do business. But some lawmakers are already calling for legislation or regulation that would submit the agencies, now largely unregulated, to new controls that could include government audits of their performances.”

“On Wall Street, the major rating agencies — the Standard & Poor’s unit of McGraw-Hill; Moody’s Investors Service; and Fitch Investor’s Service — have long enjoyed a special status. They have a steady stream of customers because companies need credit ratings to raise money through debt offerings. In addition, many fund managers are barred from investing in bonds of companies that have not obtained investment-grade ratings. At the same time, companies seeking evaluations of their creditworthiness are allowed to give rating agencies detailed nonpublic financial information that other analysts are not privy to because of securities regulations, thus lending an additional imprimatur to the agencies’ evaluations.”

“But Congressional investigators want to know why the rating agencies did not downgrade Enron’s debt to below investment grade until days before it sought bankruptcy protection on Dec. 2. They also want to know whether the agencies received pressure from Wall Street investment bankers worried that a downgrade would jeopardize their loans to Enron and other business with it.”