The Credit-Raters: How They Work and How They Might Work Better

Credit-rating agencies are the newest target of congressional ire over the Enron debacle. What's gotten Washington's attention is their failure to uncover the extent of Enron's weakening financial condition and the pace at which they downgraded the energy trader in the months prior to its implosion. Despite growing questions about Enron's ties to the private partnerships that proved its undoing, the agencies kept it at an investment-grade rating until just four days before it filed for bankruptcy on Dec. 2, 2001. At a Mar. 20 hearing, Senate Governmental Affairs Committee Chairman Joseph I. Lieberman (D-Conn.) suggested tougher regulation of the ratings industry may be needed. "Power of this magnitude should go hand in hand with some accountability," he said.

For years, the ratings agencies have wielded enormous quasi-governmental power. Federal securities law recognizes just three raters: Moody's Investors Service, a unit of Moody Corp.; Standard & Poor's, which is owned by The McGraw-Hill Companies, the corporate parent of BusinessWeek; and Fitch Inc.