S&P testifies that Enron lied to ratings agencies

By Ronda Fears

Nashville, Tenn., Nov. 30 - Standard & Poor's analyst Ronald Barone testified before the U.S. Senate Committee on Governmental Affairs on Wednesday, basically saying that Enron Corp. officials lied to rating agencies about the state of its affairs.

"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 on Standard & Poor's, just as it did to many others," said Barone, who also is a managing director at S&P.

"On a number of occasions Enron made what we later learned were direct and deliberate misrepresentations to Standard & Poor's, relating to matters of great substance."

In order to gain a full understanding of Enron's use of off balance sheet partnerships, he said S&P requested a full description of Enron's special purpose vehicle activity. On two occasions - once in 1999 and again in 2000 - Enron made presentations to S&P that purported to be all of Enron's off-balance sheet affiliates. These presentations failed to mention many partnerships like Chewco, LJM1 and LJM2, he said, and S&P's requests for updates and further clarification of this information were not met in any meaningful way.

Citing news accounts, Barone said Enron failed to reveal some $4 billion in debt, instead calling them hedge instruments.

"For a company that actually showed between $8 billion and $10 billion in debt, the effect on Enron's book debt-to-total capital ratio of showing several billion more would have been enormous," Barone said.

"Had Enron told the truth about its financial condition during the ratings process, the impact on Enron's rating would have been significant. Had they been revealed, the clandestine dealings and obfuscatory disclosure practices conducted by Enron's management would have cast long shadows on the validity of Enron's credibility in general and its financial reporting in particular."

Barone strongly defended S&P's rating history on Enron, saying that Enron's BBB+ rating "was by no means the greatest vote of confidence a rating can bestow."

He said it placed Enron at the lowest category of investment grade ratings and was well below what Enron itself "repeatedly and unsuccessfully" sought from S&P. But, he added, even the BBB+ rating was predicated on deliberate misrepresentations made by Enron.

"At the heart of the process that leads to a rating is an unambiguous understanding between the company seeking the rating and Standard & Poor's: The company is obliged to furnish complete, timely and reliable information to Standard & Poor's and we, in turn, use that and other information we gather to assess creditworthiness," Barone. said

"But Enron did not keep, it did not begin to keep, its part of the well understood bargain."

Barone said S&P has always supported, and continues to support, any regulatory efforts aimed at enhancing transparancy and a better ratings process.

Fitch Ratings analyst Ralph G. Pellecchia also testified before the committee on Wednesday.

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