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Borrowers Find System Open to Conflicts, Manipulation

At the Water Cooler

Because the major rating companies juggle tens of thousands of debt issues at any given time, many are given cursory attention, according to current and former rating analysts and those they rate. An analyst will cover as many as 55 borrowers at once. And in recent years, the credit raters say analyzing debt has become more complicated, involving more financial provisions.

"You can't monitor all those companies," one former rating analyst said.

About This Series

Unchecked Power: The world's three big credit-rating companies have come to dominate an important sector of global finance without formal oversight. The rating system has proved vulnerable to subjective judgment, manipulation and conflicts of interest, people inside and outside the industry say.
Moody's Close Connections
When Interests Collide
Graphic: The Rating Game

Shaping the Wealth of Nations: As more countries rely on the bond markets to raise capital, they have been forced to accommodate the three top rating firms. The credit raters often have more sway over foreign fiscal policy than the U.S. government.
Transcript: Post Writer Alec Klein
Smoothing Way for Debt Markets
Graphic: Moody's Expansion

Flexing Business Muscle: Lack of oversight has left the rating companies free to set their own rules and practices, which some corporations say has led to abuses. The credit raters have rated companies against their wishes and ratcheted up their fees without negotiation.
New Choices for Consumers
Graphic: Raters' Big Misses

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So why don't raters hire more analysts? "It would cut into their profitability," he said.

The credit raters say they have a sufficient number of analysts to cover companies throughout the world. Still, at Moody's at least, according to some current officials and former analysts, committee meetings on occasion are hastily arranged, include only two analysts and last minutes, or seconds.

"We had a colloquial term for that," said W. Bruce Jones, a former Moody's official who works for a small competitor, Egan-Jones Ratings Co. "We called it a 'water cooler rating.' "

One meeting that took only minutes involved Omnicare Inc., a supplier of pharmaceutical services to nursing homes, when it announced plans to acquire competitor NCS HealthCare Inc. in 2002, according to another former Moody's analyst.

As soon as the deal, worth more than $400 million, looked imminent, the analyst said he dropped into a supervisor's office and quickly explained that he assumed Omnicare would sell bonds to make the acquisition. As a result, he was going to put its rating on review for a potential downgrade.

He didn't need to explain why: By carrying more debt, the company would become a bigger credit risk. The supervisor promptly gave the analyst approval to proceed.

That was the committee meeting.

Within about a half-hour, the decision flashed to some 5,000 news services around the globe. About six months later, however, Moody's took Omnicare's credit off review. The company planned to use stock, not just loans, to buy its competitor. That meant Omnicare's debt wouldn't be as large as the Moody's analyst had anticipated.

McDaniel of Moody's said his company works diligently to provide well-researched ratings. "We treat the ratings committee process very seriously," he said, but added, "We don't want to waste people's time."

The rating companies said they already have strong internal controls designed to minimize mistakes or conflicts, including codes of conduct at S&P and Moody's.

Moody's, for instance, instructs employees to do nothing that "might, or might appear to, compromise the integrity" of the rating process. The credit raters say they also conduct ethics training in-house.

Still, some lawmakers -- Republicans and Democrats -- say the system is flawed. In a House hearing last year, Rep. Paul E. Kanjorski (D-Pa.) said the credit raters' failure to identify problems at WorldCom and other major companies "ultimately resulted in the loss of billions of dollars for American investors who little understood the true credit risks."

Staff researcher Richard Drezen contributed to this report.

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