The spectacular collapse of Enron Corp. has raised fresh questions about every fiber in the safety net woven over the years to protect investors from major losses. Among those drawing renewed scrutiny are the big credit-rating agencies, which provide investors with vital assessments of companies' ability to service their debts.

Critics say both Moody's Investors Service and Standard & Poor's Corp., the nation's dominant credit raters, failed to thoroughly scrutinize Enron and moved too slowly to lower the company's ratings.

Enron's demise also has revived larger questions that date back at least to 1975 and the agencies' failure to downgrade New York's debt before the city plunged into fiscal chaos.

Among the lingering concerns: Do the agencies act too slowly to be useful to investors? Do conflicts of interest call their judgments into question? Do they have too much unregulated power to drive companies, even nations, into financial ruin?

Robert Webb, a professor of finance at the University of Virginia, suggested rating agencies should move more quickly when they have access to information -- not available to ordinary investors -- that might indicate looming cash problems, such as those faced by Enron.

"There are instances where agencies may have a better sense of a company's situation than market participants have," Webb said. "In those instances, if the agencies moved a little more quickly, or made larger adjustments, the market would be better off."

That can be a tough call, though, because a downgrade itself can make a company's bad situation worse. A downgrade can trigger requirements that the company make accelerated payments to creditors -- as in Enron's case -- depleting it of cash. Or a downgrade can force big pension and mutual funds to sell bonds because they are mandated to hold only highly rated securities -- as happened in the case of New York City's default.

Still, outside of Enron's accounting firm, Arthur Andersen, the rating agencies probably had the greatest access to information about Enron's complicated financial arrangements. In general, companies tend to give credit-rating agencies access to documents not available to the general public in order to justify the highest possible credit rating. But there is no requirement that they divulge everything.

"By virtue of who they are, they are in a position to get more information than anyone else," said the head of bond trading at a major international financial firm who requested anonymity. "But did they really know the right questions to ask? The Enron situation does not paint them in a very favorable light."

Clifford Griep, chief credit officer at Standard & Poor's, defended his firm's performance, saying that while S&P did evaluate and rate some of Enron's off-balance-sheet entities, there was also "some off-balance-sheet activity we were not aware of." Griep said S&P analysts factored the debt from the off-balance-sheet activity they knew about into Enron's bottom line. And he noted that S&P never gave Enron more than a "BBB+" rating, meaning the firm has "adequate capacity" to meet obligations but could be weakened by adverse economic conditions or changing circumstances.

"I don't consider the Enron situation to be a failure by the ratings agencies," Griep said. "Enron was long regarded as a poster child for successful corporate innovation. A triple-B-plus rating, in light of all the accolades this company received, reflected a more realistic perspective."

Moody's Vice President Fran Laserson said her firm acted as swiftly as possible "in a situation that deteriorated precipitously."

Moody's did not downgrade Enron more quickly because until very close to Dec. 2, when Enron petitioned for bankruptcy court protection, it still appeared there was "a good possibility" that energy merchant Dynegy Inc. would go forward with a merger that could have saved Enron, she said.

Nancy Stroker, a managing director at Fitch Inc., defended her firm's performance, noting that it, like S&P, never rated Enron above BBB+. And she criticized Enron for withholding information on its complicated finances. "In hindsight, there were a lot of things they did not want us to know," she said.

Credit ratings are critical to financial markets in several ways. A company's or government's rating helps determine the interest rate it pays on its debt, thereby affecting the cost and availability of credit. Bond traders use ratings to price the debt. Stock investors look to credit ratings as a gauge of a company's financial health.

That gives the agencies sometimes brutal power. As Argentina's credit ratings dropped last year, the interest rate it had to pay to borrow on international markets skyrocketed, deepening the country's financial problems and political turmoil.

Enron's bankers were so worried about a downgrade that on Nov. 8, less than a month before Enron entered bankruptcy, former Clinton administration Treasury secretary Robert E. Rubin, now chairman of the executive committee at Citigroup, a major Enron banker, called Peter Fisher, Treasury undersecretary for domestic finance, and asked whether he thought it would be wise for Fisher to call the rating agencies and encourage them not to downgrade Enron. According to current Treasury officials, the two agreed such a call would not be a good idea.

In late November the agencies dropped ratings for Enron and several of its off-balance-sheet instruments to below investment-grade status, setting off a cascade of events that resulted in the company's bankruptcy filing Dec. 2.

Rating agencies use different grading systems to rank borrowers according to their ability to service their debt. They all have several levels of "investment grade," which generally means a firm is unlikely to default on its debt. Ratings below-investment grade indicate "junk" status, meaning investment is very risky.

Moody's began to scrutinize Enron for a possible downgrade on Oct. 16, the day the company reported a $638 million loss for the third quarter and reduced the value of its equity by $1.2 billion. On Oct. 29, Moody's dropped Enron to the middle of the bottom-tier of "investment grade" ratings. On Nov. 9, Moody's lowered the rating for Enron's commercial paper to "not prime," a below-investment-grade status. On Nov. 28, Moody's downgraded Enron to junk status. On Dec. 3, the day after Enron filed for bankruptcy protection, Moody's downgraded the company to a lower junk status.

S&P, meanwhile, had a BBB+ investment-grade rating on Enron as of Oct. 29, but downgraded its outlook to "negative" on that day. On Nov. 28, S&P downgraded Enron bonds to junk status, dropping the firm to B-, meaning that it might not be able to make payments to investors. On Dec. 3, it dropped the company to D, the firm's lowest rating.

Downgrading Enron debt below investment grade activated a series of "triggers" requiring the company to make cash payments to holders of its debt. In addition, the ratings trigger required Enron to pay back $690 million to a limited partnership as well as $3.9 billion to two off-balance-sheet trusts. Enron did not have the money and quickly wound up in bankruptcy court.

Moody's acknowledged shortly after Enron's bankruptcy filing that these triggers may defeat their purpose of protecting investors. Moody's warned in a December report that "investors who think they might be protected by a rating trigger in their respective agreements may well find -- as in recent cases -- that there is no protection because the trigger could potentially cause a default or bankruptcy adversely affecting ALL creditors."

When the agencies lower credit ratings they can swiftly seal the fate of a troubled company or city, drawing criticism from angry executives and government officials. But well before Enron they have been criticized for waiting too long to downgrade. That was true in 1975, when the SEC criticized the rating agencies for failing to make "diligent inquiry" into the depth of New York City's financial crisis.

To understand how the rating agencies gained such power, according to Lawrence White, a New York University business professor and an expert on the rating agencies, one must begin in 1909, when John Moody became the first person to issue ratings -- in his case for railroad-company bonds. The Poor's Co. began issuing bond ratings in 1926, followed by the Standard Co. in 1922 (Standard and Poor's merged in 1941). Fitch entered the trade in 1924.

In the 1930s, federal regulators began to require that banks pay attention to the ratings on bonds in their portfolios. Bonds with below-investment-grade ratings were to be avoided to protect deposits.

Until the early 1970s, the rating agencies made their money by selling publications, essentially charging investors for their analysis of corporate creditworthiness. But, according to White, the spread of low-cost photocopying made it too easy for the agencies' work to be shared by non-payers. In addition, the default by the Penn Central made bond issuers more eager to reassure investors. They were willing to pay the rating agencies to accomplish that goal.

But that left unaddressed the question of how to make sure an unscrupulous rating agency didn't offer triple-A bond status to whomever would line their pockets. That question remained open until 1975, when the Securities and Exchange Commission decided to begin using ratings to judge the quality of bonds bought and sold by brokers. So the SEC created an official appellation: Nationally Recognized Statistical Rating Organization, or NRSRO, to signify that a firm had demonstrated reliability in its judgments. Moody's, S&P and Fitch were immediately named NRSROs. But the SEC does not regulate the three big rating firms or perform regular checks on their performance.

The ensuing quarter-century also saw the creation of regulations requiring that large institutional investors, such as mutual and pension funds, keep only a very small portion of their assets in below-investment-grade debt. That meant that if companies, cities, the federal government or foreign governments wanted to tap the vast U.S. capital markets, they needed strong ratings from an NRSRO.

One result has been healthy profits for at least one of the rating agencies. Moody's reported net income of $185.5 million in 2000 and $153.4 million through Sept. 30 of last year. S&P and Fitch are subsidiaries of other companies, so their profits are undisclosed.

S&P's Griep said one thing the rating firms could do differently is clarify how they account for off-balance-sheet partnerships and more clearly lay out for companies what they expect in terms of financial disclosure.

Moody's, meanwhile, has sent inquiries to 4,200 firms seeking information about off-balance-sheet activity and partnerships that could be affected by a downgrade in a company's bond rating, a spokesman said. Those inquiries were first reported by the Wall Street Journal.

But outside observers say that barring new federal law, there is no guarantee that the efforts undertaken by the rating agencies to seek more information on off-balance-sheet activity or partnerships will prevent future Enron-like implosions.

The final post-Enron question many are asking of credit rating agencies concerns the potential for conflicts of interest. In addition to charging the companies for ratings, the agencies charge companies fees for advice on how possible corporate moves might affect their credit ratings. Critics say that structure could make rating agencies reluctant to downgrade companies.

Griep said the arrangement does not pose a conflict. "We have dedicated resources to be able to provide feedback," he said. "And, where the resources required are material, we do have incremental fees associated with that. I view it as routine part of business, not an advisory service." Dropping Grades The major rating agencies were slow to downgrade Enron's corporate debt. Oct. 16: Enron reports a $638 million loss for the third quarter, and its equity value falls by $1.2 billion. Moody's places all long-term Enron debt on review for downgrade. It continues to rate Enron long-term bonds Baa1, meaning the company is likely to meet obligations but faces some risk. S&P rates Enron BBB+, a rating similar to Moody's Baa1, and calls the outlook for the company "stable." Oct. 22: Enron acknowledges a Securities and Exchange Commission inquiry into a possible conflict of interest related to the company's dealings with partnerships run by Chief Financial Officer Andrew Fastow. Oct. 23: Enron CEO Kenneth L. Lay reassures investors in a conference call. Oct. 24: Enron ousts Fastow. Oct. 25: Fitch places Enron on a "credit watch negative" and rates its long-term debt at BBB+, a rating similar to S&P's BBB+. Oct. 29: Moody's downgrades Enron to Baa2, two notches above junk-bond status, and places the company's short-term debt on review. Oct. 31: Enron announces the SEC inquiry has been upgraded to a formal investigation. Nov. 1: S&P lowers Enron's long-term debt rating to BBB, two steps above junk-bond status. Nov. 5: Fitch drops Enron two ratings, to BBBÐ, just above junk-bond status. Nov. 9: Dynegy Inc. announces an agreement to buy its much larger rival Enron for more than $8 billion in stock. Fitch changes Enron's long-term debt status to "rating watch evolving" pending assessment of the Dynegy announcement. Moody's downgrades long-term Enron debt to Baa3, one step above junk. S&P downgrades Enron long-term debt to BBBÐ, one step above junk. Nov. 19: Enron restates its third-quarter earnings and discloses it is trying to restructure a $690 million obligation that could come due Nov. 27. Nov. 28: Moody's downgrades Enron long-term debt to B2, junk-bond status. Fitch lowers Enron long-term debt to CC rating, junk-bond status. S&P downgrades Enron to BÐ, junk-bond status, citing concerns about the viability of the merger agreement with Dynegy and the liquidity implications of the possible failure of that transaction. Dynegy backs out of Enron deal. Enron shares plunge below $1, with the heaviest single-day trading volume ever for an NYSE- or Nasdaq-listed stock. Nov. 30: S&P lowers long-term Enron debt to CC, the third-lowest rating. Dec. 2: Enron files for Chapter 11 bankruptcy protection and sues Dynegy for wrongful termination. Dec. 3: Moody's downgrades Enron long-term debt to Ca, its second-lowest rating. Fitch downgrades Enron to D, its lowest rating. S&P downgrades Enron to D, its lowest rating.