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Allegations have been raised against the rating agencies that they have been particularly slow in predicting Enron's ill fate. While the rating agencies defend themselves saying they have performed their duties, critics argue that they were lax.
Over the last few decades, credit rating agencies, by making information widely available at a low cost, have radically increased market efficiency. The rating agencies, with the help of their "extra investigative edge" are expected to read the financial pulse of the companies and convey the same to the investors. This, in turn, gives the investor an idea of the company's creditworthiness. As far as the company is concerned, credit ratings issued on a scale of AAA to D, should ideally explain the company's ability to borrow and the payment required to be made for availing it.
However, the business of rating agencies is unlike any typical one. The users of their product investors, financial intermediaries and other knowledge seekers do not pay the rating agencies and the payers are not the actual users. The company, whose information is disclosed, actually pays the rating agency. The authentication of the credit rating agencies regarding the company's credibility becomes relevant during the issuance of a financial instrument by the company, generally an IPO. As the price determination of the services provided by the credit rating agencies do not follow the usual rules of demand and supply, there are always possibilities of conflicts of interests. How the foray of the rating agencies into their core rating business, risk consulting and advisory services can sow the seeds of conflict has been discussed earlier. (Credit Rating Agencies: Risky Conflicts, Analyst, July 2001).
Of late, allegations have been raised against the rating agencies for not being prompt in identifying the Enron debacle. It has been opined by various people that had the rating agencies been quick in envisaging the company's bankruptcy, many investors would have saved themselves from burning their hands. Whether the conflicting interests of the big three credit rating agencies S&P, Moody's and Fitch, manifested itself in the form of being slow in signaling Enron's sad demise, is a controversial issue.
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