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83–604 PDF

" ! COMMITTEE PRINT 107th Congress

2d Session

S. PRT.

2003

107–83

ENRON’S CREDIT RATING: ENRON’S

BANKERS’ CONTACTS WITH MOODY’S

AND GOVERNMENT OFFICIALS

R E P O R T

PREPARED BY THE STAFF

OF THE

COMMITTEE ON GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

JANUARY 3, 2003

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

JOSEPH I. LIEBERMAN, Connecticut, Chairman

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

MARK DAYTON, Minnesota

FRED THOMPSON, Tennessee

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

THAD COCHRAN, Mississippi

ROBERT F. BENNETT, Utah

JIM BUNNING, Kentucky

PETER G. FITZGERALD, Illinois

JOYCE A. RECHTSCHAFFEN, Staff Director and Counsel

CYNTHIA GOOEN LESSER, Counsel

RICHARD A. HERTLING, Minority Staff Director

GARY M. BROWN, Minority Special Counsel

DARLA D. CASSELL, Chief Clerk

(III)

C O N T E N T S

Page

INTRODUCTION .................................................................................................. 1

BACKGROUND ..................................................................................................... 2

Moody’s Threatened Downgrade ..................................................................... 3

The Response to Moody’s Threatened Downgrade ......................................... 3

Calls to Government Officials Regarding Enron’s Credit Rating ................. 7

Robert Rubin’s Call to Peter Fisher ............................................................. 7

Calls to William McDonough ....................................................................... 12

CONCLUSIONS ..................................................................................................... 13

Influence or Pressure on Moody’s .................................................................... 13

Rubin’s Call to Fisher ...................................................................................... 14

Bankers’ Calls to McDonough ......................................................................... 16

APPENDIX

Appendix A: Memorandum from Peter Fisher to David Aufhauser, General

Counsel, Treasury Department, November 8, 2001 .......................................... 19

Appendix B: Memorandum from Jack Maskell, Legislative Attorney, American Law Division, Congressional Research Service, to Senate Committee

on Governmental Affairs, regarding Issues Concerning Post Employment,

Revolving Door Laws and Former Secretary of the Treasury, December

16, 2002 ................................................................................................................. 20

Appendix C: Memorandum from Jack Maskell, Legislative Attorney, American Law Division, Congressional Research Service, to Senate Committee

on Governmental Affairs, regarding Propriety of Informal Communication

from Private Regulated Financial Entity to the Federal Reserve Bank,

December 17, 2002 ............................................................................................... 24

(1)

1 In addition, the Committee’s Permanent Subcommittee on Investigations investigated and

held hearings with respect to the roles of Enron’s board of directors and financial institutions

in Enron’s collapse. 2 Committee staff interviewed Michael Carpenter, former Chief Executive Officer, Citigroup

Corporate and Investment Banking, and the Honorable Robert Rubin, Chairman of the Executive Committee and Member of the Office of the Chairman, Citigroup.

ENRON’S CREDIT RATING: ENRON’S

BANKERS’ CONTACTS WITH MOODY’S

AND GOVERNMENT OFFICIALS

INTRODUCTION

The collapse of Enron Corp. on December 2, 2001 devastated

thousands of its employees, many of whom lost not only their jobs

but also their retirement savings, as well as investors who watched

the value of their investment accounts evaporate. While corporations often fail, Enron’s collapse was particularly shocking and

problematic in part because of its size—it was then ranked as the

seventh-largest corporation in America—and in part because it appeared that its rather sudden downturn could be traced to widespread fraud at the company. In January 2002, the Senate Governmental Affairs Committee launched a broad investigation into that

collapse, focused on the role of government and other, private sector watchdogs, and what could have been done, if anything, to detect Enron’s problems or to prevent its failure.

The full Committee 1 has since held five hearings and produced

extensive staff reports, analyzing the roles played by key overseers

of Enron, including the Securities and Exchange Commission, the

Federal Energy Regulatory Commission, Wall Street equity analysts, and credit rating agencies. In connection with this investigation, questions have been raised about efforts by Enron’s bankers

to convince a credit rating agency, Moody’s Investor Service

(‘‘Moody’s’’), not to downgrade Enron, and to convince government

officials to intervene on behalf of Enron with Moody’s. The Committee received calls to investigate these matters in the wake of

certain press accounts, particularly those relating to a call regarding Enron that Robert Rubin, former Secretary of the Treasury,

made to Peter Fisher, Under Secretary of the Treasury for Domestic Finance.

Chairman Lieberman and Ranking Member Thompson responded

by asking Committee staff to determine what, if anything, was

done by Enron’s bankers to influence or pressure Moody’s on

Enron’s behalf, and particularly what, if anything, was done by

Enron bankers to obtain government intervention in aid of that effort. Majority and Minority Staff interviewed officials of Citigroup, 2

2

3 Committee staff interviewed John Rutherfurd, Chief Executive Officer, Moody’s Corporation,

and Debra Perry, Senior Managing Director for Corporate Finance-Americas and U.S. Public Finance, Moody’s Corporation. 4 Committee staff interviewed Lawrence G. Whalley, former President and Chief Operating Officer of Enron (though Mr. Whalley is no longer with Enron). 5 Committee staff interviewed the Honorable Peter Fisher, Treasury Department Under Secretary for Domestic Finance. 6 Committee staff interviewed William McDonough, President of the Federal Reserve Bank of

New York. 7See, e.g., Robin Sidel, Kara Scannell, and Rebecca Smith, ‘‘Enron Seeks Cash Infusion of $2

Billion,’’ Wall Street Journal, November 6, 2001. 8 John Emshwiller, Rebecca Smith, and Jonathan Sapsford, ‘‘Enron Taps $3 Billion From

Bank Lines In Pre-Emptive Move to Ensure Liquidity,’’ Wall Street Journal, October 26, 2001. 9 ‘‘Moody’s Downgrades Enron Corp. Long-Term Debt Ratings (Senior Unsecured to Baa2) and

Keeps Them Under Review For Downgrade,’’ Moody’s Press Release, October 29, 2001; ‘‘Enron

Corp.’’s Rating Lowered, Placed on CreditWatch Negative,’’ S&P Press Release, November 1,

2001; ‘‘Fitch Downgrades Enron to ‘‘BBB-’’; Maintains Rtg Watch Negative,’’ Business Wire, November 5, 2001. 10Staff Interview with Lawrence G. ‘‘Greg’’ Whalley, former President and Chief Operating

Officer, Enron Corp., October 29, 2002 (‘‘Whalley Interview’’). 11 Id.

Moody’s, 3 Enron, 4 the Treasury Department, 5 and the Federal Reserve Bank of New York 6 in an effort to reconstruct the pertinent

events. Based on its findings, Committee staff asked experts at the

Congressional Research Service (‘‘CRS’’) to assess the legality of

what had occurred. This report contains the findings of this investigation, and the conclusions of CRS.

Based on its investigation, Committee staff concludes that

Moody’s November 8, 2001 decision not to downgrade Enron’s credit rating below investment grade was not based on improper influence or pressure, but on new information presented by financial institutions and others that in Moody’s view changed Enron’s circumstances. In addition, based on its investigation and opinions

provided by CRS, Committee staff concludes that no improper influence was brought to bear by government officials on Moody’s,

and that the bankers who contacted government officials regarding

Enron and its credit rating, including Rubin, did not act contrary

to law.

BACKGROUND

The relevant events occurred during early November 2001. At

that time, reports abounded that Enron was seeking a substantial

equity investor or acquiror in order for the company to address its

liquidity problems.7 Enron already had drawn down its $3 billion

line of credit with its banks on October 25, 2001.8 By November 5,

2001, its credit rating had been lowered to just two notches above

‘‘junk’’ by Moody’s and Standard & Poor’s, and just one notch above ‘‘junk’’ by Fitch Ratings.9 The dividing line between a ‘‘junk’’ credit

rating and an ‘‘investment grade’’ credit rating was an important

one for Enron: as Enron’s former President, Greg Whalley, indicated in an interview with Committee staff, Enron’s ‘‘business

model [did not] exist below investment grade.’’ 10 In other words, its

investment grade rating was essential to its ability to enter into

agreements with counterparties in the context of its trading operation, one of Enron’s most profitable divisions; in addition, Enron

had ‘‘triggers’’ tied to credit ratings in a number of agreements

that, in the event of a downgrade, would have either constituted a

default or would have required Enron to post significant amounts

of cash collateral.11

3

12Staff Interview with Debra Perry, Senior Managing Director for Corporate Finance-Americas and U.S. Public Finance, Moody’s Corporation, October 30, 2002 (‘‘Perry Interview’’). 13Whalley Interview, at note 10 above. 14Perry Interview, at note 12 above. 15 Id. 16 Id. A ‘‘material adverse change’’ clause is a term in an agreement that gives certain or additional rights (e.g., such as the right to terminate) to a party to that agreement if a specific event

or events occur. In the case of Enron, the material adverse change clauses related to Enron’s credit rating. 17Perry Interview, at note 12 above. See also Staff Interview with Moody’s officials, including

John Diaz and Stephen Moore, March 8, 2002, described in Financial Oversight of Enron: The

SEC and Private-Sector Watchdogs, Report Prepared by the Staff of Senate Governmental Affairs Committee, S. Prt. 107–75, 107th Cong. (October 7, 2002) at 84, n. 404. (‘‘March 8, 2002

Moody’s Interview.’’) 18Perry Interview, at note 12 above.

Moody’s Threatened Downgrade

During this period, Enron was negotiating a possible merger

with Dynegy, Inc., another Houston energy company. On or about

November 5 or 6, 2001, Enron officials held a confidential meeting

with Moody’s to detail the terms of the proposed merger agreement, which was not yet public.12 Enron was planning to announce

the proposed merger on November 8, 2001.13 Jeffrey MacMahon,

Enron’s Chief Financial Officer, and Rob Doty, Dynegy’s Chief Financial Officer, along with other Enron personnel, made the presentation to Moody’s in a meeting that lasted approximately two to

three hours.14 Officials from Moody’s who attended the meeting included Debra Perry, Senior Managing Director for Corporate Finance; Pamela Stumpp, Chief Credit Officer for Corporate Finance;

Susan Abbott, Managing Director for Corporate Finance; John

Diaz, Managing Director for the Power and Energy Group; and Stephen Moore, primary analyst on the Enron credit.15

In her interview with Committee staff, Debra Perry stated that

she left the meeting believing that the business combination of

Dynegy and Enron could have been ‘‘engineered’’ in such a fashion

that the new entity could maintain a ‘‘marginal’’ investment grade

rating. Moody’s officials were concerned, however, that the merger

agreement presented to them contained too many ‘‘outs’’ for

Dynegy, principally in the form of conditions linked to ‘‘material

adverse changes’’ (‘‘MACs’’). These MAC clauses would have allowed Dynegy to terminate the transaction based upon, among

other things, a decline in Enron’s credit rating.16 Moody’s officials

were concerned that neither Dynegy nor the banks were sufficiently committed to the transaction, and they felt that Enron

could not sustain an investment grade rating without merging with

Dynegy. As a result, on the evening of November 7, 2001, Moody’s

convened a credit committee meeting, at which it was decided that

Moody’s would lower Enron’s credit rating to below investment

grade.17 Moody’s analyst Stephen Moore called Enron’s MacMahon

the next day, November 8, 2001, at approximately 8 a.m. Eastern

Standard Time, to inform him that Moody’s was planning to issue

a press release that day announcing the downgrade.18

The Response to Moody’s Threatened Downgrade

Enron had intended to announce its merger with Dynegy on November 8, 2001. Knowing that a downgrade in Enron’s credit rating

to below investment grade would end the transaction, however,

Enron decided to delay the announcement after Moore informed

4

19Whalley Interview, at note 10 above. 20Perry Interview, at note 12 above. 21 Id. 22 Id. Neither Harrison nor Lee were interviewed by Committee staff for this report, but counsel for J.P. Morgan Chase has confirmed the facts described in this report involving J.P. Morgan

Chase officials. 23Perry Interview, at note 12 above. 24 Id. 25 Id. No one from ChevronTexaco was interviewed by Committee staff for this report. 26Laura Goldberg, ‘‘Dynegy to Acquire Enron in $8.9 Billion Stock Deal; New Giant Moves

Out of Shadow,’’ Houston Chronicle, November 10, 2001. 27Perry Interview, at note 12 above. Around this time, there was speculation in the press that

Dynegy or ChevronTexaco might be willing to put additional capital into Enron, specifically to

avoid a downgrade that would threaten the viability of the merger. See, e.g., Richard A. Oppel,

Jr. and Andrew Ross Sorkin, ‘‘Enron Admits to Overstating Profits by About $600 Million,’’ The

New York Times, November 9, 2001.

MacMahon of Moody’s intended ratings action.19 Soon after

MacMahon received the call from Moore, MacMahon called Perry.

He asked when Moody’s planned to issue its press release announcing the downgrade, and told her that there was a material development of which Moody’s probably was unaware—that Enron might

be receiving up to $1 billion in additional equity—which he thought

might affect a ratings decision.20 Perry told MacMahon that Enron

could appeal Moody’s decision to lower Enron’s rating, but it had

to supply Moody’s with new and truly significant information, and

it had to do so immediately. MacMahon agreed, and Perry agreed

to halt the release pending the new information from Enron.21

Soon thereafter, at or about 8:30 to 8:45 a.m., Perry received a

call from James B. Lee, Vice Chairman of J.P. Morgan Chase, and

William Harrison, Chairman and Chief Executive Officer of J.P.

Morgan Chase.22 Harrison and Lee told Perry that they were working with Enron to address Moody’s concerns and requested a meeting with Moody’s. Perry agreed, but said such a meeting had to

take place right away. Not having heard further from J.P. Morgan

Chase by 11 a.m., Perry called Lee, who offered a meeting at 1 p.m.

that day at the bank’s offices.23 Perry told Committee staff that she

had never been contacted by such high-level bank officials with respect to the rating of another entity.24

At some point before the meeting at J.P. Morgan Chase, Perry

also received a call from the Chief Executive Officer and Vice

Chairman of ChevronTexaco, which owned just over one-quarter of

Dynegy.25 Under the terms of the merger agreement,

ChevronTexaco was to provide Dynegy with $1.5 billion to invest

in Enron at the outset, and then ChevronTexaco would infuse the

combined entity with another $1 billion after the closing of the

transaction.26 According to Perry, while ChevronTexaco executives

expressed strong ‘‘soft’’ support for the transaction, they stopped

short of saying that ChevronTexaco would provide any additional

financial support beyond its then current involvement.27

Meanwhile, John Rutherfurd, the Chief Executive Officer of

Moody’s, also was receiving calls relating to Enron on November 8,

2001. Sometime after 9 a.m., while on his way in to work in a taxicab, Rutherfurd received a call on his cellphone. Rutherfurd told

Committee staff that the person patching him into the call said the

call was from Robert Rubin, former Treasury Secretary and current

Citigroup executive, and Michael Carpenter, Chief Executive OffiVerDate 11-MAY-2000 10:29 Jan 14, 2003 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 83604.TXT SAFFAIRS PsN: SAFFAIRS
5

28Staff Interview with John Rutherfurd, Chief Executive Officer, Moody’s Corporation, October 30, 2002 (‘‘Rutherfurd Interview’’). 29 Id. Although a Citigroup spokesperson has acknowledged that Rubin was supposed to be

on this call, see Jonathan Weisman, ‘‘Returning Fire, Republicans Take Aim at Rubin,’’ Washington Post, August 4, 2002, in interviews with Committee staff, neither Rubin nor Carpenter

could recall Rubin’s involvement with this call in any way. Staff Interview with Michael Carpenter, former Chief Executive Officer, Citigroup Corporate and Investment Banking, November

13, 2002 (‘‘Carpenter Interview’’); Staff Interview with the Honorable Robert Rubin, Chairman

of the Executive Committee and Member of the Office of Chairman, Citigroup, December 3, 2002

(‘‘Rubin Interview’’). 30 Rutherfurd Interview, at note 28 above. 31 Carpenter Interview, at note 29 above. 32 Id. Carpenter said that he had final decisionmaking authority with respect to this financing,

although he consulted with Sanford Weill, and to a lesser extent, Robert Rubin, on the extension

of this credit to Enron. 33 Carpenter Interview, at note 29 above. Carpenter told Committee staff that his conclusions

about the effect of instability at Enron on the energy markets was not derived from a technical

analysis or expert opinion; he indicated that his conclusion was just ‘‘common sense.’’ 34 Rutherfurd Interview, at note 28 above; Carpenter Interview, at note 29 above. 35 Id. 36 Rutherfurd Interview, at note 28 above.

cer of Citigroup Corporate and Investment Banking.28 As the call

was going through, however, Rutherfurd recalled that he was told

that Rubin was unavailable and would not be on the line.29 Accordingly, Rutherfurd spoke only with Carpenter.30

Carpenter told Committee staff that until the Fall of 2001, he

had not had much contact or involvement with Enron beyond the

occasional senior management courtesy calls.31 After Enron’s problems started to emerge, however, his involvement increased. Although he could not recall attending any meetings with Enron directly, he was essentially the final decisionmaker relating to the

additional $600 million in financing to be secured by Enron’s subsidiaries’ pipelines, which was announced on November 1, 2001.32

Citigroup also was serving as an adviser to Enron with respect to

the proposed Dynegy merger. Accordingly, when he was notified on

November 8, 2001 about Moody’s intent to downgrade Enron’s credit rating, Carpenter was directly familiar with Enron’s situation.

Carpenter not only felt that a lowering of Enron’s rating would imperil the merger with Dynegy and seriously threaten Enron’s financial situation (although Carpenter said that he did not believe it

would send Enron into bankruptcy immediately), but he also was

concerned that any threat to the stability of Enron—a leading participant in the energy markets—would seriously disrupt those markets.33 Carpenter wanted to communicate to Moody’s that the decision it was about to make was therefore ‘‘critical,’’ and Moody’s

should ‘‘make sure’’ it was making the right decision.

In his call to Rutherfurd, Carpenter communicated these concerns.34 Rutherfurd told Carpenter that he did not handle ratings

issues, but would pass Carpenter’s concerns along to Debra

Perry.35 Rutherfurd also recalled telling Carpenter that Rutherfurd

did not believe that Carpenter’s concerns about Enron’s potential

effect on the energy markets was a consideration for Moody’s, but

rather an issue for the appropriate government agency to address;

Rutherfurd remembered telling Carpenter that if the government

had concerns about this, it could organize a ‘‘rescue’’ as it had for

Long Term Capital Management.36

After arriving at his office that morning, Rutherfurd spoke to

Perry, who told him about the meeting with J.P. Morgan Chase.

Rutherfurd asked if Carpenter also could attend the meeting, and

6

37 Id. 38 Id. Carpenter did not remember speaking to Rutherfurd again, but he did recall being invited to the meeting. Carpenter Interview, at note 29 above. 39Perry Interview, at note 12 above; Carpenter Interview, at note 29 above. 40 Id. According to Moody’s, the following people attended the 1 p.m. meeting. From Moody’s,

the attendees were Debra Perry, Pamela Stumpp, Stephen Moore, John Diaz (by phone from

Houston), and Mara Hilderman, a managing director at Moody’s, who also attended by phone.

From J.P. Morgan Chase, the attendees were William Harrison, James Lee, Henry Higbie,

James Ballentine, Patricia Caffrey, Christopher Wardell, and James Biello. From Citigroup, Michael Carpenter and Chad Leat attended. Perry Interview, at note 12 above. 41Perry Interview, at note 12 above. Enron appears to have had little, if any, involvement

in these talks; Whalley described Enron as a ‘‘bystander,’’ with the banks having taken over the

situation with Moody’s. Whalley Interview, at note 10 above. Perry said that banks frequently

provide credit rating advisory services to companies, and sometimes participate in calls and

meetings with rating agencies in that regard. Perry added, however, that high-level bank executives were never involved in these arrangements. In any event, Citigroup and J.P. Morgan

Chase were not, to her understanding, talking to Moody’s in this instance because they were

providing credit rating advisory services. Perry Interview. 42Perry Interview, at note 12 above. 43 Id. 44 Id. 45 Carpenter Interview, at note 29 above. 46Perry Interview, at note 12 above. 47Perry Interview, at note 12 above; Carpenter Interview, at note 29 above. Carpenter indicated that Citigroup had not given any consideration to making this infusion prior to his appearance at J.P. Morgan Chase that day. He told Committee staff that when he first arrived at their

offices, Lee and Harrison took him aside, told him of their intention to provide the additional

capital, and asked if Citigroup would do the same. Carpenter stated that this was ‘‘out of the

blue,’’ and without clear assurances about what Enron asset would support this financing, he

could not agree to the funding; he told them, however, that Citigroup would be open to contributing more capital. Carpenter Interview.

Rutherfurd recalled Perry saying that this would not be a problem.37 According to Rutherfurd, he then called Carpenter back and

invited him to the J.P. Morgan Chase meeting, which Carpenter

agreed to attend.38

The 1 p.m. meeting lasted approximately three hours, 39 with

representatives from Moody’s, J.P. Morgan Chase, and Citigroup in

attendance; no one from Enron was present at the meeting.40 Perry

told Committee staff that she had never attended a meeting such

as this relating to a rating, when the company being rated was not

represented, but the company’s banks were.41 Perry told Committee staff that prior to the start of the meeting, J.P. Morgan

Chase’s Harrison and Lee took her aside.42 She recounted that

Harrison warned about the systemic risk from an Enron collapse—

disruption in the energy and financial markets—and said that he

had spoken to William McDonough, President of the Federal Reserve Bank of New York, about the situation.43 Perry recalled that

she told Harrison that systemic risk issues were the government’s

problem, and if McDonough or any other government official had

concerns, they could contact Moody’s.44

According to Carpenter, Moody’s had a very long list of questions

for the banks, and wanted reassurance that Dynegy would close on

the transaction and that the banks were truly backing the merger.45 Perry said that she explained Moody’s concerns about the fragility of the merger due to the MAC clauses that allowed Dynegy

to terminate the transaction. She indicated that Moody’s was also

concerned that the litigation thresholds in the merger agreement

were too low.46 Perry told Committee staff that in response, J.P.

Morgan Chase indicated that it would contribute an additional

$250 million of capital into Enron, and Carpenter said he would

consider a similar cash infusion if commercially reasonable for

Citigroup.47 Soon after this meeting, Stumpp had a conference call

7

48Perry Interview, at note 12 above. 49 Id. 50 Id. 51 Id. 52 ‘‘Moody’s Downgrades Enron Corp. Long-Term Debt Ratings And Keeps Them Under Review For Downgrade,’’ Moody’s Press Release, November 9, 2001. Moody’s did not mention the

merger in the press release because it had not officially been made public; however, Moody’s was clear in interviews with Committee staff that the prospective merger with Dynegy was the

only reason Enron maintained its investment grade rating at this point. Perry Interview, at note

12 above; March 8, 2002 Moody’s Interview, at note 17 above. 53Perry Interview, at note 12 above; Rutherfurd Interview, at note 28 above; Rating the Raters: Enron and the Credit Rating Agencies, Hearing Before the Senate Governmental Affairs

Committee, 107th Cong., S. Hrg. 107–471 (March 20, 2002) at 28 (Testimony of John Diaz, Managing Director, Moody’s Investor Service). 54 Rating the Raters: Enron and the Credit Rating Agencies, Hearing Before the Senate Governmental Affairs Committee, 107th Cong., S. Hrg. 107–471 (March 20, 2002) at 28 (Testimony

of Ronald Barone, Managing Director, Standard & Poor’s, and Ralph Pellecchia, Senior Director,

Fitch Ratings). 55 Rubin Interview, at note 29 above.

with Dynegy officials in which they agreed to remove the MAC

clauses that concerned Moody’s and to raise the litigation thresholds in the agreement.48 Indeed, Perry told Committee staff that

Dynegy made every change to address Moody’s concerns and

seemed strongly supportive of a transaction taking place.49

Moody’s convened a credit committee meeting that evening to reconsider Enron’s rating based on the new information.50 The committee felt that the changes agreed to by the banks and Dynegy—

the removal of the MAC clauses, the raising of the litigation

thresholds, and the additional capital—represented a sufficient

commitment to the merger, and therefore a downgrade below investment grade was not warranted at that time.51 On November 9,

2001, Moody’s announced that it was lowering Enron’s rating to

Baa3, the lowest investment grade rating.52

Despite Perry’s recollection of Harrison’s mention of his conversation with McDonough, Moody’s representatives report that the rating agency never received any calls from government officials relating to Enron.53 The two other major credit rating agencies—Standard & Poor’s and Fitch Ratings—likewise have testified that they

never received any such calls.54

Calls to Government Officials Regarding Enron’s Credit Rating

While the bankers were talking to Moody’s, they were also reaching out to government officials about Enron. Committee staff’s investigation revealed calls from the bankers to two government officials: Peter Fisher, Treasury Department Under Secretary for Domestic Finance, and William McDonough, President of the Federal

Reserve Bank of New York.

Robert Rubin’s Call to Peter Fisher

Robert Rubin’s role at Citigroup, where he started in October

1999 as Chairman of Citigroup’s Executive Committee and Member

of the Office of the Chairman after leaving his post as Treasury

Secretary in July 1999, is at once limited and extremely broad.

Rubin describes his role as ‘‘minister without portfolio,’’ without

specific duties assigned to him.55 In other words, as Carpenter explained to Committee staff, Rubin is not ‘‘part of the operational

8

56 Carpenter Interview, at note 29 above. 57 Rubin Interview, at note 29 above. 58 Id. 59 Id. 60 Id. 61 Id. Rubin told Committee staff that in addition to running into Lay at a conference in

Shanghai and a few other chance meetings, Rubin also received two requests from Lay to serve

on Enron’s board of directors, both of which he refused. The first time was in 1999, either just

before or shortly after Rubin left Treasury. Rubin indicated that the request, which piqued his

interest somewhat because of Enron’s trading business and Rubin’s own background as a trader,

was one of 30 or 40 he received at the time, but he never seriously considered it, as Rubin was

interested in a board position with a major industrial company. Rubin said Lay also called to

ask him to join Enron’s board just after the company’s problems emerged in the Fall of 2001,

to help the company through the crisis. Rubin refused that request as well. The only other contact with Lay that Rubin could recall was a call from Lay in 1999, in which he asked Rubin

to meet with Lay’s son Mark regarding Mark Lay’s for-profit inner city investment organization,

in an apparent hope that Rubin would join the board. (Rubin serves as Chairman of the board

of a non-profit community development organization, so it is an area of interest for him.) Rubin

refused. Rubin Interview. In addition to Rubin’s recollections, records reviewed by Committee

staff in connection with its Enron investigation indicate that two additional contacts between

Rubin and Lay may have taken place. Documents reflect that a meeting between Rubin and

Lay was scheduled for July 27, 1994, while Rubin was serving as Assistant to the President

for Economic Policy and head of the National Economic Council. Documents also show that

Rubin and Lay both may have attended a meeting scheduled for August 4, 1997 with the President and a group of business leaders. 62 Rubin has maintained a friendship with Linda Robertson, who was the head of Enron’s government affairs office in Washington during the time period relevant here, but Rubin said that

he and Robertson did not speak of Enron business. Rubin Interview. 63 Rubin Interview, at note 29 above. 64 Carpenter Interview, at note 29 above. Rubin did not specifically recall this. Rubin Interview, at note 29 above. 65 Carpenter Interview, at note 29 above. Rubin told Committee staff that he recalled that

someone from Salomon Smith Barney asked him to make the call to Treasury, but he could not

independently recall who it was; when his counsel refreshed Rubin’s recollection by telling him

that Carpenter recalled making the request, Rubin thought that seemed correct. Rubin Interview, at note 29 above.

decisionmaking chain.’’ 56 Rubin, who sits on four committees at

Citigroup, said that he mainly gets involved in whatever major

issues on which his counsel is requested.57

In the Fall of 2001, Rubin did not have an independent relationship with Enron on behalf of Citigroup. He told Committee staff

that he was not aware of the level of Citigroup’s exposure to Enron

until Enron’s troubles began that fall.58 Rubin knew Ken Lay, having met him in or about 1992, when Rubin, then co-senior partner

of Goldman Sachs, was serving as Chairman of the Host Committee for the Democratic Convention in New York while Lay was

serving as Chairman of the Host Committee for the Republican

Convention in Houston.59 Others at Goldman Sachs urged Rubin to

reach out to Lay in this context for business development reasons,

and according to Rubin, he met with Lay once or possibly twice in

this capacity.60 Rubin recalled having a few more encounters with

Lay since that time, 61 but Rubin could not recall any other direct

interactions with Enron officials.62

Rubin’s involvement on matters relating to Enron began in the

Fall of 2001. He recalled attending two or possibly three meetings

about Enron, primarily concerning the $600 million in financing

Citigroup provided to Enron’s pipeline subsidiaries on November 1,

2001.63 In addition, in addressing Enron’s difficulties in the Fall of

2001, Carpenter told Committee staff that he occasionally consulted with Citigroup Chairman and Chief Executive Officer Sanford Weill, and, to a lesser extent, Robert Rubin.64 It was Carpenter who sought Rubin’s involvement in Enron’s credit rating difficulties on November 8, 2001.65

9

66 Carpenter Interview, at note 29 above. 67 Rubin Interview, at note 29 above. 68 Carpenter Interview, at note 29 above. 69 Id. 70 Id. Rubin did not recall knowing or having been told that Carpenter was planning to call

or had called William McDonough. Rubin Interview. 71 Carpenter Interview, at note 29 above. Rubin did not remember this call. 72Memorandum from Peter Fisher to David Aufhauser, General Counsel, Treasury Department, November 8, 2001 (‘‘Fisher Memo,’’ attached as Appendix A). 73Staff Interview with Peter Fisher, Under Secretary for Domestic Finance, U.S. Department

of the Treasury, October 28, 2002, November 19, 2002 (‘‘Fisher Interview’’). 74 Id. 75 Id. Rubin remembered that Fisher had called him about this, but did not recall when. Rubin

Interview, at note 29 above. 76During this time, Fisher, at the request of Tim Adams, Chief of Staff to Treasury Secretary

Paul O’Neill, had a number of conversations with L. Greg Whalley, then Enron’s President,

about Enron’s financial health and position in the markets. Fisher Interview, at note 73 above;

Whalley Interview, at note 10 above. Fisher’s marching orders, as he understood them, were

to obtain a clear picture of Enron’s financial situation from Whalley and form a view about

whether there was any role for Treasury to play. Fisher Interview. Fisher and Whalley had

about eight conversations during late October into November. Fisher Interview; Whalley Interview. Throughout this period, Fisher also spoke to a number of people on Wall Street and in

Continued

Carpenter remembered calling Rubin sometime on the morning

of November 8, 2001 to tell him about Moody’s intention to lower

Enron’s rating to below investment grade.66 Rubin recalled being

told that the concern was that a downgrade effectively would end

the possibility of the planned merger with Dynegy, which was supposed to stave off an Enron bankruptcy. Indeed, Rubin understood

that the downgrade itself probably would precipitate a bankruptcy,

since Enron was a trading company and counterparties would not

trade with a below-investment grade entity.67 Carpenter also remembered sharing his concerns with Rubin about the damaging

implications for the energy markets, financial markets, and possibly even the banking system if the company’s stability was endangered.68 According to Carpenter, he told Rubin that Citigroup

should alert the relevant regulators to the problem. To Carpenter,

this meant the Treasury Department and the Federal Reserve

Bank should be called.69 Carpenter said he would call the Federal

Reserve, but asked Rubin to call Treasury, as Carpenter did not

have any contacts there, and Rubin agreed to make the call.70 Carpenter called Rubin again before the 1 p.m. meeting at J.P. Morgan

Chase, but could not recall if he got through to Rubin, or if he did,

whether he told Rubin about the 1 p.m. meeting with Moody’s.71

On November 8, 2001, Rubin called Peter Fisher at approximately 2:30 p.m.72 Peter Fisher has known Rubin since approximately 1993, when Fisher was at the Federal Reserve Bank of New

York with responsibility for matters relating to foreign currency

and central banks and Rubin was Secretary of the Treasury. Fisher

recounted that he and Rubin participated in frequent telephone

calls during Rubin’s tenure as Treasury Secretary about emerging

issues in these areas.73 According to Fisher, he and Rubin have

had only occasional and, for the most part, casual contact since

Rubin’s departure from the Treasury Department.74

Fisher, however, had just spoken to Rubin a little over a week

before the November 8, 2001 call. Fisher called Rubin on October

31, 2001 to alert Rubin to the announcement by the Treasury Department that morning that it was halting the issuance of the thirty-year bond.75 As Fisher was monitoring Enron’s situation at the

time, 76 Fisher, aware that Citigroup was one of the banks with the

10

the business community to gauge their views of the situation. Based on these conversations and

his conversations with Whalley, Fisher formed a view that Enron’s collapse, if it were to occur,

would not have a systemic effect on the markets, and that the market had ‘‘priced in’’ Enron’s

problems into its stock price. Therefore, Fisher concluded that no action from Treasury was necessary. Fisher Interview. 77Fisher Interview, at note 73 above; Rubin did not recall that he and Fisher spoke about

Enron in that conversation. Rubin Interview, at note 29 above. Fisher was most interested in

whether the two sides were keeping an open line of communication. Fisher said that he called

Rubin again a few days later to get more information and an update regarding Citigroup’s comfort level with respect to Enron, but Rubin was not available and Fisher was transferred to another person at Citigroup (Fisher could not remember whom); although they had a fairly long

conversation, Fisher did not learn anything significant, except that Citigroup and Enron were

continuing their dialogue. Fisher Interview. Rubin did not remember or was not aware of this

call from Fisher. Rubin Interview. 78Fisher Memo, at note 72 above. 79Fisher Interview, at note 73 above; Rubin Interview, at note 29 above. 80 Rubin Interview, at note 29 above. 81 Id. Rubin indicated that he formed this view about the potential effect of instability at

Enron based on his extensive experience with respect to the workings of markets, and his understanding that Enron was a major market maker in energy. He acknowledged, however, that this

was just his view and was not based on any other expert’s opinion or analysis. Rubin Interview. 82 Id. 83 Id. 84 Id. 85Fisher Interview, at note 73 above. 86 Id. 87 Id.

most exposure to and involvement with Enron, recalled asking

Rubin about Citigroup’s comfort level with respect to that company’s fortunes. Fisher said that Rubin was ‘‘reasonably sanguine’’ about Enron’s situation at that point, indicating to Fisher that

Citigroup was in a ‘‘dialogue’’ with Enron, which Fisher interpreted

as a positive sign.77

The next time Fisher and Rubin spoke was on November 8, 2001.

Fisher returned Rubin’s call shortly after he received it.78 Their

recollections of the call are similar, although they both told Committee staff they have not discussed it since speaking that day.79

According to Rubin, he prefaced the call with a disclaimer that the

suggestion he was about to make was ‘‘probably a bad idea.’’ 80

Rubin said that he mentioned the potential detrimental effect an

Enron bankruptcy could have on the energy markets.81 Rubin then

told Fisher that Enron’s banks were considering infusing additional

capital into Enron, but that a risk of a credit rating downgrade had

emerged that would prevent this and might precipitate instability

at the company that would wreak havoc in the markets.82 Rubin

said that he then asked Fisher what he thought of this idea: that

Fisher might call the rating agencies and ask them to delay action

while the banks decided about the additional capital.83 Fisher refused, and Rubin replied that he thought that was probably the

right decision.84

Fisher’s recollection of the call, which he thought lasted approximately four minutes, was that Rubin told him of the potential

downgrade.85 Then, after Rubin offered the disclaimer that his suggestion was probably a ‘‘bad idea,’’ Fisher recalled that Rubin

asked what Fisher would think of contacting the rating agencies to

encourage them first to specify what would be needed to prevent

a downgrade, rather than simply going forward with the ratings action.86 Fisher said he told Rubin he thought that was a bad idea.87

According to Fisher, Rubin had indicated that there was a ‘‘nonpublic equity investor’’ involved, and Fisher told Rubin that the investor was better suited to make contact with the rating agenVerDate 11-MAY-2000 10:29 Jan 14, 2003 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 83604.TXT SAFFAIRS PsN: SAFFAIRS
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88 Id. 89 Id. When asked about the reference to this ‘‘non-public investor,’’ which appears also in the

Fisher Memo, Rubin did not have any recollection of mentioning this to Fisher, nor could he

discern to whom he might have been referring if he did reference such an ‘‘investor.’’ Rubin said

that the only parties he was aware of in the transaction in addition to Enron were the banks

and Dynegy. Rubin Interview, at note 29 above. 90Fisher Interview, at note 73 above; Fisher Memo, at note 72 above. Fisher said it was unusual for him to prepare such a memo. He said that he has only drafted memos like this one

three times before, and could not recall doing so after a telephone call. Fisher described the call

as ‘‘extraordinary,’’ and ‘‘worthy of note,’’ but he indicated that he did not view the call as inappropriate. He could not say why he was prompted in this situation to write the memo. 91Fisher told Committee staff that he had not reviewed the Fisher Memo in advance of the

Committee staff interview to refresh his recollection. Fisher Interview, at note 73 above. 92Fisher Memo, at note 72 above. This does not shed light on who the ‘‘investor’’ could have

been, as both the banks and Dynegy had ‘‘conversations’’ with Moody’s that afternoon. 93 Id. 94Fisher Interview, at note 73 above; Rubin Interview, at note 29 above. 95 Id. Fisher indicated he was aware that McDonough had received a call relating to Enron

from Richard Grasso, Chairman and Chief Executive Officer of the New York Stock Exchange.

Fisher told Committee staff that he spoke to McDonough frequently, and this came up in conversation in late October or early November of 2001. Fisher Interview. 96Fisher Interview, at note 73 above. 97 Id. According to Secretary Evans, Lay’s call had come on October 29, 2001, and had gone

as follows: ‘‘[Lay] called me to let me know that Moody’s was undergoing a review of their credit

rating, and he also wanted to remind me and did remind me, which I knew, the large player

they are in the energy markets, which obviously I was aware of, and said to me he didn’t know

if there was any support that we could give them at Moody’s, but if there was, he would welcome that, but left it up to my judgment. I listened to him and told him, ‘Thank you very

much.’ ’’ ‘‘Don Evans Discusses The Collapse of Enron,’’ Meet The Press, NBC News Transcripts,

January 13, 2002. No evidence has emerged to indicate that Secretary Evans took any action

on behalf of Enron with the credit rating agencies. 98Fisher Interview, at note 73 above.

cies.88 Fisher did not know who this investor was, but did not

think it was Dynegy, whose involvement with Enron at that point

was well-known, although the merger had not been officially announced.89

Fisher prepared a contemporaneous memorandum to David

Aufhauser, General Counsel of the Treasury Department, detailing

the contents of the call with Rubin.90 The memorandum is basically

consistent with Fisher’s recollection of the call.91 It also indicates

that Rubin mentioned that ‘‘conversations’’ were taking place between the unnamed investor and the rating agency that afternoon.92 In addition, it indicates that Rubin told Fisher that ‘‘a suggestion had been made to another public sector official that he

place a call to the rating agency to encourage them to work with

the bankers and the investor but that the official had declined to

do so.’’ 93 Neither Rubin nor Fisher remembered this remark when

asked about it, and did not know who the ‘‘public sector official’’

might have been.94 Both Rubin and Fisher said they did not know

or did not remember knowing that William McDonough, of the Federal Reserve Bank of New York, had received calls that day from

bankers concerned about Enron’s credit rating situation.95

Fisher stated that, after receiving the call from Rubin, he considered mentioning it to Secretary O’Neill, but dismissed the idea.96

Nevertheless, a few days after receiving the call from Rubin,

O’Neill told Fisher about Ken Lay having contacted Commerce Secretary Don Evans regarding Enron’s difficulties with the credit rating agencies.97 Fisher paraphrased O’Neill as saying, ‘‘Can you believe Ken Lay called Don Evans and asked if he would intervene

with the credit rating agencies?’’ 98 Fisher believed that O’Neill

took the call as an indication of Enron’s imminent demise, and was

12

99 Id. 100 Id. 101 Id. Fisher told Committee staff that he might not have felt the same way if such a call

had been made to a lower-level staffer at the Treasury Department, who might have felt ‘‘pressured’’ to take some action. 102 Rubin Interview, at note 29 above. 103 Id. 104 Id. 105Staff Interview with William McDonough, President, Federal Reserve Bank of New York,

November 26, 2002 (‘‘McDonough Interview’’). 106 Id. McDonough did not independently recall the times of this and other calls; he refreshed

his recollection with his telephone log. Richard Grasso was not interviewed by Committee staff

for this report, but representatives from the New York Stock Exchange have indicated that they

stand by McDonough’s description of this call. 107 Id. 108 Id. 109 Id.

surprised it was coming so quickly. In response to O’Neill’s recounting of Lay’s call to Evans, Fisher told O’Neill about Rubin’s call.99

Fisher told Committee staff that he did not believe it ‘‘useful’’ for

government officials to contact rating agencies about particular ratings, because such a call would serve only to distract the rating

agencies from their task.100 Nevertheless, he said that Rubin’s call

did not make him uncomfortable, because they were each free to

take action as they believed would best serve their own respective

interests. Fisher explained that he and Rubin were equals, and

thus Fisher had the option of simply saying no to Rubin, as he had

done.101

Rubin told Committee staff that he thought his call to Fisher was

‘‘not only proper, but I would do it again.’’ Rubin said that the potential impact on the energy markets posed by Enron’s possible collapse at the time was a public policy issue that warranted Treasury’s attention.102 Although Rubin acknowledged that even at the

time he felt that it may have been a bad idea for Treasury to get

involved, it was still worth calling the Department’s attention to

the matter.103 As to whether a government official should ever intervene in a ratings action, Rubin said that the issue had never

come up while he served as Treasury Secretary, and he had not

given the matter a great deal of thought.104

Calls to William McDonough

William McDonough, President of the Federal Reserve Bank of

New York, received a number of calls on November 8, 2001 relating

to Enron.105 The first such call, which in retrospect, McDonough

speculated was probably a warning about the calls to come, was

from Richard Grasso, Chief Executive Officer of the New York

Stock Exchange, at 9:38 a.m.106 McDonough indicated that he and

Grasso speak frequently, but it was unusual to receive a call from

Grasso after the opening of the stock market at 9:30 a.m.107

McDonough’s recollection of the call was that Grasso called him

about the fact that Enron might be subject to a rating agency

downgrade, which could have placed in jeopardy the proposed

merger with Dynegy.108 According to McDonough, Grasso and

McDonough agreed that both should stay out of ratings issues, so

as not to influence ratings in any way.109

After the call from Grasso, McDonough got a call from J.P. Morgan Chase’s Harrison at 9:47 a.m. and a call from Citigroup’s CarVerDate 11-MAY-2000 10:29 Jan 14, 2003 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 83604.TXT SAFFAIRS PsN: SAFFAIRS
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110 Id. 111 Id. 112 Id. 113 Id. 114 Carpenter Interview, at note 29 above. 115 Id. 116 Id. 117 Id. 118McDonough Interview, at note 105 above. 119 Id. 120 Id. 121See Financial Oversight of Enron: The SEC and Private-Sector Watchdogs, Report Prepared by the Staff of Senate Governmental Affairs Committee, S. Prt. 107–75, 107th Cong. (October 7, 2002), at 89–90.

penter at 10:08 a.m.110 McDonough could not remember the details

of these calls, except he thought that the credit rating problem

came up and they discussed the effect a downgrade of Enron to

below investment grade might have on the merger with Dynegy.111

McDonough did not remember whether Harrison or Carpenter

raised the credit ratings issue, or if McDonough, having been alerted to the problem by Grasso, preemptively said that the Federal

Reserve Bank would not get involved with credit ratings as a matter of policy.112 Either way, McDonough said that he did not recall

being asked directly to intervene with the credit rating agencies,

but would have refused had he been asked.113

Carpenter’s recollection of his call with McDonough was more

specific. He said that he told McDonough that Moody’s was considering downgrading Enron and would make a decision within the

next day.114 According to Carpenter, he told McDonough about his

belief that this could have a serious impact on the energy markets,

the financial markets, and even on the banking system.115 Carpenter could not recall, however, if he asked McDonough to call

Moody’s.116 Carpenter indicated that McDonough was fairly unresponsive to his call, basically saying only, ‘‘Thank you for the

call.’’ 117

McDonough told Committee staff that the Federal Reserve Bank

has a longstanding, though unwritten, policy not to intervene with

credit ratings, which he believes should have been well-known to

the bankers who contacted him.118 McDonough said that the policy

is intended to prevent the Federal Reserve Bank from even unintentionally influencing the process of ratings, which might distort

the markets.119 McDonough stated, however, that banks are encouraged to contact the Federal Reserve Bank as early as possible

about any problems in the market—particularly those involving entities to which regulated banks have significant exposure—to alert

the Federal Reserve quickly to issues that might arise.120

CONCLUSIONS

Influence or Pressure on Moody’s

In a report released in October 2002, Committee staff expressed

the view that Moody’s and the other credit rating agencies should

have downgraded Enron to below investment grade much earlier

than they did (November 28, 2001)—indeed, significantly earlier

than November 8, 2001.121 In that report, Committee staff attributed this lapse to the rating agencies’ failures to probe more deeply

to get the information they needed to assess Enron, and to focus

14

122 Id. 123 It is relevant to note that to the extent Moody’s was lobbied on Enron’s credit rating, there

are no statutes or regulations specifically prohibiting this. Credit rating agencies, despite the

quasi-governmental function they serve by providing ratings used as benchmarks in a number

of Federal and state laws and regulations, are private entities, and the credit rating process—

at least presently—is not regulated. Id. at 79–84. 124This analysis focuses on Rubin’s status as former Secretary of the Treasury; to the extent

that he was acting in his capacity as Citigroup executive, CRS has stated that ‘‘it may be noted

that persons who are now private citizens, as well as the corporations that they might represent,

have been recognized to possess First Amendment rights to petition the Government and to engage in advocacy speech with the Government (even when otherwise competitors combine to

on issues affecting long-term health of the company, rather than

only short-term considerations.122 Accordingly, putting aside the

question whether Moody’s should have lowered Enron’s rating to

below investment grade before November 28, 2001, it nevertheless

does not appear from Committee staff’s investigation that Moody’s

decision not to do so on November 8, 2001 came as the result of

any inappropriate influence or pressure from any private-sector or

government official.123

Based on interviews conducted by Committee staff in this investigation and Moody’s own testimony before the Committee in

March 2002, Committee staff concludes that Moody’s never received any calls from any government officials, and thus no pressure was brought to bear from the public sector. As for the private

sector, Moody’s did have significant contact, mostly with Enron’s

bankers—J.P. Morgan Chase and Citigroup—and Dynegy on November 8, 2001. According to those involved, Moody’s only agreed

to forgo lowering Enron’s rating to junk after Dynegy agreed to address Moody’s specific concerns associated with the merger agreement, and after J.P. Morgan Chase committed to providing additional capital to Enron, and Citigroup agreed to consider doing so.

To Moody’s, a successful Enron-Dynegy merger was the only justification for Enron’s investment grade rating; if the merger appeared unlikely to occur, that rating level was not justified for

Enron. Moody’s was concerned that certain merger terms (such as

the MAC clauses and the litigation thresholds) indicated a lack of

commitment to the merger on the part of Dynegy, making the

merger less likely. When the banks and Dynegy provided substantive comfort to Moody’s about their commitment—the changes

to the agreements and the additional capital—Moody’s once again

felt justified in its rating. To the extent that the bankers tried to

raise the spectre of market disruption as a result of an Enron collapse brought on by a credit rating downgrade, Moody’s does not

appear to have been swayed by that argument; instead, Moody’s officials appear to have required substantive changes to address its

concerns.

Rubin’s Call to Fisher

There have been suggestions in the press and from Members of

Congress that Robert Rubin’s November 8, 2001 call to Peter Fisher regarding Enron’s credit rating was somehow improper. Committee staff asked CRS to review the facts of Rubin’s telephone call

to Fisher as gleaned both from staff interviews in connection with

this report and from media accounts, and to opine as to whether

any laws or regulations were violated by Rubin in making such a

call.124

15

lobby the Government on a matter of mutual interest to the industry).’’ Memorandum from Jack

Maskell, Legislative Attorney, American Law Division, Congressional Research Service, to Senate Committee on Governmental Affairs, regarding Issues Concerning Post Employment, Revolving Door Laws and Former Secretary of the Treasury, December 16, 2002 (‘‘CRS Rubin Opinion,’’ attached as Appendix B) at 1. CRS’ observation with respect to the bankers’ calls to

McDonough would also apply: barring any evidence of bribery or similar malfeasance, ‘‘there is

no apparent violation of any Federal law for a private, regulated entity to generally communicate informally with, lobby, discuss, explore, or otherwise suggest or try to persuade officials

of Federal regulatory departments, agencies, government corporations or sponsored enterprises,

concerning matters of public policy, economic policy, or potential governmental action concerning

or into matters in which those private entities may have financial interests.’’ Memorandum from

Jack Maskell, Legislative Attorney, American Law Division, Congressional Research Service, to

Senate Committee on Governmental Affairs, regarding Propriety of Informal Communication

from Private Regulated Financial Entity to the Federal Reserve Bank, December 17, 2002 (‘‘CRS

FRB Memo,’’ attached as Appendix C). 125See CRS Rubin Opinion. 126 Id. at 3. 127This rule is codified at 18 U.S.C. § 207(a)(1). See CRS Rubin Opinion at 2. 128See CRS Rubin Opinion at 2, citing 18 U.S.C. § 207(a)(2). 129See CRS Rubin Opinion at 2, citing 18 U.S.C. § 207(d). The CRS Rubin Opinion notes that

President Clinton issued Executive Order No. 12834 on January 20, 1993, which, among other

things, extended the ‘‘cooling-off’’ period for lobbying a former official’s department or agency

to five years and required each official in the Administration to take an oath to this effect. By

a subsequent Executive Order (No. 13184) issued on December 28, 2000, President Clinton revoked Executive Order No. 12834. As Rubin’s telephone call to Fisher took place in November

2001—nearly a year after this Order was rescinded—Maskell notes that it has no application

here. CRS Rubin Opinion at 3–4. 130 CRS Rubin Opinion at 4.

CRS, in an opinion attached to this report, reviewed the legal restrictions applicable to former cabinet-level officials regarding postemployment activities in the private sector.125 Of those limitations

that CRS’ expert Jack Maskell listed in this opinion, he concluded

that only two have potential relevance to the Rubin call to Fisher— the restrictions on ‘‘switching sides’’ and the ‘‘cooling off’’ requirements.126 According to CRS’ Maskell, the ‘‘switching sides’’ rule imposes a lifetime ban on representing a party before or against the

U.S. Government in relation to a particular matter between specific

parties on which the official had worked ‘‘personally and substantially’’ while still employed by the government.127 The rule also imposes a two-year ban on representing a party before or against the

U.S. Government regarding a particular matter over which the

former government employee had ‘‘official responsibility.’’ 128 The

‘‘cooling-off’’ requirements mandate that very senior executive

branch officials—including cabinet officers—may not for one year

after leaving the government represent parties or make contacts for

advocacy purposes on any matter before the agencies or departments they left, or to any person at a certain level of the government in any agency or department of the executive branch.129

The CRS opinion concludes that neither of these restrictions applies to the Rubin call to Fisher. The one-year ‘‘cooling-off’’ period

required by statute already had passed: Rubin left the Treasury

Department in July 1999, and he called Fisher on November 8,

2001.130 As to the ‘‘switching sides’’ ban—either the lifetime ban or

the two-year ban—Enron’s credit rating by Moody’s was not a matter on which Rubin worked while at the Treasury Department. The

two-year ban would not apply because Rubin had left the Treasury

Department more than two years before the call to Fisher. As for

the lifetime ban, according to CRS, the rule requires that the matter be a ‘‘particular’’ one between specific parties, such as a specific ‘‘investigation, application, requires for a ruling or determination,

rulemaking, controversy, claim, charge, accusation, arrest, or judiVerDate 11-MAY-2000 10:29 Jan 14, 2003 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 83604.TXT SAFFAIRS PsN: SAFFAIRS
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131 CRS Rubin Opinion at 3, citing 18 U.S.C. § 207(i)(3). 132 Rubin confirmed this through his counsel. 133 CRS Rubin Opinion at 3. 134There are no statutory legal prohibitions on government officials requesting credit rating

agencies to take particular actions such as the one suggested here. However, given the protections afforded ratings under the First Amendment in other contexts, see Financial Oversight

of Enron: The SEC and Private-Sector Watchdogs, Report Prepared by the Staff of Senate Governmental Affairs Committee, S. Prt. 107–75, 107th Cong. (October 7, 2002), at 96–97, it might

be suggested that the government was exercising unconstitutional prior restraint on speech if

it sought to stop publication of a rating decision. 135When Fisher and McDonough were asked, however, what they would have done had they

believed that Enron’s collapse posed a systemic risk to the markets, as Rubin and Carpenter

were suggesting—Fisher and McDonough had both determined that Enron did not pose such

a risk—neither could say. Fisher Interview, at note 73 above; McDonough Interview, at note 105

above. 136See CRS FRB Memo.

cial or other proceeding.’’ 131 This does not apply because Rubin did

not work ‘‘personally or substantially’’—or at all, to his recollection—on a Moody’s credit rating decision relating to Enron while

at the Treasury Department.132 Moreover, even if he had, CRS is

skeptical that this type of ‘‘matter’’ is one that falls under the restriction.133

Therefore, based on Committee staff’s investigation, it does not

appear that Rubin violated any laws or regulations in contacting

Fisher and proposing that the Treasury Department contact a credit rating agency in connection with Enron’s rating. Moreover, the

‘‘idea’’ Rubin proposed in the November 8 conversation—a request

from Treasury to Moody’s to delay its rating decision regarding

Enron—would not itself have violated any laws, 134 although neither Fisher nor McDonough of the Federal Reserve Bank of New

York believed that such government intervention would be good

policy in general, and even Rubin indicated that he did not at the

time believe it to be a very good idea.135

Bankers’ Calls to McDonough

Similarly, the Committee staff asked CRS to analyze whether the

November 8, 2001 calls regarding Enron to William McDonough,

President of the Federal Reserve Bank of New York, from William

Harrison of J.P. Morgan Chase and Michael Carpenter of

Citigroup, violated any law or regulation. CRS concluded that they

did not, based on the accounts of these calls from the Committee

staff interviews with McDonough and Carpenter.136 Based on its

investigation, Committee staff agrees that it does not appear that

the calls violated any law or regulation.

Although McDonough’s and Carpenter’s recollections of the calls

were not very specific, even assuming that Carpenter and Harrison

asked McDonough to intervene with Moody’s in its rating of

Enron—and neither recalled whether this request was actually

made—the bankers would not have been in violation of any law or

rule in making this request. As CRS explains, barring any evidence

of bribery or similar malfeasance, ‘‘there is no apparent violation

of any Federal law for a private, regulated entity to generally communicate informally with, lobby, discuss, explore, or otherwise suggest or try to persuade officials of Federal regulatory departments,

agencies, government corporations or sponsored enterprises, concerning matters of public policy, economic policy, or potential governmental action concerning or into matters in which those private

17

137 Id. at 1. 138 Id. at 1–2, citing Eastern Railroads President Conference v. Noerr Motor Freight, Inc., 365

U.S. 127, 137–138 (1961). 139McDonough Interview, at note 105 above. 140 Id. 141 Id. 142 Id.

entities may have financial interests.’’ 137 In addition, CRS points

out, corporations have a First Amendment right to petition the government or to advocate for action from the government.138

In his interview with Committee staff, McDonough indicated that

he regularly speaks to J.P. Morgan Chase and Citigroup bankers,

as the Federal Reserve Bank of New York is the main bank regulatory agency for those banks.139 McDonough explained that, when

problems may be on the horizon, he believes that everyone benefits

if the regulators are made aware of the problems as early as possible, and banks are encouraged to so notify the Federal Reserve

Bank.140 In the case of Enron, McDonough already had concluded

that an Enron collapse did not pose a systemic risk to the markets

or the banking system. That, combined with the Federal Reserve

Bank’s unwritten policy on non-intervention with credit ratings, led

McDonough to determine that he would not intervene with Moody’s

rating of Enron.141 As McDonough acknowledged, however, he was

unsure what he would have done had the Federal Reserve Bank

determined that Enron’s collapse did pose a systemic risk.142

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