[Senate Prints 107-83]
[From the U.S. Government Printing Office]


107th Congress 
 2d Session                 COMMITTEE PRINT                     S. Prt.
                                                                 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



[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


                            January 3, 2003



                           U.S. GOVERNMENT PRINTING OFFICE
80-604                          WASHINGTON : 2003
___________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpor.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001













                   COMMITTEE ON GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois          SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey     GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia                 THAD COCHRAN, Mississippi
THOMAS R. CARPER, Delaware           ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota               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














                            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

















                     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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\ 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.
---------------------------------------------------------------------------
    \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.
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \7\ See, 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.
    \10\ Staff Interview with Lawrence G. ``Greg'' Whalley, former 
President and Chief Operating Officer, Enron Corp., October 29, 2002 
(``Whalley Interview'').
    \11\ Id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------
    \12\ Staff Interview with Debra Perry, Senior Managing Director for 
Corporate Finance-Americas and U.S. Public Finance, Moody's 
Corporation, October 30, 2002 (``Perry Interview'').
    \13\ Whalley Interview, at note 10 above.
    \14\ Perry Interview, at note 12 above.
    \15\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
    \17\ Perry 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.'')
    \18\ Perry Interview, at note 12 above.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------
    \19\ Whalley Interview, at note 10 above.
    \20\ Perry Interview, at note 12 above.
    \21\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
    \23\ Perry Interview, at note 12 above.
    \24\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \25\ Id. No one from ChevronTexaco was interviewed by Committee 
staff for this report.
    \26\ Laura Goldberg, ``Dynegy to Acquire Enron in $8.9 Billion 
Stock Deal; New Giant Moves Out of Shadow,'' Houston Chronicle, 
November 10, 2001.
    \27\ Perry 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.
---------------------------------------------------------------------------
    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 Officer 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\
---------------------------------------------------------------------------
    \28\ Staff 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.''
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \34\ Rutherfurd Interview, at note 28 above; Carpenter Interview, 
at note 29 above.
    \35\ Id.
    \36\ Rutherfurd Interview, at note 28 above.
---------------------------------------------------------------------------
    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 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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \39\ Perry 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.
    \41\ Perry 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.
    \42\ Perry Interview, at note 12 above.
    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------
    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 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\
---------------------------------------------------------------------------
    \45\ Carpenter Interview, at note 29 above.
    \46\ Perry Interview, at note 12 above.
    \47\ Perry 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.
    \48\ Perry Interview, at note 12 above.
    \49\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \53\ Perry 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).
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------
    \55\ Rubin Interview, at note 29 above.
    \56\ Carpenter Interview, at note 29 above.
    \57\ Rubin Interview, at note 29 above.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \72\ Memorandum from Peter Fisher to David Aufhauser, General 
Counsel, Treasury Department, November 8, 2001 (``Fisher Memo,'' 
attached as Appendix A).
    \73\ Staff 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.
---------------------------------------------------------------------------
    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 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\
---------------------------------------------------------------------------
    \75\ Id. Rubin remembered that Fisher had called him about this, 
but did not recall when. Rubin Interview, at note 29 above.
    \76\ During 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 
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.
    \77\ Fisher 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \78\ Fisher Memo, at note 72 above.
    \79\ Fisher 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.
---------------------------------------------------------------------------
    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 
``non-public equity investor'' involved, and Fisher told Rubin 
that the investor was better suited to make contact with the 
rating agencies.\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\
---------------------------------------------------------------------------
    \85\ Fisher Interview, at note 73 above.
    \86\ Id.
    \87\ Id.
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \90\ Fisher 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.
    \91\ Fisher 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.
    \92\ Fisher 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.
    \94\ Fisher 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.
---------------------------------------------------------------------------
    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 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\
---------------------------------------------------------------------------
    \96\ Fisher 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.
    \98\ Fisher Interview, at note 73 above.
    \99\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \102\ Rubin Interview, at note 29 above.
    \103\ Id.
    \104\ Id.
---------------------------------------------------------------------------

  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\
---------------------------------------------------------------------------
    \105\ Staff 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.
---------------------------------------------------------------------------
    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 Carpenter 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\
---------------------------------------------------------------------------
    \110\ Id.
    \111\ Id.
    \112\ Id.
    \113\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \114\ Carpenter Interview, at note 29 above.
    \115\ Id.
    \116\ Id.
    \117\ Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \118\ McDonough Interview, at note 105 above.
    \119\ Id.
    \120\ Id.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------
    \121\ 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 89-90.
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \124\ This 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 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).
---------------------------------------------------------------------------
    CRS, in an opinion attached to this report, reviewed the 
legal restrictions applicable to former cabinet-level officials 
regarding post-employment 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\
---------------------------------------------------------------------------
    \125\ See CRS Rubin Opinion.
    \126\ Id. at 3.
    \127\ This rule is codified at 18 U.S.C. Sec. 207(a)(1). See CRS 
Rubin Opinion at 2.
    \128\ See CRS Rubin Opinion at 2, citing 18 U.S.C. Sec. 207(a)(2).
    \129\ See CRS Rubin Opinion at 2, citing 18 U.S.C. Sec. 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.
---------------------------------------------------------------------------
    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 judicial 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\
---------------------------------------------------------------------------
    \130\ CRS Rubin Opinion at 4.
    \131\ CRS Rubin Opinion at 3, citing 18 U.S.C. Sec. 207(i)(3).
    \132\ Rubin confirmed this through his counsel.
    \133\ CRS Rubin Opinion at 3.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \134\ There 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.
    \135\ When 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \136\ See CRS FRB Memo.
---------------------------------------------------------------------------
    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 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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \139\ McDonough Interview, at note 105 above.
    \140\ Id.
    \141\ Id.
    \142\ Id.


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]