Investigative Reporting Requires Resolve

By Alec Klein
January 24, 2005 09:19 AM

Investigative reporting can begin with an anonymous tip, an urgent need to know, or, as it happened on my most recent project, a simple question: Who are the credit raters?

The question was posed by my editor at The Washington Post, Larry Roberts. What inspired that question was how the credit raters had failed to identify the multibillion-dollar collapse of National Century Financial Enterprises Inc., a healthcare financier, despite a series of red flags. Such is the benefit of a great editor. He asked the right question. But little did I know that as an investigative business reporter, I would spend more than a year seeking an answer.

It was 2003, and I had just completed a project on AOL's accounting, which ultimately resulted in federal investigations, criminal convictions and more than a half-billion-dollar settlement by AOL with the U.S. government. I knew little about the credit-rating industry. Even government officials found the business mysterious. One Securities and Exchange Commission official had called it the "dark corner" of the financial markets.

Starting from scratch, I researched the available literature on the credit raters who dominated the industry—Moody's Investors Service, Standard & Poor's and Fitch Ratings. It quickly became obvious that the big three c redit raters wield enormous power with little accountability or oversight.

Without the credit raters' approval, towns, cities, school districts, companies and even nations can't borrow money by issuing bonds to build the things that define a society: a hospital, a highway, a factory. Few question whether there is a need for credit raters to assess the debt markets--and the raters themselves say they do a public service by helping investors measure the creditworthiness of companies and countries alike. And yet, the credit raters remain virtually unregulated.

What took longer to figure out was this: The credit-rating industry was sometimes marked by conflicts of interest and abusive business practices. A secret ratings process hides a system at times characterized by subjectivity and error.

How had so much of this remained under the radar for so long?

For one, the ratings industry considered the heart of its work—the ratings process—a private matter, in some cases describing what it did as occurring in a "black box." Few had penetrated that black box. And for good reason. Many powerful executives of major corporations, wealthy Wall Street insiders and high-ranking government officials of sovereign nations feared to speak publicly about the credit raters, saying they did not want to raise the ire of those who hold so much sway over their financial fortunes.

If the big three credit raters downgraded the debt of a company, or a country, it could choke off its access to the bond market, making it costly to raise money, according to many people inside the industry. They even had a term for that kind of punishment: a "hostile rating."

Not surprisingly, few people would talk to me, at first. (A critical question for those who think they want to become an investigative reporter: What is your threshold for spinning your wheels, reporting for days, or weeks, without getting anything but a door slammed in your face?)

So I began at the outer layer of the onion. With little known about the inner workings of the credit raters, I turned to documents. Public companies, like Moody's, file a wealth of information with the SEC. In the public domain, there are also lawsuits, which can yield valuable insights into a company, or just the name of an individual who might be important to interview. Beyond that, I began to immerse myself in the field, reading academic research, attending industry conferences and meeting employees of the rating companies, their clients and their competitors wherever and whenever I could.

Along the way, I collected leads, bits of information, names of key people. (Another question if you want to become an investigative reporter: Can you be your own best secretary? It isn't glamorous, but can you keep meticulous notes and master the mountains of information that begin to overwhelm your desk?) And then, I followed up on those leads, those bits of information, those names of key people.

I think of investigative reporting as the construction of a spider web, a set of interlocking relationships. One person led to another person who led to a third person, and before I knew it, I found myself in Germany, interviewing a major insurance company that told me it had been confronted with several ratings downgrades when it refused to buy Moody's ratings service. The result of its refusal, after Moody's last downgrade: The insurer's stock plunged by nearly $200 million in a matter of hours. The company, to be sure, was apprehensive about talking to a reporter.

But the insurer agreed to speak to me—as did several other people inside the credit-rating business. Why? Part of it has to do with whether people believe that you, the reporter, are sincere. Do they believe that you will abide by your agreement to keep their comments on the record, on background, or off the record, whatever the case may be? And will you let your sources go, to change their mind and withdraw their comments, when they fear the repercussions of their comments?

In the end, all that I could do was appeal to my sources' sense of what is right—the idea that it's a good thing to let the public know there are abusive business practices, conflicts of interests, and error and subjectivity in an important part of global finance.

Prior to publication, I also spent several months exchanging questions and answers with the credit raters themselves. It is a delicate but necessary part of investigative reporting--to give your subject ample opportunity to respond. Some credit raters were more forthcoming than others. In varying degrees, they disputed what many people had told me about abusive business practices and conflicts of interest. The raters also argued against the publication of such stories.

In November, under the guidance of my editors Larry Roberts and Jill Dutt, The Washington Post published my findings in a three-part series called, "The Gatekeepers."

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