WASHINGTON Lawmakers slammed a "culture of secrecy" at Moody's (MCO.N) and expanded a credit ratings industry probe to find out why securities regulators ignored a tip that Moody's managers routinely put profits above ratings quality.
The allegations about Moody's business practices came as Congress considered legislation to curtail rating companies' practices and expose them to greater legal liability if their rating assessments prove to be wrong.
Lawmakers blame credit raters for fueling the financial crisis by assigning top ratings to mortgage-backed securities that later crumbled in value.
Two former Moody's executives, in testimony at a House Oversight and Government Reform Committee hearing, said workers were encouraged to remain silent and cover up evidence of alleged improper practices in assigning and monitoring credit ratings.
The two "described a culture of secrecy, a place where putting things in writing was frowned upon," said Rep. Edolphus Towns, the Democratic chairman of the panel. "Can you imagine working at a place where the very act of writing a memo or sending an email is suspect?"
Towns also said his committee would investigate why the Securities and Exchange Commission failed to act on a March 2009 letter sent by Moody's former senior vice president of compliance. The executive urged the SEC to take a closer look at Moody's weak compliance department and ratings process.
Separately, top executives from the largest credit agencies -- Standard & Poor's MHP.N, Fitch Ratings (LBCP.PA) and Moody's -- warned a House Financial Services subcommittee that Congress should not go too far in imposing stricter regulation.
The top Democrat on that panel has already circulated draft legislation to rein in credit agencies.
Moody's has born the brunt of criticism, its stock losing roughly one-fourth of its value in the past two weeks. On Wednesday, shares initially tumbled as much as 8 percent before ending the trading session down 1.7 percent at $20.46.
Moody's chief executive Raymond McDaniel told the subcommittee that the company may agree to disclose some of its fees to regulators.
But McDaniel said a proposal to impose "collective liability" on the sector could lead to frivolous lawsuits and was regulatory overkill, a view echoed by rivals Standard & Poor's and Fitch.
Two former Moody's executives -- Scott McCleskey and Eric Kolchinsky -- testified that senior managers were willing to silence employees who raised concerns about the ratings process or compliance efforts.
McCleskey said that while he was the head of compliance at Moody's, he voiced concerns that the firm was not properly monitoring ratings on municipal debt. McCleskey, who was dismissed by Moody's in 2008, said he was instructed not to mention the issue in e-mails or writing.
Kolchinsky, a Moody's managing director who was recently suspended by the firm, said senior managers pushed revenue over ratings quality and were willing to fire employees who disagreed.
The two whistleblowers were flanked by Moody's current chief credit officer, Richard Cantor. Cantor sat impassively, staring straight ahead as his former colleagues described their concerns to the lawmakers.
In his testimony, Cantor said Moody's had recently hired an independent law firm to review Kolchinsky's allegations.
That was criticized as an empty gesture by Chairman Towns, who said the law firm had no deadline and would not produce a written report.
Kolchinsky told lawmakers that Moody's compliance group was understaffed and lacked independence. He also alleged Moody's knowingly issued misleading ratings on complex securities and that analysts were "bullied" by managers, who overrode their decisions to protect revenue.
Kolchinsky said he would soon meet with the SEC to discuss his charges. SEC officials said the regulator had contacted Kolchinsky about his concerns in March 2009.
McCleskey, meanwhile, sent the SEC a letter in March 2009 warning about Moody's weak compliance department and ratings process. He said Moody's management had ignored his warnings that the company failed to properly monitor municipal bond ratings.
The company also spurned his suggestion to erect a firewall between the compliance department and its revenue-generating units, he said.
Allegations that the SEC ignored the whistleblowers' concerns could be another black mark against the regulator, which is still reeling from its failure to uncover Bernard Madoff's $65 billion investment scam.
The SEC says it has established an examination program for credit rating agencies that includes reviews of disclosures, policies, and procedures regarding municipal securities ratings.
"We are focusing carefully on the tips and complaints we receive and following up, where appropriate, with examinations targeting suspected problems," SEC spokesman John Nester said.
(Reporting by Rachelle Younglai, additional reporting by Jonathan Stempel in New York and Kim Dixon in Washington; Editing by Julie Vorman)