UPDATE 2-Moody's secretive nature described to Congress

* Two ex-Moody's whistleblowers testify about concerns

* Top credit agency execs to testify at second hearing

* Moody's stock drops sharply before ending down 1.7 pct

* Congressional panel to probe SEC shortcomings
(Recasts with allegations of a culture of secrecy at Moody's)

By Rachelle Younglai

WASHINGTON, Sept 30 (Reuters) - Lawmakers slammed a
"culture of secrecy" at Moody's (MCO.N: Quote, Profile, Research) 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: Quote, Profile, Research), Fitch Ratings (LBCP.PA: Quote, Profile, Research) 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.

MOODY'S WHISTLEBLOWERS

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.

RELATED NEWS:

* Another ex-Moody's exec slams process [ID:nN29169536]

* Draft bill puts raters on short leash [ID:nN25527439]

* SEC mulls liability standards for raters [ID:nN11458924]

* Lawmaker eyes "radical" reforms [ID:nN24477151]

* Rating agencies protest broader oversight [ID:nN30225878]
(Reporting by Rachelle Younglai, additional reporting by
Jonathan Stempel in New York and Kim Dixon in Washington;
Editing by Julie Vorman)