The following excellent aarticle is from the September 23, 2013 issue of Time magazine on page 36 titled “Oversight for Hire: The Rise, and Downsides, of Private Bank Examiners” by Massimo Calabresi and I quote:
“Bank Oversight For Hire
The rise, and downsides, of private bank examiners
By Massimo Calabresi Monday, Sept. 23, 2013
Brooks Kraft / Corbis for TIME
Correction Appended: Sept. 12, 2013
In early 2011, the federal government’s top watchdogs found themselves with yet another crisis on their hands. The nation’s biggest banks had been accused of wrongly foreclosing on vast numbers of Americans. Investigating every complaint would require an enormous amount of money and manpower; some 4.4 million borrowers were potentially affected. Billions in payouts from titans Bank of America, Wells Fargo and Citibank were at stake, not to mention up to $125,000 for each affected homeowner–as well as the credibility of federal regulators.
So the regulators punted. Julie Williams, chief counsel for the Office of the Comptroller of the Currency (OCC), the primary regulator for many big banks, argued that private contractors could review the foreclosures, sampling paperwork for errors rather than investigating every claim, according to regulators familiar with the discussions. Banks would then compensate victims. Despite opposition from Sheila Bair, chair of the Federal Deposit Insurance Corporation charged with maintaining public confidence in the U.S. financial system, the plan went into effect in April 2011. Twenty months later, it collapsed in failure. By January of this year, the OCC canceled the program as complaints from borrowers mounted. The banks reached a $9.3 billion settlement to provide a blanket distribution of cash to homeowners with little regard to the specifics of each case. Regulators found themselves atoning for the plan in front of Congress. Williams was forced out of the OCC.
The episode ended well for some: private consultants made huge profits. Half of the fees the banks paid them–nearly $1 billion–went to a single company: Promontory Financial, a Washington-based firm that has emerged as something of a shadow regulator. And in early 2013, Williams was hired as a managing director at Promontory, a position that has previously paid more than $1 million in salary and bonuses.
Congress passed President Obama’s sweeping financial-reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, in the wake of near total economic collapse. The motivation behind the landmark legislation was simple: Never again. But three years on, the reform bill’s shortcomings are many, and one of them is its growing reliance on private regulators to oversee the nation’s banking system. In place of publicly accountable examiners working for the government, private bank oversight has become the norm, along with some of the same hallmarks of the pre-crash era: byzantine regulations that few but the experts can understand, outsize influence by a handful of firms with deep links to both banks and the government and a revolving door between Washington and Wall Street still spinning like a top.
It has long been true that America’s financial system could hardly function without Promontory and other private accounting firms such as Deloitte, PricewaterhouseCoopers and Ernst & Young. Regulators and banks alike hire them to investigate suspicious activity, act as intermediaries between government and private companies and advise financial institutions on how to comply with complex regulatory rules. At the OCC alone, one-third of legal actions taken against banks since 2008 have required the aid of outside consultants. Most are staffed with former regulators, who now implement the rules they helped write. Consultants have become so indispensable to the system, they have started to shape it.
Promontory is arguably the most powerful of these regulators-for-hire. The expertise of former watchdogs, including founder and CEO Eugene Ludwig, is at the heart of the company’s business model. The 450-person firm boasts two former SEC heads, two former top Federal Reserve enforcers and a former leading official from the newly formed Consumer Financial Protection Bureau. Government has also hired from Promontory’s ranks. Amy Friend, Williams’ eventual replacement at the OCC and a key author of Dodd-Frank when she worked on Capitol Hill, worked at the firm from 2011 to early 2013.
Born in Brooklyn and educated at Haverford, Oxford and Yale, Ludwig had been a successful banker and Washington lawyer when President Bill Clinton tapped him to head the OCC in 1993. (Clinton and Ludwig’s connection goes back to Oxford and Yale Law School.) By the time he left government in 1998, Ludwig realized that the growing size and complexity of financial institutions would lead to ever-more-labyrinthine regulation. Federal officials found it just as difficult to enforce rules as banks did to comply with them. Promontory stepped into the breach, advising both sides. In recent years, Promontory reportedly charged up to $1,500 an hour for its services.
The company grew as regulators and banks increasingly relied on it. By the time of the crash, Promontory was already the first among equals. The month after the September 2008 global run on U.S. money markets nearly brought low the world economy, Senate Banking Committee chairman Chris Dodd empaneled his first hearing of outside experts on the crisis and on potential responses by lawmakers to ensure it never happened again. Two of the five panelists were from Promontory–former SEC chair Arthur Levitt, a board member, and Ludwig.
But it was Dodd-Frank regulatory overhaul in the wake of the crash that solidified an important line of business for the firm: shaping the rules themselves. The bill laid out broad goals but left crucial rulemaking to regulators. Promontory registered as a lobbying firm from 2004 to 2009 on behalf of TD Ameritrade, General Motors and failed mortgage lender Countrywide Financial. Promontory officials arranged and attended meetings between regulators and clients in which the firm explained the potential effects of Dodd-Frank rulemaking on financial institutions. Promontory now says it is no longer in the lobbying business and has not tried to influence Dodd-Frank on behalf of its clients.
Last year, Ludwig was among the highest-paid executives in the financial world, reportedly making more than $30 million–more than JPMorgan Chase CEO Jamie Dimon or Goldman Sachs chief Lloyd Blankfein. Ludwig oversees the enterprise from a 13,000-sq.-ft. mansion in northwest D.C., the 19th most expensive home in the city according to Washingtonian magazine. Promontory occupies the top floor of a new steel-and-glass office building two blocks from the White House.
The rise of private regulation in the banking industry is not without its shortcomings. In January 2010, London-based Standard Chartered bank reported to U.S. officials that its New York office might have problems with its anti-money-laundering procedures. As part of an agreement with the Federal Reserve, the Treasury Department and New York State’s banking regulator, Standard agreed to hire Promontory to determine if bankers had violated Treasury Department and other rules in routing money to and from accounts in Iran through American banks and then back overseas.
Promontory found that Standard Chartered had violated the rules in millions of dollars’ worth of transactions. That turned out to be a fraction of the $250 billion the bank ultimately conceded it had moved for Iran during the period. Promontory has been subpoenaed for records in a separate investigation by New York State bank regulators regarding the firm’s conduct during its review of Standard Chartered practices, a source familiar with the investigation told TIME. “Promontory from time to time receives document requests in the form of subpoenas related to client activities,” a spokesperson explained. “Promontory does not disclose the nature of individual requests or scope of inquiry.” Regarding its review of the bank’s transactions, the spokesperson says, “We were hired to review a set of transactions, determine what those transactions showed or did not show and submit the results to the client’s lawyers, and that is what we did. We were not retained to characterize the transactions or interpret their legal meaning.”
Private regulators not only police bank practices; they are often tasked with forcing banks to mend their ways. After a rogue wheat-futures trader lost MF Global $141 million on the night of Feb. 26, 2008, the Commodity Futures Trading Commission ordered the firm to hire a monitor to help fix its risk-management problems. The firm chose Promontory, and on May 26, 2010, Promontory reported to MF Global’s board that it had “successfully and effectively” implemented its recommendations. A mere 18 months later, MF Global collapsed, allegedly raiding client accounts for cash in the process. In his report on the firm’s demise, the bankruptcy-court-appointed trustee, former FBI director Louis Freeh, found that the new, stricter risk-management policies Promontory had vouched for “were never fully implemented.” (Promontory says the policies were mostly implemented.)
And because so much banking regulation has been pushed out of government agencies and into the private sector, even private regulators find themselves stretched to capacity and have outsourced the work to still other contractors. In its review of millions of dollars’ worth of foreclosures by Bank of America, for instance, Promontory outsourced the hiring and management of hundreds of reviewers to staffing company SolomonEdwards Group, according to documents in a case brought in Georgia by contractors claiming Promontory owes them overtime pay. When OCC head Tom Curry canceled the review, he said he was doing so because the process was taking too long and wasn’t producing discernible results for the affected borrowers. Promontory managing director Konrad Alt says his firm remained in control of the SolomonEdwards review and that problems with the foreclosure program were the result of the OCC’s faulty design. Why did Promontory turn around and hire Julie Williams, who says she was “very involved” in crafting the enforcement order requiring the review? “Julie is a highly distinguished former public servant,” says Alt. “Any firm in America would have been thrilled to hire her.”
Who Watches the Watchers?
At a hearing on the use of consultants in the mortgage-relief case last April, Ohio Senator Sherrod Brown asked an OCC official what it would take for a private consultant to be barred from working for the feds. “If a consulting firm … has repeatedly been, for lack of a better term, at the scene of a crime, what would it take before they are viewed as not qualified?”
The question could apply to many of the private firms that, in the wake of Dodd-Frank, are serving as the public’s cop in the marketplace. “The monitor comes in and often has good intent,” says Benjamin Lawsky, the New York State banking and insurance regulator. “But the bank is paying the monitor, the monitor is living at the bank, coziness develops, and if you don’t have a regulator checking in to say, ‘What have you found? Where are you looking?,’ it’s a recipe for disaster.” Former FDIC chair Bair describes Williams as a lifelong public servant whose actions at the OCC were motivated by a desire to defend her agency and its prerogatives as a regulator. “This is not about Julie or even about Promontory. It’s about a much bigger problem with the public’s perception that regulators are not independent of the banks they regulate, and that is undermining their authority as regulators.”
The question is how Congress and regulators can set and enforce new standards and accountability for private firms and limit the areas of the system they can influence. Ohio’s Brown is developing legislation with other lawmakers to give regulators authority to punish consultants using powers similar to those they can use against banks. Brown’s proposal is controversial; it may take months to find enough votes for passage. And it may take even longer before the impact of the private-bank-regulation boom is fully understood.
The original version of this article failed to include Benjamin Lawsky’s first name.
(WHAT’S HAPPENING TO OUR BANKING INDUSTRY? I’VE READ THAT IT’S THE FIVE-YEAR ANNIVERSARY OF LEHMAN BROTHERS GONG BANKRUPT THAT TWO MAJOR MAGAZINES TALKED ABOUT THE NEW REGULATIONS IN THE INVESTMENT BANKING WORLD TO MAKE IT SAFER AND BETTER, IN BUSINESSWEEK, AS WELL AS IN TIME MAGAZINE. IT’S MAKING THE BANKS BIGGER IN SIZE AND WORSE IN SAFETY BECAUSE OF LACK OF FEDERAL REGULATORS REGULATING THE BANKS. THE DODD-FRANK BILL, WHICH WAS SUPPOSED TO MAKE IT SAFER, DECIDED TO LET THE BANKS REGULATE THEMSELVES AND HAVE A TWO-TIERED BANKING SYSTEM. ONE MORE OR LESS FOR THE COMMON PEOPLE IN THE RURAL AREAS AND THE OTHER, FOR WALL STREET AND THE INVESTMENT BANKERS, WHICH WILL BE REGULATED BY NO ONE BUT ITSELF. DUE TO THE FACT THAT EUGENE LUDWIG MAKES $30 MILLION A YEAR, DOESN’T MAKE HIM LOOK LIKE AN HONEST BUSINESSMAN. HIS SECOND TIERED BANKING SYSTEM, MADE UP OF PRIVATE EQUITY, WILL FINANCE ANYTHING IN THE WORLD, REGARDLESS OF HOW RISKY BECAUSE THEY ARE USING THOSE UNREGULATED TOXIC DERIVATIVES TO FINANCE THEIR PRODUCTS. AFTER ALL, THE TAXPAYER BAILED US OUT ONCE, SO HOW CAN WE FAIL, IF WE GOT INTO TROUBLE AGAIN. HARDLY ANYONE WENT TO JAIL, EVEN THOUGH THEY SHOULD, IF WE WOULD HAVE AN FBI AND ATTORNEY GENERAL WATCHING THEM. SO, ALL YOU PEOPLE THAT BELIEVE IN THIS, SHOULD READ BOTH ARTICLES IN TIME MAGAZINE OF SEPTEMBER 23, 2013 ON PAGE 36 TITLED “OVERSIGHT FOR HIRE” BY MASSIMO CALABRESI. THEN READ THE ONE ON PAGE 30 TITLED “THE MYTH OF FINANCIAL REFORM’ BY RANA FOROOHAR ABOUT THE SECRECY OF SHADOW BANKING AND THEN CALL YOUR LEGISLATORS. WE CAN’T KEEP OUR ECONOMY GOING FOREVER WITH BORROWED MONEY AND THE SECOND-TIER SYSTEM OF BANKING IS EXPORTING JOBS OUT OF THIS COUNTRY FOR THE CHEAP LABOR MARKET. THESE TWO THINGS ARE KILLING THE CAPITALIST SYSTEM. NOW, SINCE LARRY SUMMERS WAS SMART ENOUGH NOT TO RUN, I HOPE PRESIDENT OBAMA PICKS SOMEBODY FOR FED CHM THAT KNOWS SOMETHING ABOUT THE GROWING SHADOW BANKING SYSTEM WHICH WAS TALKED ABOUT IN TIME MAGAZINE AND ALSO BY HENRY PAULSON WHEN HE WAS ON NBC’s MEET THE PRESS SUNDAY.
LaVern Isely, Overtaxed Independent Middle Class Taxpayer & Public Citizen & AARP Members