In little more than a decade, Promontory Financial Group LLC has evolved into a new kind of Washington player tapped by banks including Morgan Stanley (MS) and Citigroup Inc. to resolve regulatory disputes behind the scenes.
“Other people advocate,” said Eugene Ludwig, the firm’s founder and chief executive officer. “Other people litigate and lobby. Those are different kinds of things.”
Alan Blinder, a Princeton University economics professor and a member of Promontory’s advisory board, described the firm as a “quasi-regulator” that is a go-between for regulators and bankers “who sometimes speak different languages.”
Promontory has cemented its influence and expanded its business by hiring dozens of ex-regulators, including some who wrote parts of the Dodd-Frank Act and trained those enforcing key U.S. banking rules.
About a fourth of the almost 400 people on Promontory’s payroll have government service on their resumes. That includes Ludwig, who was head of the Office of the Comptroller of the Currency in the administration of President Bill Clinton, and Blinder, a former vice chairman of the Federal Reserve.
“If you’ve fallen afoul of the regulators, failed your stress test for example, then they would be on the top of the list for who to call,” said Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy.
While the firm grew without much attention outside banking and regulatory circles, its strategy is now coming under the spotlight. Questions about Promontory’s revolving door greeted news last week that former Securities and Exchange Commission Chairman Mary Schapiro was coming on board, just as lawmakers summoned Promontory and other consultants to a hearing tomorrow to explain their role in a failed $2 billion foreclosure review.
Schapiro joins other ex-regulators including Julie Williams, who spent 19 years at the OCC where she became the agency’s top lawyer and twice served as acting comptroller; Pat Parkinson, a former Fed official who was a top adviser to chairmen Alan Greenspan and Ben S. Bernanke during a 31-year- career and helped write the 2010 Dodd-Frank Act; Wayne Rushton, former senior deputy comptroller and chief national bank examiner; Jack Murphy, former FDIC general counsel; and Elizabeth McCaul, former New York state bank superintendent.
“It’s not just who they’ve hired but when they’ve hired them,” said Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods Inc. “These are people who’ve been through the wars of writing Dodd-Frank, implementing Dodd-Frank, crisis management through the financial crisis. Their insights are invaluable.”
Promontory can also draw on the experience in its ranks as it confronts the congressional inquiry into the foreclosure settlement. Under the auspices of the OCC and the Fed, 14 mortgage servicers hired consultants in 2011 to review more than 4 million foreclosures with the aim of compensating wronged homeowners.
Promontory had the largest share. Banks paid $2 billion to the consultants before regulators canceled the project for lack of results and replaced it with a new settlement to send money directly to borrowers.
Promontory is sending one of its managing directors, Konrad Alt, to the hearing called by Senator Sherrod Brown, an Ohio Democrat who is chairman of the banking panel’s subcommittee on financial institutions. Alt used to be the top lawyer for the Senate Banking Committee as well as chief of staff at the OCC.
“Promontory Financial Group is not in the business of providing oversight,” Alt said in prepared testimony. “We are consultants, not regulators.”
It’s not just a one-way street from the financial agencies to Ludwig’s shop; after Williams left the OCC last year, she was replaced by Amy Friend, a managing director at Promontory.
Ludwig said the idea that veteran officials are cashing in on their government work by traveling through a revolving door is misplaced, because he said his firm sells expertise and not access to their former employers and co-workers.
He said people who dedicated their careers to public service can continue to ensure that regulations are implemented properly. “We’re an attractive place to many former regulators,” said Ludwig.
Ludwig, 66, came to Washington in the 1970s after graduating from Haverford College and Yale University Law School. Specializing in banking law, he was appointed to the OCC in 1993 by Clinton, whom he had met at Oxford University in England when the future president was a Rhodes scholar and Ludwig was studying for a master’s degree.
At the OCC, Ludwig drew criticism for politicizing his role by attending coffee meetings with bankers inside the Clinton White House. He backed banking deregulation, saying in March 1997 congressional testimony that “absent clearly demonstrable public policy concerns, it is not government’s business to tell financial services providers how to structure their business.”
Two years later, Clinton signed the Gramm-Leach-Bliley Act that tossed out longstanding prohibitions against commercial banks offering investment and insurance services. Ludwig later argued that retaining those walls wouldn’t have prevented the 2008 credit crisis.
“It’s funny that one of the key architects of financial services deregulation is now considered a shadow regulator,” said Josh Rosner, an analyst with independent research firm Graham Fisher & Co. in New York. “I believe his reputation is held in higher regard by the banks than by the existing regulators.”
When he left the comptroller’s office in 1998, Ludwig received a $1 million signing bonus to be vice chairman at Bankers Trust Corp., then one of the largest U.S. banks. Within months, the struggling bank was acquired by Deutsche Bank AG. Soon after, Ludwig started Promontory in 2001 in leased office space at Covington & Burling (1175L), the Washington law firm where he previously had been a partner.
A year later, he began opening affiliated businesses including Promontory Interfinancial Network LLC, which sells products to thousands of banking clients, including a method of spreading large deposits among several institutions to ensure they are covered by FDIC insurance that otherwise tops out at $250,000 per account.
Promontory has grown into a global business. Its consulting arm has offices in six U.S. cities and nine other countries, according to its website. In 2011, the firm’s Washington headquarters moved into two floors in a glass tower two blocks from the White House’s north lawn.
Ludwig, who friends say is a perfectionist about appearances, became part-time decorator, going for a look both airy and luxurious. The décor reflects what Ludwig tells associates is one of his goals, to be the “Cartier” of consulting -- the best and most expensive.
As the firm’s fortunes grew, so have Ludwig’s. He lives in a 12,740-square-foot home in Washington’s Foxhall neighborhood. The residence, appraised at $11.5 million, has a swimming pool and tennis court and has been featured in Washingtonian magazine’s lists of the capital’s most expensive homes.
Promontory has conducted about 1,400 consulting projects since it was founded, according to Ludwig. As Morgan Stanley sought to avoid the fate of Lehman Brothers Holdings Inc. in September 2008, it tapped Promontory to help with its reinvention as a bank holding company. The firm helped Citigroup with Japanese compliance issues, aided the European Central Bank’s efforts at supervising banks and cut its teeth solving illicit-trading problems for Allied Irish Banks Plc (ALBK).
While most contracts are private, Promontory sometimes has been criticized when its work breaks into public view. Before MF Global Holdings Ltd (MFGLQ) collapsed in 2011, Promontory issued a report giving the futures brokerage high marks for risk management and compliance.
Promontory also did work for Standard Chartered Plc (STAN), Britain’s second largest bank by market value, which was later hit with $667 million in U.S. fines for violating trade sanctions with Iran. The consultant had cleared 99.9 percent of the transfers as complying with existing rules.
Ludwig said Promontory did “a factual review” for Standard Chartered that was confined to a specific area. On MF Global, he said, the firm’s work was also “very narrow,” involving how the company had handled a government order.
“When you’re asked to do something, you do what is required of you, often, and don’t get to do as much as you’d like,” he said.
Questions about the role of consultants in the OCC’s foreclosure-mitigation program arose soon after more than a dozen U.S. mortgage servicers signed onto a 2011 settlement to compensate borrowers for errors. As part of the settlement, the servicers were required to hire outside consultants to review their files.
Bank of America Corp., PNC Financial Services Group Inc (PNC). and Wells Fargo & Co (WFC). chose Promontory, giving the firm more cases to review than any of the other independent consultants, including PricewaterhouseCoopers LLP, Ernst & Young LLP and Deloitte & Touche LLP.
About 18 months after the settlement, reviews had produced nothing for wronged borrowers. The OCC scrapped most of the program and orchestrated a new $9.3 billion settlement, along with the Fed, under which banks must provide mortgage assistance and direct payments to borrowers who otherwise would have continued to wait for the case-by-case review. The payments are scheduled to begin this week.
“The cost of concluding these reviews would far exceed the harm that would be found,” Comptroller Thomas Curry, the third appointed to the job since Ludwig left in 1998, said in a February speech. He said he supported the new settlement to stop servicers from “funneling money to consultants that could be better used to help distressed borrowers who have lost their homes.”
Last week, the Government Accountability Office had a different view on how the process became so expensive. The GAO, Congress’ investigators, said in a report that after the review began, regulators made adjustments that “contributed to delays” and that the lack of clarity in the agencies’ guidance limited the “usefulness of the information obtained.”
Regulators routinely include consulting provisions in today’s enforcement settlements. In the foreclosure review, the consultants were meant to inject independence into examining blunders by the banks paying their fees.
“Using outside contractors paid by the servicers themselves did not add to the ’independence’ of the Independent Foreclosure Review,” said House Financial Services Committee ranking Democrat Maxine Waters, in a statement. The California lawmaker said the GAO’s recent report on the foreclosure review shows it was “poorly designed and executed.”
Waters said she’ll introduce a bill that would set standards to align the consultants’ incentives with the public interest.
The OCC “would welcome” a move by Congress to expand the agency’s authority to seek sanctions against independent consulting firms for wrongdoing stemming from their work on behalf of lenders, Daniel P. Stipano, the OCC’s deputy chief counsel, said in testimony prepared for tomorrow’s Senate subcommittee hearing.
“The OCC faces significant jurisdictional obstacles if it seeks to take an enforcement action directly against an independent contractor,” Stipano said.
Promontory, which has confidentiality agreements with its clients, hasn’t discussed details of the foreclosure review. Ludwig said he remains “very proud” of his firm’s work.
Blinder, though, said the review was outside Promontory’s “sweet spot,” requiring the firm to hire hundreds of people to go through all the files.
“There’s nothing like it in Promontory’s history and I suspect there won’t be another,” Blinder said.