We documented at considerable length in 2013 how bank regulatory consultant Promontory Group played a huge, and hugely lucrative role, in overseeing a foreclosure review process mandated by the Office of the Comptroller of the Currency and the Fed for Bank of America and PNC Bank. In both cases, we showed, based on detailed accounts from multiple whistleblowers, including documents, that Promontory orchestrated a coverup by both banks (see here for the executive summary from the series and here and here for details on Promontory’s role).
Both the fact that the foreclosure reviews were turning into a fee feeding frenzy for the consultants (Promontory earned twice Goldman’s revenues per employee on that assignment alone, despite never finishing the job) and that ProPublica had started publicizing the sham process at Bank of America led to the abrupt shutdown of the reviews, with no objective basis for paying out borrowers who’d asked for reviews of their foreclosures.
Despite the scale of this fiasco, or perhaps precisely because it delivered what Bank of America and PNC considered to be a success, Promontory has continued to be a major force in bank regulatory circles. It chairman, former Comptroller in Chief Gene Ludwig, and its ever-growing roster of former bank regulators including former Fed vice chairman Alan Blinder, former SEC chairman Mary Shapiro, and former OCC general counsel (and Ludwig’s OCC hire) Julie Williams, give Promontory a luster of legitimacy and inside knowledge.
A decision by the New York State Department of Financial Services appears to be finally crimping the wings of this powerfully placed bank fixer. We’ve attached the DFS’ report into its investigation into Promontory’s conduct on the case that put the DFS on the map, that of its order against Standard Chartered for long-standing money-laundering abuses, most notably with Iran, in which Standard Chartered admitted to having at least $250 billion of transactions out of compliance. The British bank initially paid $340 million in fines to the DFS alone, and then due to exhibiting serious ‘tude as well as failing to remedy its behavior (which it then unconvincingly tried to depict as a mistake), the DFS fined Standard Chartered for an additional $300 million.
As we pointed out when the row between Standard Chartered was in the headlines (Federal regulators were outraged at being shown up by an uppity second-rate regulator, despite the then DFS chief Benjamin Lawsky having gotten permission from the Fed to take his investigation further), Promontory was critical to Standard Chartered’s efforts to minimize its wrongdoing. The Feds had apparently taken the Promontory whitewash, um, report, that Standard Chartered had a mere $14 million of transactions out of compliance, at face value. Bear in ming that the $14 million in the Promontory report was more than a full four orders of magnitude lower than the $250 billion that Standard Chartered later admitted to. This sort of creative accounting appears to be plenty profitable. The DFS report released yesterday says that Promontory earned over $54 million for its work for Standard Chartered on its money laundering investigation.
The DFS investigation is on the matter of whether Promontory acted in such a compromised manner as a consultant as to undermine its independence. That may seem like a novel standard, but the DFS’s approach reflects a long-overdue need to deal with how substantial amounts of regulatory work have been outsourced by overburdened, understaffed agencies. The drill too often in that a regulator orders certain changes in conduct. Rather than have compliance overseen by the regulator, the miscreant’s compliance is overseen by an “independent” consultant…whose bills are paid for by the perp. Think that’s not an arrangement that is rife for abuse?
The DFS has already fined two other “independent” consultants that fell short of the mark, PriceWaterhouse Coopers paid $25 million and was suspended for two years for anti-money-laundering violations for the Bank of Tokyo-Mitsubishi. Deloitte was fined $10 million and suspended for one year for its work on Standard Chartered.
Prmontory and the DFS were negotiating a settlement and talks broke down. The New York Times reports:
The suspension is a surprising escalation of a broader crackdown on the consulting industry,…
And until last week, it appeared as if the agency might settle with Promontory as well, according to people briefed on the investigation. The firm had already provided some of its employees for the depositions. And Mr. Ludwig traveled to New York from Washington, where the firm is based, to discuss a financial payout, the people said. The agency and Promontory were discussing a $20 million penalty.
But certain demands caused Promontory to balk. For example, the firm declined to admit wrongdoing or accept a temporary suspension in New York, the people said. That would have set it apart from Deloitte and PwC.
When the negotiations broke down last week, the tone turned hostile. In a letter to the Department of Financial Services, a copy of which was reviewed by The New York Times, Promontory’s lawyer asked the agency to hand off the investigation to another government authority, arguing that the New York regulator itself had a conflict. The conflict, the lawyer, Paul Shechtman, said, stemmed from Mr. Lawsky, New York’s former financial regulator, who recently left the agency to form his own consulting firm. Calling Mr. Lawsky a “direct competitor of Promontory,” Mr. Shechtman argued that any action against Promontory would “directly benefit” his firm.
The argument by Promontory is desperate. First, Lawsky left in mid-June. The negotiations are now in the hands of his successor, Lawsky’s former chief of staff and interim head of the DFS, Anthony Albanese. Lawksy is out of power, so to allege that the decision has anting to do with him is barmy. Moreover, Lawksy can’t do any business with the DFS for a full two years. Second, it would actually be not surprising for the department to rethink its work priorities now that Lawsky is gone. The fact that the team that he created is as tenacious as he was is a real testament to his judgment in who he put in key positions, as well as to the dim view that the DFS clearly has of Promontory’s conduct. This was a case the new crew could have let go or eased up on but chose not to.
The sanction is not based on the howler of the $14 million Promontory said was out of compliance versus the $250 billion that Standard Chartered admitted to. That could simply be due to gross incompetence. which is not a basis for punishment. If you read the investigation, what the DFS was looking for, and found, was what amounts to bad faith in Promontory preparing reports to regulators, as in watering down findings. What may have motivated the DFS not to back down was the results of interviews with Promontory staff. As you’ll see in the report below, they tried to explain away incriminating e-mails in ways that only dug their hole deeper, like trying to say that an instruction to make something “more bland” meant “more accurate”.
The impact of the DFS’ action is significant. Again from the Times:
On Monday, New York State’s financial regulator effectively suspended Promontory from conducting most assignments for banks that are licensed in New York State and suspected of wrongdoing.
And here’s the real beauty: the suspension is indefinite, meaning it remains in place until DFS sees fit to lift it. Ouch.
That means Promontory can’t take on the most attractive assignments for foreign banks, which are almost without exception licensed in the US as New York branches, which is the ones for getting them out of hot water. Foreign banks are generally a top target for Promontory, since they won’t have deep existing relationship with US regulators. It also would bar business with securities firms that got New York banking licenses for the purpose of getting access to Fed liquidity during the crisis, namely Goldman and Morgan Stanley.
Promotory howled like a stuck pig. From the Wall Street Journal:
Promontory vowed to fight the department’s move and could file a request in court within days to put a hold on the action, people familiar with the matter said. “We will litigate the matter and defend our firm against this regulatory overreach,” Promontory said.
This too is funny and is very similar to the sort of bad names the DFS was called in its ultimately successful battle with Standard Chartered. “Regulatory overreach” is what bank perps say when they are mad at regulators who are unexpectedly doing their jobs and the target has no substantive defense.
Even though Promontory can try suing the DFS, it’s not clear how it will get anywhere. As the New York Times points out:
But the litigation against the New York regulator could spawn a messy legal battle. And because the agency shaped its action as an informal report, rather than a legal order, it is unclear whether any court has authority to compel the agency to release confidential bank information.
In addition, and I’d welcome commentary from litigators, I wonder if a suit by Promontory could enable the DFS to escalate by deposing Promntory on other investigations out of the DFS’ purview, to establish a pattern of lack of independence in Promontory’s other “independent” consulting assignments. Why not start with the the Bank of America foreclosure reviews? I’m sure my whistleblowers would love to help. Promontory seems not to understand that keeping this matter in the spotlight could do it more reputational damage. Just getting the staffers to repeat the credulity-strainign defenses they tried to make of the damaging e-mails would not be pretty.
If you are in New York, please e-mail Anthony Albanese at the DFS and thank him for having the guts to keep the heat on Promontory. It’s impressive to see a mere acting superintendent of a bank regulator running rings around the New York State attorney general, Eric Schneiderman. Maybe if we get lucky, not only will Albanese keep the DFS punching above its weight, but he might also embarrass Schneiderman into rousing himself from his torpor.
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