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PricewaterhouseCoopers Paid $1 Billion as Consultant on Mortgage Settlement

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Matt Stoller is a fellow at the Roosevelt Institute. You can follow him at http://www.twitter.com/matthewstoller.

Francine McKenna has a useful column in American Banker about the 50 state AG mortgage settlement.

The foreclosure reviews are a “look back” at the past. No one hates admitting and paying for mistakes more than banks. The “independent consultants” selected by the banks in November, after more than six months of contract negotiations, haven’t calculated any final damage numbers yet. It wasn’t until June of this year that, 15 months after the consent orders were signed, regulators finally issued a “financial remediation framework” prepared by the consultants.

Rest assured the consultants are getting paid, even if borrowers are not. PricewaterhouseCoopers will bill more than $1 billion for four of the 14 ordered reviews, according to my sources. I think banks will spend at least $5 billion in total on consultants just to find out how much they’ll owe.

Settlement monitor Joe Smith continues to emphasize strong deference to bank executives. Back in April, Smith said the following.

“If litigation against the banks continues and plaintiffs’ claims continue to contradict what I’m hearing from bank leadership,” Smith says. “I’ve got to pay attention to it.”

In other words, if bank executives continue to lie to him, he might have to start paying attention to the lies. This is an interesting and important perspective, because it comes from someone who is considered to be on the left side of the aisle. My liberal Democratic sources like Smith; he was the banking commissioner of North Carolina, where Bank of America was headquartered, but he had a reputation as an ally of community banks. He also investigated predatory lending practices, and had a reputation as a fair-minded regulator. He’s part of the left-leaning slice of the financial establishment, and was appointed to head the Federal Housing Finance Agency a few years ago (though the Senate wouldn’t confirm him). Since his appointment to the position as settlement monitor, his behavior has followed the basic template of liberal reformers. He basically supports the existing leadership of the regulatory and banking worlds, while seeking slight modifications of their behavior. For instance, as settlement monitor, Smith chose not to build a public regulatory agency, he chose to build a private one that would not be subjected to Federal pay caps, Freedom of Information Act requests, and ethics and campaign contribution restrictions. This firm (BDO) serves as he put it, as “his eyes and ears and arms and legs” in the banking landscape.
Smith also has a deregulatory mindset. Here he is just a few days ago.

“The thing the policymakers need to be discussing is the cost of compliance with a necessarily more rigorous mortgage regulatory system,” he says. “I am not saying it’s wrong to have those costs. But I think the banks are going to reduce the number of loans that they are making and reduce the number of counterparties from whom they buy loans. The level of competition in the marketplace overall” will decrease.

“There is a chance,” Smith says, “that the cost of this will reduce competition in the marketplace, and we don’t know how that will affect the availability and cost of credit in the future.”

Smith figures the standards will be loosened, eventually.

“I think the standards we’ve got are effective to address the abuses we’ve had in the past,” he says. “I am not entirely convinced all of them will be needed going forward and can’t be streamlined over time. But it’s not the time to streamline yet. Let’s get them in place and see what works and what doesn’t.”

According to American Banker, the big banks are going to end up paying “$5 billion to consultants just to find out how much they owe.” That’s a large amount of money, and enough to establish a real temporary public agency that could actually enforce real servicing standards. By way of comparison, the Consumer Financial Protection Agency has a 2013 budget of less than a tenth that. Obviously you can’t scale a massive multi-billion dollar agency that quickly, but you can certainly get something up and running that doesn’t allow the banks to regulate themselves. What is necessary for a regulatory model that doesn’t have the obvious conflicts of interest and lack of accountability or competence so clearly in evidence with the settlement monitor is a new ideological framework that prioritizes adversarial relationships between banks and regulators, and a clearly delineated personnel separation between public and private entities.

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21 comments

  1. Ms G

    Boy, they really have it covered “coming and going,” as they say. Nice work if you can get it . . .

    1. Greg R

      While Captain Smith is meandering around the ship looking for stuff to toss overboard…yep, another great choice.

    1. Susan the other

      I thought they put a figure on what the banks owed at $25Bn; that’s the settlement figure.

    2. Roman Berry

      Your question (who is paying) seems close to asking for whom the bell tolls: Ask not whom is paying. The bill is coming to thee.

  2. sk

    “PricewaterhouseCoopers will bill more than $1 billion for four…reviews”
    It is good to see there are some who can rip off even the bankers

  3. Lambert Strether

    So, “by way of comparison, the Consumer Financial Protection Agency has a 2013 budget of less than a tenth” of the $5 billion the rentiers are going to pass around among their agents.

    Looks like the market state in action, and everything that’s wrong with it.

  4. chris m.

    I may be wrong about this but wasn’t PricewaterhouseCoopers one of the auditing firms that was touting the soundness of these same mortgage banks right up until the crash happened?

  5. briansays

    still probably cheaper in the long run than the hourly rates of the lawyers or are they simply another story?

  6. Conscience of a Conservative

    The goal of punishing , prescribing remediation and checks to to punish bad behavior, send a message that it’s not tolerated and ensure compliance. Using the honour system to check compliance is absurd. Perhaps Smith would take ex-cons at their word that they followed the rules of their parole?

  7. Hugh

    “He [Smith] basically supports the existing leadership of the regulatory and banking worlds, while seeking slight modifications of their behavior.”

    This is a good definition of what I call an “Establishment liberal”. I had not realized until now that it works equally well as the definition of a “stooge”.

    “left-leaning slice of the financial establishment”

    This is an oxymoron. It’s in the same vein as “Obama is a socialist.” Both statements are not just untrue, but wildly so.

    Also I came across this:

    “Major media has yet to mention the name of PwC, the external auditor, when talking about the Barclays Libor scandal, JP Morgan’s costly “whale” trade, or the woes brought to Chesapeake Energy by its imperial CEO, Aubrey McClendon. There was some mention of PwC early in the MF Global case, but interest in PwC died down quickly as has the general coverage of this scandal as the months wear on.”

    http://retheauditors.com/2012/07/02/barclays-libor-scandal-more-client-headaches-for-pwc/

    PwC was also the Northern Rock’s auditor. Pricewaterhouse works for the kleptocrats, but then it really is no surprise that Smith would use it. He works for them too.

    1. Francine McKenna

      Smith, the mortgage settlement monitor for the settlement negotiated by the AGs, is not using PwC. He is using BDO and five other smaller firms. The AG mortgage settlement is a different initiative then the OCC/Fed foreclosure reviews. Joe Smith selected and pays the consultants directly. They are smaller firms and their rates are much less than the Big Four auditors and firms like Promontory and Treliant that are working directly for the banks on the foreclosure reviews.

      1. Hugh

        I stand corrected. PwC is working as a consultant to the banks on 4 of the 14 reviews then. It is still acting as an enabler of looting, as is Smith.

  8. sierra7

    “(H)e says. “I am not saying it’s wrong to have those costs. But I think the banks are going to reduce the number of loans that they are making and reduce the number of counterparties from whom they buy loans. The level of competition in the marketplace overall” will decrease.

    “There is a chance,” Smith says, “that the cost of this will reduce competition in the marketplace, and we don’t know how that will affect the availability and cost of credit in the future.”
    Read more at http://www.nakedcapitalism.com/2012/10/pricewaterhousecoopers-paid-1-billion-as-consultant-on-mortgage-settlement.html#Rw0iPhlH0AwzGSom.99

    This is like saying that we have to endure the “mumps” or suffer constant “flu” in order to get new mortgages. Suffer the disease or no mortgages…..

    ABSURD, ABSURD, ABSURD!!
    And downright criminal!

  9. avg John

    The risk these accounting firms manage isn’t related to the financial statement containing material errors and lack of full disclosure, it is the risk that you can prove that they didn’t follow the procedures they have set up for themselves and you will be able to successfully sue them.

    To trade on a public exchange requires periodic SEC filings, including financial statements that have been audited. They have the market cornered and charge billions. I suppose their consulting arms made billions helping corporations implement Sarbanes-Oxley, and as Yves has repeatedly pointed out, to what avail. Financial statements, signed by the CEO, are likely to show healthy financial ratios right up to the point of bankruptcy.

    And I don’t believe these accounting firms are going to turn on one another when auditing a clients whose previous auditors were derelict. Maybe quietly issue revised prior period adjustments, but that’s it.

    Financial Statements should be derived from income tax statements, and reported income from operations should match taxable income and income tax laws should be designed to include all foreign subsidiary income (with credit for taxes paid to foreign countries). No deferrals and no tax holidays for prior period remittals. And if there is any regulatory body that should be composed of a government employees, it is the auditors of publicly held companies. After all, our entire monetary policy is devoted to supporting the market value of these global corporations.

    They are a complete fail in their fiduciary duty to the public. Weasel words, powerful lobbyists, well-connected politically, and have been one of the chief point men (women) for selling America down river. “Pssst! Hey buddy, want to to know how to make billions and not pay any taxes? You’ve came to the right place and I can put you in touch with the right people to make it happen, know what I mean?”. The only thing missing is the guy in a trench coat standing on the corner, ducking in and out of a dark alley.

    1. ZygmuntFraud

      May I quote from Animal Farm, the one by Orwell?

      “Gentlemen,” concluded Mr. Pilkington, “gentlemen, I give you a toast: To the prosperity of Animal Farm!” [1]

      [1] Animal Farm: A Fairy Story by George Orwell (Chapter 10), section “ALL ANIMALS ARE EQUAL”, Paragraph 8, as here:

      http://www.marxists.org/subject/art/literature/children/texts/orwell/animal-farm/ch10.htm

      The pigs take control of Animal Farm, and in the end, they walk on their two hind legs. A half-dozen pigs and a half-dozen human farmers meet to “fete” a reconciliation of sorts …

    2. Nathanael

      Given the extreme prevalence of accounting fraud, which has been a problem since before Ben Graham published Securities Analysis in the 20s or 30s (incidentally, that book is all about accounting fraud….)

      Anyway, given its extreme prevalence, I think (for starters) cash accounting should be mandatory at all firms. It’s actually trackable unlike accrual accounting.

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