Bank of America Foreclosure Reviews: How Promontory Became a Shadow Regulator (Part VA)

Today we release the two latest posts in our whistleblower series on the Bank of America foreclosure reviews, focusing on the role of the “independent” consultant hired to perform the reviews, Promontory Financial Group.

The Plot So Far

As we described in earlier posts in this series (Executive Summary, Part II, Part IIIA, Part IIIB, Part IV, and Part IVB), OCC/Federal Reserve foreclosure reviews meant to provide compensation to abused homeowners were abruptly shut down at the beginning of January as the result of a settlement with ten major servicers. Whistleblowers from the biggest, Bank of America, came forward to provide compelling evidence that the bank and its independent consultant, Promontory Financial Group, attempted to suppress evidence that borrowers had been harmed by the false and deceptive practices of the mortgages lenders. Together, they reviewed over 2500 files. When asked to estimate the percentage of harm and serious harm they found, the lowest estimate of harm was 30%, with the majority judging the rate of harm at or over 90%. Estimates of serious harm ranged from 10% to 80%.

In this post and the next, we focus on how Promontory was badly conflicted and incompetent. Here we discuss how it has become a powerful, yet unaccountable shadow regulator. In the next post, we show how it made a hash of the foreclosure reviews and probe what the egregious expenses might be hiding.

Promontory, the Shadow Banking Regulator

Promontory has increasingly come to serve as the dominant shadow regulator in the financial services arena. It is difficult to name a player who occupies a similar role in any other heavily regulated industry.

Promontory has been an influential player virtually from its inception. Its founder and CEO, Gene Ludwig, was the Comptroller of the Currency under Bill Clinton and recognized the potential of the then-sleepy agency to end run other regulators.* After a stint as vice chairman of Bankers Trust, Ludwig established Promonotory and began hiring former regulators, along with attorneys with financial industry experience and former bank officers. The firm gained public visibility when Ludwig prepared a review for the board in the wake of a currency trading scandal at Allied Irish Bank.

As the firm became larger, Promontory recruited more senior and well connected former regulators, both to work at the firm and to serve on its advisory board. Its roster includes former SEC chairman Arthur Levitt, former Nixon and Ford administration official and NASD chief Frank Zarb, and Fed vice chairman Alan Blinder as advisors. Uber lobbyist Ken Duberstein is also on the advisory board. Fed governor Sarah Bloom Raskin is a former Promontory managing director. Their current staff is virtually an alumni association of the people who ran TARP, 1990s deregulatory advocates in Europe and Australia, and examiners from the OCC and Fed. And it doesn’t hurt that their public relations is handled by a former executive editor of American Banker. Analyst Josh Rosner has described Ludwig and the pre-eminent bank regulatory lawyer Rodgin Cohen of Sullivan & Cromwell as probably the two private sector parties most responsible for bank deregulation in the U.S.

Since Promontory is private, it is impossible to know its mix of revenues. However, its activities focus heavily on the adept circumvention of regulations. For instance, it operates CDARS, the Certificate of Deposit Account Registry Service, which is a service that divides large deposits and distributes them across a network of over 3000 banks. This is regulatory arbitrage, taking deposits that would otherwise exceed FDIC deposit insurance ceilings and breaking them into amounts that fall below the limits. A Bloomberg article, “Exploiting FDIC Loopholes Enriches Former U.S. Bank Regulators,” noted:

“These guys know how to work the system,” says {Sherrill] Shaffer, [former chief economist at the New York Fed] who’s now a professor of banking at the University of Wyoming in Laramie…Promontory charges banks more in fees, about $12.50 per a $10,000 one-year CD to get access to federally insured funds, than the FDIC itself charges in insurance premiums, typically $5-$7 per $10,000 deposited.

Another one of its major activities is getting financial firms out of hot water. From Promontory’s website (emphasis ours):

Promontory Examination and Enforcement Advisory Services offers financial and regulatory risk diagnostic and remediation services aimed at preempting, complying with, and mitigating the severity of regulatory enforcement action.

As one reader quipped,

Promontory has been running this scam for a long time. I used to be involved in Patriot Act/Anti Money Laundering Compliance industry working with the largest banks in the world. Every time there was a regulatory action, Promontory was brought in to be the overlord. The running joke was that there the OCC and FRB stapled Ludwig’s business card to consent orders.

Marcy Wheeler has called this the “Get Out of Jail Free industry”. But recently, Promontory’s most visible engagements have involved failed efforts at prettying up diseased managements. For instance, it told MF Global’s board that the broker-dealer had “robust risk management” a mere five months before it failed. And not only was this reading “absurdly sanguine,” but it was remarkably self-serving. Promontory was retained in 2009 to help implement reforms in the wake of an alleged trading scandals, so the report was an assessment of its own work. Similarly, Promontory prepared an analysis for Standard Chartered of wire transfers with Iran and other sanctioned countries, and reported only $14 million were out of compliance. The bank later admitted that at least $250 billion were impermissible, an over four order of magnitude difference.

But unlike the formal regulatory apparatus, whose actions are subject to supervision in the form of Congressional elbowing, Inspector General investigations, and Freedom of Information Act requests, Promontory is accountable only to its clients. It’s unlikely that prospects will be deterred by a few high profile failures. After all, in the overwhelming majority of cases, egregious massaging of the facts by bank-friendly consultants gets a free pass from regulators. Sheila Bair provided examples in her book Bull by the Horns. For instance, she described how she was pressing for management changes at Citigroup in the wake of a bailout in the form of guarantees on $306 billion of toxic assets. A consultant was brought in to shield CEO Vikram Pandit:

I met with Parsons, Grundhofer, and O’Neill on June 22 to discuss their willingness to boost capital and change management. They showed willingness to make some management changes, but resisted further capital raising….Throughout the ensuing negotiations…we were able to get significant management changes…Citi also agreed to hire an independent consultant to review its management from the top down and benchmark their qualifications and performance against other banks’…

When the “independent consultant” report came back in the fall, it compared Pandit to small European bank CEOs and gave him glowing marks. As for its review of the rest of Citi’s management, it gave high grades to Pandit loyalists while criticizing those who were not viewed as part of the Pandit team…

That was my first and last experience in asking bank consultants to assist regulators in reviewing bank operations. They are hopelessly conflicted, given their desire to secure future consulting work at those big banks. The consultants clearly considered their primary client to be Vikram Pandit. Indeed, they reported to him regularly on their review and sought his input until we found out about it and objected…..But Citi’s primary regulators, the OCC and NY Fed, didn’t seem to mind one bit.

Troublingly, Ludwig is also the Managing Principal of GenCap, a private equity firm that “invests in financial services businesses with a particular focus on community and regional financial institutions, specialty finance and related services.” It is impossible to maintain any sort of a Chinese wall between an investment business and a consulting business where the firm gets not only inside information about bank operations but also pending regulatory actions when the same person heads both businesses.**

Promontory was Badly Conflicted at Bank of America

The track record of “independent” consultants hired when banks are under regulatory scrutiny is their real job is not to investigate but put lipstick on pigs.

Since the official policy of the Obama Administration has been to declare peace with honor in the struggle against bank misdeeds, it was well understood by observers that the independent foreclosure reviews were never meant to be a serious exercise. The reviewers were conflicted, and Promontory was no exception. It had performed a “corporate governance review” for Countrywide’s board in November 2007. Recall that Bank of American had already made a $2 billion investment in the troubled subprime player in late August. The review is credited with getting Countrywide CEO Angelo Mozilo to accept that the bank was a goner and Something Needed to Be Done. Accordingly Bank of America announced its acquisition of Countrywide in early January 2012.

In other words, the Promontory work seems to have led directly to Countrywide getting Bank of America to stump up for the rest of bank at a rich price given the distress it was in (over market prior to the leak of the acquisition news). So finding a lot of borrower damage resulting from the Countrywide lending and subsequent servicing would show Countrywide to have been an even bigger garbage that it is already known to be. Given Promotory’s role in moving the deal forward, that’s hardly the sort of adding-insult-to-injury news that Bank of America would want to hear.

And it isn’t simply that Bank of America is a juicy potential client for Promontory. The firm already has close ties to the bank. It was deeply involved in a cost-cutting project launched under new CEO Bryan Moynihan called Project New BAC. And don’t think that expense reduction programs are tedious bean counting exercises. They are arguably the most lucrative consulting service. Cost cutting advisors are paid a percentage of the savings, and at a large bank, the rewards are rich. And the consultants naturally never question whether the assignment is warranted. As we wrote when the project was made public by a flattering article in the New York Times:

The New York Times piece is hagiography about the cost cutting process at Bank of America, in which the Charlotte bank will shed 30,000 jobs, more than 10% of its workforce. It starts with the misrepresentation of calling the belt-tightening a “turnaround plan.” That implies that the business of the bank is in trouble and the headcount reduction measures can save the day.

This is utter bunk. Bank of America was already a very cost and efficiency driven bank, to a fault. It botched its acquisition of the private bank US Trust by imposing its stingy ways on customers who had every reason to demand a bit of cosseting. It went so far as to impose ATM fees on a customer base that typically held 6 to 7 figure balances in checking accounts.

Banking expert Chris Whalen has called the cost cutting effort “criminal”. He points out the obvious: there is nothing wrong with the bank’s operating businesses. The threat to BofA’s survival comes from litigation on its mortgage backed securities business….

It is important to understand the business model of these firms… the whole project [is] accounted as a restructuring, with their compensation buried in the total.

To give an sense of how large the fees might run…a guesstimate by an informed source is that the fees on a medium-large project, say $400 million in savings, would be 5% or $20 million. Fees presumably scale down as deal sizes increase, so the $5 billion BofA assignment would presumably be set at a lower percentage. By contrast, the going rate for bona fide restructuring specialists like Houlihan Lokey or Gordian Group (remember these deals are accounted for as restructurings) are in the 0.75% to 1.5% range.

So given a high profile, high stakes project for a large and extremely profitable client, the last thing Promontory would want to do was to find borrower harm in the foreclosure reviews, since that would not only cost the Bank of America dearly through mandated payments to wronged borrowers but could also stoke litigation from homeowners*** and investors.

Our next post will discuss what whistleblowers told us about how Promontory managed its foreclosure reviews at Bank of America and PNC.

* I engaged Ludwig when I lead the Mergers & Acquisitions Department at Sumitomo Bank to advise on a complex international real estate syndication venture. We would meet infrequently over the 1990s. Ludwig mentioned with some pride that at the OCC, he had outflanked the Fed on certain issues.
** This isn’t the first time Ludwig has been insensitive to issues of propriety. See here for details of a brouhaha over a Ludwig coffee meeting with Clinton, bankers, and Democratic fundraisers.
*** The OCC consent order that included the foreclosure reviews stipulated that borrowers who received a payment under the review did not waive their rights to litigate for additional damages.

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    1. Susan the other

      Agency, the whole concept of how agency is applied, is such a big steaming mess. The OCC even. Promontory. MERS. SEC. Accountability? Not if agency is involved.

    2. psychohistorian

      Our society is rotting from its financial system outward.

      How does one kill this cancer of social organization that has lost its moral compass?

      Thanks for the stellar reporting Yves!!!!

  1. Lorraine

    From Promontory’s website today: Promontory Financial Group announced that it has promoted Alice Cho to Managing Director in the firm’s San Francisco office….
    “Having worked alongside the financial industry’s most important decision makers, Alice has invaluable insight into the rapidly evolving practices in corporate governance and risk management,” said Eugene A. Ludwig, Promontory’s founder and chief executive officer…..
    Prior to joining Promontory, Cho was a Director at BITS, the technology arm of the Financial Services Roundtable. Cho also served at the Federal Reserve Board as Special Assistant to Vice Chair Alice M. Rivlin, worked in the Bank Supervision and Regulation Division of the Federal Reserve Board, and was the lead analyst of banking issues at the U.S. Office of Management and Budget.
    In the last year, Promontory has attracted a number of senior professionals from public and private practice, including William Haraf, the former California Commissioner of Financial Institutions, Tony Murphy, the former CEO, Global Banking and Markets, Americas at HSBC, Patrick Parkinson, the former Director of the Division of Banking Supervision and Regulation for the Federal Reserve Board, Catherine West, the former Associate Director and Chief Operating Officer of the Consumer Financial Protection Bureau, and Julie Williams, the former First Senior Deputy Comptroller and Chief Counsel of the Office of the Comptroller of the Currency .
    Cho is part of an expanding team of experienced senior regulatory advisers that now includes 45 Managing Directors across 15 global offices.

  2. diptherio

    So my question is this: given that about 98% of the high-level actors in this whole fiasco (bankers, regulators, ratings agencies, Promontory, etc) are severely conflicted and cannot possibly be trusted to defend the public’s interests, what, short of literal heads literally rolling, can possibly put a stop to this?

    It seems to me that we need a clean sweep if we are to accomplish anything. A little change here and there around the edges cannot but be overwhelmed by the mass and inertia of current corruption. One of the chants in Tahrir Square was “They All Must Go!” It is a chant I think we might do well to pick up. It might seem impossible, but I don’t see how anything less can be effective.

    You’re really putting a cherry on this story Yves, dotting all the “t”s and crossing all the “i”s. Quite impressive. Those MSM schlubs got nothing on you, that’s for sure (speaking of which, where is the MSM on this story???). You go, girl!

    1. steelhead23

      The effects of conflicts of interests can be muted through various procedures, including diligent oversight and limited access of those being reviewed to the reviewer. But, when the conflict extends to a company’s primary business model, such conflicts are irreconcilable. Such is pretty clearly the case with Promontory. So, why was an obviously irreconcilably conflicted reviewer chosen? Ans. To minimize the potential damage to the bank while looking like you’re kicking butt. This is a tactic team Obama has down pat.

  3. Teejay

    Adminstration policy to “declare peace with honor” w.r.t.
    bank misdeeds. clever, funny and concise.

  4. Maya

    Promontory also did Wells Fargo reviews, correct? So if they were pulling all this nonsense at BoA, wouldn’t they have done the same thing at Wells Fargo?

    1. Yves Smith Post author

      Yes, I don’t have any Wells whistleblowers, but one came forward to Martin Andelman much earlier in the process. It looks as if Wells was much smarter in managing the coverup. There, the letters from borrowers asking for reviews were screened in such a way that hardly any had their case reviewed. So it seems there were many fewer bodies working on their exercise relative to the size of Wells’ servicing operations. See here for more details:

      1. Ashley

        I have a loan with First Horizon Home Loans, they say the investor is BNYM. I thought I had a lemon loan because errors kept happening with my escrow account (they forced me to pay property taxes through them) they would send back money then demand it was a mistake and raise my mortgage $1,000.00 month. Other strange things were taking place, I wanted out of that loan & they offered me a modification. Once I filled out mod paperwork they began rejecting my always on time payments. They sent me false phone #s to call. Then they gave me chance to do trial mod but I had to pay on time. My second trial payement (certified mail money order) went missing. I tracked down the actual post man who delivers mail to the bank. He said my payment was in the bank, he delivers their certified mail on big sheets and they sign for them at will. The executives were cherry picking through the certified mail and “choosing” the date the payment arrived. I have alerted the OCC, FBI, Dianne Feinstein, Barbara Boxer, USPS postmaster, Darrell Issa and the CFPB they told me to contact the, wait for it . . . OCC. I’m still a prisoner in my home with fraudulently signed modification and most likely clouded title home. I want mail room staff and postmen interviewed and the mail room staff to be sent a supoena by congress and put on the spot about mail fraud.

  5. Brian

    The henhouse has no more chickens. Foxes have taken up residence. From the description of Promontory herein, if what they do is not illegal, that is not merely oversight, but by design of people that profit from illegal acts as a business practice.

  6. H. Alexander Ivey

    “declare peace with honor”, I like that! Been looking for a short statement that captures the state of the US politics to its financials. Also liked Neil Barofsky’s “Geithner Doctrine”. reading NC justs keeps getting better and better, ha ha…

  7. David Petraitis

    Peace with honor…

    Obama is making Nixon look more and more liberal every day!
    And to think I grew up hating Nixon’s policies and presidency. It’s funny to think of him as seriously to the LEFT of Obama. More liberal healthcare act that he tried to pass as well.
    Live and learn ;)

  8. Kristina

    I loved it when she used the phrase “biggest of the mortgage miscreants” to describe BofA. Another perfect description!

  9. C.M.

    Thank you SO much for all the information you posted! I look forward to all of your future post. I have a couple of comments. Concerning the statement..” It looks as if Wells was much smarter in managing the coverup.” I agree. But I think BOA’s lack of coverup wasn’t from not being smart. I think it’s because BOA is SO pompus to think they can do whatever right out in the open and get by with it because they have everybody in their back pocket. Also they know a lot of people are so blind to what’s really going on and will not believe such mass crookedness is going on. Concerning the so called “independent review” of BOA over the wrongful foreclosures, I knew when they sent me a form to fill out for my case to be reviewed that this “independent review” was not legitimate and instead was just a lot of busy work and a pacifier to make people think they were really doing something about it. I filled it out and sent it in anyway. I’ve not heard anything back from them and it’s been…what? about a year now, or more? I’v lost track of time….been dealing with them since 2008. But I’m keeping a legal paper trail of all their actions with dates and names for the near future. They’ve convinced me they have no intention of doing anything about meeting with me to clear up all the inacurate book keeping. They faniggle the #’s and jerk people around through the escrow accounts. A mortgage payment of $700 suddenly jumps to $1,400 per month all in the name of escrow and they tack on false late charges galore. When you try to meet with them face to face to show your receipts and proof you are not behind….they ignore you as if to say…”I can’t hear you”… while still tacking on more unjust charges. BOA has one goal… to keep the tarp money for themselves while wearing down homeowners will to fight until they give up, foreclosing and taking as many homes as possible. This is a well-oiled machine BOA has running and they have their butt covered in every direction imaginable. But, it appears a few judges are beginning to rise up and do the right thing toward some homeowners. To them I say “thank you and I love you”!

  10. diets that work

    I think that what you posted was actually very
    reasonable. However, what about this? suppose you were to write a awesome headline?
    I am not saying your information is not good, however suppose
    you added a post title that grabbed people’s attention? I mean Bank of America Foreclosure Reviews: How Promontory Became a Shadow Regulator (Part VA)

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