As a follow up to our series* on how Bank of America and its supposed independent consultant Promontory Financial Group, colluded to make a mockery of a process designed to provide compensation to borrowers who had suffered abuses in foreclosures during 2009 and 2010, we thought we would offer a few suggestions as to how to forestall future fiascoes of this sort.
Recall that when the OCC set forth what was later called the Independent Foreclosure Reviews, it envisaged that the process would be carried out by independent consultants. However, that process is well known by those who care about the public interest, as opposed to the interest of banks, to be hopelessly corrupted when the party who is supposed to be subject to tough scrutiny is choosing the consultant and writing the checks. And that’s before you get to the wee problem that large banks are very lucrative clients. Even a party that was not retained by the bank might well want to use a consulting gig to cultivate a relationship with it.
This problematic practice is made worse by the special role that Promontory has carved out in the financial services industry. The firm operates as a shadow regulator.** Promontory’s founder and CEO Gene Ludwig was Comptroller of the Currency under Bill Clinton; it was then that installed its recently departed chief counsel, Julie Williams, who was firmly ensconced when the consent orders were being negotiated. Williams, having been deeply involved in designing a process that insiders estimate earned Promontory $1 billion in gross fees across three clients, then went from the OCC to Promontory. And, bringing the revolving door to a new level, a Promontory staffer, Amy Friend, took her place at the OCC.
So any suggested reforms don’t simply need to address the general problem that supposedly independent consultants will follow the money, and the money happens to reside at banks; they also need acknowledge the fact that the OCC is a hopelessly bank-friendly regulator. It isn’t just that it has deep ties to a private-sector firm that pushes hard to help banks get their way (its own site describes how it helps “preempt” and “mitigate the severity of” regulatory actions). It’s that there’s no good reason for the OCC to exist at all. Recall that at one stage, regulatory reform proposals included getting rid of the current apparatus and folding everything into the Fed. There was considerable backlash, party due to turf protection, partly due to fear of too much power being concentrated in an already too secretive and influential organization.
But the consolidation proposal has some merit. Too many regulators with overlapping mandates allows for regulator-shopping (as in characterizing or housing activities so as to get the most friendly regulator in charge). And the OCC has the worst incentives of any financial regulator. Unlike the SEC and the CFTC, it is not subject to Congressional budgetary appropriations and oversight. Unlike the Fed and the FDIC, it does not have to eat its own cooking. If a bank fails, the FDIC has not only to deal with the consequences, it actually has to now and again run banks. This creates a vigilance and an understanding of nitty-gritty bank operations that other bank overseers lack. The Fed has trading operations in the New York Fed (giving it some appreciation of trading businesses and current market conditions) and has to open up the discount window (and more recently, create an alphabet soup of special facilities) to keep sick financial firms from keeling over. The OCC has no one to serve but the banks, since it lives off fees from them. It lives to serve their interests, not the public interest, and suffers no adverse consequences when it gets things wrong.
We’ll sketch out some high level ideas; we welcome further reader input.
Reforming the Use of Contractors in Consent Orders and Other Regulatory Processes
It would be much better if regulators were staffed up to regulate rather than having to fob off their job onto contractors. But in lieu of that, some changes that would improve the current process include:
Much tougher rules on conflicts. Every conflict, not just at the firm level, but of its senior executives the leadership team on the engagement, and any subcontractors must be disclosed online to the public. Failure to disclose a conflict should subject the company to an automatic fine greater than the value of the engagement. Bringing in subcontractors without disclosure and clearing for conflicts should also lead to automatic, punitive fines.
Greater transparency. While the engagement letters for the foreclosure reviews were made public, the redactions were remarkable. There is no justification for not disclosing the past work that Promontory did for Bank of America, nor for failing to disclose the names and backgrounds of the senior members of its project team. Even more important, the financial terms should be made public.
Have the regulator clearly be the client. The regulator should engage the consultants, not the bank, and the banks should be required to pay for the cost of the engagement. Given how the banks failed to do anything to contain the massive fee feeding frenzy of the foreclosure reviews, it’s impossible to imagine that any regulator could do a worse job.
Close the revolving door. Call it a Julie Williams clause, that no one at a regulator involved in any way in a consent order can obtain employment at any consultant involved in providing services related to that consent order for two years after the end of the engagement.
Reforming the OCC
While it would be better to get rid of the OCC, it is more realistic to rein it in.
Subject the OCC to Congressional budgetary processes and oversight. The OCC needs to be made accountable to the public. Making it answer to Congress isn’t perfect, but it would be a step in the right direction
Give the OCC its own inspector general. Right now, the OCC is supervised by the Treasury IG, which Neil Barofsky has depicted as the weakest IG in the executive branch.
Eliminate the budget for international travel and fold any foreign oversight into other regulators. The London Whale was under the purview of the OCC. Need we say more? The risk supervision in JP Morgan’s Chief Investment Office was astonishingly lax, including the unheard of approach of having the risk managers report to the business unit, rather than an independent, corporate-wide risk management function. The very fact that the OCC waved that through alone should be cause for clipping its wings.
Install external directors that can oversee the OCC on an ongoing basis and vote on major policy measures. Perversely, given its track record, the Comptroller of the Currency is a Director of the FDIC. It would be preferable to have there be, say five directors of the OCC, with two appointees, plus the head of the FDIC and (say) the Vice Chairman of the Fed as directors, along with the comptroller. Obviously, an important governance step would be to determine what decisions could be made by the Comptroller alone and which needed to be approved by the full board.
Investigate What Went Wrong With the Foreclosure Review
Any reform effort would be much better informed with a proper investigation of why the foreclosure reviews went so horrifically awry. An investigation needs to start not with the hiring of the independent consultants, but the development of the consent orders themselves, and include what parties influenced the provisions of the consent orders. At a minimum, it’s critical to review the e-mails, meeting schedule, and phone log of Julie Williams and anyone else in the OCC who was involved in a major way in negotiating the consent orders and in the process of vetting independent consultants. It is also important to subject the sudden closure of the review to similar scrutiny. The key questions there involve the fact that the banks and the independent consultants clearly misrepresented the amount of borrower harm to the OCC. Query what penalties should result from that sort of misrepresentation.
* See Executive Summary, Part II, Part IIIA, Part IIIB, Part IV, Part IVB Part VA and Part VB. We have also contacted Promontory Financial Group with a list of these articles, indicating that were planning additional posts and asking for their comment. We did not get a reply.
** ProPublica called Promontory a “shadow OCC” yesterday. Naked Capitalism readers know that well already, since Matt Stoller first described Promontory as a shadow regulator in May 2012 and reiterated that point in June. We fleshed out his observation in our whistleblower series, including an entire post that described how Promontory became a shadow regulator on February 11.
Why is this flagged as a ‘guest post’?
‘Cause I put it up in haste right before the 7:00 AM email deadline and the default, weirdly, is “guest post”. Fixing now.
Without power, suggestions are meaningless. The question should be how to build power — how to make the ruling class do what you want it to do.
I don’t agree. People in the US are not going to engage in a general strike.
You can find leverage points and this is one. To take a “nothing can be done unless it’s radical” cedes even more power to the elites. They depend on the ignorance and complacency of the population in order to get their way.
I don’t think Patton’s comment can be so easily brushed aside.
Granted, something like a general strike is not going to happen. I also disagree with the notion that what needs to be done is to “build power.”
Never the less, every one here knows full well that the reforms mentioned here will not come to pass. The question then is why, and what can be done to address those observations so that reforms could be passed. I do feel compelled to note that this question is outside the current topic. So I will try to be brief.
“Closing the revolving door” is a basic idea. But it can not be done because you are asking that the door be closed by the very people who benefit from the open door. But there is a competitive environment at work her too. Those who make the right connection will be at an advantage to those who do not, and the open door is a great path for making connection. Thus those who want to close the door are at an extreme political disadvantage to those who are prepared to keep the door open.
I actually have a name for this, called the Utopian Paradox, where reformers assume a functional system is in place in order to enact reforms that are dictated by a dysfunctional system. Any reform that fails to take the Utopian Paradox into account is an exercise in futility.
With respect to Yves, finding “leverage points” still makes the reforms proposed a very heavy lift indeed. And even if they should be made into law, they will not law long as the current system quickly starts pulling teeth, blowing full of loop holes, or repealing it all together. The “enemy” if I may use the word, can leverage legislation too.
A third approach is needed. One that doesn’t rely on pointless mass demonstrations, or on the Utopian Paradox.
It’s easy to snipe, what did you have in mind?
Proposing we need another option just Lazy Utopianism.
Thank you. I may have been curt, but I am losing patience with people who say, “oh, don’t do X” and offer no suggestions of their own. It amounts to telling people to do nothing, which is the last thing we need under these circumstances.
George Bush the Elder called for “the vision thing.” He wasn’t all that wrong (at least as applied to our context).
Still, one can’t wait for the vision to alight, like a dove descending. One must be out in the world, engaging. “The way out is the door,” is the Zen answer to the Utopian Paradox.
Interesting to learn that the IG at Treasury is the weakest of all. That’s pretty shocking. While Congress is at it, they should require Treasury to have more integrity. It’s almost like we are starting from scratch because the “system” in place was nothing. It’s discouraging because it will take years before a regulatory structure is created which will require conformity by the banks. And in the meantime they will be as immoral as they please. But it has to be done painstakingly because there will always be a connection between private banking and public finance or functional finance. This is the firewall, unless we outlaw private banking altogether. Make the regulators draw up rules which include explicit language which protects future public finance (which will be Treasury’s thing).
There are some such as Chris Whalen who think all of the major banks will eventually find their way back to state charters. I guess the question is whether a national charter vs just a state charter is even necessary for banking. We still don’t have a federal insurance charter or a federal corporation charter and we have done fairly well without them.
If we (as a country) are lucky, this whistleblower-driven series will be followed by other series like it.
This series is the foundation for plenty of other work. For my money, “investigating what went wrong” is the key. Sometimes, you pull one thread hard enough, and the Emperor’s entire suit of clothes unravels.
Political arrangements always seem immutable and eternal. Until they’re not.
In addition to the proposed OCC reforms listed by Yves above: Change the culture of complacency and subservience at the senior ranks of the OCC. Bring in talent with a backbone and a penchant for the investigations that have been sorely lacking. Only by bringing transparency and truth to light, will the OCC ever regain the public’s respect.
Another tangent – First, I may be off-base here, but the consent order in question is the Schneiderman et al. foreclosure settlement – right? Then, most of the nation’s AG’s have an interest in the settlement. OCC then acted as an agent of these states as well as the U.S. Gov. In such an arrangement I would assume that the agent incurs liabilities if it fails to serve the interest of its sponsors. Hence, if you wish to develop the political power to enact reform, it might behoove us to demonstrate that the OCC’s management of the consent process materially injured the various states (harmed their citizens) and encourage the AGs to carry the battle to the OCC and the U.S. Congress. I bet that would get Julie’s knickers in a bunch.
This is playground logic. If you aren’t stout enough to cripple your bullies, get the big dude to settle things for you.
Is Thomas Curry hopeless? The departure of Julie Williams looked promising at one point.
I think Curry has good intentions, but he inherited a complete mess. Really bad culture. He got rid of Williams in a very public way (moved her from a huge office to a cubicle!) to send a message. I do like that sort of thing.
And he inherited the terrible consent order. But I’m taken aback that he shut the foreclosure reviews down without providing for a decent restitution process and for a number that looks like 1/4 of the damages the banks could have expected to pay, which to me suggests he could have gotten double what he got in cash (which is all that matters, the rest is window-dressing).
Now he may have been lied to by his staff, as in the claim was that there was little evidence of borrower harm when that is nonsense. Another head rolled in January. So the jury is still out.