Former Regulators Find a Home With a Powerful Firm

Eugene A. Ludwig, center, founded Promontory Financial after serving as President Bill Clinton’s comptroller of the currency.
Getty Images
Eugene A. Ludwig, center, founded Promontory Financial after serving as President Bill Clinton’s comptroller of the currency.

The consulting firm is filled with so many former bureaucrats and political insiders that it has become known as Wall Street's shadow regulator.

Nearly two-thirds of its roughly 170 senior executives worked at agencies that oversee the financial industry. The founder, Eugene A. Ludwig, is a former comptroller of the currency and a law school friend of Bill Clinton; the latest hire, Mary L. Schapiro, ran the Securities and Exchange Commission until late last year.

Building off those connections, the Promontory Financial Group has emerged as a major power broker in Washington, helping Wall Street navigate an onslaught of new rules and regulatory scrutiny. Promontory accompanied Morgan Stanley when the bank urged regulators to rethink limits on risky trading, records show. It also joined Bank of America, Citigroup and other big banks at the Treasury Department to discuss plans for dismantling failing financial firms.

But Promontory and other consultants are now facing scrutiny in Congress, amid growing unease over their influence and their close ties to federal authorities. The Senate Banking Committee is set to hold a hearing on Thursday to examine whether regulators inappropriately "outsource" oversight to consultants like Promontory, which are paid billions of dollars by the banks.

"This process raises troubling questions," said Senator Sherrod Brown, the Ohio Democrat leading the Senate hearing. "By shining a light on these practices, I hope we can prevent this kind of fragmented and frustrating effort in the future."

Promontory rejects the notion that it is beholden to Wall Street. The firm says that when it is hired by a bank, it reports to the board, not management.

"I consider my client to be the board members, who are keenly aware of their responsibilities and want an unvarnished and independent view," said Peter Bass, a managing director at Promontory. Mr. Bass, once a State Department official, added that he was "in the business of telling inconvenient truths."

Over the last decade, Promontory has secured lucrative deals to clean up bank misdeeds like foreclosure abuses and money laundering, according to public records and interviews with regulators and executives. The firm has also advised the government of the United States and those of far-flung locales like Cameroon and Iceland.

Behind the scenes, the firm acts as an advocate for banks, helping draft letters that challenge crucial rules and discussing reforms with regulators. While Promontory has not registered as a lobbyist since 2009, the firm's executives have met with regulators at least 10 times in the last two years on thorny issues like the so-called Volcker Rule that curbs risky trading, according to an analysis of data from the Sunlight Foundation, a nonprofit organization that tracks government disclosures.

"Promontory does not seek to influence regulators and does not lobby," the firm said. "This does not mean we never attend a government meeting with clients."

Some lawmakers and housing advocates question the quality of the consultants' work. Promontory, they note, was one of several firms that stumbled in the recent review of foreclosure abuses. In 2008, MF Global hired Promontory to improve its risk controls after a rogue trading blowup; three years later, the brokerage firm collapsed.

Banks are also privately raising concerns about Promontory and its steep fees, which can total as much as $1,500 an hour, according to people with knowledge of the matter. Bank executives, who were not authorized to speak publicly, said they sometimes hired Promontory to appease regulators, who think highly of the firm's expertise.

Promontory defends its work, noting that it has helped turn around dozens of troubled banks. The firm, Mr. Bass said, continues to win new business, as part of "a flight to quality." For example, the firm is working on Project New BAC, the broad cost-cutting effort under way at Bank of America.

"They have a lot of first-class people who know the problems facing the banking business, and who know the regulations extremely well," said Robert G. Wilmers, the chief executive of M&T Bank.

Still, Promontory says there are limits to its authority. It cannot control whether banks disregard the firm's advice and continue to run afoul of the law.

"The recommendations are sometimes challenging to implement," Mr. Bass said.

From the beginning, Mr. Ludwig cemented the firm's ties to Washington and Wall Street.

Mr. Ludwig has occasionally invited Fed governors and other top officials to parties at this 13,000-square-foot Washington home, an $11.5 million estate replete with a tennis court and a modern art collection. Mr. Ludwig, a former executive at Bankers Trust, is also a regular at the Four Seasons restaurant in New York, where he is known by name and salad order.

Promontory said that Mr. Ludwig entertains regulators on occasion but that "there is no discussion of current matters."

According to people with knowledge of the matter, Mr. Ludwig regularly travels by private jet and earns more than $30 million annually, making him better paid than top executives at many big banks. He has shared some of his fortune with a range of philanthropic causes, including the National Academy Foundation, Yale Law School and community groups like the Neighborhood Assistance Corporation of America.

Through Promontory and other companies, Mr. Ludwig has a vast reach, overseeing a private equity firm that invested in struggling banks during the financial crisis and another business that helps banks bundle mortgages and other consumer loans. He also started the Promontory Interfinancial Network, an independent firm that splits up companies' large bank deposits into multiple $250,000 chunks so that the F.D.I.C. will insure the cash. The business processes more than $1 billion a week in customer funds, according to court filings.

For Promontory's consulting business, Mr. Ludwig has recruited among the regulatory elite, including Susan Krause Bell, a onetime senior official at the Office of the Comptroller of the Currency, and Patrick M. Parkinson, who spent three decades at the Federal Reserve. The revolving door spins both ways: the former Promontory executive Amy Friend recently returned to the comptroller of the currency's office.

Promontory notes that conflict-of-interest rules prohibit its employees "from working on matters that were their responsibility in government."

With its regulatory ties, Promontory was well positioned to guide the industry through the financial crisis. In 2006, the firm lobbied for General Motors as the carmaker sought government permission to spin off its sinking lending division. When regulators sanctioned banks for foreclosure abuses, Bank of America, Wells Fargo and PNC hired Mr. Ludwig's firm to assess loans for problems.

"He thinks banks ought to play by the rules, but he's not antibanking," said Alice M. Rivlin, a former vice chairwoman of the Federal Reserve and a longtime friend of Mr. Ludwig.

Ultimately, the foreclosure review proved a headache for Promontory and other consultants. Lawmakers faulted the consultants for farming out much of the work to lower-paid contract employees. Promontory, according to people briefed on the matter, relied on contractors scattered across the United States and the Philippines.

Promontory said it was "accepted practice in the industry" to employ "third-party personnel."

Consultants also remain dogged by concerns that their work does not always remedy Wall Street's problems.

After a rogue trader cost MF Global $141 million, Promontory came in to bolster certain areas of the firm's risk controls. By 2010, Promontory reported to MF Global's board that the brokerage had "successfully and effectively implemented" most of the recommendations, according to court filings. The consultant lauded MF Global's management for setting "a tone at the top." Promontory noted on Tuesday that its purview did not extend to the parts of MF Global that imploded in 2011.

Promontory also worked with banks ensnared by a broad money-laundering investigation, including HSBC and Standard Chartered. In the case of Standard Chartered, Promontory helped the bank assess the amount of illicit money funneled to nations like Iran. The consultant estimated $14 million. But in a statement announcing a settlement with the bank in August, Benjamin M. Lawsky, New York's banking regulator, said, "The parties have agreed that the conduct at issue involved transactions of at least $250 billion."

Promontory said that the firm "stands by the methodology, assessments and recommendations for improvement in its report to Standard Chartered."