Janine Wedel - Unaccountable - How Elite Power Brokers Corrupt Our Finances, Freedom, and Security

Enter Promontory. Even with the extraordinary attempts to delay and obstruct, firms still know they have a lot of new rules to contend with, and Promontory, by its own description, wants to be their consigliere: “for every well-run company the right balance between risk and reward is always critical. Today, unprecedented changes and obligations make doing so more challenging than ever before. Promontory can help you achieve and maintain the right balance.” 78

Its clients might get the “right balance,” but what about the public? With entangled allegiances and shifting roles as the firm bends with the whims of its clients (at times even standing in for regulators as overseers and auditors), accountability to the public strikes the wrong balance.

Promontory has served as sort of a proxy for government auditors, “a firm brimming with former regulators who can hold sway with old colleagues or stand in for them altogether,” as the Washington Post put it.

These ex-regulators are now paid by those they audit.

Promontory also acts as an unconventional lobbying outfit, intervening with regulators on behalf of its clients. Founder Ludwig insists that he and his people are committed to the health of the financial system, not just its bottom line: “We are here to implement what the government wants done,” he told the Post . “People who come here [to work] have high integrity and want to help institutions do the right thing in the aide [ sic ] of financial stability.” 79

One can sense, as with the retired military officers, that Ludwig is pained to be quizzed on his integrity and indeed, by many accounts, he is well regarded and well liked in both state and private sectors.

But the way his company operates—its emerging role as a shadow regulator, buffering its clients from regulation through shadow lobbying, while also availing itself of privileged regulatory knowledge, deserves our inspection.

I’ll look at the question of lobbying first.

Shadow Lobbying?

Despite being filled with well-versed and well-placed ex-regulators, Promontory insists that its people do not lobby their former employers. That doesn’t quite square with some accounts. One area that Promontory has weighed in on, according to Time , is the Volcker Rule designed to rein in risky trading by U.S. banks (and named for the former Federal Reserve chief who champions it). 80The chief counsel at the OCC until 2012, Julie Williams, tells Time that she recalls taking at least several meetings with Ludwig (or other Promontory representatives) about the Rule during the rulemaking process. 81

Williams left OCC to join Promontory in 2013. Her replacement at the OCC? Amy Friend, a managing director at Promontory. The New York Times described this as a sort of “Freaky Friday”-style body-swapping job switch. 82 Time adds that Friend recused herself from Volcker Rule matters when joining OCC, suggesting that Promontory was indeed at least somewhat involved when financial firms and regulators were hashing over the much-disputed rule.

Indeed, the New York Times , analyzing data from a nonprofit that studied the issue, found in 2013 that although Promontory hadn’t been a registered lobbyist for four years, “the firm’s executives have met with regulators at least 10 times in the last two years on thorny issues like the . . . Volcker Rule.” 83

Promontory insisted to the Times that meetings do not necessarily constitute “lobbying.” Ludwig himself made this argument to American Banker, saying “We do the opposite of influencing government. We try to influence the private sector in terms of what the government wants it to do.” 84

Regulation Sleuthing

Promontory has helped pioneer another accountability-challenged influence practice: anticipating regulation with the benefit of fresh insider knowledge. An unnamed source who watched the process in action said this to American Banker: “Law firms have been doing . . . mock hearings for clients for decades. . . . Promontory does that on the regulatory side. [Ludwig] was the first to come up with that model.” 85

There are at least two problems with this practice. First, Promontory almost certainly has access to knowledge from the inside surrounding regulation garnered through recent work experience. Since the firm is packed with ex-regulators, there is the strong possibility that banks are getting such information, which by rights should stay in government hands. (The banks aren’t paying a reported four figures an hour for nothing.)

And clearly the company and its clients value the freshest insight. The American Banker profile notes that Promontory “even has half a dozen former staffers from the Consumer Financial Protection Bureau, which is not even three years old yet.” 86

Second, hiring a firm like Promontory surely encourages banks to continue to strategize in every possible way to remain within the letter of the law while still developing new, legal, but potentially risky profit-making “innovations.” We know by now what fully legal financial innovations ended up being for the global economy in 2008: a wrecking ball.

Shadow Oversight

In Promontory’s role as a shadow regulator, we see how authority, even that of the government, gets dispersed. It is mobile, to say the least.

The government has diluted its own authority and muddied the regulatory waters by calling on firms like Promontory. This has both informal and formal variants.

The first and most common (informal) variant appears to be that when banks hire Promontory, that act carries informal weight which they can throw around to demonstrate that they are supposedly in compliance. An unnamed lawyer, one apparently working for Promontory, said this to American Banker: 87

If the regulators are saying jump on your right foot for 10 miles, we’ll tell you 20 miles. . . . And once you’ve done it, we’ll tell the regulators that you “get it,” and you will pay us well for repairing your regulatory relationship.

This surely encourages the industry to believe that it can continue to self-regulate, a fiction that has for years been embraced by the financial world, especially if banks hire a kind of “fixer” with sterling government connections.

With regard to the second variant—the formal outsourcing of authority—sometimes the government itself mandates that banks use Promontory (or a firm like it) to do some of the financial oversight that would seem to be the province of the government itself.

This has led to some very big accountability problems.

First, there is the now-bankrupt firm MF Global, headed by Jon Corzine, formerly of Goldman Sachs, the U.S. Senate, and the New Jersey governorship.

MF Global was starting to show up on the regulatory radar years before it finally imploded. In a 2008 settlement over a trading scandal with the Commodity Futures Trading Commission, charged with regulating derivatives, MF Global had to agree to hire Promontory—which is, remember, a private consulting firm , not a regulator—to ensure that it was complying with the government’s edicts. Two years later, Promontory lent MF Global its approval, saying “Promontory has witnessed a remarkable turn-around . . . in terms of leadership and culture since our original review[.]” 88Not remarkable enough, clearly, since less than six months later, MF Global would collapse in spectacular fashion after making nearly a billion dollars in “improper” transfers from customer accounts in a desperate bid to cover trading losses, a striking departure from custom. In June 2013, regulators slapped a civil complaint against Corzine, the CEO, for failure to properly supervise. Did MF Global receive a positive report because it was paying the authors? Of course Promontory says no, but we have no real way to verify.