[Vision2020] Whores Helping Whores

[Art Deco]

[image: DealBook - A Financial News Service of The New York
Times]<http://dealbook.nytimes.com/>
January 31, 2013, 9:06 pmDoubt Is Cast on Firms Hired to Help BanksBy JESSICA
SILVER-GREENBERG<http://dealbook.nytimes.com/author/jessica-silver-greenberg/>
and BEN PROTESS <http://dealbook.nytimes.com/author/ben-protess/>

Federal authorities are scrutinizing private consultants hired to clean up
financial misdeeds like money laundering and foreclosure abuses, taking aim
at an industry that is paid billions of dollars by the same banks it is
expected to police.

The consultants operate with scant supervision and produce mixed results,
according to government documents and interviews with prosecutors and
regulators. In one case, the consulting firms enabled the wrongdoing. The
deficiencies, officials say, can leave consumers vulnerable and allow
tainted money to flow through the financial system.

"How can you be independent if you're hired by the entity you're
reviewing?" Senator Jack
Reed<http://topics.nytimes.com/top/reference/timestopics/people/r/jack_reed/index.html?inline=nyt-per>,
Democrat of Rhode Island, who sits on the Senate Banking Committee, said.

The pitfalls were exposed last month when federal regulators halted a broad
effort to help millions of homeowners in foreclosure. The regulators
reached an $8.5 billion settlement with banks, scuttling a flawed
foreclosure review run by eight consulting firms. In the end, borrowers
hurt by shoddy practices are likely to receive less money than they
deserve, regulators said.

On Thursday, Senator Elizabeth
Warren<http://topics.nytimes.com/top/reference/timestopics/people/w/elizabeth_warren/index.html?inline=nyt-per>,
Democrat of Massachusetts, and Representative Elijah Cummings, Democrat of
Maryland, announced that they would open an investigation into the
foreclosure review, seeking "additional information about the scope of the
harms found."

Critics concede that regulators have little choice but to hire outsiders
for certain responsibilities after they find problems at the banks. The
government does not have the resources to ensure that banks follow the
rules. Still, consultants like Deloitte & Touche and the Promontory
Financial Group can add to regulators' headaches, the government documents
and interviews indicate. Some banks that work with consultants continue to
run afoul of the law. At other times, consultants underestimate the extent
of the misdeeds or facilitate them, preventing regulators from holding
institutions accountable.

Now, regulators and lawmakers are rethinking their relationship with the
consultants. Officials at the Federal Reserve, which oversees many large
banks, are questioning the prudence of relying on consultants so heavily,
said two people with direct knowledge of the matter.

When the Office of the Comptroller of the
Currency<http://topics.nytimes.com/top/reference/timestopics/organizations/c/comptroller_of_the_currency/index.html?inline=nyt-org>penalized
JPMorgan
Chase<http://dealbook.on.nytimes.com/public/overview?symbol=JPM&inline=nyt-org>last
month for breakdowns in money-laundering controls, it imposed stricter
requirements, ordering the bank to hire a consultant with "specialized
experience" in money laundering and to ensure that the firm "not be subject
to any conflict of interest." In a separate action against the bank related
to a $6 billion trading loss last year, the agency opted not to mandate an
outside consultant at all.

While the comptroller's office will continue requiring consultants in
certain cases, some agency officials are worried about the quality of the
work, as well as the consultants' independence, according to three
government officials briefed on the matter.

Since the financial crisis, regulators have increasingly relied on
consultants. The comptroller's office ordered banks to hire consultants in
more than 130 enforcement actions since 2008, or nearly 15 percent of the
cases.

It can be a lucrative business. In 2011, regulators mandated that 14 banks
employ consultants to determine whether homeowners were wrongfully evicted.
Over 14 months, the consultants collected about $2 billion in fees,
according to regulators and bank officials.

Those fees amounted to more than half of what homeowners will receive under
the $8.5 billion settlement that ended the review. As part of the deal,
officials will disburse $3.3 billion to 3.8 million borrowers in
foreclosure.

According to consultants and regulators, the broad review was plagued with
inefficiencies. For example, Promontory initially instructed employees to
calculate lawyers' fees for each loan, to assess if borrowers were
overcharged. Later, it scrapped the original procedure, only to reverse the
policy again two weeks later, according to two reviewers who worked for
Promontory.

"From Day 1, Promontory strove to conduct its review work as thoroughly and
independently as possible," a spokesman for the firm, Christopher Winans,
said in a statement. "Our overarching concern at all times was to serve the
best interests of borrowers."

Some lawmakers question whether a consultant's regulatory connections
helped it secure contracts. PricewaterhouseCoopers, which has a stable of
former Securities and Exchange
Commission<http://topics.nytimes.com/top/reference/timestopics/organizations/s/securities_and_exchange_commission/index.html?inline=nyt-org>officials,
won much of the foreclosure review work, signing deals with four
banks, including
Citigroup<http://dealbook.on.nytimes.com/public/overview?symbol=C&inline=nyt-org>.
Promontory, the firm examining loans for Wells
Fargo<http://dealbook.on.nytimes.com/public/overview?symbol=WFC&inline=nyt-org>,
Bank of America<http://dealbook.on.nytimes.com/public/overview?symbol=BAC&inline=nyt-org>and
PNC, was founded in 2000 by the former head of the comptroller's
office, Eugene A.
Ludwig<http://topics.nytimes.com/top/reference/timestopics/people/l/eugene_a_ludwig/index.html?inline=nyt-per>
.

When the contracts were initially awarded, some housing advocates
complained that consulting firms could not objectively evaluate banks with
which they had pre-existing business relationships. The comptroller's
office said it vetted the firms to spot such potential conflicts, and
argued that the process provided swifter relief for homeowners than if the
government had hired the companies directly through a lengthy contracting
process.

But concerns persisted. Deloitte, which won the contract to review
JPMorgan's loans, had previously audited Washington
Mutual<http://topics.nytimes.com/top/news/business/companies/washington_mutual_inc/index.html?inline=nyt-org>and
Bear
Stearns<http://topics.nytimes.com/top/news/business/companies/bear_stearns_companies/index.html?inline=nyt-org>,
two firms JPMorgan acquired during the financial crisis. In May, the
comptroller's office replaced Allonhill, the consultant for Aurora Bank,
after the firm disclosed that it had already reviewed some "of the same
pool of loans" as part of an earlier contract.

"It's clear from the foreclosure settlement that oversight over consultants
was inadequate and the review process was deeply flawed," said
Representative Carolyn B.
Maloney<http://topics.nytimes.com/top/reference/timestopics/people/m/carolyn_b_maloney/index.html?inline=nyt-per>,
Democrat of New York, who recently pressed regulators to detail how
consultants were paid. People close to the review say consultants relied on
a process that the comptroller's office designed in 2011, under previous
leadership.

"This was a very complex process," a spokesman for the comptroller said.
"Throughout the process, regulators provided continuous oversight, guidance
and were available to discuss issues." The agency also performs spot checks
on the consultants.

Still, the foreclosure review highlighted broader concerns about the role
consultants play.

Since the financial crisis, the comptroller's office has issued nearly 20
enforcement actions against banks that had already hired consultants to
help iron out problems, according to government documents. While
consultants cannot be expected to remedy every last issue at the banks, the
actions raise questions about the effectiveness of their work.

When HSBC<http://dealbook.on.nytimes.com/public/overview?symbol=HBC&inline=nyt-org>,
the British bank, was sanctioned in 2003 over porous money-laundering
controls, the bank turned to Deloitte to review its compliance, an official
briefed on the matter said. Deloitte also worked for HSBC from 2006 to
2008, the person said, building a system to monitor money flows more
effectively. But the bank ran into trouble in 2010 over similar issues, as
highlighted in a recent scathing report by the Senate's Permanent
Subcommittee on Investigations.

As part of a regulatory order, HSBC again hired Deloitte, this time to
assess the number of times the bank failed to report suspicious
transactions. Deloitte, three officials said, generously bundled hundreds
of missed transfers into a single report. That may have helped save the
bank from some government fines.

Despite the undercounting, HSBC still paid a record $1.9 billion last year
to settle accusations that it enabled drug cartels to move money through
its American subsidiaries.

In a statement, a spokesman for the firm said, "Deloitte fully stands
behind the quality and integrity of its work on behalf of regulatory
authorities."

Deloitte has also been suspected of helping institutions cloak illicit
transfers of money to rogue nations around the globe. In August, New York's
top banking regulator, Benjamin M. Lawsky, accused Deloitte of helping the
British bank Standard
Chartered<http://topics.nytimes.com/top/news/business/companies/standard-chartered-plc/index.html?inline=nyt-org>flout
American sanctions.

The consulting firm was hired to flag suspicious transfers routed through
Standard Chartered's New York branches. Instead, it instructed bankers on
how to escape regulatory scrutiny, according to state court documents.

Deloitte turned over "highly confidential information" from which the bank
gleaned insight into "regulators' concerns and strategies," the court
documents said. The firm later doctored its report to regulators, Mr.
Lawsky said, deliberately removing some illegal transfers on behalf of
Iranian clients. In an e-mail, a Deloitte partner admitted that a report on
the transactions was a "watered-down version."

The authorities never took legal action against Deloitte, and federal
officials noted in a separate settlement agreement that Standard Chartered
employees withheld critical information from the consulting firm.

Despite these concerns, regulators are turning to a familiar source to help
Standard Chartered. As part of a $327 million settlement last year, the
bank is required to hire "an independent consultant."

-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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