In 2001, Eugene Ludwig opened a consulting business with little more than a secretary and a thick rolodex of contacts from his days as a top banking regulator. An astute, driven college friend of Bill Clinton's, Ludwig had presided over a momentous five years for banking as comptroller of the currency. Even as he prodded banks to embrace fair lending and modernize their risk management, he championed their push into securities markets and used preemption to pry state regulators off the OCC's turf.
At the heart of his new firm's business model was the prescient premise that as banks diversified into new states and markets they would be concentrating their exposure to Washington's oversight. Navigating regulations-and the aims of the people who made them-would become as vital to modern banking as managing credit risk.
"I think it is insane not to follow those rules with vigor," Ludwig says. "First, more than on balance they're designed to make the system and institutions better and safer. Second, they're the law."
With close to 400 employees and some 1,400 consulting engagements under its belt, Promontory Financial Group has built a shadow network between banks and regulators. The firm is a sort of ex-regulator omnibus, capable of forecasting, mimicking and occasionally even substituting for the financial industry's supervisors.
For those who view regulators and the industry as generally reasonable and well intentioned, that work might be viewed as a blessing. But the expertise and impressive connections that shaped Promontory's success are now threatening its reputation, and potentially its future business.
Promontory's strengths, and its connections, stem directly from Ludwig. Clients and rivals alike profess admiration for his intelligence, good cheer and tireless work ethic, and former colleagues from in and out of government have flocked to work for him. He has set out to build an auxiliary, if not better, private-sector regulator, one that-for a fee-will whip problem banks into better shape.
"Promontory in general and Gene in particular know the banking industry very well. They know the problems that the industry has, they know regulation extremely well, and they've hired a lot of first-class people," says Bob Wilmers, CEO of M&T Bank, which brought in Ludwig to speak to its board in November.
Sandy Weill is another fan. The former Citigroup CEO, who founded an education nonprofit where Ludwig is a board member, was Citi's nonexecutive chairman when the bank hired Promontory to overhaul its Japanese business (although Weill says he was not involved in those discussions).
"If one looks around at who can really be helpful as an outside influence on making this industry better ... I think he and his company do that incredibly well," Weill says.
Ludwig is quick to argue that Promontory's influence and its deployment of well-connected staff members extends only in one direction.
"We don't lobby-it's not our business. We do the opposite of influencing government. We try to influence the private sector in terms of what the government wants it to do," he says. (Ludwig did register as a lobbyist for Countrywide after being hired to advise the mortgage giant on its dwindling options in late 2007, though there's no record he performed any advocacy work.)
Indeed, while Promontory could easily bring a client's concern to a high-level regulator's attention, former employees and industry insiders say that any client making such a request doesn't understand the value of the firm. Promontory knows how to please regulators, they say, but it doesn't try to cajole them.
Ludwig says he considers himself a bank doctor, one who specializes in emergency medicine but prefers providing long-term care.
"In the early days, we analyzed the problem, made recommendations, and then left," he says. "Increasingly we found it's more efficacious to be around to implement the recommendations and then order a back test."
The firm's popularity and prolific work has created a powerful network effect: given the breadth of its client list, it can spot emerging regulatory trends.
"They can say, 'We know you've never been criticized for doing something this way in your last three [Bank Secrecy Act] examinations, but you're going to get criticized for it on the next one,'" says H. Rodgin Cohen, a partner at Sullivan & Cromwell and an occasional recipient of referrals from Ludwig's firm. "Promontory is extremely scrupulous in not divulging what's happening at any other institution, but they've got a wealth of experience."
Promontory's outsized success has raised fears that consultants have usurped roles best played by regulators themselves. Chosen as the foremost consultant in the OCC's aborted independent foreclosure reviews, Promontory was an obvious beneficiary of regulators' disastrous and expensive effort to outsource the solution to the foreclosure debacle.
A particularly quick turn of the revolving door only added to recent criticism that the firm has blurred the line between regulator and consultant. In January, Promontory hired Julie Williams, the former chief counsel at the OCC and a Ludwig protégé; days later, the OCC replaced Williams with Amy Friend, who was a managing director at Promontory after serving as staff director for the Senate Banking Committee.