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It has long been true that America's financial system could hardly function without Promontory and other private accounting firms such as Deloitte, PricewaterhouseCoopers and Ernst & Young. Regulators and banks alike hire them to investigate suspicious activity, act as intermediaries between government and private companies and advise financial institutions on how to comply with complex regulatory rules. At the OCC alone, one-third of legal actions taken against banks since 2008 have required the aid of outside consultants. Most are staffed with former regulators, who now implement the rules they helped write. Consultants have become so indispensable to the system, they have started to shape it.
Promontory is arguably the most powerful of these regulators-for-hire. The expertise of former watchdogs, including founder and CEO Eugene Ludwig, is at the heart of the company's business model. The 450-person firm boasts two former SEC heads, two former top Federal Reserve enforcers and a former leading official from the newly formed Consumer Financial Protection Bureau. Government has also hired from Promontory's ranks. Amy Friend, Williams' eventual replacement at the OCC and a key author of Dodd-Frank when she worked on Capitol Hill, worked at the firm from 2011 to early 2013.
Born in Brooklyn and educated at Haverford, Oxford and Yale, Ludwig had been a successful banker and Washington lawyer when President Bill Clinton tapped him to head the OCC in 1993. (Clinton and Ludwig's connection goes back to Oxford and Yale Law School.) By the time he left government in 1998, Ludwig realized that the growing size and complexity of financial institutions would lead to ever-more-labyrinthine regulation. Federal officials found it just as difficult to enforce rules as banks did to comply with them. Promontory stepped into the breach, advising both sides. In recent years, Promontory reportedly charged up to $1,500 an hour for its services.
The company grew as regulators and banks increasingly relied on it. By the time of the crash, Promontory was already the first among equals. The month after the September 2008 global run on U.S. money markets nearly brought low the world economy, Senate Banking Committee chairman Chris Dodd empaneled his first hearing of outside experts on the crisis and on potential responses by lawmakers to ensure it never happened again. Two of the five panelists were from Promontory--former SEC chair Arthur Levitt, a board member, and Ludwig.
But it was Dodd-Frank regulatory overhaul in the wake of the crash that solidified an important line of business for the firm: shaping the rules themselves. The bill laid out broad goals but left crucial rulemaking to regulators. Promontory registered as a lobbying firm from 2004 to 2009 on behalf of TD Ameritrade, General Motors and failed mortgage lender Countrywide Financial. Promontory officials arranged and attended meetings between regulators and clients in which the firm explained the potential effects of Dodd-Frank rulemaking on financial institutions. Promontory now says it is no longer in the lobbying business and has not tried to influence Dodd-Frank on behalf of its clients.