Regulatory Looting- Suprise!!

Regulatory Looting, Promontory-Style: Botched Foreclosure Reviews Alone Generate More than Double Goldman’s Revenues per Employee

It’s really hard to convey a sense of how utterly grotesque the looting that Promontory Financial Group conducted on the misnamed Independent Foreclosure Reviews. Readers may recall that these reviews were set up as part of a 2011 settlement by the Office of the Comptroller and the Currency and the Fed with 14 major servicers. The reviews were shut down abruptly at the very beginning of this year due to revelations about lack of independence of the reviews (in Bank of America’s case, a large chunk of the review work was under the direct control of the bank, with the “review” by Promontory characterized by numerous whistleblowers as process of denying that any harm to borrowers took place) and burgeoning consultant bills. And as Congressional hearings revealed, the money spent on the reviews was a complete waste (well, except for the banks, for whom it was a cheap “get out of damages” card). The banks and the OCC decided which homeowners would get how much though a process that clearly had to be arbitrary (it was later revealed that the people who got the higher payouts were the ones who were further along in the review process, meaning it had nothing to do with any assessment of harm). A USA Today article yesterday revisits the topic of how paltry and arbitrary the payments were:

Almost all the checks have gone out from a settlement that government regulators initially touted in 2011 as their most aggressive effort to root out banks’ errors, hold them accountable and right the wrongs done to many homeowners. The outcome falls short of the vindication many borrowers expected…
The payouts, far from closing the books on an economic catastrophe that rocked millions of households in the worst years of the Great Recession, have instead reignited old feelings of anger and frustration. As Bailey and others like him see it, the banks and the government have at last put a price on foreclosure injustices — and it’s too low.

It also contains numerous examples as well as useful statistics, consistent with numerous reader complaints at NC. For instance:

Max Caycoya, 42, an engineer in Houston, got a $500 payout that left him angry and confused. He says he had a loan modification request denied in 2010, so he expected $6,000 for being in the “modification request denied” category. The $500 meant that he landed in either the “all other loans” or “modification request approved” category.
“This makes no sense to me,” Caycoya says.
John Failla, 47, a casino supervisor in Tucson, was denied a loan modification from Bank of America, he says. He expected $6,000 and got $500.
BofA says Failla was never denied a loan modification because he was never considered for one. The bank says Failla, after requesting a modification, called to say he’d decided to pursue a short sale.
Failla disputes that. He says he filled out a loan modification application and pursued a short sale only after the modification was denied. He’s complained to BofA about his payout. “I’d like my other $5,500,” he says.

Let’s contrast the doubly-shafted borrowers with the Promontory Financial Group, which handled the reviews for three servicers: Bank of America, Wells Fargo, and PNC. We had whistleblower at Bank of America and PNC report on how little supervision Promontory did and how utterly confused and chaotic the process was. We covered this terrain extensively in a series of posts that became an e-book, so we’ll provide one extract as a reminder:

As we documented in detail in our earlier posts, the result was that the work of going through six of the seven substantive tests was performed on Bank of America premises with personnel under the control of Bank of America. Promontory did provide the software with the endlessly-revised questions that the personnel at Bank of America tried to answer, along with various information guides. It visited the staff in biggest center, Tampa Bay, only four times in thirteen months, and its interaction with the people doing the review work was extremely limited. In other words, this was not a Promontory foreclosure review, it was a Promontory-decorated Bank of America foreclosure review.
By contrast, the project at PNC was modest in scale, yet it proved be well beyond the managerial capabilities of Promontory. At a bank with a comparatively small servicing portfolio, Promontory put in place a team composed almost entirely of contractors (140 to 150 when staffed up) only one Promontory employee in a managerial role, the managing director on the project, Michael Joseph.** PNC hired even more contractors to do clerical work to support this team’s efforts.
Anyone who has worked in a real organization can appreciate how insane this arrangement was. One person cannot effectively lead 150 people, particularly on a customized project operating in several locations. The only professional firm activity that routinely has such extreme ratios of partners to working oars is foreclosure mills…

Consultant D: – essentially what I witnessed in the 10 to 12 months was the fact that Promontory did not manage the project. Their effort to manage the project with any real due diligence, to me, they just, they fell short from A to Z. For example, from the time I joined the project to the time it ended, I saw the leader of the PNC part of the project two times, and the total time was less than 10 minutes….After concluding that there were too many individual specialized pieces of a loan review to achieve consistency across the large number of reviewers, PNC pushed an attempt to break the reviews up into individual subsets that could address particular borrower harm issues, with the intent of bringing them all together at the end. That was the plan, but then they couldn’t figure out how they were going to bring all the subsets together at the end and gave up on that approach. Then, complaints as to “lack of independence” grew louder, and the OCC and Promontory were faced with junking what limited deliverables they had after 10 months of work, and starting all over with review procedures designed and blessed by Promontory alone. While that could have been done, the design stage was going to require a considerable amount of time, energy, and beta testing to get right.

Step back and understand what that section says. After 10 months, there was virtually nothing to show for this effort. Promontory had to junk what little it had done at PNC because the work to date was insufficiently “independent”.

What are the rewards for bank-favoring incompetence? Lucrative indeed. Promontory disclosed that its fees across its three clients was $927 million. This was for a project where the engagement letters were signed in early September 2011 and the project was aborted the first week of January 2013. That’s 16 months, but since the project had an initial detailed work planning and ramp-up phase, plus the clients had to organize how to get information to the consultants, it’s a conservative assumption that the fees covered 12 to 14 months at full staffing levels. We’ll use 14 months to be conservative. That translates to $795 million on an annual basis, so call it $800 million applicable to calendar 2012. Now remember, not all of Promontory was turned over to this activity; in fact, one of the major problems was it hired lots of contract workers (on which it charged large markups).
But let’s run some crude comparisons:

Promontory, according to American Banker, has 400 employees. So the project revenue per head was $2 million dollars. Goldman Sachs in 2012, by contrast, has $28.8 billion in revenues for 33,000 employees, or a mere $873,000 in revenues per head. And Goldman uses capital and has lots of infrastructure (back office, IT systems) and takes market risk
Promontory said it reviewed 250,000 loan files. So it spent $3,700 per file and didn’t produce any usable conclusions. And that number gives a misleading impression, since at Bank of America, over 100,000 files were reviewed mainly by temps hired directly by the bank, with only minimal involvement by Promontory. So the cost on files where Promontory did most of the work was considerably higher. Contrast these fees to borrower payouts averaging around $850.

The revelation of Promontory’s fees was in response to a request from the Senate Banking Committee. The firm attempted to defend the pay for non-performance:

Konrad Alt, a Promontory managing dierctor who was a top OCC official in the 1990s, wrote that the company ”performed several million hours of labor” and “an amount of information comparable in magnitute to all the written materials held by the Library of Congress.”

This opens up the question of how accurate these statements to Congress are. Promontory most assuredly did not generate meaningful amounts of information; it’s attempting to take credit for information in bank systems. Moreover (and one needs to see the entire letter, not the extract) but the firm most assuredly did not perform several million hours of work; Promontory hired large numbers of poorly supervised contract workers.
While Promontory’s billings were the most egregious, it did have some competition. Deloitte got a stunning $465 million for JP Morgan. Given that the bank bought two companies with famously lousy loans that it wound up servicing, Bear Stearns and WaMu, the results seem to reflect a Promontory-level job (even though Promontory handled Wells which also was a large servicer, whistleblower reports from Wells suggest that the bank kept Promontory on a tighter leash by setting up borrower-requested review in such a way as to reject virtually all letters) than BofA did, which if true, would have led to much lower costs.
Unfortunately, it’s clear that the banks, the reviewers, and the OCC have done an effective job of putting a shroud over this travesty. The OCC appallingly can stymie requests for details that might the banks or the consultants as confidential supervisory information and prevent disclosure. The only real remedy is to inflict meaningful costs on the OCC for protecting the perps, and that is by getting the agency shut down.