How Promontory Financial Became Banking’s Shadow Regulator
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.