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> ABA Insurance Risk Management Forum - February 2-5, 2014 - San Diego, CA

The financial crisis and its regulatory aftermath proved to be a solid business opportunity for a group of consulting firms that have risen to help banks with their compliance needs. The like of Promontory Financial Group, Rust Consulting, PricewaterhouseCoopers, Deloitte & Touche and others flew under the radar for many years. But just recently, they have found themselves in a harsh spotlight, as more people awoke to some big issues involving these "shadow regulators."

DealBook reports that New York state banking regulators have subpoenaed Promontory and PwC, seeking answers to questions that apparently revolve around a "perceived coziness" they maintain with the industry.

My sense is that the coziness is plain and obvious. It's to be expected. These firms are not regulators per se, they are private consulting firms that banks hire to help them with thorny compliance issues. They are by definition going to be cozy, as these firms rake in millions of dollars in fees from the banks. That makes for good "friends" in any professional service industry, law, audit, and so on.

While coziness is to be expected, there are other issues. One of course is the shoddy quality of the some work. Rust Consulting was roundly criticized recently for botching restitution payments to aggrieved mortgage holders this year. Some of the checks actually bounced.

To be sure, these consulting firms want more business. And they will deliver a story that the industry wants to hear. The danger of course is when the industry starts to assume that if they implement a certain firm's solution, they will end up de facto compliant. That may not be the case, and we certainly hope that such a message is not part of the marketing.

Some regulators to their credit seem to be aware of these issues.

New York state regulators took action against Deloitte recently, fining the firm $10 million and banning it from advising banks in the state for a year after accusing it of "watering down a report about money-laundering controls at the British bank Standard Chartered."

A final issue that affects some is the extent to which a bank's audit firm is also performing consulting work. That's where some conflicts of interest can really crop up.

Read more about: Consultants, Auditors
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Today's Top News

1. Goldman Sachs timekeeping at issue in Zurich

By Jim Kim

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2. Michael Dell goes back to his roots

It's fair to say that the tragic death of a Bank of America intern in London has resonated with more force in Europe than in the United States. In some countries, it has become a regulatory issue that affects the entire industry.

An interesting example has cropped up in Switzerland, where regulators have opened a probe in Goldman Sachs' efforts to keep track of hours worked by some employees.

The issue, according to the Financial Times, is whether the gilded bank is overworking some employees.
The Zurich Office for Economy and Labour confirmed that an investigation is indeed underway. The big issue locally concerns senior staff hours. "For more than a year, Swiss employers' and employees' organisations have been locked in a dispute over whether companies can stop keeping a record of the hours worked by senior staff, such as team leaders, or those with a high degree of professional autonomy."

It's unclear how all this came about at the bank. I doubt that high-level executives complained about working too many hours; that would hardly be Goldman Sachs-like.

In the United States, it's doubtful that this will ever be an issue, even for junior staff. It's assumed that the job is anything but a standard 9 to 5. You work until the job is done. Few are paid by the hour.

For more:
- here's the article

Read more about: Goldman Sachs, Enforcement Action
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By Jim Kim

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3. Erin Callan-- still doing well

And now the real work begins.

Michael Dell and Silver Lake have prevailed in their effort to take the ailing computer maker private. Shareholders gave their $25 billion deal thumbs up in a short meeting this week, as expected. Carl Icahn, while still pursuing an appraisal rights gambit, has walked away with a $70 million profit and some parting shots. We presume he has made good on his word to call and congratulate Michael Dell.

But it would be way too premature to pronounce this saga over.

The question now is not whether Michael Dell will lose executive control of the firm he founded but whether the can turn it around. The goal is to transform Dell into a mobile hardware powerhouse and a mission-critical enterprise networking company.

In some ways, Michael Dell is back in his element. He owns about 75 percent of the company and will be calling the shots from here on out. It's all on him---just like it was when he started the company in his dorm room. There's no other option when it comes to doling out credit or blame for whatever happens to the company.

The best guess is that the company will remain private for many years. Perhaps permanently.

For more:
- here's an overview from Bloomberg Businessweek

Read more about: LBOs, Dell
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By Jim Kim

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4. Twitter to go public -- very soon

We noted recently that at least two of the "where are they now" slideshows published to mark the 5^th Anniversary of the Lehman Collapse failed to include former CFO Erin Callan.

It's nice to see that she has landed on her feet.

She was among the highest-profile ex-Wall Street executives who clammed when the financial crisis hit home. She apparently had a bit of a struggle coming to grips with what happened to her. But there had been tidbits of information that came to light along the way suggesting that she had found a new life---and a new happiness. She actually wrote about it in March.

Bloomberg got her to open up even more about her new life---less lavish but more rewarding---and how she was treated before she was forced out.

The truth is that the crisis is not truly over for her. "There was financial uncertainty: Callan says she left Lehman with close to nothing—she hadn't negotiated a severance package and forfeited all her stock and options. Callan continues to contend with civil lawsuits over Lehman and her role there. Since Lehman's liability insurance ran out a year ago, she's paying her own legal bills."

And there will always be questions about her executive role as the Lehman drama played out. "She seemed to be completely on her own as the financial crisis worsened and Bear Stearns collapsed and was sold to JPMorgan Chase. Callan was vilified, held up as the personification of Lehman's recklessness even though she'd spent the bulk of her time at the firm developing its hedge fund business. 'I was presented to the public in a very solitary fashion without other management team members with me or around me, and I think there was an assumption that I was articulating personal views of some sort,' Callan says. 'When you're tasked with presenting a view in a public setting, you are asked to present the view of management, the view of the organization.' She adds: 'It became too much about me.' "

I'm not sure what the lesson is. But I'm glad for the happy ending.

For more:
- here's the article

Read more about: Lehman Brothers, Erin Callan
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By Jim Kim

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5. Where have all the monitoring fees gone?

In the wake of the passage of the Jumpstart Our Business Startups (JOBS) Act last year, people were fond of saying that the law would likely have a limited impact. In some ways, that has proven to be true. But when it comes to IPO registration, quite a few companies have taken advantage of the provisions that allow for companies with less than $1 billion to file registration documents in secret.

The issue was thrust front and center by Twitter, which took advantage of the provision ahead of its IPO.

Not everyone thinks that's a good thing for what will no doubt be a very high-profile deal, one that fittingly was announced via the company's blockbuster product.

"A tweet running to 135 characters was all it took late on Thursday to launch one of the year's biggest financial stories: that Twitter has taken the first steps towards an initial public offering," according to the Financial Times.

"The complete absence of further information about the proposed share sale, however, left potential investors in the dark about key facts such as the state of the company's business, how it plans to handle the share sale or how much money it hopes to raise."

The debate over this new registration option for small companies will not be settled anytime soon. What is clear is that outside analysts have less time to do their work ahead of the actual priced date, which could be within a month or so.

It will be interesting to see if the underwriters, which have yet to be announced, will take advantage of another JOBS Act provision that makes it easier to distribute their research, which tends to be very glowing. The law allows for analysts employed by underwriter to release their research much earlier. Previously, they had been bound by a 40-day quiet period. So far, however, most investment banks have not aggressively taken advantage of this provision, fearing conflicts with other laws.

For more:
- here's the article

Read more about: IPO, Twitter
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By Jim Kim

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