Via Financial Times

A former top US financial regulator has struck a multibillion-dollar deal with Blackstone to sell a company that helps savers obtain extra deposit insurance, in what one former bank supervisor called a way of “gaming” financial rules.

The sale of Promontory Interfinancial Network for about $2.5bn caps a lucrative private sector career for Eugene Ludwig, who completed a five-year term as comptroller of the currency in 1998.

But it has drawn criticism from another former bank regulator, Sheila Bair, who played a pivotal role in the response to the financial crisis as chair of the Federal Deposit Insurance Corporation. Promontory’s business model, Ms Bair said, “is just gaming the FDIC rules. The FDIC takes all the credit risk, and Promontory gets the profit.”

Promontory strongly disputed that characterisation of its patented business methods, which involve parcelling large deposits into portions of $250,000 or less — under the cap for government-backed insurance. Each chunk is sent to a different FDIC-insured bank, which then sends the money straight back to the original institution where it can be used to finance loans.

“The significant technology and infrastructure we’ve invested in building is a valuable service for depositors to more efficiently accomplish what they can otherwise already do . . . in a much more burdensome manner,” Promontory said. It added that its services promoted lending and growth, and were especially important to small businesses and local community banks.

Federal law limits FDIC protection to $250,000 per bank account, a move that economist Sherrill Shaffer said was partly intended to give large depositors an incentive to avoid reckless banks. Congress may also have been leery of providing an unlimited safety net to the very rich, Prof Shaffer added.

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More than 3,000 FDIC-insured banks participate in the Promontory network, meaning a wealthy customer could theoretically deposit $750m through the network without any risk of loss. Promontory says the actual customer limits “are always a fraction of that amount” and that its average deposit weighs in at between $2m and $3m.

Blackstone declined to comment, as did Mr Ludwig, who is selling a significant personal stake in Promontory. He briefly served as vice-chairman of Deutsche Bank after leaving public service, and has since helped dozens of the world’s biggest banks navigate regulatory difficulties. 

His consultancy business, Promontory Financial, was sold to IBM in 2016, a year after it was censured by New York regulators over conduct relating to a report it prepared in 2011 on sanctions violations by the UK’s Standard Chartered bank.

As comptroller of the currency, Mr Ludwig’s remit included ensuring the safety and soundness of the US banking system. 

Over the years he has repeatedly written to the FDIC urging it to relax rules that would have imposed additional costs on banks that use Promontory’s service. Promontory said thousands of other stakeholders also sent letters “backing a policy that has wide support”.

One such letter, sent in 2008, said Promontory’s service could “help to minimise the FDIC’s liability in the event of a bank’s failure”. If large depositors received extra government-backed insurance, he reasoned, they were less likely to withdraw money at the first sign of trouble.

When the agency ruled on the matter a year later, it decided not to place “reciprocal” deposits — such as those placed through Promontory — in a category that would attract higher FDIC levies.

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“Everybody knew it was self-interested,” said Ms Bair, referring Mr Ludwig’s occasional correspondence. “It wasn’t a secret that he had a personal financial stake.”