Earlier today, a settlement was reached between federal regulators, led by the Office of the Comptroller of the Currency and the Federal Reserve, and ten banks over foreclosure abuses. Over the past week or so, the New York Times has been reporting that a settlement was expected, imminent and today it was announced that the deal had been reached where ten banks will pay $8.5 billion "in cash payments and other assistance to help borrowers."
Regulators are calling this a win for homeowners, although the Times' Gretchen Morgenson doesn't see it that way and that's the big story that most people are discussing.
What isn't going to be talked about much, except maybe here, is that this settlement could affect a number of employees at three of the Big 4 accounting firms.
PwC, along with Ernst & Young and Deloitte were all "primary consultants" for various banks as part of "Independent Foreclosure Review." The IFR "mandated that banks hire independent consultants to audit loan files and look for illegal fees, bungled loan modifications and instances where borrowers lost their homes even though they were current on their payments." And who better to "audit loan files and look for illegal fees" than professional service firms that do this stuff every day, right?
Right! The firms loved this because the situation was basically a license to print money for them. The government were mandating these reviews, the banks have plenty of money, and PwC, Deloitte, and E&Y have plenty of warm bodies to look through the thousands of claims.
Back in October, Francine McKenna reported at American Banker that PwC, especially was doing quite well with its arrangement:
PricewaterhouseCoopers will bill more than $1 billion for four of the 14 ordered reviews, according to my sources. I think banks will spend at least $5 billion in total on consultants just to find out how much they'll owe.
So the government gets to look tough; the banks are playing ball; the firms get some hefty fees. Everyone's happy! Okay, maybe not the people that lost their homes aren't happy, but whatever!
Except now the government isn't happy anymore. Here's the Times report from yesterday:
Within the comptroller’s office, senior officials raised concerns that the reviews had grown bloated and inefficient, especially after each loan took more than 20 hours to review, up from original estimates of eight hours a file. The mounting costs of the reviews, up to $250 an hour, began to worry the banking regulators, according to several of the people with knowledge of the matter. So far, the foreclosure review program has cost the banks an estimated $1.5 billion, according to these people. Banking regulators grew concerned that the reviews were not producing meaningful instances of banks wrongfully seizing the homes of borrowers who were current on their payments, according to these people.
In other words, the feds were surprised to learn that poring over just one of these loans would take more than double the time they thought. They concluded that rather than wait months or, more likely, years for the PwC and others to report back, the government is pulling the plug and with this settlement, the accounting firms' cash printing press will come to a screeching halt.
And no one is wasting time getting out of there -- here's a tweet from Francine earlier this afternoon:
It happens that quick.I've heard consultants- external and the bank's - packing up their foreclosure review swords at $JPM already.
— Francine McKenna (@retheauditors) January 7, 2013
Don't feel bad for the firms, they still reaped plenty of fees in the year-and-a-half or so that they were performing the reviews, but now the thousands of employees that were working on these engagements have nowhere to go.
The word on the street (i.e. a person we spoke to that is familiar with the situation) is that PwC alone had hundreds (maybe thousands) of employees working on these engagements. PwC was the primary consultant for Citibank, U.S. Bank, SunTrust, and Ally. Of these, only Ally was not included in today's settlement but presumably, they eventually will as they are still in negotiations
with the OCC. Deloitte was serving as the primary consultant for JP Morgan, E&Y had HSBC and MetLife Bank.
Now I'm just spitballin' here, but there seems to be a couple of options for these firms: 1) re-assign everyone or 2) re-assign some people and cut some people. Option 1 would be ideal obviously, but it seems complicated. Option 2 is less desirable but solves the supply problem.
Option 1 doesn't seem likely to me, simply because of logistics. Can the firms really re-assign thousands of professionals in January? Audit teams could use the help, but they aren't going to risk blowing their budgets just for the sake of good PR? Advisory business is booming, but is there really so much work that all these IFR people can find new homes?
Option 2 seems more feasible because, well, it's feasible. The firms cut a ton of people in the wake of the six-year hiring glut after Sarbanes-Oxley, why wouldn't they take the some approach here? Sure, they'd deal with some blowback, but ultimately they'd keep the machine lean and would avoid having a bunch of people sitting around with nothing to do.
Of course the other scenario is that the firms were 100% planned for the end of the IFR and had placeholders all over their respective organizations so that unfortunate situations like RIFs could be avoided this time around.
A PwC spokesperson declined to comment. Emails sent to Deloitte and Ernst & Young were not returned.
If you had the distinct pleasure of working on one of these engagements and are now sitting around wondering or have already been told what's next, email us. We want to know how this all shakes out.