Feasting on Paperwork
The amount billed by Debevoise & Plimpton to write a 17-page letter on a new rule intended to rein in risky banking — around $100,000 — would make most authors jealous.
That’s the fee just for parsing the proper definition of a bank-owned hedge fund. Longer and more complex regulatory missives, weighing in on who should be deemed too big to fail or how derivatives are traded, can easily cost twice as much.
These comment letters could save Wall Street banks billions of dollars if they help persuade policy makers to adopt a more lenient interpretation of the coming rules. And white-shoe law firms like Debevoise & Plimpton are cranking them out by the dozen.
Call it Dodd-Frank Inc. A year after Congress passed the broadest financial overhaul since the Great Depression, the law has spawned a host of new businesses to help Wall Street comply — and capitalize — on the hundreds of new regulations.
Besides the lawyers, there are legions of corporate accountants, financial consultants, risk management advisers, turnaround artists and technology vendors all vying for their cut.
“It is a full-employment act,” said Gregory J. Lyons, a partner at Debevoise, where a team of a half-dozen lawyers has drafted 30-plus comment letters in the last six months.
“The law is passed, but we are still reasonably early in the process,” Mr. Lyons said. “There is still a lot to be written.”
New regulation has long been one of Washington’s unofficial job creation tools. After the enactment of the Foreign Corrupt Practices Act in the late 1970s, hundreds of lawyers and accountants were hired by companies to strengthen their internal controls. The Sarbanes-Oxley Act of 2002 became a boon for the Big Four accounting firms as public corporations were forced to tighten compliance in the wake of the Enron and WorldCom scandals.
Now, the Dodd-Frank Act is quickly becoming such a gold mine that even Wall Street bankers, never ones to undercharge, are complaining that the costs are running amok.
“It’s basically lawyers, hired guns and money,” said the chief financial officer of a major Wall Street firm, who was not authorized to speak publicly on the matter. “Everyone has an angle.”
No one yet is tracking all the money being spent to deal with Dodd-Frank (which in itself could be an entrepreneurial venture), but a back-of-the-envelope calculation puts it in the billions of dollars.
And that’s not even counting the roughly $1.9 billion spent by companies lobbying on financial issues since the regulatory overhaul was first proposed in early 2009, according to the Center for Responsive Politics.
The bulk of the lobbying tab was spent in the two years before Dodd-Frank took effect. Now firms are spending similarly eye-popping sums to comply with or battle against the rules emerging from the law. They are turning to existing companies that have started dedicated teams like the one at Debevoise & Plimpton, as well as start-ups like the Invictus Consulting Group.
When Kamal Mustafa founded Invictus in early 2008, few banks underwent routine stress tests to assess their financial health. Now, the new law requires the nation’s largest banks to conduct annual stress tests, while regulators are leaning hard on smaller lenders to take similar measures. As a result, Invictus’s business — dispensing advice on how to properly administer those exams — has taken off.
“You can stress-test all you want, but somebody has to validate the results,” Mr. Mustafa said. “That’s a massive opportunity.”
Regulators from seven states — including California, New Jersey and Pennsylvania — have hired his firm, Mr. Mustafa said, and he is selectively signing up two to four new bank clients a month. Annual advisory fees start at $20,000 and can reach $100,000 or more.
With business booming, Mr. Mustafa said he planned to hire 40 to 50 former bankers in the coming months, almost quadrupling his current staff. And in May, Invictus established its first European outpost: a London office focused on overseas banks and regulators.
Technology vendors, including I.B.M. and SunGard Consulting Services, are expecting huge windfalls from the new systems that banks will need to churn out vast amounts of data for regulators, or to lower the cost of processing a derivatives trade. Wall Street banks and asset managers are expected to spend more than $3.8 billion from this year to 2013 on technology to cope with all the new financial rules, according to the TowerGroup, a technology research firm.
Retail banking consultants are racking up new assignments advising banks on how to make up missing revenue from lost debit card fees, while governance advisers are helping firms assess whether executive pay packages will pass muster with shareholders, who are now entitled to a nonbinding say-on-pay vote.
Some law firms have even become small-scale publishing houses. Davis Polk & Wardwell, for example, is offering a $7,500-a-month subscription to a Web site that tracks the progress of every Dodd-Frank requirement. So far, more than 30 large financial companies have signed up.
As Congress started drafting the legislation in the spring of 2010, Davis Polk & Wardwell began compiling a spreadsheet to keep its lawyers updated on hundreds of regulations. Then, Gabriel D. Rosenberg, a young associate, proposed turning the firm’s database of legal summaries and rule-making deadlines into an interactive site — and spent a weekend building a prototype.
By late July, clients started logging on to the “regulatory tracker” — and have steered more business to the firm as a result, said Randall D. Guynn, the head of Davis Polk’s financial institutions group. “There were a lot of new relationships because people want this,” he said.
Perhaps the biggest new business established by Dodd-Frank stems from the requirement that large financial institutions establish living wills, or emergency plans to wind themselves down in the event of a collapse. Firms are hiring small armies of outside advisers to develop the plans and handle the mountains of paperwork, according to people involved in the process.
As a result, global law firms like Clifford Chance and Sullivan & Cromwell; accounting firms like Deloitte and PricewaterhouseCoopers; and financial consultancies like Oliver Wyman and the Promontory Financial Group, are all working overtime to land assignments. Even restructuring boutiques, like Alvarez & Marsal and Houlihan Lokey, are elbowing their way in.
Armed with a 60-slide visual presentation, Houlihan Lokey executives approached about a dozen Wall Street firms this spring with an offer to help draft their living wills.
Their sales pitch: we mapped out funeral plans for Lehman Brothers and the CIT Group during the throes of the crisis; we can help with your final arrangements, too.
“When we do a restructuring, we advise our clients and then execute on it,” said Michael McMahon, the head of Houlihan’s financial institutions group. “We are doing the exact same thing here — but we just have to document it.”
It is lucrative work. Barclays said earlier this summer that it has spent more than £30 million, or $48 million, on outside advisers and in-house staff to draft its living will. Each of the five biggest Wall Street banks and several other large financial companies could easily spend just as much.
What is more, most global firms will need to have several versions of their living wills to satisfy the requirements of the different national regulators. That should keep the billable hours coming.
Lawyers and consultants are salivating at the prospect of even more business opportunities. Some envision that many of the banks’ largest creditors will hire them to figure out how they might fare if the living wills were actually to take effect.
“They are going to ask, ‘What is going to happen to me?’ ” said Chip MacDonald, a lawyer at Jones Day. “We are only getting started.”