Fed’s big boost for BlackRock raises eyebrows on Wall Street
Last Tuesday, investors poured a record-breaking US$1.5 billion into an exchange traded fund run by BlackRock, a sum that represents about US$2.3 million of fees for the asset management giant. And it was all thanks to the Federal Reserve.
A day earlier, the U.S. central bank announced plans to buy bond ETFs for the first time through its New York arm, as part of an effort to ease stresses in the financial system caused by the novel coronavirus.
One program will buy bonds directly when they are issued; another will purchase bonds on the secondary market and buy ETFs; a third will purchase commercial mortgage-backed securities.
All three will be overseen by BlackRock.
The company will credit back to the Fed any fees earned on program assets that are invested in its own ETFs. It will also only charge the Fed fees for managing bond assets in the program and not include ETF purchases in that calculation, according to an update from the Fed posted on Friday. But last week’s inflows into its ETF, as investors raced to front-run the central bank’s expected purchases, show how the Fed has already indirectly shaped markets to BlackRock’s benefit.
“It is truly outrageous,” said one asset management executive, who declined to speak on the record due to BlackRock’s influence. “BlackRock will be managing a fund and deciding if they want to use taxpayer money to purchase ETFs they manage. There’s probably another 100-200 managers who could do this, but BlackRock was chosen.”
A representative of the company’s Financial Markets Advisory (FMA) business — a separate unit from the traditional asset management business — said it was “honoured” to have been selected to assist the New York Fed “during this extraordinary time.”
It is truly outrageous. BlackRock will be ... deciding if they want to use taxpayer money to purchase ETFs.
A similar role for the advisory unit in overseeing assets the U.S. central bank acquired in the financial crisis yielded a net US$12-billion profit for taxpayers, the Fed said in 2018.
“I don’t know of any other firm that can handle this type of thing on short notice,” said John Morley, professor at Yale’s law school, where he focuses on finance.
Even if BlackRock were not directly involved, he said, it would have worked with the Fed given the dominance of its ETFs.
Yet BlackRock’s dominance in the ETF market raises questions over conflicts of interest. The fund group’s US$566 billion in fixed-income ETFs represents about half the global total.
The Fed’s buying will probably boost assets across the company’s ETFs, improve their liquidity and could even attract new classes of investor who take comfort that the Fed is there beside them.
For BlackRock, the appointment by the Fed reflects the return of founder Larry Fink to the influential role that he played during the financial crisis a dozen years ago.
Then, he spoke to Treasury Secretary Hank Paulson more frequently than some chief executives of the big Wall Street banks.
BlackRock then was a large, influential fund manager. Today, it is a behemoth.
The firm has trebled in assets since then, driven largely by Mr. Fink’s 2009 decision to purchase Barclays’s investment management business. That included iShares, its prized ETF business that is now the crown jewel of BlackRock. A couple of weeks ago Fink met Donald Trump at the White House and pressed the president on the gravity of the hour, according to several people familiar with the meeting.
Within days the Fed had radically ramped up its crisis-fighting efforts, and the U.S. government was shepherding a US$2-trillion stimulus package through Congress.
The company’s consulting unit has served 250 clients — including central banks and government and regulatory entities — since its 2008 founding in the flames of the crisis. The FMA business has “a capability that certain clients need and there’s not many people in the universe that can provide that capability,” Rob Goldstein, BlackRock’s chief operating officer, said in an interview with the FT last month.
In the last decade, BlackRock has hired extensively from the types of public organizations it seeks to serve in the FMA unit.
Philipp Hildebrand, the former head of the Swiss central bank, is BlackRock’s vice-chairman. Stanley Fischer, former vice-chairman of the Federal Reserve, and George Osborne, former U.K. chancellor of the exchequer, are senior advisers.
Barbara Novick, a BlackRock co-founder who last month announced her departure from the company, was for years its face in Washington. She helped BlackRock avoid the “systemically important” label after the financial crisis.
That decision by federal regulators today looks ironic, said Tyler Gellasch, executive director of Healthy Markets, a trade group. “In this time of crisis, the Fed is turning to BlackRock for help, in part because it is so significant.” Financial Times