Fed’s big boost for Black­rock raises eyebrows on Wall Street

Calgary Herald - - FINANCIAL POST - ROBIN WIG­GLESWORTH and RICHARD HEN­DER­SON Fi­nan­cial Times

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.”

ERIC THAYER/BLOOMBERG FILES

Black­rock CEO Larry Fink is see­ing his com­pany ben­e­fit from the Fed­eral Re­serve’s plans to buy bond ETFS for the first time through its New York arm as a re­sponse to COVID-19.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.