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

Investors on Tuesday poured a record $ 1.5 billion into an exchange-traded fund managed by BlackRock, which represents roughly $ 2.3 million in fees for the asset management giant. And all thanks to the Federal Reserve.

A day earlier, the US central bank had announced its intention to buy bond ETFs for the first time through its New York subsidiary, as part of an effort to ease tensions in the financial system caused by coronaviruses. A program will buy bonds directly when they are issued; another will buy bonds on the secondary market and buy ETFs; and a third party will purchase commercial mortgage-backed securities. All three programs will be supervised by BlackRock.

The Fed has committed to publishing the terms of the commitment once finalized, and scrutiny will likely encourage BlackRock not to massively buy its own funds. But this week’s entries into the ETF, as investors rushed to anticipate expected central bank purchases, show how the Fed has already indirectly shaped the markets for the benefit of BlackRock.

“This is truly outrageous,” said an asset manager, who declined to speak publicly because of BlackRock’s influence on Wall Street. “BlackRock will manage a fund and decide whether it wants to use taxpayers’ money to buy the ETFs it manages. There are probably still 100 to 200 managers who could do it, but BlackRock was chosen. “

A representative from the company’s Financial Markets Advisory division – a separate unit from traditional asset management – said he was “honored” to have been selected to help the New York Fed “during this extraordinary time.”

A similar role for the advisory unit in overseeing the assets acquired by the US central bank during the financial crisis has Profit of $ 12 billion for taxpayers, the Fed said in 2018.

“I don’t know of any other firm that can handle this kind of thing on short notice,” said John Morley, a professor at Yale Law School, where he focuses on finance. Even if BlackRock was not directly involved, he said, it would have worked with the Fed given the dominance of its ETFs.

“There are not many organizations the size of BlackRock, which gives it a level of expertise and experience in managing these types of programs,” agreed Jill Fisch, a law professor at University of Pennsylvania.

Yet BlackRock’s dominance in the ETF market raises questions about conflicts of interest. The group of funds’ $ 566 billion in fixed income ETFs represent about half of the world’s total. Fed purchases will likely increase the assets of the company’s ETFs, improve their liquidity, and may even attract new classes of investors who are reassured that the Fed is there with them.

For BlackRock, Fed Appointment Reflects Founder Larry Fink Returning To Role consigliere that he played during the financial crisis a dozen years ago. Next, he met with Treasury Secretary Hank Paulson more frequently than some general managers of the major Wall Street banks. Back then, BlackRock was a big, influential fund manager. Today he is a giant.

The company has tripled its assets since then, largely due to Mr. Fink’s decision in 2009 to acquire the investment management business from Barclays. This included iShares, its popular ETF business which is now the jewel in the crown of BlackRock.

Last Wednesday, Mr. Fink met with Donald Trump at the White House and pressed the president on the severity of the hour, according to several people familiar with the meeting. Within days, the Fed had radically stepped up its efforts to fight the crisis, and the US government was leading a $ 2 billion stimulus package through Congress.

The company’s advisory unit served 250 customers – including central banks and government and regulatory entities – since its foundation in 2008 in the flames of the crisis. FMA has “a capacity that certain customers need and there are not many people in the universe who can provide this capacity,” said Rob Goldstein, Director of Operations for BlackRock, in an interview with the FT last month.

Over the past decade, BlackRock has largely recruited from among the types of public organizations it seeks to serve in the FMA unit. Philipp Hildebrand, former director of the Swiss central bank, is the vice president of BlackRock. Stanley Fischer, former Vice-President of the Federal Reserve, and George Osborne, former British Chancellor of the Exchequer, are senior advisers.

Barbara Novick, a co-founder of BlackRock who announced her departure from the company last month, has been her face in Washington for years. She helped BlackRock avoid the label of “systemically important” after the financial crisis.

This decision by federal regulators now seems ironic, said Tyler Gellasch, executive director of Healthy Markets, a business group. “In this time of crisis, the Fed turns to BlackRock for help, in part because it is so important.”

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