Why BlackRock Has a Role in the Fed Bond-Buying Spree
It’s not the first time the government has partnered with the asset-management behemoth.
(Bloomberg) -- As part of its whatever-it-takes effort to reduce the economic pain from the coronavirus pandemic, the U.S. Federal Reserve enlisted BlackRock Inc. to direct three of its bond-buying programs. It’s not the first time the government has partnered with the asset-management behemoth, which under the arrangement could buy some of its own funds on behalf of the central bank.
1. What is the Fed doing?
The Fed’s stimulus plan extends aid to U.S. companies and local governments borrowing money as an increasing number of American businesses screech to a halt. It vowed to buy unlimited amounts of Treasury bonds and mortgage-backed securities, to keep borrowing costs cheap. The central bank reached even further, offering direct support for companies, pushing into territory typically reserved for federal government spending, or fiscal policy. The Fed’s plans include buying newly issued corporate bonds, existing investment-grade bonds and exchange-traded funds that are based on highly rated debt. The expansive measures follow its decision to lower interest rates to near-zero levels, an emergency step that encourages investment and spending.
2. What is BlackRock’s role?
The Fed is turning to New York-based BlackRock to oversee three separate debt-buying efforts. It will buy and manage portfolios of newly issued bonds from U.S. companies as well as portfolios of investment-grade bonds and ETFs, according to the Federal Reserve Bank of New York. (BlackRock is the world’s largest issuer of ETFs.) BlackRock will also oversee purchases of packages of mortgages on commercial real estate guaranteed by one of three government agencies: Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corp. (Freddie Mac). Still to be determined is how much money BlackRock will direct in these efforts.
3. Why does the Fed need BlackRock?
Parts of the Fed’s bond-buying program fit more squarely in an asset manager’s wheelhouse than its own. While the Fed’s main job is to set big-picture monetary policy by purchasing Treasury debt, a fund firm like BlackRock can be tapped for its expertise in evaluating and managing different kinds of debt, like portfolios of corporate bonds -- something that’s not a main skill set of the central bank. BlackRock Financial Markets Advisory, an arm that consults with government agencies and institutions, will manage the projects. Aladdin, the risk-monitoring software that BlackRock will use in the process, already watches over more than $20 trillion, with a client base including insurers, pensions and fellow asset managers. (Bloomberg LP, the parent company of Bloomberg News, sells financial software that competes on certain fronts with Aladdin.)
4. Is there precedent for this?
Yes. In the aftermath of the 2008 financial crisis, the Federal Reserve turned to BlackRock to oversee $130 billion in distressed debt formerly on the books of Bear Stearns Cos. and American International Group. Back then, BlackRock wasn’t nearly as large a force in global finance as it is today. The firm oversaw a total of $1.3 trillion at the end of 2008. At the end of March 2020, it had about $6.5 trillion in assets under management.
5. What’s in it for BlackRock?
The firm stands to collect as much as $48 million per year for its work on behalf of the Fed, according to filings. That compares to approximately $4.5 billion it earned in profit in 2019 -- but the project comes with clout.
6. Isn’t this a conflict of interest?
Following the 2008 financial crisis, BlackRock drew some objections for its involvement in the clean-up. “Why is it that BlackRock is the only firm qualified to manage the assets of special-purpose vehicles?” Senator Chuck Grassley, the top Republican on the Senate Finance Committee, asked at a January 2009 hearing, questioning the no-bid government contracts awarded to the firm. (“They come with a world-class reputation,” answered Timothy Geithner, who was then the Treasury secretary.) In a step that could help manage potential conflicts of interest this time around, BlackRock will waive investment advisory fees on all ETFs it buys on behalf of the Federal Reserve Bank of New York. The firm will also credit any other associated fees it would have collected from purchases of its own ETFs in the program. Also worth noting: The Fed will not buy more than 20% of the assets of any ETF, nor will it purchase more than 10% of any individual issuer’s outstanding bonds.
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