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Wall St. Firm Draws Scrutiny as U.S. Adviser

BlackRock headquarters
Mark Lennihan
BlackRock headquarters

The financial crisis has ravaged many a Wall Street giant, but it has also produced a handful of winners. BlackRock, a money manager that is much admired but little known outside financial circles, is fast emerging as one of the nation’s financial powerhouses.

BlackRock , which started in a one-room office 21 years ago, now manages $1.3 trillion in assets for big private clients, including hedge funds and foreign governments.

But it is the company’s highly prized role as a government adviser and contractor that is now drawing attention.

By dint of its expertise and track record, it has won contracts to help the government manage the complex rescues of Bear Stearns, the American International Group and Citigroup .

It also won a bid to carry out a Federal Reserve program to stimulate the moribund housing market, and it has been hired to help evaluate Fannie Mae and Freddie Mac, the government-created mortgage finance giants.

Other firms have been hired by the government to assist with the bailout, illustrating the increasingly symbiotic relationship between Washington and Wall Street.

It makes sense for the government to turn to financial experts for help, but BlackRock has become so ubiquitous that some lawmakers, federal auditors and watchdog groups are now asking if the firm does too much, and if its roles as government adviser, giant federal contractor and private money manager will inevitably collide.

Can a company that is being paid to price and sell troubled assets for the government buy the same kinds of assets for private clients without showing preference? And should the government seek counsel from a company whose clients stand to make or lose billions if those policies are enacted?

“They have access to information when the Federal Reserve will try to sell securities, and what price they will accept. And they have intricate financial relations with people across the globe,” Senator Charles E. Grassley, Republican of Iowa, said. “The potential for a conflict of interest is great and it is just very difficult to police.”

Without naming BlackRock, federal auditors have warned that any private parties that purchase distressed assets on the government’s behalf could use generous federal subsidies to overpay, artificially pushing up the price of similar assets that they manage for their own portfolios.

“In other words, the conflict results in an enormous profit for the fund manager at the expense of the taxpayer,” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report last month.

Some of BlackRock’s advice to the government has in fact helped the company. For example, in its role as an informal adviser, it urged the Fed to intervene in the markets in a way that made investors feel it was safe to put money back into money market funds, including BlackRock’s.

The Federal Reserve will not reveal what it is paying BlackRock, disclosing only that on one of its five contracts, it will pay at least $71 million over three years to BlackRock and other firms to manage a portfolio of mortgage assets once owned by Bear Stearns. BlackRock says that rate is discounted and that the fees it collects on bailout-related work are only a tiny portion of its overall revenue.

BlackRock has many admirers for the range and the quality of services it has provided to the federal government. James R. Wilkinson, who served until January as the chief of staff to the former Treasury secretary, Henry M. Paulson Jr., described BlackRock’s co-founder and chief executive, Laurence D. Fink, as a “patriot.”

He added, “He is willing to help our country when we need it most.”

Mr. Fink said he was proud that his company was helping pull the economy back from the brink, and he bristled at the suggestion of impropriety.

Treasury and Fed officials have begun to take precautions. BlackRock’s dominance has prompted the Fed to seek an alternative partner as it prepares to expand its rescue efforts, a government official close to the situation said, requesting anonymity because the actions could affect the market.

And Treasury is holding off announcing the winning bidders for perhaps the most anticipated of all the bailout programs — the $1 trillion federally subsidized plan to purchase troubled assets from banks — in part to make sure the bidders cannot game the system. BlackRock is widely expected to win one of the contracts, in which the government would be a partner with private firms.

Andrew Williams, a Treasury Department spokesman, said that BlackRock had no special status and was among a large group of industry players consulted about bailout programs.

“We take this very seriously,” Mr. Williams said. “We talk to a lot of people — as we should.”

Now 47 percent owned by Bank of America , BlackRock offers traditional services like managing other people’s money. But the unit that has grabbed most of the attention lately is BlackRock Solutions, whose sophisticated software, fine-tuned over many years, can take apart the thousands of loans in a mortgage-backed security to estimate what it is now worth and what it will most likely be worth in the future, helping investors decide whether to hold or sell the asset.

During one frantic weekend in March 2008, when Bear Stearns was collapsing, BlackRock’s omnipresence became evident.

On a Saturday, the firm was hired by JPMorgan Chase — which was considering buying Bear Stearns — to value one type of Bear Stearns security.

The next day the Federal Reserve hired BlackRock, through a no-bid contract, to analyze and eventually sell off a $30 billion pool of risky mortgage securities that JPMorgan did not want.

"How can one company have so much control over the process?"

Those multiple roles created the potential for conflict, BlackRock’s own executives acknowledge. The company would be trying to sell assets on behalf of the government that were similar to assets it buys and sells for thousands of other private investors.

For example, if BlackRock Solutions signaled to BlackRock’s asset managers the timing of a planned sale, that could benefit BlackRock’s investors, but harm taxpayers and the Federal Reserve.

“We were very sensitive to it,” said Mark Wiedman, a managing director at BlackRock Solutions.

To avoid this, BlackRock Solutions and BlackRock asset management employees are housed in separate buildings, working on separate computer networks. The firm also sells the Bear Stearns securities only through an independent broker, meaning BlackRock does not know who the buyers are. The Fed, in addition, has prohibited BlackRock from knowingly buying any of the Fed-controlled assets.

But some remain skeptical that such firewalls really protect taxpayers.

“How can one company have so much control over the process?” said Scott Amey, general counsel at the Project on Government Oversight, a Washington-based non-profit group. “Isn’t there somebody else they can turn to?”

The concerns about BlackRock also extend to its role as an informal adviser. Mr. Fink has been known to call Treasury officials several times a day, Bush and Obama administration officials said, between occasional visits.

Last fall Mr. Fink urged the Fed to take action to unlock the frozen market for short-term lending to companies — a business that BlackRock’s money market mutual funds played a major role in. Investors had withdrawn $48 billion from those BlackRock funds, but once the Fed adopted the policy Mr. Fink was advocating, the money came pouring back.

Mr. Fink said his advice was for the good of the economy, and that his was one of many industry voices calling for such a move.

Still, Mr. Fink has not been shy in boasting about his access. “I mean it is a great seal of approval,” Mr. Fink told Wall Street analysts in December, as he simultaneously coached the Bush administration and the incoming Obama team. “We are asked to help navigate new policy. I’m running out of here to go meet with Treasury to talk about plans later this afternoon.”

But it is clear that the income from fees is a lesser benefit than the buffing of its global reputation, a point Mr. Fink has made. “It gives comfort to our clients that we are being involved in some of the solutions of our economy, and it allows us to show our clients that we are being asked in these difficult situations to provide advice,” he said at the same event.

BlackRock has not been immune to market turmoil, but its stock over the last year has held up better than its peers’. While BlackRock’s share price tumbled 33 percent, Federated Investors shares have lost 34 percent and Legg Mason , 65 percent. BlackRock ended 2008, a disastrous year for Wall Street, with $786 million in profit on $5 billion in revenue.

Some lawmakers remain wary, even though they cannot cite any specific impropriety. “The very nature of what we are asking them to do almost guarantees that it is going to be to the benefit of BlackRock,” said Representative Darrell Issa of California, the ranking Republican on the House Committee on Oversight and Government Reform. “You can have separate pews, but if you go to the same church, it will cross over.”