The Fed Asks for BlackRock’s Help in an Echo of 2008


The Federal Reserve has turned again to BlackRock.

The nation’s central bank said it tapped BlackRock, the world’s largest asset manager, to help oversee the Fed’s efforts to stabilize the bond market amid the economic turmoil caused by the coronavirus pandemic.

A BlackRock subsidiary will advise the Fed on the purchase of billions of dollars in commercial mortgage-backed securities and investment-grade corporate bonds — a decision that echoed a move from the 2008 financial crisis.

The details of the arrangement, including how much BlackRock will be paid for its services, have not yet been released. But it promises to be a lucrative venture for the firm, which could also be in a position to profit from the advice it gives.

Under one of the programs that BlackRock will help lead, the Fed can buy exchange-traded funds that hold stakes in investment-grade bonds, a type of investment that BlackRock sells.

BlackRock found itself in a similar situation during the last crisis. After Bear Stearns and American International Group collapsed, the New York Federal Reserve retained BlackRock to help oversee billions of dollars in ailing assets that had belonged to them. The firm helped price and sell those assets for the government at the same time it was helping private clients buy similar assets.

At the time, that arrangement prompted criticism from lawmakers and others who worried about coziness between Wall Street and Washington, as well as the potential for conflicts of interest.

“The key here is for the Fed to avoid the backlash like last time,” said Dennis Kelleher, president of Better Markets, a nonprofit group that supports stringent financial regulation. “The Fed needs to guarantee there is full transparency and oversight of BlackRock.”

BlackRock’s dominant position in the stock and bond markets — and, with it, its influence over Wall Street — has only grown in the past decade. The firm now manages nearly $7 trillion in assets for big private clients, including pension funds, hedge funds and sovereign wealth funds. It managed about $1.3 trillion at the time of the last crisis.

The Fed has not yet posted a copy of the contract it signed with BlackRock, though it plans to disclose more details. The central bank was slow to disclose the specific terms of its agreement with BlackRock during the last crisis, and even today the full details of what the firm earned have not been disclosed.

BlackRock’s advisory business is separate from its asset management business, which generates most of the firm’s revenue. Besides working with the Fed during the 2008 crisis, the advisory division has done work for the British Treasury, the Swiss National Bank, the European Central Bank and the government of Greece.

“BlackRock Financial Markets Advisory is honored to have been selected to assist the Federal Reserve Bank of New York during this extraordinary time,” the New York firm said in a statement. It said it “will not engage in discussions with market participants and issuers” until more specific details were put out about the programs.

The New York Fed said in a statement that it had selected BlackRock on a “short-term basis” because of its expertise in the market for commercial mortgage-backed securities, which are backed by government-sponsored mortgage finance firms — Fannie Mae, Freddie Mac and Ginnie Mae.

BlackRock certainly has expertise in that area: Laurence D. Fink, its chief executive, was one of the pioneers in the trading of mortgage-backed securities on Wall Street.

The Fed’s programs to stabilize the markets will also permit it to buy some of the kinds of E.T.F.s that BlackRock sells.

Todd Rosenbluth, head of E.T.F. and mutual fund research for CFRA, a research firm, said BlackRock dominated the market for the kinds of bond E.T.F.s the Fed said it would buy.

“The firm’s flagship corporate bond fund, LQD, is a likely beneficiary of the Fed’s planned efforts to stabilize the bond market,” he said. “BlackRock needs to provide transparency in its due diligence process to alleviate concerns that it is choosing to invest in LQD because they are the asset manager running the Fed’s program.”

Vanguard and State Street have E.T.F.s that also could fit the Fed’s buying criteria, Mr. Rosenbluth said.

Mr. Kelleher said conflict-of-interest measures would be essential for the Fed’s credibility as BlackRock helped the central bank see the economy through another crisis.

“It needs to make sure the public understands what it is doing,” he said.

Jeanna Smialek contributed reporting.



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