BlackRock, a Wall Street titan that manages $7 trillion in assets, is facing growing scrutiny over its role at the center of the Federal Reserve’s massive bailout of U.S. corporations — and it’s coming from all sides.
The world’s largest asset manager is sparking concern from U.S. lawmakers in both parties on multiple fronts, including over its sheer size and market power, its ties to China, its tough stance against companies that contribute to climate change and the extent to which its own bottom line may benefit from the government programs.
The Fed selected BlackRock to run a groundbreaking program to buy hundreds of billions of dollars in debt from large companies slammed by the coronavirus crisis. But the firm’s involvement has raised questions about potential conflicts of interest, since it is a dominant player in the markets where the Fed is intervening and can affect how the bond purchases are carried out.
“They’re huge. They have tremendous influence,” Rep. Chuy García (D-Ill.), a member of the Congressional Progressive Caucus, said in an interview. “They’re not bound by the same regulations and rules as banks would be.”
Garcia called for more oversight of the Fed programs so “the public can know who we do business with.” The congressional commission charged with overseeing the Fed programs doesn’t yet have a chair, but the other members of the panel have pressed the central bank on why it chose BlackRock.
It’s not the first time BlackRock has played a pivotal part in carrying out federal initiatives — it helped manage the toxic assets that the Fed acquired from AIG and Bear Stearns during the last crisis. But the company’s sway over financial markets, and its Washington presence, have ballooned over the past decade.
Under the emergency program that BlackRock is managing, the Fed will purchase debt from companies that borrow through corporate bond markets, making it cheaper for them to tap into more funds. The central bank has already started doing so indirectly, by buying so-called exchange-traded funds that are invested in a group of underlying bonds.
The Fed’s contract governing its relationship with BlackRock aims to mitigate any conflicts. Also, BlackRock isn’t directly invested in the assets that the Fed is buying; its clients — institutions and individuals — are, which means the firm has less to directly gain from boosting those assets than would a different type of financial firm, like a bank.
Still, from its perch assisting the Fed, BlackRock will get deep insight into the central bank’s approach to bond markets.
“I don’t think there’s a strong incentive to self-deal, but I do think that BlackRock’s [role] is definitely going to be a boon for the business,” said John Morley, a Yale Law School professor and a leading expert on investment management. “They also have the unparalleled opportunity to develop expertise, develop a business. This is a transformational moment for the Fed, and BlackRock’s now going to be in an even stronger position to serve the Fed in the future.”
BlackRock’s funds are already seeing a boost: According to data compiled by Bloomberg, total assets in its investment-grade corporate bond ETF rose to $46.7 billion on May 19, up from $28.2 billion on March 19. The Fed first announced its plans to buy ETFs on March 23.
BlackRock spokesperson Brian Beades emphasized that the firm will act however the central bank directs it to.
“BlackRock will execute this mandate at the sole discretion of the [Fed], and in accordance with their detailed investment guidelines, in order to provide broad support to credit markets and achieve the government’s objective of supporting access to credit for U.S. employers and supporting the American economy,” Beades said in a statement.
The job is bringing an uncomfortable amount of attention to the company, which, though well-known in the financial world, isn’t a household name.
During a Senate Banking Committee hearing with Fed Chair Jerome Powell this month, Sen. Martha McSally (R-Ariz) suggested that BlackRock’s profits from its contract with the central bank could end up enriching Chinese companies, given that the firm manages a range of investments in China.
“BlackRock is one of the leading investment banks in Chinese funds,” McSally said. “What, if anything, will prevent BlackRock from taking their profits that they earn to invest in their interest in China and Chinese state-owned enterprises?”
BlackRock’s business model is based on investing and managing funds on behalf of institutions and individuals, rather than making bets with its own money. Powell pushed back on the suggestion that the contract had anything to do with Chinese investments.
“What we’re trying to do is create conditions in which U.S. workers can keep their jobs or return to them,” he said. “And that’s what our sole focus is; we’re not trying to reach out for other public policy objectives or deviate from that.”
Despite BlackRock CEO Larry Fink’s friendly relationship with President Donald Trump, the company has become a target of conservatives after Fink shook the financial world in January by highlighting climate change as a prominent risk and pledging to shift the company’s investing policy to promote economic sustainability.
That has led to fears among Republican lawmakers such as Sen. Ted Cruz of Texas that it might disfavor oil and gas companies in its actions on behalf of the Fed.
“We believe the Federal Reserve should emphasize that … to avoid conflicts of interest, BlackRock must act without regard to this or other investment policies BlackRock has adopted for its own funds,” 17 Republican senators said in an April letter led by Kevin Cramer (R-N.D.) with Cruz among the signatories.
In contrast, nine Democratic senators in late April urged Powell to include climate risks in its considerations of which bonds to buy.
“The timing and scope of climate damages may not fit neatly into existing risk management frameworks, but they will be economy-wide and potentially irreversible,” wrote the lawmakers led by Sen. Brian Schatz (D-Hawaii).
That’s not the only concern raised by Democrats. García, along with eight other House members including Reps. Rashida Tlaib (D-Mich.) and Alexandria Ocasio-Cortez (D-N.Y.), stressed BlackRock’s size and influence in the economy. They argued that the Fed’s selection of the company underscores that it should be subject to more oversight.
“BlackRock is already big, and you must ensure that its work during this crisis doesn’t cement the firm’s structural importance in the global economy and our dependence on it,” the lawmakers wrote in their own letter to Powell and Treasury Secretary Steven Mnuchin.
Under the Obama administration, BlackRock successfully fended off efforts to be placed under the supervision of the Fed, a move that would have ratcheted up regulation under the assumption that the firm’s role is so key to markets that its failure could shock the financial system. The asset manager has maintained that its activities aren’t important enough to have that effect.
According to BlackRock’s contract with the New York Fed, the central bank will communicate its goals and strategies for the bond purchases to the firm, which will come up with specifics on how to execute them — plans the Fed will regularly sign off on. To start, BlackRock will earn two cents on every $100 for each purchase.
BlackRock’s own ETFs can’t make up a larger share of the Fed’s portfolio than their actual share of the market — currently 50 percent. And the firm will refund the Fed for fees it earns from the central bank’s holdings of its ETFs. According to the latest data released by the Fed, 48 percent of the ETFs it has bought are managed by BlackRock.
Still, the company will be entrusted to determine a fair market price of bonds in an environment where markets won’t necessarily be functioning properly — an area where the firm has extensive expertise and precisely why the Fed has hired it in the first place.
The Fed could have selected smaller asset managers for the job, but “none of those other entities I think would be given this kind of power and brought into the inner circles of financial management in the way that BlackRock is,” said Marcus Stanley, policy director at Americans for Financial Reform, which advocates for tougher rules on Wall Street.
Stanley said BlackRock’s growing relationship with the U.S. government has echoes of Citigroup and Goldman Sachs in decades past, when those firms worked closely with prior administrations and saw former executives ascend to high-level government positions. The point is supported by speculation that Fink has ambitions of becoming Treasury secretary under a future Democratic president.
“BlackRock faces a ton of political risks here that run from [accusations that] BlackRock is pursuing some agenda other than the best interest of the public, to the personal ambitions of Larry Fink,” Morley said.
But Ian Katz, an analyst at Capital Alpha Partners, said the central bank was always going to turn to a private firm to help out with the purchases.
“There’s only so many people in the world who have expertise on these very specific issues,” Katz said. “If you eliminate all the people who are working at big financial services companies, it would be very hard to find the right expertise.”