On Tuesday, investors poured a record-breaking $1.5bn into an exchange traded fund run by BlackRock, a sum that represents about $2.3m of fees for the asset management giant. And it was all thanks to the Federal Reserve.
A day earlier, the US central bank had announced plans to buy bond ETFs for the first time ever through its New York arm, as part of an effort to ease stresses in the financial system caused by coronavirus. One programme will buy bonds directly when they are issued; another will purchase bonds on the secondary market and buy ETFs; and a third will purchase commercial mortgage-backed securities. All three programmes will be overseen by BlackRock.
The company will credit back to the Fed any fees earned on programme assets that are invested in its own ETFs. It will also only charge the Fed fees for managing bond assets in the programme and not include ETF purchases in that calculation, according to an update from the Fed posted on Friday.
But this week's inflows into its ETF, as investors raced to front-run the central bank's expected purchases, show how the Fed has already indirectly shaped markets to BlackRock's benefit.
"It is truly outrageous," said one asset management executive, who declined to speak on the record due to BlackRock's influence on Wall Street. "BlackRock will be managing a fund and deciding if they want to use taxpayer money to purchase ETFs they manage. There's probably another 100-200 managers who could do this, but BlackRock was chosen."
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A representative of the company's Financial Markets Advisory business — a separate unit from the traditional asset management business — said it was "honoured" to have been selected to assist the New York Fed "during this extraordinary time".
A similar role for the advisory unit in overseeing assets the US central bank acquired in the financial crisis yielded a net $12bn profit for taxpayers, the Fed said in 2018.
"I don't know of any other firm that can handle this type of thing on short notice," said John Morley, professor at Yale's law school, where he focuses on finance. Even if BlackRock were not directly involved, he said, it would have worked with the Fed given the dominance of its ETFs.
"There are not a whole lot of organisations of BlackRock's size, which gives it a level of expertise and experience in managing these kinds of programmes," agreed Jill Fisch, a professor of law at the University of Pennsylvania.
Yet BlackRock's dominance in the ETF market raises questions over conflicts of interest.
The fund group's $566bn in fixed-income ETFs represents about half the global total. The Fed's buying will probably boost assets across the company's ETFs, improve their liquidity and could even attract new classes of investor who take comfort that the Fed is there beside them.
For BlackRock, the appointment by the Fed reflects the return of founder Larry Fink to the role of consigliere that he played during the financial crisis a dozen years ago. Then, he spoke to Treasury secretary Hank Paulson more frequently than some chief executives of the big Wall Street banks. At the time BlackRock was a large, influential fund manager. Today, it is a behemoth.
The firm has trebled in assets since then, driven largely by Mr Fink's 2009 decision to purchase Barclays' investment management business. That included iShares, its prized ETF business that is now the crown jewel of BlackRock.
On Wednesday last week Mr Fink met Donald Trump at the White House and pressed the president on the gravity of the hour, according to several people familiar with the meeting. Within days the Fed had radically ramped up its crisis-fighting efforts, and the US government was shepherding a $2tn stimulus package through Congress.
The company's consulting unit has served 250 clients — including central banks and government and regulatory entities — since its 2008 founding in the flames of the crisis. The FMA business has "a capability that certain clients need and there's not many people in the universe that can provide that capability," Rob Goldstein, BlackRock's chief operating officer, said in an interview with the FT last month.
In the last decade, BlackRock has hired extensively from the types of public organisations it seeks to serve in the FMA unit. Philipp Hildebrand, the former head of the Swiss central bank, is BlackRock's vice-chairman. Stanley Fischer, former vice-chairman of the Federal Reserve, and George Osborne, former UK chancellor of the exchequer, are senior advisers.
Barbara Novick, a BlackRock co-founder who last month announced her departure from the company, was for years its face in Washington. She helped BlackRock avoid the "systemically important" label after the financial crisis.
That decision by federal regulators today looks ironic, said Tyler Gellasch, executive director of Healthy Markets, a trade group. "In this time of crisis, the Fed is turning to BlackRock for help, in part because it is so significant."
Written by: Richard Henderson in Melbourne and Robin Wigglesworth in Oslo
© Financial Times