The Wall Street Journal reported this morning that BlackRock is in the running for a new contract to help state insurance regulators perform risk analysis on insurers’ investments, prompting Agnes Crane at Reuters to ask: “Is BlackRock going to rule the world?”
As Crane points out, BlackRock—the country’s largest publicly traded asset management firm—has already enjoyed a cozy relationship with several government agencies that are working to address the financial crisis. At the moment, BlackRock is already providing risk and analytics support for the New York Fed’s $1.25 trillion agency mortgage-backed securities purchase program. BlackRock is also the asset manager for all three of the New York Fed’s Maiden Lane transactions, which were formed to facilitate JPMorgan’s acquisition of Bear Stearns and to restructure the New York Fed’s support to AIG. (A recent New York Times investigation revealed that three of BlackRock’s contracts with the New York Fed were no-bid, including one in which fees were not established until after the contract was awarded.) Finally, BlackRock has raised over $500 million in private capital in order to purchase and manage legacy securities as part of the Treasury Department’s Public-Private Investment Program.
And now, according to the Journal, BlackRock is on a short list of companies that are under consideration to receive a “high-profile” contract from the National Association of Insurance Commissioners (NAIC). If it wins the contract, BlackRock will be analyzing the risk of mortgage-backed bonds owned by insurers, a job previously performed by credit rating agencies, which have fallen out of favor recently due to allegations of inflated ratings.
Another company that is reportedly under consideration for the contract is PIMCO, which has also played a central role in advising the government on its bailout programs, and has been on POGO’s watch list due to its potential conflicts of interest.
To understand why hiring a company like BlackRock or PIMCO could raise the risk for conflicts of interest, just take a look at BlackRock’s latest quarterly SEC filing. As of June 30, 2009, BlackRock is managing a whopping $1.37 trillion in assets, including $510 billion in bonds, $317 billion in cash products, $330 billion in stock funds, and $52 billion in alternative investments such as hedge funds. The company also advises clients on $166 billion in assets, including many of the same types of assets that it would be evaluating for the NAIC. And these numbers will soon be increasing thanks to BlackRock’s recent acquisition of Barclays’ investment unit, which, according to Bloomberg, will create a “company overseeing $2.7 trillion in assets—more than the Federal Reserve.”
A BlackRock spokesperson assured the Journal that the company has “very strict policies and procedures in place to protect confidential client information and manage any potential conflicts of interest.” They’re almost certainly referring to the company’s internal firewalls, which supposedly separate the employees working on the government contracts from the employees managing the firm’s private investments. But in a letter POGO sent to Congress in May, we questioned how effective these firewalls are in protecting the government from conflicts of interest, especially given the magnitude of private investments managed by BlackRock and similar firms.
The NAIC's frustration is understandable with the credit rating agencies, which suffer from their own conflicts of interest since they receive funding from the issuers of the securities they evaluate. But POGO hopes the NAIC exercise caution before trusting a risk analysis from a private firm like BlackRock that has a massive financial stake in the market for mortgage-backed bonds.