(Bloomberg) — Once again, Washington is turning to its favorite Wall Street cleaning crew to pick up after the US banking industry.
After almost two months of smoldering turmoil in the banking sector — and investors worrying there could be more trouble ahead — BlackRock Inc. has only just begun its work.
The firm’s Financial Markets Advisory unit, a sort-of financial-crisis SWAT team, has been retained to size up and sell investments related to two failed lenders, Silicon Valley Bank and Signature Bank. A third, First Republic Bank, has been sold to JPMorgan Chase & Co., but markets remain on edge.
For FMA, the client is the Federal Deposit Insurance Corp., and the challenge is to find buyers for $114 billion of securities left to the US government by SVB and Signature, all while not further ruffling financial markets.
It’s a big job – the biggest of its kind ever, in fact — and one that will entrench BlackRock, the world’s largest asset manager, even more deeply in the regulatory apparatus of Washington. Insiders acknowledge the potential payoff isn’t money: Fees haven’t been disclosed, but BlackRock’s take on previous projects has been modest.
The real reward, as is often the case at such moments, comes in the form of access, prestige and influence — a seat at the table when the next crisis, or perhaps the next opportunity, arises. That clout burnishes BlackRock Chief Executive Officer Larry Fink’s reputation as a power broker — and draws attention to the firm’s growing reach into global markets.
Fink has spent years positioning FMA as the crisis-manager favored by governments and central banks. Largely behind the scenes, it spends most of its time — when not contracting with the government — advising financial firms around the world about risks to their books.
In 2008, BlackRock cleaned up after the Bear Stearns and American International Group fiascoes and later helped the European Central Bank with bank stress-tests. When the Federal Reserve needed assistance with a pandemic rescue mission in 2020, officials called on BlackRock to help stabilize the corporate bond market.
More recently, in addition to the new FDIC job, BlackRock has been advising Saudi Arabia’s giant new infrastructure fund and helping Ukraine create a war reconstruction fund. It has also been assisting Credit Suisse Group AG with offloading complex securities after the bank collapsed into the arms of rival UBS Group AG.
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The high-profile assignments highlight BlackRock’s clout with officials and create a sort of “organizational dependency” on the firm by the US government, said Saule Omarova, a Cornell University professor who was nominated by President Joe Biden to a top bank regulatory post before withdrawing amid opposition from the finance industry and some senators.
“BlackRock really does appear to be the go-to when it comes to large-scale, politically salient and systemically important types of asset sales and management,” Omarova said in a phone interview. “It creates this very important potential avenue for BlackRock to cultivate a kind of relational power with the federal government.”
Omarova said the government should consider having an asset-management unit of its own to handle this kind of work.
Well before SVB and Signature cratered, BlackRock was positioning itself for just such a moment. It was reaching out to FDIC officials about contractor work in the event of bank failures, people familiar with the matter said. It even advised SVB, a prominent lender to the technology industry, well before the California bank failed.
Its pitch to the FDIC apparently was compelling enough for the regulator to pre-approve BlackRock for future work. This placed FMA at the top of a shortlist of contractors for receivership work including Houlihan Lokey Inc., McKinsey & Co. and FTI Consulting Inc. Given BlackRock’s size and reach specifically in capital markets, the job after SVB and Signature was its alone.
“BlackRock was the only vendor on our receivership basic ordering agreement list qualified to sell securities,” FDIC spokesman David Barr said in a statement. BlackRock’s role will likely be part of any review of the agency’s work, according to the FDIC’s inspector general’s office.
The work is delicate. FMA staff must distance themselves from BlackRock traders and money managers and keep their plans under wraps to avoid giving anyone an unfair advantage. To minimize potential conflicts, the group sits in its own part of the 16th floor of the firm’s New York headquarters and has separate access to BlackRock’s vast risk-and-portfolio system, Aladdin.
The early verdict: so far, so good. BlackRock appears to have handily managed the initial round of sales on April 18, which involved mortgage-backed securities. Coming rounds – which could work out to the rough equivalent of $2 billion a week, and take months – may not be as easy, analysts said.
As Morgan Stanley analysts put it in an April 21 note to clients, the effort is happening as the mortgage market moves into “uncharted waters.” The uncertain course of markets and the economy won’t help.
This week, for example, investors said BlackRock’s team could have a challenge selling municipal bonds left over by SVB because they were mostly long-term securities with relatively low coupons.
FMA, which employs roughly 200 people, has never been a huge money-spinner. The company generated $27 million of revenue from advisory and other related work during the first three months of this year, a scant 0.6% of the $4.2 billion in total BlackRock raked in.
For any given year – or at least one without a major crisis — FMA tends to bring in $75 million to $100 million, according to a person familiar with the matter. The unit takes on roughly 30 to 50 assignments a year, with a mix of short- and long-term projects.
Fink has likened the recent banking tumult to the slow-rolling savings-and-loan crisis of the 1980s and ’90s. The collapses of four US banks this year — including Silvergate Capital Corp. — have already stuck investors with tens of billions of dollars of losses.
Privately, BlackRock executives say FMA may well get more work soon. That’s particularly so if, as some policymakers have suggested, Washington ends up tightening banking regulations.
At the center of FMA are co-heads Brandon Hall, 42, and Ben Leax, 39, veterans of the policy debates over bank capital and financial blowups of the past decade. Hall, with a bachelor’s degree in classics from Princeton University and master’s degrees from Columbia University, worked as an analyst at the Federal Reserve Bank of New York during the 2008 crisis and has been at BlackRock since 2010. Leax, with an economics degree from Penn State University, is a company lifer, with almost 18 years at the firm.
FMA’s staffers hail from financial, regulatory and consulting backgrounds and report to Charles Hatami, global head of the financial and strategic investors group. The group is frequently in touch with Fink and other senior managers.
A few years ago, BlackRock executives considered expanding FMA into a bigger consulting practice for financial companies. But they concluded that trying to create a miniature McKinsey or Oliver Wyman, or advising firms directly on regulation, didn’t make sense given the competitive landscape. Executives in the group also have steered clear of setting up something akin to an investment bank deal team or a trading desk, which could create conflicts by being directly opposite on a client transaction.
FMA has plenty of work. The group advises banks and financial firms on things like the riskiness of balance sheets and how interest rate changes might affect investment portfolios and deposits.
“This is at its core a capital markets and risk-consulting business and always has been, even in the way that we grew up out of the financial crisis,” Hall said.
But when SVB and Signature began struggling in March, Hall and Leax sensed that they might be tapped by Washington — again — for a big project. Sure enough, only a few days later, Hall fielded one of the calls from the FDIC while on a boat as he was about to go snorkeling.
The group has been evaluating $87 billion of investments from SVB and $27 billion from Signature – a collection that includes securities backed by residential and commercial mortgages, as well as more complex collateralized mortgage obligations. A lot of the work involves analyzing the trickier parts of the portfolios, setting expectations in the market and thinking through how to structure the sales process via electronic-trading systems.
“Particularly given the size of this, if the market doesn’t believe there is going to be a disciplined and thoughtful process, you could see a big market reaction,” Leax said.
Because BlackRock isn’t a broker, it connects with Wall Street players who are, and they then typically reach out to potential buyers. Given worries that some other regional banks might run into trouble, too – and the prospect of tougher regulations from Washington – BlackRock’s team expects it could have more work coming its way.
–With assistance from Scott Carpenter.
(Updates with estimate of losses from bank collapses this year and job titles after the ‘More Work’ subhead.)
