Exploiting knowledge and connections, Goldman-like.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In Brussels there is one industry that is thriving better than just about any other: the bailout business. In the last five years, some of the world’s biggest financial consultancies have trousered tens of millions of euros apiece advising bailed-out governments and central banks how to reorganize their finances.
As Irish central bank governor Patrick Honohan said during Ireland’s 2011 bailout, “it’s amazing when you pay large sums of money, how the best consultants in the world can come flocking.” Those firms include Alvarez and Marsal, Oliver Wyman and Pimco.
A Bright Future
Unlike many other industries in Europe´s crisis-ridden economy, the bailout business appears to have a bright future in store. As long as the continent’s banking industry remains prone to the occasional meltdown, the bailout business should remain a lucrative source of revenues and profits.
One firm that has proven particularly adept at carving out a niche in this sector is BlackRock Solutions, a small – in relative terms – advisory unit of BlackRock, the world’s largest asset management fund, with roughly €3 trillion under management. In 2011 the firm was hired by the Bank of Ireland to forecast how much Irish banks would risk losing and to carry out a “stress test” on worst-case scenarios for the Irish banking system, which had just been bailed out to the tune of €85 billion.
Despite providing embarrassingly wayward forecasts, BlackRock Solutions pocketed €30 million for the job. The firm got a similar contract worth €12.3 million from the Bank of Greece and was also hired by the Bank of Cyprus to double-check the methodology used by Pimco to evaluate the recapitalization needs of the Cypriot banking sector.
Perks of the Trade
For a company the size of BlackRock, €40 million is small change. But the bailout business has a much more enticing perk than petty cash – information. As EU Observer reports, BlackRock Solutions had intimate knowledge of the situation inside Irish banks, and not just from its January 2011 contract:
The Irish central bank also hired the US firm to assist in the completion of the 2012 and 2013 reviews of the banks’ capital needs. At the same time, its parent firm, BlackRock, had, according to a company statement from April 2012, “client business in Ireland” worth “over €5 billion” and “assets domiciled in Ireland” worth €162 billion.
Pressed by MPs earlier this year to reveal the extent of BlackRock’s acquisitions in Ireland since 2011, Noonan said the Irish central bank “does not have the information requested” and noted that, in any case, “they [Blackrock] observe EU and Irish procurement legislation/requirements.”
Seven months later, BlackRock announced it would buy 3% of the Bank of Ireland – one of the banks which its subsidiary, BlackRock Solutions, “stress-tested” in 2011.
In other words, thanks to BlackRock Solutions’ consulting business, the firm’s parent company, BlackRock, was able to glean invaluable knowledge of Ireland’s financial system – knowledge that it was not afraid to exploit, just as it was allegedly not afraid to exploit the knowledge it gleaned from its recent recruit as chief of infrastructure investments in Latin America, Manuel Sánchez Ortega.
Until July this year, Sánchez Ortega was the CEO of the renewable energy giant Abengoa, a company that is now seeking bankruptcy protection [read: Spain Braces for its Biggest Corporate Insolvency… Ever!]. No one knew the real state of the company’s accounts like Sánchez Ortega. It was information that could be worth a lot of money to somebody who knew how to use it. Within a month of resigning from Abengoa, Ortega had been hired by BlackRock. Three weeks later, BlackRock admitted that it had placed a short position on Abengoa. Since then the value of the Spanish company’s shares have plummeted 75%. That’s how you do business!
Spreading Its Tentacles
Much like Goldman Sachs, Blackrock is spreading tentacles across Europe at a startling rate. In a sign of its growing influence, the firm met EU officials to discuss financial market matters more times than any other company in the seven months to July, Financial Times reported this week.
During that period the firm met Jonathan Hill, European Commissioner for financial services (and former City of London lobbyist), and his team five times — one more time than HSBC and two more times than Deutsche Bank. In fact, the only institutions that met the Commissioner as many times were London Stock Exchange Group, the British Bankers’ Association and Insurance Europe.
BlackRock’s lobbying efforts have worried some investors amidst concerns that the fund house, which offers traditional active mutual funds, passive funds and alternative products such as hedge funds, could have too much influence on European policy.
By pure happenstance, the growth in BlackRock’s influence coincided with a 10-fold increase in the company’s self-reported lobbying spending in Brussels: in 2012 the firm spent €150,000; by 2014 that number had catapulted to €1.5m.
That kind of money gets you a heck of a lot of access and influence in Brussels, the world’s second most important lobbying hub, especially when you’re already the world’s biggest asset manager. According to EU Integrity Watch, BlackRock held meetings with Brussels officials over issues as far-reaching as the regulatory agenda in financial services by the EU and the US — a vital issue given the looming TTIP and TiSA trade treaties — capital markets union, Mr. Hill’s plan to boost business funding and investment financing, and money market funds.
No Conflicts of Interest Whatsover
BlackRock’s most audacious coup to date took place in August, 2014, when the European Central Bank announced its decision to hire BlackRock Solutions to provide advice on the design and implementation of the central bank’s upcoming purchase of asset-backed securities. In other words, just before the ECB embarked on one of the biggest QE programs in world history, it sought the advice of the world’s largest asset manager – i.e. the company most invested in the assets it intended to buy.
To ensure that there were/are no conflicts of interest, BlackRock’s contract stipulates that there must be an effective separation between the project team working for the ECB and its staff involved in any other ABS-related activities, which, as you can imagine, is an immense relief. So too is the fact that “all external audits related to the management of conflicts of interest would be made available to the ECB,” an institution famed worldwide for its blinding institutional transparency and accountability.
To put all lingering fears to bed, a spokesperson for BlackRock told FT, “BlackRock advocates for public policies that we believe are in our investors’ long-term best interests.”
That may be good for those investors, but their interests aren’t fully — or even partly — aligned with those of the 500 million Europeans who get to pay for BlackRock’s advice, enrich its investors, and live with its direct consequences. By Don Quijones, Raging Bull-Shit.
And Abengoa, the company whose shares BlackRock allegedly shorted after hiring its CEO? Well, there’s blood on the Bourse. Read… Spain Braces for its Biggest Corporate Insolvency… Ever!