Why’s the World’s Biggest Asset Manager Advising the ECB on the Health of EU Banks?

BlackRock is “a market power that no state can control anymore.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The ECB’s latest biannual stress tests are almost over. For months legions of financial regulators have been poking around in the soft financial underbellies of the Eurozone’s 130 largest banks looking for signs of weakness. Presumably, the worst causes or symptoms of financial duress have been largely sidelined or ignored, just as happened in 2016 when Spain’s then-sixth largest bank, Banco Popular, passed muster just months before its collapse.

This year, the ECB has again called on the assistance of the world’s largest asset management fund, BlackRock, to conduct its health check of Europe’s banking sector. The stress tests are being spearheaded by the European Banking Authority (EBA), which tests the region’s systemic banks, while the ECB focuses its attention on smaller lenders, such as Banco Popular.

This is not the first time the ECB has turned to BlackRock for advisory support. In 2014, the central bank hired BlackRock Solutions, an advisory unit of BlackRock, 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.

BlackRock Solutions already had expertise in this area, having formerly advised the Federal Reserve on its first QE program. Since then, the firm has become a vital strategic partner to major central banks engaging in complex asset purchases, resolution mechanisms and strategic asset allocations. The firm is particularly adept at mapping out large numbers of different, often complex asset classes across myriad markets.

To ensure there were no conflicts of interest in its dealings with the ECB, BlackRock’s contract stipulated 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. If that wasn’t enough to set concerned minds at ease, “all external audits related to the management of conflicts of interest would be made available to the ECB,” an institution that is hardly famed for its transparency and accountability.

In 2016, the ECB hired BlackRock Solutions again, this time to help it conduct its stress tests for that year. Earlier this year, the firm was awarded an extension of that contract. Although there has been no disclosure of just how much BlackRock Solutions will be charging for its services this year, Danièle Nouy, the Chair of the Supervisory Board at the ECB, has revealed that in 2016 Frankfurt allocated €8.2 million to pay the firm’s consultants.

This is, of course, chicken feed for a company the size of BlackRock, which manages $6.3 trillion in assets for clients in over 100 countries — more money than every hedge fund in the world combined, and over six times the value of assets BlackRock had under management ten years ago! But the advisory services BlackRock provides to the ECB, as well as the national central banks of the Netherlands, Spain, Ireland, Cyprus and Greece, have a much more enticing perk than petty cash: information.

Through the contracts awarded to BlackRock Solutions, BlackRock, the parent company has potential access to privileged information that can help it make highly profitable investment decisions. On behalf of its clients, BlackRock holds huge blocks of shares in many, if not all, of the banks that its consulting arm is helping to audit.

Few, if any, market players have such intimate knowledge of the true state of European banks’ balance sheets. This inherent conflict of interest was first highlighted by U.S. Senator Charles E. Grassley in 2009, when BlackRock was helping the Federal Reserve out with its QE program and the U.S. government with the complex rescues of Bear Stearns, AIG, and Citigroup.

“They have access to information when the Federal Reserve will try to sell securities, and what price they will accept. And they have intricate financial relations with people across the globe,” Grassley said. “The potential for a conflict of interest is great and it is just very difficult to police.”

BlackRock has always claimed that it carefully manages its potential conflicts of interest through a “Chinese Wall” that separates the company’s advisory business from its asset-management business. However, as the advocacy group BlackRock Transparency points out, an analysis of BlackRock statements, marketing materials, and executive profiles suggest that the company’s assurances may have little weight in practice.

As early as 2006, BlackRock Solutions aggressively touted its “close ties between our investment and non-investment activities” as an “important driver of our long-term success” (page 6). Marketing materials boast of the company’s “One BlackRock culture, which emphasizes partnership across functions, communications, transparency, consistent standards and teamwork.”

Much like Goldman Sachs, BlackRock is spreading its tentacles across Europe at a startling rate, by spending lavishly on lobbying efforts and snapping up well-connected retired politicians and central bank officials, including the former Chairman of the Swiss National Bank’s governing board, Philipp Hildebrand, and former U.K. Treasury head George Osborne.

BlackRock’s aggressive lobbying have sparked fears that the fund house exerts too much influence on public policy. Even some of BlackRock’s own investors are beginning to have reservations. Last year, almost one-fifth of the firm’s shareholders backed a proposal, calling on BlackRock to provide an annual breakdown of its global lobbying spend.

But it may already be too late to address the problem. “The sheer size of BlackRock creates a market power that no state can control anymore,” said Michael Theurer, member of the German parliament; and according to the Tagesspiegel, the FDP politician should know: as member of the European Parliament from 2009 bis 2017, he has had experience in dealing with BlackRock operations. As long as BlackRock continues to grow by delivering solid returns for its investors, which include many of the world’s governments, sovereign wealth funds and central banks, its domination of markets is likely to continue. By Don Quijones.

“The global market for leveraged loans is larger than – and growing as quickly as – the US subprime mortgage market was in 2006.” Read… “Concerned” Bank of England Raises Alarm about Growth of High-Risk Loans  
 

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  41 comments for “Why’s the World’s Biggest Asset Manager Advising the ECB on the Health of EU Banks?

  1. Wisdom Seeker
    Oct 15, 2018 at 9:44 pm

    “BlackRock’s contract stipulated 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.”

    This is outrageous. I was going to say it was like letting a handful foxes into the henhouse as long as they “promise” not to talk to the other foxes. But there’s no way such a promise can be verified! (particularly after the assignment is completed…) Making matters worse, BlackRock is clearly a political animal and able to use whatever it finds against just about anyone it wants leverage over. Worse still is that fact that somehow the ECB considers this an acceptable practice! Given the potential for malfeasance in this process I would not want to be a shareholder in any of these banks, if that is the standard of care with which the regulators treat my investment.

    No, this is far worse than simply letting a few foxes nab a few chickens… It’s more like the doctor deliberately infecting the patient while doing a routine checkup…

    • fajensen
      Oct 16, 2018 at 1:41 am

      It’s more like the doctor deliberately infecting the patient while doing a routine checkup…

      While buying life insurance on the patient, made out to benefit the doctors retirement fund.

      • claudio
        Oct 17, 2018 at 2:48 pm

        but guys this is just happening right now: if you trusted bankers in 2000 you have been under chapter 11 and if you trust a doctor today i think you will apply to the same chapter about your health

  2. Javert Chip
    Oct 15, 2018 at 9:53 pm

    EU bank stress tests…

    I’m so excited. Always good to read up on how many (more) billions are required to keep Banca Monte dei Paschi di Siena “solvent” (our bank was founded 20 years before America was discovered). How many times has this turkey (the bird, not the country, which also has problems) had to be refinanced in the last 5 years ? Three? Four?.

    The only stress in EU banks is sore backs from corruptly hauling away all that (taxpayer) money.

    • Unamused
      Oct 15, 2018 at 11:42 pm

      ->The only stress in EU banks is sore backs from corruptly hauling away all that (taxpayer) money.

      Wrong scale. The stress is in the structure of the container ships. The gantry crane operators have to load and unload the TEUs in engineered sequences, monitored with strain gauges, to avoid cracking the hull or swamping the vessel. It has been estimated that container ships worldwide lose between 2,000 and 10,000 containers at sea each year: find a couple dropped by these guys and you could buy Delaware, which they probably own anyway.

  3. Petunia
    Oct 15, 2018 at 9:57 pm

    This is the funniest thing I’ve read in a long time. They have a Chinese Wall between their advisory and asset management divisions. Who the hell is pricing the deals and evaluating the markets, the receptionist.

  4. Unamused
    Oct 15, 2018 at 11:56 pm

    -> As long as BlackRock continues to grow . . .

    For the love of Pete stop feeding them before they change the name to Planet Blackrock and order everybody off the property. Most people are in no position to comply with a Notice to Quit.

    • Barry
      Oct 16, 2018 at 4:05 am

      For the love of “Pete”. You mean Pete Peterson? The self made man from Nebraska, son of Greek immigrants, CEO of Blackstone or now Blackrock. I was friends with his kids before they moved from Winnetka, Ill to D.C to head up the Commerce Dept under Tricky Dick. I remember him around the house sometimes on sundays, I thought it was cool he had a limousine driver.

  5. Beverley L Kennedy
    Oct 16, 2018 at 1:16 am

    Parallel game on a much lower scale occurs in Canada with its system of sros funded by quess who…. Sort of a parallel government
    I note the reference to assets of many governments in the article. And I am still wondering exactly what Canada did with the money it obtained in its selling of almost all its gold reserves…the most the public was told was that there were better investments that this money was being switched to….so – wonder…what were the better assets with a better return. And can the public play too?

    • Alistair McLaughlin
      Oct 16, 2018 at 10:25 am

      Bank of Canada’s books are public. You could look it up. There was no conspiracy involved in the sale of gold.

  6. desmond
    Oct 16, 2018 at 5:42 am

    Blackrocks Chinese Walls are made of very thin glass.

  7. MC01
    Oct 16, 2018 at 6:02 am

    Does anyone know what “Chinese Wall” means here? The WSJ article is far from clear on the matter.

    It could mean anything from the Great Wall of China, whose Ming incarnation (the one you see in postcards and documentaries) was easily defeated by the Manchu time and time again in the first half of the XVII century, to some opaque financial instrument used in modern China to hide from prying eyes mountains of bad loans.
    Or it could be that wall Mr Kim from City Wok tried building around South Park only to have the Mongolians tear it down time and time and time again.

    • Petunia
      Oct 16, 2018 at 9:41 am

      Chinese Wall in the consulting/investment business is a term of art. There is no separation because logically there can be no separation between the creators of complex financial products and those that evaluate them. Only a real insider knows the value or lack of value in the product. Only a real insider can price the product. Only a real insider knows who will buy it.

    • Longtime Listener First Time Caller
      Oct 16, 2018 at 11:49 am

      An ethical wall means someone puts a sticker on a folder, sends out a memo, and prevents certain people from access certain electronic files. Your mileage may vary.

  8. Sneaky Pete
    Oct 16, 2018 at 6:34 am

    Hmm. Corporate Colonialism. I’m sure Heinlein addressed that particular horror somewhere. Probably in The Moon is a Harsh Mistress.

  9. raxadian
    Oct 16, 2018 at 7:09 am

    Black Rock…

    Beware of men whose hearts are black as coal and hard as rock.

    Honesty the name says it all.

  10. Crysangle
    Oct 16, 2018 at 7:59 am

    [“We must buy government bonds,” he said.

    It was Axel Weber, the head of the German Bundesbank. ]

    https://www.japantimes.co.jp/news/2013/04/03/business/how-three-central-bankers-made-todays-world-in-three-days/#.W8Xev4zTWSw

    Who is, after a stint in the US, now working for UBS, and member of G30, along with Blackrock and the ECB

    https://www.reuters.com/article/ecb-banks-ethics/update-1-eu-ombudsman-urges-ecbs-draghi-to-leave-g30-club-of-financiers-idUSL8N1PC2HX

    ECB has been there for many years, previous ombudsman reports dismissed complainants, there are pdfs of those.

    Etc.

  11. John Henderson
    Oct 16, 2018 at 8:05 am

    There a price to pay if you require the very best brains.

    • raxadian
      Oct 16, 2018 at 8:50 am

      You mean there is a risk in being chummy with private companies when you work for the government or there should be.

      Just take a look at certain FCC Chairman on the current US administration that flaunts the fact that he sides with the people the FCC should be regulating.

      Super Mario of the Euro chumps sides with banks even if it means Eurozone Countries suffer.

      And people wonders why Brexit happened. It wasn’t a conspiracy, a lot people on the UK got tired of the Euro chumps abuse.

  12. Wisdom Seeker
    Oct 16, 2018 at 8:05 am

    After further thought, it probably would not matter who performed the stress tests for the ECB – even if it was the ECB staff themselves. Regardless of how the project was staffed, the people involved would be able to hop jobs and/or leak the data to those who wanted to exploit it. To then be suitably rewarded later after the rules allowed it. After all, this information is far more valuable than the standard political news which leaks every day.

    Given that, the only fair way to approach the matter is to have all the relevant bank data made public to all at the same time.

  13. Crysangle
    Oct 16, 2018 at 9:23 am

    DQ… a bit OT , am trying to place the Italy budget etc. and whether it is being made a show of or not, and by who. I don’t know if Italy has used some creative accounting to reach 2.4% deficit, but flying under the radar seems to be Spain, that pencils in a low deficit by granting 3.9% GDP increase next year, which just seems a tad optimistic

    https://tradingeconomics.com/spain/gdp-growth/forecast

    So is it a wider brazen faced contest playing out in Italy , or that a recipe to monetise paella been cooked up…or has it come to this, a sideshow bread and circus kabuki designed to tolerate a notional national relevance ?

    • MC01
      Oct 16, 2018 at 10:07 am

      A little bit of advice… look at how CPI and PPI are calculated starting January 2018. ;-)

      A further hint: look at energy prices, then at how they contribute to CPI and PPI. If ULSD (Ultra Low Sulfur Diesel) prices go up over 10% year on year, taking pretty much everything else with them, and the CPI moves by just 1.25%… multiply that for any item that goes into GDP statistics and he who has ears to hear, let him hear.

      Freight volumes in the EU are stagnating for 2018 (the common consensus seems to be ±1% over 2017) in spite of everything France and Italy are doing and that tells me everything I need to know.

    • Oct 16, 2018 at 10:54 am

      Cysrangle,

      Don’t know where you got the 3.9% forecast growth figure from. Just yesterday, Spain’s Ministry of Economy trimmed its growth forecasts for both 2018 and 2019, to 2.6% and 2.3% respectively.

      Here’s a link:

      http://www.elmundo.es/economia/macroeconomia/2018/10/15/5bc4743922601da4048b4596.html

      To be honest, with all the economic headwinds brewing over Spain right now, I’d be amazed if its economy grows anywhere near that much next year. And I imagine the Spanish government will be delighted with Italy’s mano-a-mano with the EU Commission, at least until or unless the fallout begins to affect Spanish banks or bonds. The confrontation serves as a perfect distraction from its own failure to meet budget targets.

      • Crysangle
        Oct 16, 2018 at 11:43 am

        “El problema es que la economía crecerá mucho más rápido, un 3,9%, según las estimaciones del ministerio.”

        https://www.elconfidencial.com/economia/2018-10-16/gobierno-aprobara-gasto-publico-mas-bajo_1630649/

        But to be honest I don’t know whose figures are whose… that 3.9% might be with the increase in spending counted in?

        I think you are right there, and Spain is quite happy to miscalculate than confront.

        MC, the problem is that though CPI might increase, I am not sure that can really boost GDP if the Spanish are pretty much tapped out already… it might even be deflationary in that people hold back for saving. Added is that the ECB will find that inflation a good enough reason to tighten… and Spain is on rate linked mortgages. We will see I suppose.

        • Crysangle
          Oct 16, 2018 at 12:23 pm

          Looked through the budget there and the only 3.9 % I saw were nominal GDP for Spain or global real GDP excluding euro. So maybe elconfidencial was being a little disingenuous…or not if they are thinking inflation is going to slow the economy. Hmm.

        • Maximus Minimus
          Oct 16, 2018 at 1:02 pm

          The problem is more that the CPI is understated, and that boosts the real GDP. And what turd paper publishes nominal GDP numbers!?

        • Crysangle
          Oct 16, 2018 at 1:47 pm

          Elconfidencial has been ok all the time I have read it. The crux of the article was on debt to gdp figures, percentage of spending to gdp, deficit, which are often calculated using nominal. The writer probably overlooked that when most people talk gdp they talk real gdp :-/.

        • Oct 16, 2018 at 2:46 pm

          Crysangle,

          Here is the European Commission’s actual data for the past few years and forecast for Spain’s “real” GDP in 2018 (=2.8%) and 2019 (=2.4%):

          https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/spain/economic-forecast-spain_en

          Make sure GDP growth data is “real” (inflation adjusted) GDP not “nominal” GDP.

        • Crysangle
          Oct 17, 2018 at 10:39 am

          Wolf… yes, I should have checked – the figure was mid introduction text outside of any other reference and without nominal added, and was not mentioned later, so I took it as real, my bad.

          Anyway, they are at each other over it in congress, with Casado (PP) calling Sanchez a fake and a fraud, calling for new elections before the socialists ruin the country. This is one of the heaviest and most direct frontals I have seen there.

  14. Hugs
    Oct 16, 2018 at 9:40 am

    “probably would not matter who performed the stress tests”
    Gives an indication on how close SHTF moment is. Some won’t risk their brand if SHTF moment is too close.

    • d
      Oct 17, 2018 at 12:29 am

      IT wont.

      As the EU will do,is what it has done in the past. lower the requirements, before, the final report is drafted, to ensure, all the banks it wants to pass, DO.

      Then they have this nice Black-rock report to state all the banks passed their requirements.

  15. Oct 16, 2018 at 10:24 am

    Is the CIA inside Blackrock?

  16. Tom Jones
    Oct 16, 2018 at 11:30 am

    The only real wall, is the one between the what,s in the public’s interest; and the marriage of governments to special interests, destroying currencies through inflationary financializations of everything under the sun. Nothing produced but more paper and computer digits. While infrastructures sinks into a morass of decay, cities looked bombed out, drinking water poisoned, true health insurance and housing beyond the reach of greater numbers daily…corruption has become legalized, and democracies remain so in name only. The world is caving in due to complex financial instruments, and “too big banks” with no real accountability…and above all, unpayable debts, both private and public. Clear away the zombies, close the insolvent, reset everything…otherwise only revolution, repression, and/or wars will be upon us all.

    • Unamused
      Oct 16, 2018 at 11:50 am

      Once their new AI CEO has replaced it’s employees with AI substitutes, it will probably decide that pollution control, infrastructure, and agriculture provide insufficient ROI, and The Matrix will be recategorized as a documentary. So let me be the first to welcome our new robot masters.

      This site gives me nightmares, so I’m going to wake up now.

      • Tyson Bryan
        Oct 17, 2018 at 1:58 pm

        Larry Fink is the human CEO of BlackRock. We presume he makes rationally advantageous decisions to further enhance the power of his corporation as an arm of the global banking juggernaut. We presume there is still a human hand somewhere in the analysis of the AI generated data. The corporate ledger data refreshes at 100 million cycles per second. Speed = liquidity. Credit and liquidity are just the hum of data flow. Faster flow generates liquidity? While at the same time giving the appearance of credibility? Moore’s law saves the system?

    • Joe Banks
      Oct 16, 2018 at 7:24 pm

      Well said Tom Jones. And great article Don.

    • Dan Romig
      Oct 16, 2018 at 9:12 pm

      Minnesota has a state law (144.145) that mandates: “… shall require the fluoridation of water in all municipal water supplies …” “This fluoride concentration must be between .9 milligrams and 1.5 milligrams per liter.”

      So yes, my tap water is poisoned.

      I did buy a few shares of BLK this morning after the market opened for $406.03. Since BlackRock seems to be calling the shots with the world’s central banks, I figured I’d own a minute piece their action.

  17. Maximus Minimus
    Oct 16, 2018 at 1:13 pm

    It’s all for the good of the people, and BlackRock is just like people’s commissars of a past regime. Honestly, do people deserve any better?
    BTW, FDP in Germany is the most free market outlet among the parties, not some kind of rebels.

  18. Steve clayton
    Oct 17, 2018 at 3:41 pm

    Hi DQ, currently who are the top 10 European banks with the lowest CET1 ratio?

Comments are closed.