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.
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