BlackRock’s Role as Fed Adviser Confers More ‘Clout’ Than Fees

(Bloomberg) -- BlackRock Inc.’s management of government coronavirus-relief assets won’t produce a financial windfall. But it will boost the stature of the world’s largest investment manager.

The firm stands to bring in as much as $40 million a year in fees to purchase and oversee corporate debt as part of a U.S. program to juice capital markets and counter the economic calamity of the pandemic, according to an analysis of the firm’s contract for the deal.

Generating those tens of millions of dollars won’t be easy. That’s in part because BlackRock’s management agreement with the Federal Reserve Bank of New York bars the firm, the world’s largest issuer of exchange-traded funds, from collecting fees on any ETFs in the portfolio it assembles. ETFs could make up a big share of the program’s purchases, especially initially.

Whatever BlackRock’s cut turns out to be, it will be modest for the New York-based firm, which oversees about $6.5 trillion in assets and recorded a 2019 profit of $4.5 billion. (The firm is also managing a Fed program to support mortgage-backed securities, from which it could collect about $8 million.)

The assignment confers other benefits, including the U.S. government’s endorsement of BlackRock as its go-to adviser. “They’re still getting a lot of clout,” said William Birdthistle, a professor at the Chicago-Kent College of Law.

The Federal Reserve enlisted BlackRock to manage the purchases in its $750 billion program to buy up both corporate debt and exchange-traded funds tracking corporate debt.

According to BlackRock’s 66-page contract with the New York Fed, the firm will receive no commissions for executing trades. Instead, it will take an administration fee that starts at $2 million for the second quarter this year and declines to $750,000 by the fourth quarter. It will also collect a sliding-scale rate for the corporate debt under management excluding ETFs. It will charge 2.5 basis points -- $2.50 per $10,000 -- on the first $10 billion under management, stepping down to 50 cents per $10,000 as assets approached $350 billion. For assets above $350 billion, the firm will collect no fees.

But that scale is academic, at least for now. The first phase of the federal program, which started Tuesday, calls for the purchase of corporate debt ETFs -- on which BlackRock can’t charge fees, in order to avoid any appearance of self-dealing. Management fees won’t kick in until the New York Fed directs the firm to begin adding debt of individual corporations.

Virus Portfolio

The Fed is turning to BlackRock more than a decade after they worked together to shore up debt markets hammered by the 2008 global financial crisis.

As the biggest money manager in global markets, BlackRock’s moves have the power to sway prices. When the Fed announced its plan to support corporate bond issues, including those that dropped below investment grade during the crisis, debt markets rallied, including ETFs focusing on high yield bonds. Among the gainers was BlackRock’s own iShares iBoxx $ High Yield Corporate Bond ETF.

To address concerns, the contract calls for the New York Fed to make almost all of the buying decisions, with BlackRock executing trades -- removing it from having to pick “winners” and “losers” in the debt markets. State Street Bank will be the custodian of the assets.

“BlackRock is acting as a fiduciary to the Federal Reserve Bank of New York,” the firm said in a written statement. “As such, BlackRock will execute this mandate at the sole discretion of the bank, and in accordance with their detailed investment guidelines, in order to provide broad support to credit markets and achieve the government’s objective of supporting access to credit for U.S. employers and supporting the American economy.”

‘Ethical Wall’

The document also outlines an “ethical wall” segregating the BlackRock team managing the government-bond operations from personnel throughout the rest of the firm’s trading, brokerage and sales operations. Staffers working on BlackRock’s Fed-backed program won’t be allowed to provide investment advice to anyone but the special-purpose vehicle created by the Fed, known as Corporate Credit Facilities LLC.

BlackRock will run the government’s bond-buying program through its Financial Management Advisory Group, which is separate from its other investment and advisory services. With some 250 employees, the group already operates under a material non-public-information-barrier policy restricting communications with other parts of the firm. It’s not clear how many people in the group will be allocated to the Fed program.

“There are stringent information barriers in place between BlackRock Financial Markets Advisory and the firm’s investment business,” the firm said. “These information barriers are well-established, having been in place for over a decade and repeatedly audited and reviewed by clients, competitors, regulators and BlackRock control functions.”

Confidential information about the government program will be shared internally on a “need to know” basis and will be shared with other parts of the firm only under certain controlled procedures, according to the contract. Employees who transition out of the Fed bond-buying program into other parts of the firm are required to go through a two-week “cooling off” period.

In addition to not collecting management fees for ETFs in the portfolio, BlackRock has also agreed to rebate to the Fed the ETF management fees it receives on any of its ETFs that are purchased for the program.

Under its contract, BlackRock is required to disclose potential conflicts of interest to the New York Fed and is prohibited from trading securities with other portfolios under its control. It also can’t subcontract duties to other firms without consent, and it’s prohibited from lending securities in the portfolio, which will make it more difficult for short-sellers to bet against the assets. The firm’s liability is limited, provided it acts in good faith.

The deal also bestows wide-ranging authority to the New York Fed, allowing it to appoint and remove investment managers, hire additional managers and examine records.

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