By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, June 17, 2009
NEW YORK, June 16 -- The acquisition of Barclays Global Investors by BlackRock, which has emerged from the financial crisis as a powerhouse and adviser to the U.S. government, creates a giant overseeing $2.7 trillion in assets, making it by far the largest money manager in the world.
To grasp the size of that purchasing power, consider: The Federal Reserve, in its unprecedented effort to rehabilitate the economy, has expanded its balance sheet by $1.2 trillion. The federal government's 2010 budget is $3.6 trillion. The gross domestic product for the United States, the world's largest economy, was $11.7 trillion last year.
At a time when "too-big-to-fail" institutions such as AIG and Citigroup have been injected with billions in taxpayer funds, some analysts are raising questions about the scale of the BlackRock enterprise and its ties to the federal government. President Obama is set to propose Wednesday a plan to tighten financial regulation, but largely absent from the debate about regulatory reform has been the role of asset managers, which oversee about $21 trillion of assets globally for institutional investors such as pension funds, hedge funds and university endowments.
In an interview Tuesday, BlackRock's chairman and chief executive Larry Fink, who started the firm 21 years ago in a modest New York office, said "$2.7 trillion may sound like a lot of money, but the reality is, most of the added money from BGI is in stock and bond index funds." He disputed the notion that BlackRock could pose a risk to the financial system and the larger economy.
For one, he said, "100 percent" of BlackRock's business is managing assets for clients as a fiduciary responsibility, not trading for its bottom line. BlackRock also uses minimal leverage -- $20 billion, or less than 1 percent, of its $2.7 trillion in assets is bought with money lent to clients, Fink said. The use of leverage, or debt, in the pursuit of higher profits amplified losses for financial institutions, including firms that no longer exist such as Bear Stearns.
"There's more systemic risk in a hedge fund that has $10 billion in assets that's leveraged 40 to 1 than a BlackRock," he said, adding that every entity with more than $1 billion in assets should be regulated regardless of whether it is public or private.
"For every dollar of equity BlackRock has, we have a dollar of assets. That is why it's not a too-big-to-fail issue," Fink said. "What has happened over the past five years, in terms of the tremendous leveraging of certain financial institutions, does not apply to BlackRock. You can't compare the two."
Responding to concerns that have been raised by some members of Congress about BlackRock's role in helping the federal government evaluate and manage the rescues of troubled financial institutions, Fink said there was a fire wall between investment management and the part of his firm that performs risk analysis, called BlackRock Solutions.
"It so happened that because of the financial crisis, many institutions, public and private, are utilizing that service," Fink said. That business now analyzes risk for $7 trillion of assets and clients include sovereign wealth funds and other governments, he said.
Indeed, BlackRock and other asset managers are "not as risky" as a dealer who writes billions of dollars worth of credit-default swaps and whose collapse could spark a chain reaction of failures, said John Coffee, a law professor at Columbia University.
But, he added, "If you were giving common advice to $3 trillion worth of funds, you are going to be having an impact that could increase systemic risk. There can be systemic risk if one person or entity is able to make a bet-the-farm-investment decision based on poor investment analysis for an extraordinary large amount of capital."
While BlackRock is known as an active manager of fixed-income and other assets, Fink noted that more than $1 trillion of the $1.5 trillion of new assets it will be taking on from Barclay Global Investors is in passively managed stock and bond index funds.
"The tendency for increasing concentration and size bothers me. Size also comes with political power," said Simon Johnson, former chief economist at the International Monetary Fund and professor at MIT's business school. "We've all been talking about banks being too big to fail, but other financial institutions could be. I think the next big crisis could come from asset managers." Johnson is co-author of The Hearing blog at washingtonpost.com.
The BlackRock-BGI deal, which must be approved by Barclays shareholders, is scheduled to close in the fourth quarter of this year. It is expected to win approval from regulators. The combined firm would be the largest asset manager, followed by State Street, with $1.44 trillion, and Fidelity Investments, with $1.39 trillion, as of the end of last year, according to Pension & Investments magazine.
"Those portfolios move up and down with the world -- they are agnostic to the market," Fink said, referring to the index funds. BlackRock "is not a hedge fund," he said. "Our clients award us business on a specific product and strategy, and we have to conform to our clients wishes. All of our clients' money is managed with a specific strategy."
Staff researcher Julie Tate contributed to this report.