The BlackRock advice to the Fed and other central banks on how to alleviate the Covid-19 crisis is generating strong controversies on Wall Street. The famous secondary market corporate credit line (SMCCF) that the US central bank has launched due to the pandemic leaves for now the controversial fact that more than 48% of your ETF purchases have gone precisely to your advisor’s vehicles.
Jun 04, 2020
According to a Bloomberg article, with data from the Fed itself, purchases of ETF with investment grade and ‘high yield’ that the body chaired by Jerome Powell carried out between May 12, the date on which this program began, and on May 19 they amounted to 1,307 million dollars. Of that amount, 48.2% was for BlackRock ETFs; 34.8% for Vanguard, and 15.3% for State Street. The remaining 1.7% was shared equally between Van Eck and Deutsche Bank.
The Fed has justified the large concentration of its purchases in that it wants to respect the distribution of ETF market for “Do not alter current market shares.” But many Wall Street executives see these words as an underlying reality. An anonymous executive interviewed by the Financial Times said in a recent article that “it’s really outrageous”, Because “BlackRock will manage a budget or mandate and decide whether it wants to use taxpayer money to buy the ETFs they manage. There are probably another 100 or 200 managers who could do this, but BlackRock was chosen, “he criticized. In other words, this anonymous executive means that, indirectly, the Fed has conditioned the markets to BlackRock’s benefit.
BlackRock’s dominance in the ETF market raises questions about conflicts of interest. “I don’t know of any other firm that can handle these kinds of issues in the short term,” said John Morley, a professor at Yale Law School, specializing in finance. “Even if BlackRock were not directly involved, the Fed program would have worked the same way given the dominance of its ETFs,” create this expert. The almost 600,000 million dollars that the manager has in fixed income ETFs represent approximately half of the world total. The same opinion is the professor of law Jill Fisch, from the University of Pennsylvania: “There are not many organizations the size of BlackRock, which gives it a level of experience in managing these types of programs.”
The bond ETF where the Fed invested the most so far, with a market value of 326 million, is the iShares iBoxx US Dollar Investment Grade Corporate Bond, although by number of shares, the most contracted was the Vanguard Short-Term Corporate Bond. Two other ETFs also highly demanded by the North American central bank have been the Vanguard Intermediate-Term Corporate Bond and the iShares iBoxx High Yield Corporate Bond.
AN UNPRECEDENTED CRISIS
The fund giant was selected both by the Fed and the Bank of Canada to advise these two central banks on how to alleviate the economic crisis caused by the coronavirus through its Financial Markets Advisory unit, which is independent of its ‘core’ asset management business. This is not the first time that BlackRock has been an advisor to the main public economic and financial institutions in times of market stress, as recognized by its president and CEO, Larry Fink, in an open letter to his shareholders, But it is the most “limit, fast and fierce” situation that the manager has lived through during his 44 years of profession. In a few weeks in mid-March, the major global stock indices fell from record levels to a bear market.
Of the Covid-19 stimulus programs implemented by the Fed, one buys bonds directly when they are issued; another buys bonds on the secondary market, as well as ETFs, and a third buys commercial mortgage-backed securities. And all three programs are overseen by BlackRock. The controversy is served.