Fink reaches for Wall Street’s crown

June 16, 2009

Matthew GoldsteinYou have to marvel at the seemingly Midas touch of Larry Fink.

The BlackRock Inc. chief executive avoided taking over the helm of Merrill Lynch — something John Thain probably wishes he had done. Fink’s firm emerged from the financial crisis as the Federal Reserve’s favorite private money manager, with BlackRock getting the lion’s share of the government’s work for managing troubled assets. And the $13 billion deal Fink just reached with Barclays Global Investors has turned BlackRock into the outright titan of the asset management world with $2.7 trillion in other peoples’ money under management.

It’s often been said Jamie Dimon is the new king of Wall Street. But one can argue that the 56-year-old Fink, who started BlackRock as a small bond investment shop two decades ago, can also rightfully lay claim to that honor. Even as the Obama administration is about to announce its plan for managing so-called “too big to fail” financial institutions, Fink’s BlackRock is getting bigger and more consequential than ever.

The deal puts BlackRock’s fingers firmly into every significant asset class-corporate bonds, mortgage-backed securities, mutual funds, stocks, cash, hedge funds and now the ever popular exchange traded funds — a stock index-like security. Barclays now joins Bank of America and PNC Financial in having major equity stakes in BlackRock and a vested interest in the money manager’s long-term health.

The danger, of course, in creating a money management firm the size of BlackRock is that it puts a lot of people’s retirements at risk if the firm were to collapse, or its investment funds were to implode. To put BlackRock’s size in perspective, it’s now bigger than the combined assets managed by mutual fund giant Fidelity Investments and the entire hedge fund industry.

Wall Street historian Charles Geisst says money managers traditionally have not posed the same kind of risk to the financial system as a commercial bank or investment. But Geisst worries whether Wall Street is laying the groundwork for a new kind of systemic risk, if the BlackRock deal with Barclays encourages a consolidation of too much pension and retirement money into the hands of just a few players. “We could have big problems with these huge asset managers down the road,” he says.

To be sure, BlackRock is not too big to fail in the way that phrase came to be used during the current crisis. The firm is not a primary lender to other institutions and BlackRock is not widely leveraging its own balance sheet to fund its operations. The firm has just $1 billion in debt on its balance sheet. More significant, the investments that BlackRock manages aren’t insured by the federal government — so a collapse of its many investment vehicles wouldn’t require any direct payout by taxpayers. And it’s hard to imagine all of BlackRock’s many funds going south at the same time.

Still, it’s worth remembering that no money manager always has the golden touch. Consider the case of Anthracite Capital, a commercial mortgage-focused real estate investment trust (REIT) that is teetering, and which long has been tied to both Fink and BlackRock.

Last year, Anthracite shelled-out about $24 million in management fees to BlackRock. In March, Anthracite’s auditors officially voiced doubt about Anthracite’s ability to survive as a “going concern”, although it has since renegotiated some of its credit lines. The shares are trading around 80 cents — down from $8 a year ago. Anthracite hasn’t paid a dividend to most shareholders since the end of 2008.

Anthracite, meanwhile, owes its very existence to BlackRock. Back when BlackRock was still a subsidiary of PNC, it took Anthracite public in 1998 with Fink as the REIT’s first chairman. Trying to decipher the many related party transactions between the two firms is enough to give you a headache. But suffice to say, the connections between the two financial firms are substantial.

Over the years, BlackRock has relied on Anthracite to provide $150 million in equity capital for two separate real estate funds Fink’s firm manages, and BlackRock also is one of the REIT’s main financiers.

Now if Anthracite were to go bust, the impact on BlackRock wouldn’t be immense. (BlackRock declined to comment.) But the firm would be forced to take a write-down on the lost management fees, its remaining equity stake in Anthracite and the roughly $30 million in loans it has extended to Anthracite.

But the more significant impact might be to Fink’s reputation. For Anthracite’s collapse could come just as he is reaching for his share of the Wall Street crown.


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