Is BlackRock going to rule the world?

October 8, 2009

It’s amazing how well the company has positioned itself to clean up the mess left behind by the financial crisis. It already has chummy ties with the government, including the Federal Reserve which tapped it to manage and eventually liquidate toxic assets the central bank took on from AIG. It’s also the risk and analytics manager in chief for the Fed’s MBS purchasing program.

The Wall Street Journal reports today that the National Association of Insurance Commissioners is also considering the giant money manager to sub for the rating agencies, which the insurance industry blames for getting insurers into such a pickle with structured finance investments.

BlackRock Inc., which scored multiple government assignments during the financial crisis, is a contender for another prestigious gig: helping state regulators size up risks in insurers’ investments.

The money manager and risk-advisory outfit is among a handful of firms that have talked with officials from the National Association of Insurance Commissioners lately about possibly taking on a slice of work now done by the major ratings firms, according to regulators and an official at the NAIC.

The article goes on to say that PIMCO could also be in the running.

The insurance lobbying outfit, the American Council of Life Insurances, is behind the plan to anoint a third party to run risk models on bonds back by mortgage bonds held by insurers. The thinking is that rating agencies aren’t properly measuring loss risk and the end result is insurers are being forced to tie up too much capital to comply with exisiting regulations.

First, I’m not sure it’s such a great idea for the insurers to set aside less capital rather than more given their exposure to residential and commercial mortgages. Second, is it a good idea to have big money managers also deciding how risky certain investments are for an industry that invests trillions in bonds?

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