Fed Hires BlackRock and PIMCO To Facilitate Increased Buying Of Corporate Debt

alexic

BlackRock and PIMCO have been hired by the Federal Reserve to help the central bank buy up corporate debt.

The Federal Reserve has announced that it will increase the number of corporate bonds that it purchases as a form of a financial bailout to companies that have been put in financial distress as a result of the coronavirus, according to CNBC. BlackRock and Pacific Investment Management Co. (PIMCO) are in charge of overlooking the massive undertaking of the Federal Reserve buying up corporate bonds. Aggregately, BlackRock and PIMCO manage $8 trillion in assets. Some estimate that BlackRock will direct $750 billion in corporate debt into the market for the Federal Reserve to purchase.

“Here’s a chance for asset managers to show they could be powerful partners in the recovery,” Ben Phillips, a principal at Deloitte consulting arm Casey Quirk, told the WSJ. “They’re organizing capital, as opposed to using their own balance sheet, and can think longer term.”

For every $100 in bond purchases made by the Federal Reserve, BlackRock will earn close to two cents. However, earnings on corporate bond purchases made by the Federal Reserve will begin to decrease once the portfolio exceeds $20 billion and earnings will stop once the portfolio exceeds $50 billion. As a result, BlackRock will not earn more than $7.75 million per year on the services it provides to the Federal Reserve, according to the New York Times.

BlackRock has had a long and profitable relationship with both the Federal and state governments. During the last financial recession, BlackRock played a key role in helping federal and state governments sell off its low-quality assets. According to CNN, early on in the 2008 financial crisis, BlackRock was hired by Florida’s state government to analyze what junk assets could be sold off in order to save the state’s investment portfolio. This client alone helped quadruple BlackRock’s business.

The reason that the government is so reliant on BlackRock is because state governments invest in different assets in order to pay pensions and salaries of different state employees, including teachers, firefighters and police officers. In the 2008 financial crisis, state governments had heavily invested in assets that were backed by sub-prime mortgages, the assets that fell steeply in value. BlackRock is a major asset manager that has the capacity to quickly evaluate which assets need to be shed and proceed to sell them. As a result, BlackRock, to an extent, benefits from financial crisis.

BlackRock was hired by the New York Federal Reserve during the 2008 financial crisis to price and sell the assets left over from the collapse of Bear Stearns and American International Group, according to the New York Times. This relationship was scrutinized given that BlackRock was selling assets acquired by the government to primarily BlackRock’s clients.

More specifically, BlackRock was setting the price of assets sold to their own clients. Additionally, the contracts for the services provided by BlackRock were released months after the services were provided or never provided at all. As a result, it is undisclosed just how much money BlackRock made from the last financial crisis.

Comments

Economics, Finance and Investing

FEATURED
COMMUNITY