BlackRock Is Go-To Firm to Divine Wall Street Assets

Bloomberg) -- Got assets you can’t value? Call Larry Fink.

That’s what Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner have done, as have many heads of banks and insurance companies, including Robert Willumstad, former chief executive officer of American International Group Inc., and current AIG CEO Edward Liddy.

Fink, 56, is CEO of BlackRock Inc., the U.S.’s biggest publicly traded asset management firm, with $1.3 trillion under management for clients that include Ford Motor Co. and Microsoft Corp. BlackRock, like many other money managers, has taken some hits in the credit crisis. It also loaded up on Lehman Brothers Holdings Inc. stock, for example, buying shares last June at $28 only three months before Lehman declared bankruptcy. One BlackRock fund that rushed in to buy distressed debt in September 2007 saw its value plunge 25 percent during the following 12 months.

More recently, mirroring results at rival firms, BlackRock’s first quarter profits fell 65 percent to $84 million after stock and bond market declines hurt its fees.

Dominant

Fink has a way of making good money in bad times. A decade ago, he created a subsidiary called BlackRock Solutions, looking to capitalize on ever-more-sophisticated risk-management analytics that the firm was running for clients, including mortgage giant Freddie Mac, that needed help in assessing stressed portfolios or in deciding whether an investment made sense.

In the unfolding credit crisis, BlackRock Solutions has become the dominant player in evaluating and pricing distressed assets such as mortgage-backed securities by winning more contracts from the government, investment banks and insurance companies than other firms.

“It’s our fastest-growing unit,” says Robert Kapito, BlackRock’s president, citing revenue that doubled to $400 million last year. In the latest quarter, the unit’s revenue more than doubled to $140 million from $60 million a year earlier.

“BlackRock has established itself as the go-to firm when you have problems,” says Terrence Keeley, a managing director at UBS AG, which sold a $22 billion portfolio of subprime mortgages to a fund managed by BlackRock.

Desperate Customers

The terms -- in which UBS offered a $7 billion discount and provided $11.25 billion in financing -- demonstrate how desperate banks are to get distressed assets off their books. “It’s hard to replicate the BlackRock approach because they built their systems, tools and analytics a long time ago,” Keeley says.

The Federal Reserve and U.S. Treasury Department have awarded contracts to BlackRock Solutions to manage $130 billion in distressed debt formerly on the books of investment bank Bear Stearns Cos. and crippled financial giant AIG. The Fed called on the company in September to analyze the assets of Fannie Mae and Freddie Mac after the government took an 80 percent stake in the two mortgage giants. BlackRock is also one of four co-managers of a $500 billion Fed program, announced in November and expanded to $1.25 trillion in March, to buy residential mortgage-backed securities.

Fink began his career as a bond trader who three decades ago helped pioneer collateralized-mortgage obligations, the forerunners of the complicated derivatives at the heart of the present crisis.

Lucrative Work

Over time, Fink and BlackRock Solutions stand to earn tens of millions or even hundreds of millions of dollars in fees, primarily from lucrative private-sector toxic-asset work, according to Fink and people familiar with the contracts.

“We’re managing hundreds of billions for governments,” Fink says. Asked for details about whom else BlackRock is working for and how it actually goes about its tasks, he demurs. “I have to be opaque,” he says. “It’s hundreds of billions and not necessarily for the U.S. government.”

The Fed and Treasury, beyond confirming Fink’s contracts, also have little to say about the exact nature of the work -- a stance that worries some. Janet Tavakoli, president of Chicago- based Tavakoli Structured Finance Inc. and the author of three books on derivatives, says the government should be more forthcoming.

Need for Transparency

“The Federal Reserve and the Treasury would do the world a favor by giving us more transparency on AIG and Bear Stearns assets,” she says. “The regulators have just given up and are just throwing the assets with BlackRock and saying ‘Manage this.’” (Bloomberg News filed a Freedom of Information Act lawsuit in November asking a federal judge to require the government to disclose data about the Bear Stearns assets.)

Not content to be a manager of toxic assets with no transparent value, Fink is also planning to buy them. He says BlackRock Inc. wants to raise $5 billion to $7 billion from investors to participate in a government plan, announced March 23 by Geithner, to finance up to $1 trillion of such purchases. BlackRock intends to apply to become one of the five managers under the plan, known as the Treasury Department’s Public- Private Investment Program. Fink says he sees no conflict of interest in being one of the Treasury’s managers and participating in the plan.

“I don’t get any inside information, and it’s a competitive auction pool,” he says.

Read more here