Sideways: BlackRock walks a governance tightrope

News and opinion on finance

BlackRock’s Larry Fink and New York Federal Reserve president John Williams: Both seem keenly aware that the slightest hint of impropriety in their unusual relationship could cause enormous reputational damage

BlackRock was already under scrutiny after chief executive Larry Fink repositioned the firm in January to place greater emphasis on environmental, social and governance (ESG) criteria.

Fink’s journey from mortgage-bond trading hotshot at First Boston in the 1980s to apostle of ethical investing in 2020 struck many rivals as self-serving and unconvincing, although the strong relative performance of ESG products during the Covid-19 crisis should go some way to dampening those criticisms.

The crisis also saw BlackRock win the most controversial mandate of the year so far, with the appointment of its financial markets advisory group as agent for the Federal Reserve’s first foray into the direct support of the credit markets.

The US central bank did not hold a competitive tender for the mandate and was slow to release details of its contract with BlackRock, which exacerbated suspicion about the potential for valuable information to flow from the specialist advisory unit to other parts of the asset manager.

BlackRock is understandably keen to promote the idea that there’s nothing to see here – move along.

“There are stringent information barriers in place between BlackRock financial markets advisory and the firm’s investment business,” said a BlackRock official. “These information barriers are well-established, having been in place for over a decade and repeatedly audited and reviewed by clients, competitors, regulators and BlackRock control functions.

But the halo effect from being anointed as the Fed’s representative on credit trading earth is undeniable.

BlackRock’s iShares iBoxx investment grade corporate bond exchange-traded fund went from under $30 billion of assets before the Federal Reserve’s credit support mandate was announced in March to almost $50 billion by late May.

The halo effect from being anointed as the Fed’s representative on credit trading earth is undeniable

And the pronouncements of BlackRock’s chief investment officer for fixed income, Rick Rieder, will be followed more closely than usual, even if he is blissfully unaware of the details of the trades being handled for the Federal Reserve by his financial markets advisory colleagues.

Rieder is a high-profile former head of global principal strategies and credit for Lehman Brothers and – like Fink – a veteran of the go-go days of big trading bets and outsized bonuses for Wall Street bankers.

His counterpart as head of financial markets advisory, Charles Hatami, is a more technocratic figure.

Before joining BlackRock in 2010, Hatami worked as a junior banker at Banco Itaú in São Paulo and in risk management at BNP Paribas in Frankfurt. He then set up a boutique hedge fund in London called Xeryus Capital, whose chief distinction seems to be sharing a name with a men’s fragrance by Givenchy, designed “for a man who embraces his freedom and is a risk-taker at heart.”

That doesn’t sound like the approach the Fed was looking for when it gave BlackRock its contract to help restore calm and confidence to the credit markets. But there is no reason to believe that a veteran of risk management in Frankfurt will choose to embrace his freedom when helping to select corporate bonds to buy for a central bank.

Soul-sapping detail

Hatami and his colleagues in the financial markets advisory group at BlackRock will no doubt be monitored in soul-sapping detail by compliance officers at the firm as they handle their Federal Reserve mandate.

Hatami reports to Mark McCombe, chief client officer at BlackRock, but the Federal Reserve wrote a dispute resolution clause into its corporate credit-buying contract that would quickly involve other senior staff in the event of any conflict.

Any dispute that Hatami cannot resolve would escalate to a second level involving the New York Federal Reserve’s head of markets, Daleep Singh, and BlackRock’s head of international and corporate strategy, Mark Wiedman.

The next stop would be a meeting between New York Federal Reserve president John Williams and BlackRock’s Larry Fink.

Both the central bank and the world’s biggest asset manager seem keenly aware that the slightest hint of impropriety in their unusual relationship could cause enormous reputational damage to both parties.