In limelight for Barclays deal, BlackRock also faces controversy

Eric Thayer/Reuters
BlackRock agreed Friday to buy Barclays Global Investors to create the world's biggest asset manager.

With its $13.5 billion acquisition of a global investment business from Barclays, the Wall Street firm BlackRock is set to become the world's largest asset manager, but it already is the locus of considerable clout – and controversy.

The very expertise that has made the firm respected on Wall Street has, during the financial crisis, given it a prominent role as a consultant to the US government.

As a result, some lawmakers in Congress are questioning whether BlackRock is getting too sweet a deal, with too little oversight.

Rep. Marcy Kaptur (D) of Ohio has raised this issue twice in hearings – once earlier this month and once on Thursday. The essence of her questions goes beyond BlackRock itself to a larger point: In seeking to fix a financial crisis that threatened the whole economy, policymakers have had to shower benefits on Wall Street firms through bailouts or, in this case, through business contracts.

That's one reason the financial-rescue efforts, despite signs of success in their implementation, have been unpopular in public opinion polls – and a source of concern in Congress.

"Very privileged and powerful bankers in our country have hurt our nation deeply," Ms. Kaptur complained to Federal Reserve Chairman Ben Bernanke earlier this month. "Yet it seems that they get special treatment by the Federal Reserve and other financial regulatory agencies that should be protecting the public interest."

Where firms such as AIG have been in the spotlight because of direct bailouts, BlackRock's role has been largely out of the media limelight. The government has turned to the firm for consulting services as it deals with how to unwind toxic assets that have got AIG and the banks into trouble. The general public knows little about the firm, despite this prominent new role.

"How many no-bid contracts has the Fed now signed with private money-management firm BlackRock and any of its subsidiaries?" Kaptur asked Bernanke.

"We have signed several because of exigencies of time," he replied, adding that he believed the terms of the contracts will be released to Congress.

The Project on Government Oversight (POGO), a nonprofit watchdog group, says it's not surprising that the Fed and Treasury have turned to BlackRock for help in the crisis, because it is one of the most experienced firms around when it comes to asset management and valuation.

In the deal with Barclay's Friday, BlackRock will expand its investment business to include the exchange-traded funds called iShares. BlackRock also runs a number of mutual funds. The firm's CEO, Laurence Fink, was a pioneer in the market for mortgage-backed securities.

When there was the financial equivalent of a bomb scare, policymakers turned to a firm that knows the internal workings of complex financial instruments.

But in May, POGO expressed concern about the firm's intertwined roles in the public and private sector. "The multiple roles played by BlackRock and other asset managers creates a serious potential for conflicts of interest," the group warned.

At a recent hearing, Sen. Claire McCaskill (D) of Missouri asked why "BlackRock is all of a sudden everywhere and is involved in everything as it relates to sorting out our financial mess?"

Maybe taxpayers are getting a good deal for all of BlackRock's work. But for now, it's hard to know. Questions about BlackRock aren't likely to end.

– Guest blogger Mark Trumbull is a Monitor staff writer.

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