BlackRock Doesn’t Need A Scarlet Letter
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Mr. Fink has been making the case that gargantuan asset managers — coincidentally, like the firm he heads, BlackRock — should not be given the dreaded label of Systemically Important Financial Institution. Being a S.I.F.I. means that you are capable of transmitting all manner of systemic financial diseases to trading partners and customers and need an extra measure of regulation.
Such Washington spectacles are made all the worse when the head regulator of Mr. Fink's firm echoes industry talking points. Mary Jo White, the chairwoman of the Securities and Exchange Commission, BlackRock's main regulator, has been on a genuflecting tour to reassure asset managers that they have a sympathetic ear in the nation's capital. The S.E.C. has been jostling for turf over this question. Recently, Ms. White disagreed with the Treasury Department, telling the industry that it isn't " overreacting" to the process.
But just because Mr. Fink is talking his book and Ms. White is acting the sycophant doesn't mean they are wrong. Large asset managers shouldn't be designated S.I.F.I.s.
Regulators have clear tasks left unfinished from the financial crisis. Where they have made progress, it's been inadequate. This needs to be the relentless focus. Asset managers don't top the list.
O.K., some context is in order.
As part of the Dodd-Frank financial overhaul, a body was created called the Financial Stability Oversight Council. Its continuing mission: to look out for dangerous practices and precarious institutions whose collapse could cause another systemwide financial crisis. It would be one committee to rule them all. Which in practice means summoning all the regulators to meetings.
Immediately, all banks with more than $50 billion in assets were designated as S.I.F.I.s. Then the question arose: What about the nonbanks that are systemically important, too? After deliberation, three nonbanks were given the scarlet letters: GE Capital, American International Group and Prudential.
Regulators have now turned to examining large asset managers, including BlackRock and Fidelity. It makes sense to ask the question. BlackRock has more than $4 trillion under management. That's not the right figure to consider, however, when assessing whether the company itself represents a risk. BlackRock and other giant asset managers manage other people's money, which is not held on their own balance sheets.
Banks do something special. They borrow and promise to pay customers back, sometimes at any moment. Then they lend that money out over a longer period of time. In the jargon, they are engaged in every parent's long-awaited dream for their children: "maturity transformation."
BlackRock doesn't do this as a business. Yes, when you invest in a bond fund, you get to take the money out at any point. And the investment manager puts that money to work in all sorts of investments with differing maturities. But the investor is on the hook for the losses, not BlackRock.
Regulators all over the world are debating this. Smart people like Andrew Haldane of the Bank of England make the case that this is the new frontier in regulation. The argument is that large asset managers are the vehicle for people to herd into and out of investments. So when people are inflating a bubble, they do it through their funds at Fidelity or BlackRock. When they panic and sell, those funds lose value. As the investors take losses, they have to liquidate other investments, spreading losses and possibly creating a crisis.
This is clearly systemic risk. But trying to regulate away bubbles and panics, figuring out how and where investment flows can and should go, however, is probably a loser's game. As Robert Jenkins, a former banker and colleague of Mr. Haldane's argues, regulators might as well add greed and fear to their to-do list as well. And that risk isn't located at the asset management company level, but in the funds themselves.
One can envision BlackRock posing big risks. It sells risk management software all over the world, which could fail in myriad ways. And BlackRock is involved in businesses such as securities lending that could be vulnerable. But one can imagine lots of things happening.
Regulators cannot do everything at once. For now, the focus should be on making the system safer where we know the vulnerabilities lie. The giant banks still don't have sufficient capital, after all of the supposed increases in the last several years. And important capital markets weaknesses haven't been shored up. It's unclear whether regulators have the skill, will and tools to unwind failing gigantic financial institutions.
Banks and brokers continue to be financed in precarious ways, often through the kinds of asset repurchase agreements that brought down Wall Street in 2008. And money market funds, an open sore of systemic risk, haven't been fixed.
These fixes would also make the asset managers much safer entities. As Steve G. Cecchetti and Kermit L. Schoenholtz, economists who write the Money and Banking blog, point out, if regulators managed to address the systemic risks posed by the activities and products that asset managers offer, then the risks posed by the companies themselves would be sharply diminished, if not eliminated.
The good news for the asset managers is that nothing is happening immediately. The Financial Stability Oversight Council is merely studying the question and hasn't reached a conclusion, whining from Mr. Fink notwithstanding. Washington takes studying as seriously as Torah students do, as an end in and of itself.
The bad news is that the fight has exposed a sorry regulatory pettiness, largely from the S.E.C.
It's not a scandal if the Financial Stability Oversight Council decides to pass, said Erik Gerding, a University of Colorado law professor. "The F.S.O.C. does have to set priorities for which sources of systemic risk are the most troubling," he said.
The problem with the public fight is that it could appear that the oversight council is weak, he added. "The question becomes more political: Would the Beltway and Wall Street perceive that as the F.S.O.C. blinking or backing down in the face of S.E.C. and industry resistance?"
The infighting is particularly unfortunate because the Financial Stability Oversight Council has been attacked and reviled by the right. An S.E.C. commissioner gave a speech on Tuesday, labeling the council the Firing Squad on Capitalism. The S.E.C. is undermining financial regulation with its public and needless antagonism. And the S.E.C. already lacks credibility. Things haven't gotten better under Ms. White. The agency took a Financial Stability Oversight Council report published last fall on asset managers and put it out for public comment, a gratuitous poke in the eye. And the S.E.C. has a long, proud history of demonstrating its incapacity to identify systemic risks.
And it's all the worse because the S.E.C. has been dragging its feet on finishing Dodd-Frank rules or proposing half-measures, such as its rules on derivatives and money market funds.
So the regulators have work to do. They can leave Mr. Fink alone for now.
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