The Federal Reserve just made the problem of financial firms considered ‘too big to fail’ a whole lot bigger.
That’s because the U.S. central bank has hired private equity giant BlackRock BLK, which manages some $7 trillion in assets, to run purchases of corporate bonds and commercial mortgages that are part of its response to the pandemic-led recession.
During the 2008 financial crisis, the Fed complained that it had been forced to bail out Wall Street megabanks because of the real possibility that their failure would lead to even deeper economic damage.
Financial reforms that became the Dodd-Frank Law were supposed to solve the problem by making banks raise more equity relative to their debt loads, making them less fragile, and giving the Fed the authority and means to wind down very large banks in an “orderly” fashion.
However, not only are same banks that received taxpayer funds in 2008 still seen as far too large to be allowed to go under, growth in private equity, hedge funds and other darker corners of financial markets have arguably created a whole new set of too-big-to-fail firms.
During the last crisis, BlackRock’s assets under management were $1.3 trillion, so they have ballooned in size by over five times in just a decade.
Under the Fed’s program, BlackRock “could buy some of its own funds on behalf of the central bank,” according to Bloomberg. It doesn’t take a financial expert to find that kind of self-dealing fishy.
The appearance of coziness between central bankers and the private equity giant is further underlined by ex-Fed Vice Chair Stanley Fischer decision to take a job at the firm not long after stepping down from the Fed.
In addition to the prestige advantage the move gives BlackRock, which has suddenly become instrumental to the transmission of monetary policy, there’s also the bonus of management fees: $8 million per year.
It’s no wonder activists and financial sector critics are sounding the alarm.
His Highness, JPOW, has temporary given his divine weapon to the equity giant BlackRock ($7 trillion in assets) with a power of “could buy some of its own funds on behalf of the central bank” around late March
…And this is making people concern now