MutualFundWire.com: BlackStone? BlackRock? BlackBoulder? Well, Whoever

MutualFundWire.com

The insiders' edge for 40 Act industry executives!
an InvestmentWires' Publication

Thursday, April 3, 2008

BlackStone? BlackRock? BlackBoulder? Well, Whoever

Sometimes getting bigger does not mean becoming better known.

Wayne Allard
R-Colorado
Senator

Years ago -- on June 4, 1998 to be exact -- The MFWire was at a Washington event only to witness the meeting between a BlackRock managing director and then-SEC Chairman Arthur Levitt in a conference break coffee line. Beaming from being in the presence of raw regulatory power, the BlackRocker introduced himself to Levitt with obvious pride. Looking like a slightly confused and very tall elderly uncle, Levitt politely asked the BlackRocker exactly what it was that BlackRock did.

"We are a fixed income manager," replied the clearly crestfallen BlackRocker. The universal "that's nice, but I need to move on now" expression quickly passed over Levitt's face, conveying that he had no idea who BlackRock was nor did he really care.

Tim Geithner
Federal Reserve Bank of New York
president

Levitt's response may have been understandable in 1998, but a decade has passed and BlackRock has acquired SSRM and MLIM to become firmly ensconced in the topmost ranks of the largest asset manager league tables. Still, that increased Wall Street profile does not mean Larry Fink and his posse are getting more recognition in Washington. A faux pas during this morning's Senate Banking Committee's hearing on the collapse of Bear Stearns underscores that the long distance from Wall Street to Capitol Hill remains unchanged.

The moment came while Senator Wayne Allard (R-Colorado) was questioning Tim Geithner, president of the Federal Reserve Bank of New York. While following up on a comment from Fed Chairman Ben Bernanke to discover how the Fed selected BlackRock as the advisor for Bear Stearns' portfolio and to uncover how its fees were set, the Senator confused BlackRock with Blackstone. That confusion later provided an opportunity for New York Democrat Charles Schumer to exercise his wit -- see "BlackBoulder" below.

Fortunately for Larry Fink's ongoing branding efforts and the dividing line between asset management and private equity, Robert Steel, Treasury undersecretary for domestic finance, stepped in to set the record straight after Geithner politely ignored (or missed) the mistake. Geithner also explained that BlackRock may have been the only asset manager for the job.

As for the BlackRock fees, Geithner waited until a follow-up from Senator Jon Tester (D-Montana) to answer that question. It turns out that BlackRock's fees are "not yet" set but Geithner reassured Tester that they would be "commercially reasonable."

Sen. Wayne Allard: Under the Bear Stearns agreement that was reached, one thought that came to me is the managing ... who is going to be the manager of the remaining assets, and it was determined that BlackStone Group would be that. And, so that's a key decision, I think, in managing what's left and how was that decision arrived at? And how do you determine what their fee or -- whatever would be determined -- to manage those assets?

Timothy Geithner: Thank you, Senator. That afternoon of Sunday, March 16, we were exploring whether there was a way to make this work. We did a range of things to try to get ourselves as comfortable as we could with the mix of assets that we were willing to consider financing.

The financial system holds typically several hundred billion dollars of collateral with the New York Fed against the possible need to borrow and we have a team of people that spend their lives thinking about how to evaluate collateral and look at that. And we had those people along side us as we looked at this portfolio.

We established a set of very important conditions described by the chairman for what we would accept in the portfolio. And, we structured it to again, very carefully -- very very carefully -- to minimize risk of future loss. But, as part of that we made the judgment -- I made the judgment -- that we should have a world class advisor sitting there with us. In that period of time -- very little time -- we made the best judgment we could about what firm would have the mix of expertise, knowledge, experience and independence that could best provide that judgment. I think they met that test.

I don't think that there were any better options available at that moment and I think that we are in a much better position now -- we certainly were that afternoon and going forward -- to have them at our side as we thought through those judgments. And as their chairman said, emphasized -- part of the agreement that we worked out to limit risk to the taxpayer was to have them be in a position to help manage the assets over time.

Robert Steel: If I could just make a correction sir.

Senator Allard: Yes ...

Steel: ... When your question ... the correct name is BlackRock for the institutional ...

Senator Allard: Oh, was it BlackRock?

Robert Steel: BlackRock not Blackstone.

Senator Allard: Well, whoever ... Yeah, I appreciate that ... Thank you.

Senator Allard: That is an error we had in my notes and I apologize for that. But, just the same I think the question applies. Yeah. Mr. Chairman, I see that my time has expired. Thank you.

Chairman Chris Dodd: Thank you very much, Senator Schumer.

Senator Charles Schumer: Well, thank you Mr. Chairman. I hope next time you don't need to bring in BlackBoulder instead of BlackRock or Blackstone ...

* * *

Later, Senator Jon Tester followed up with a question about BlackRock's fees.

Senator Jon Tester: How much is BlackRock charging for managing the $29 billion?

Geithner: Senator, we have not yet completed our negotiations on the fee. It will be a commercially reasonable fee. We will be very careful in setting it so that we will be paying something that matches the complexity of the responsibilities and the importance to us that it get managed in a way to minimize the risk.

Senator Tester: ... I will ask this to the next panel up ... but is that typically how things are done, you enter into the agreement and then set the fees later?

Geithner: Almost nothing is typical about the arrangement that we reached in this context. And as I said, we tried to be very careful to make sure we designed this in a way to minimize any risk to the tax payer and part of that was having them there with us.