The New York Times' in-depth piece on Treasury Secretary Tim Geithner and his cozy relationship with Wall Street includes some interesting new details about contracts awarded to BlackRock to manage the Federal Reserve's mortgage-backed securities purchase program:
"Mr. Geithner has also faced scrutiny over how well taxpayers were served by his handling of another aspect of the bailout: three no-bid contracts the New York Fed awarded to BlackRock, a money management firm, to oversee troubled assets acquired by the bank.
BlackRock was well known to the Fed. Mr. Geithner socialized with Ralph L. Schlosstein, who founded the company and remains a large shareholder, and has dined at his Manhattan home. Peter R. Fisher, who was a senior official at the New York Fed until 2001, is a managing director at BlackRock....
For months, New York Fed officials declined to make public details of the contract, which has become a flash point with some lawmakers who say the Fed's handling of the bailout is too secretive. New York Fed officials initially said in interviews that they could not disclose the fees because they had agreed with BlackRock to keep them confidential in exchange for a discount.
The contract terms they subsequently disclosed to The New York Times show that the contract is worth at least $71.3 million over three years. While that rate is largely in keeping with comparable fees for such services, analysts say it is hardly discounted.
Mr. Geithner said he hired BlackRock because he needed its expertise during the Bear Stearns-JPMorgan negotiations. He said most of the other likely candidates had conflicts, and he had little time to shop around. Indeed, the deal was cut so quickly that they worked out the fees only after the firm was hired.
But since then, the New York Fed has given two more no-bid contracts to BlackRock related to the A.I.G. bailout, angering a number of BlackRock's competitors. The fees on those contracts remain confidential." [emphasis added]
We've written before about the potential conflicts of interest that could arise from firms like BlackRock and PIMCO advising the Fed on the valuation of certain mortgage-backed securities, while investing in these same assets for themselves and private clients. An FAQ section on the New York Fed's website states that "each investment manager is required to implement ethical walls that appropriately segregate the investment management team that implements the Federal Reserve's agency MBS program from other advisory and proprietary trading activities of the firm." But Fed Chairman Ben Bernanke has admitted to Congress that "it's probably impossible to completely separate these firms from the other organizations." The fact that the Fed awarded three no-bid contracts to a well-connected firm like BlackRock to oversee these assets only adds to our concerns. We strongly urge the Fed to disclose more information on these contracts, and to explain in much greater detail what it is doing to identify and manage the potential conflicts of interest.
As Treasury Secretary, Geithner is now in a position to award additional contracts to BlackRock and PIMCO, both of which have applied to manage Treasury's Legacy Securities Program. Again, we question whether taxpayers' interests are best served by giving a select group of contractors such an influential role in the government's bailout programs, especially when these contractors are giving "independent" advice on assets in which they have a direct financial interest.
-- Michael Smallberg