A reader chided me for being late to this story, but it appears not to have been widely covered yet. Moreover, I would hazard that it means less than the out-of-character reporting in the Financial Times suggests (this “leak” is a PR plant).
First, the FT article:
BlackRock, the asset manager 49 per cent owned by Merrill Lynch, is set to be signed up as the manager of the $75bn superfund being put together by the top three US banks.
The appointment of BlackRock, one of the world’s leading bond managers, is seen as an important vote of confidence in the plan, which met with initial scepticism from some banks and investors.
Larry Fink, BlackRock’s chief executive, has become a strong advocate of the plan and his team gave by far the best pitch for the business, according to a person close to the process….
The plan was leaked five weeks ago, when it was still at a very early stage, leaving it vulnerable to critics who complained that key details had not been worked out. But there has been growing support for the proposal since the banks – Citigroup, Bank of America and JPMorgan Chase – agreed to important changes 10 days ago.
These included raising the fees for selling to the fund to up to 1 per cent of assets. This will allow the fund to pay more to the banks that will provide back-up liquidity and to the managers..
The appointment of BlackRock should increase confidence that the prices the fund pays for SIV assets will be set independently of the banks, people close to the plan said…
The lead banks are expected to start syndicating the bank facilities in the first week of December and the fund could be up and running by early January.
Why is BlackRock’s participation is a “vote of confidence” in the fund? What the “manager” job entails is unclear (the fund is a new construct; the role will be defined contractually; it could therefore cover a multitude of sins) but the article indicates that BlackRock will have a role in pricing the assets purchased for the fund. The article also implies that there was a beauty contest for this role, meaning this is a fees for services job.
I don’t see signing up to earn fees as a “vote of confidence.” The only developments that would impress me are the kind that involve institutions putting up hard cash or financial commitments.
From BlackRock’s perspective, this is a no-brainer. If the fund is reasonably successful (however measured), they share in the glory and the fees. If it isn’t, all they did was waste a bit of time (and look, they still got favorable press profile, so it will not have been a total loss). This is a novel structure and they had no role in designing it. They have no reputational downside (unless they handle the role in a way that tarnishes their name, say by trying to legitimate above-market prices for the new entity’s assets).
No matter how many fancy names are associated with this enterprise, there are still some diffcult hurdles. One is how you price the assets to be transferred from existing SIVs to the new entity. Sellers want to minimize losses; investors are not willing to fund assets priced above market (however that is determined). Can a price be found that will satisfy both parties, or is this a fundamental out-trade?
In addition, I am now wondering who, exactly, will purchase the commercial paper that will fund this new entity. While this is anecdotal, I have heard a fair number of people, including financially savvy ones, say they would take money out of a money market fund that invested in this entity. So retail money market funds are somewhere between a hard sell and a non-starter. Enhanced cash management fund would have been the perfect target, but a number have broken the buck recently. Some mangers are contributing cash to the fund to make investors whole; others are letting investors take losses. As a result, that type of fund is operating under a cloud right now. Expect there to be near-term net withdrawals and greater conservatism in investment, which works against the SIV rescue program.
Now there are other types of money market investors, for example, the treasury departments of large corporations. But the big funds are the obvious deep-pocket targets. Every time I look at this, I keep concluding that it is going to be hard to sell the CP to third parties (or have I missed something really basic and this is structure really all about ratings arbitrage so the CP is rated higher than the underlying assets, and the investors look like they are dealing with a bona fide third party, rather than a related entity? Then the banks buy the CP but face lower capital charges under Basel II? If so, this seems like an awfully costly and complicated process to achieve what seems to be a limited benefit).
Separately, note that the best-case scenario for having the fund operational has receded from the end of the year to early January. Citi had gotten what amounted to bridge financing through year end for some of its SIVs. What happens if the timetable slips again? And this isn’t a Citi issue; SIVs are starting to liquidate, and as assets come on to the market and are sold on an arm’s length basis, the wriggle room for any price finesse gets smaller and smaller.