BlackRock Inc. executives met with Federal Reserve officials this month to explain why the world's largest money manager doesn't pose enough risk to the financial system to merit central bank supervision.
Robert Connolly, BlackRock's general counsel, and Vice Chairman Barbara Novick, head lobbyist and one of the New York-based firm's co-founders, met Nov. 4 with seven Fed officials to discuss the newly formed Financial Stability Oversight Council's authority to designate a firm “systemically important” and liable to tougher oversight, according to a posting on the Fed's website.
The oversight council, created by the Dodd-Frank financial overhaul law passed in response to the global economic crisis of 2008, can recommend that the Fed strengthen rules to reduce risk at banks and other financial companies. The group will decide next year which, if any, money managers, mutual funds, hedge funds, private equity firms, insurers and other companies deserve more monitoring because they pose a potential risk to financial stability.
Mr. Connolly and Ms. Novick told Fed officials that “unlike a bank, an asset management company acts as an agent for its clients and does not hold investment assets on its own balance sheet,” according to the Fed website. “They also noted that clients can and do replace asset managers, with minimal switching costs, which could reduce the systemic-risk consequences arising from an asset manager falling into financial distress.”
BlackRock, which manages $3.45 trillion in assets, is among a group of financial firms and industry lobbyists appealing to Fed officials about the Dodd-Frank requirements, according to meeting summaries on the Fed website.
“If a bank fails, there are a whole lot of issues that are systemically relevant in the economy,” Ms. Novick said in a Nov. 16 interview. “If an asset manager fails, there are a line of people who are competitors to that asset manager in one product or multiple products who can step into their shoes.”
The financial stability council is led by Treasury Secretary Timothy F. Geithner and includes Fed Chairman Ben S. Bernanke.
On Oct. 14, Gary Cohn, co-president of Goldman Sachs Group Inc., met with Elizabeth Duke, Fed governor, and other central bank officials to raise concerns about “aggregating risk at clearinghouses by requiring a much broader set of securities to be cleared.”
On Nov. 2, Michael Castellano, chief financial officer of Lazard Ltd., and Scott Hoffman, the merger adviser's general counsel, met with Fed General Counsel Scott Alvarez to discuss a Dodd-Frank requirement that so-called securities holding companies register with the Fed.
On Nov. 5, the Investment Company Institute, a Washington-based lobby group for the mutual fund industry, told the council in a letter that mutual funds pose little threat to the U.S. financial system and should remain beyond the Fed's reach.
BlackRock's Ms. Novick and Mr. Connolly pursued a similar line of persuasion in their meeting, according to the Fed website. While asset management firms conduct securities and derivatives trades, “it is typically the individual investment funds, acting on behalf of clients, who enter into trades, not the asset management company,” the BlackRock executives told Fed officials.
The executives added that “this business practice can reduce the interconnectedness between an asset-management company and other systemically important financial firms.”
Fed officials attending the meeting included Associate General Counsel Kieran Fallon; Michael Gibson and Diana Hancock, directors in the research and statistics division; and economists in the financial studies and flow of funds sections. Fed spokeswoman Barbara Hagenbaugh declined to comment on the meeting.
U.S. bank holding companies with more than $50 billion in assets — about 35 in all, including J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs — will automatically be designated systemically important.
Mr. Geithner said Sept. 30 that bailed-out insurer American International Group Inc. and GE Capital, General Electric Co.'s finance arm, could be considered for increased supervision because Dodd-Frank imposes stricter oversight on entities “that are banks in all but name, whether you call them investment banks, or AIG, or GE Capital.” Such firms may be forced to “run with a much more conservative, prudent leverage and funding mix,” Mr. Geithner said.
The council will meet again Nov. 23.
It held its first meeting Oct. 1 and opened a 30-day public comment period on designating firms for increased supervision. The group also requested comments on implementing the so-called Volcker rule that bars bank holding companies from trading for their own accounts.