As a senior in college, I noticed two kinds of people interviewing for investment banking jobs in the early part of the decade. Those who thought it sounded better to be making near six figures right out of school instead of going $150,000 more into debt to go to law school (read: me), and those who were born to work on Wall Street. The latter group was pulled from their mothers' wombs already wearing tiny Brooks Brothers suits, screaming arbitrage trades. As children, they preferred CNBC and the Wall Street Journal to Saturday morning cartoons and coloring books. Their preferred path? Work at Goldman, Morgan Stanley or Merrill Lynch for a few years and then get a job at BlackRock.
It turns out Blackrock has been involved in virtually every aspect of the government's actions to save our financial system. They consult on the rescues of troubled financial intuitions like Bear Sterns; they advise on Fannie and Freddie; and now they've made it to the second round to be a manager in Treasury Secretary Timothy Geithner's brainchild, the Public-Private Investment Program. That's Geithner's plan to rid banks of so-called toxic assets by having private investors and the government share in the profits and losses. You can practically see them sitting in a circle, holding hands and singing Kumbaya.
But some are calling foul, citing BlackRock's involvement in the buy and sell side of these assets an obvious conflict of interest. From the NYT:
Those multiple roles created the potential for conflict, BlackRock's own executives acknowledge. The company would be trying to sell assets on behalf of the government that were similar to assets it buys and sells for thousands of other private investors.
For example, if BlackRock Solutions signaled to BlackRock's asset managers the timing of a planned sale, that could benefit BlackRock's investors, but harm taxpayers and the Federal Reserve.
"We were very sensitive to it," said Mark Wiedman, a managing director at BlackRock Solutions.
And by "sensitive," he means, "concerned about public outcry when people realize we are making money hand-over-fist."
But in reality such conflicts of interest are not new to the world of finance. For quite some time now, banks have been originating debt and equity, selling the securities to investors and managing portfolios for investors. Before gaining notoriety for enjoying prostitutes, disgraced former New York Governor Eliot Spitzer was an attorney general who went after banks that showed preference to their own investors when offering new securities to the public. In response, strict regulations, and fancy measures like "Chinese walls," were created to combat such conflicts of interest. As you might expect, these "Chinese walls" are generally made of a few inches of plaster and drywall.