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Congress is finally stirring on the broad new risks the Federal Reserve is taking as it intervenes to prop up financial asset prices. Rep. Henry Waxman sent a letter today to the central bank asking some good questions about the Bear Stearns deal and how $30 billion in new federal government collateral will be managed. (JP Morgan eats the first billion in losses so the risk to taxpayers on the deal is up to $29 billion.)
I am writing to request that you provide the Committee on Oversight and Government Reform with information about the selection of BlackRock Financial Management, Inc., to manage billions in assets that now appear to belong to the federal taxpayer.
According to your testimony before the Senate Banking Committee last week, BlackRock and its affiliates will serve the Federal Reserve as the "Asset Manager" responsible for managing the "portfolio supporting the $29 billion loan to be extended by the Federal Reserve in connection with the proposed acquisition of Bear Stearns by JP Morgan Chase." This portfolio, which will be held in a limited liability company, is composed "largely of mortgage related assets" valued by Bear Steams at a market value of $30 billion on March 14,2008.
Only limited details are known about the Federal Reserve's understandings with BlackRock. It appears, however, that BlackRock is now directly responsible for managing a $30 billion portfolio on behalf of the American taxpayer. If BlackRock does its job well, the taxpayers will be made whole or even experience a gain. If BlackRock is not successful, the taxpayers stand to lose billions of dollars. In effect, it appears that BlackRock is serving as a govemment contractor providing complex financial services to the Federal Reserve.
One question involves the award of this potentially lucrative position to BlackRock without competition.
Of course, BlackRock isn't really the problem here, it is the erratic, secretive, and unprecedented actions by the Federal Reserve that have created this mess.