Unsanitized: BlackRock Is Buyer and Seller

Plus, the problem with reopening. This is The COVID-19 Daily Report for May 30, 2020.

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First Response

Every thirty days, the Federal Reserve is required to provide periodic reports on its emergency lending facilities, including the ones set up through the CARES Act. For the first time, one of these reports, released on Friday, coincides with actual Fed purchases from its money cannon. Readers of Unsanitized this week will know that the Fed created trillions in wealth by backstopping financial markets without firing the cannon at all. But you can really only do that once; at some point you have to start spending to maintain credibility. The Fed’s doing so. What are they spending it on?

The only purchases thus far have come from the Secondary Market Corporate Credit Facility (SMCCF). There’s a primary market version that would buy corporate debt directly from issuers. This secondary market facility buys shares in funds that are agglomerations of corporate debt, or “exchange-traded funds” (ETFs). About $1.58 billion were sold in the period covered here, between May 14-20.

This is all mediated through the financial system. The Fed buys the ETFs from big banks. And they are using a sponsor—in this case, asset manager giant BlackRock—to execute its purchases. Here’s a convenient list of the sales from the banks and the ETFs being held, though another sheet in the spreadsheet is more comprehensive for the ETF purchases.

Do you see the word “iShares” appearing in eight of the ETFs listed? Yeah, well that’s BlackRock. Of the $1.58 billion in holdings, $746 million come from BlackRock ETFs. That’s about 47 percent of the total. So BlackRock, as the sponsor for the Fed, made 47 percent of its purchases in BlackRock ETFs. A separate chart lists aggregate holdings of $1.31 billion. BlackRock ETFs make up about 48 percent of them.

Read all of our Unsanitized reports

ETFs from State Street or Vanguard (the other two in the Big Three asset managers) track corporate bonds as well as BlackRock’s. Yet BlackRock ETFs comprise nearly half of the purchases thus far. Since they’re administering the purchases, it’s natural to wonder about a conflict of interest.

Investors may be lemmings sometimes but they’re not idiots. They’re correct to figure that a corporate bond ETF-buying program directed by one of the leading sellers of corporate bond ETFs will work out in the way described. So we’ve seen huge inflows into BlackRock corporate bond ETFs. “Traders Pour $1 Billion Into Biggest Credit Fund ETF to Front-Run Fed,” blares this Bloomberg headline, and to mildly translate, it means that investors, knowing that the Fed is about to buy a lot of the BlackRock iShares Investment-Grade Corporate Bond ETF (known as LQD), dumped $1 billion into it in anticipation. Those inflows came on March 23, the day that the Fed announced it would buy corporate bond funds. This kept growing: by May 20, LQD had $46.7 billion in it, compared to 28.2 billion on March 19.

Sure enough, the biggest holding in this initial set of Fed purchases is LQD.

By the way, the Fed didn’t stop buying corporate bond ETFs on May 20. We know from other disclosures that they currently hold $2.98 billion, more than double the $1.31 billion listed here. You know who else knows that? Executives at BlackRock. They also know where those purchases went, before the public. There are alleged firewalls for traders—they have a two-week “cooling off” period before they can trade on the information personally. But this May 29 release just went out and the next one won’t be out until June 29. So they could trade on any purchases made in late May well before they are publicly released.

In addition, as Americans for Financial Reform points out, senior executives are exempt from this cooling-off period, and will have instant access to this market-moving information, though they are encouraged to “exercise particular caution to avoid the improper dissemination or misuse” of it. Maybe profiting off the information is not seen as improper!

BlackRock is allegedly doing this for charity, waiving its investment advisory fees for the Fed purchases. But that’s the wrong way to think about this. “What we're seeing is that this arrangement benefits the company in a number of ways,” said Graham Steele, senior fellow at the American Economic Liberties Project. “First, the Fed buys its ETFs directly. Second, the rest of the market plows into those ETFs anticipating the Fed's purchases. And third, there are executives that sit above the company's firewalls and may have access to information about all of these transactions. Regardless of whether the company is charging fees or not, it is sophisticated enough to find ample ways of making a profit.”

So it’s not just large corporations benefiting from cheaper borrowing, which has risen to a record level since the Fed announced its backstop. It’s not just investors in the various capital markets being propped up. It’s the administrator of the purchases itself getting rich from this intervention.

There are other weird things about these ETF purchases, like investments in bond funds that hold Russian telecom companies and Chinese banks. But to me, the obvious BlackRock conflicts demonstrate everything about who this rescue is for.

Reopen for Business?

The theory behind the V-shaped pandemic recovery was that businesses would furlough workers until it was safe to reopen shops and offices, and then bring them all back. Several states have reopened, at least to some degree. So how is that theory holding up? Neil Paine at Five Thirty Eight took a look, finding that continuing claims finally started to fall last week, a sign that workers are being recalled. This could also reflect new hirings, as job-search listings have picked up a bit.

But Paine’s other finding is interesting. He looked at job listings from Indeed, a large job board, on a state-by-state basis, separating out the timing of when states lifted stay-at-home orders. And the finding is that job listings in states that lifted the order early are actually down, in relative terms, compared to those states that waited longer. It’s another indication that the pandemic recovery and the economic recovery are inextricably linked. The virus’s spread, or abatement, will govern when people want to go back into the world and when businesses want to hire, to capitalize on the return to normalcy.   

Even states that appear to have the virus under control, like New York (which is on a definitive downward trend), run up against this problem. In an interesting post, Josh Marshall points out that the only way New York City can work is by filling up public transit. You can’t have everyone drive into Manhattan; there simply isn’t enough throughput on the roads for everyone that would need to get in. And mass transit does appear to be an efficient spreader of COVID-19, with enclosed spaces and recirculated air.

The switch will not be fully turned on until there’s a vaccine or effective treatment, that’s the bottom line.

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