While most of Wednesday's quarterly CARES Act testimony from Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell focused on what the central bank is doing to combat economic inequality and climate change (buying green bonds?), Sen. Elizabeth Warren (who, let's remember, was passed over in favor of Yellen for the Treasury Secretary post) dug in on what has become a pet issue for the Massachusetts Senator, for whom regulation of Wall Street is a marquee issue.
When it came her turn to speak roughly an hour into the hearing, Warren - who championed creation of the Consumer Financial Protection Bureau to help muzzle Wall Street via Dodd-Frank, only to look on helplessly as the Trump Administration gutted the bureau - decided to focus on one of her favorite Wall Street punching bags: Black Rock.
Following a preamble about the collapse of Bear Stearns and Lehman Brothers, Senator Warren demanded to know whether Yellen, who, before joining the Fed, spent a career in academia, would direct the Financial Stability Oversight Council - or FSOC, as it's commonly called - to consider designating BlackRock, which, with $9 trillion in assets under management, is the biggest pile of investor capital in the world, as a systemically important financial firm.
To be systemically important, regulators must determine that its collapse could potentially set off a chain reaction that could take down the entire debt-based global financial system.
"Secretary Yellen, hypothetically, if a $9 trillion investment company failed, would that likely have a significant impact on our economy?" Warren said.
Yellen replied that FSOC had once examined stability risks posed by concentration of ownership among the big asset managers (BlackRock, Vanguard, State Street and the other top firms, presumably). While Yellen didn't say specifically if FSOC had considered the scenario of a total collapse, she suggested that a SIFI designation wouldn't be appropriate.
"It's important to look very carefully at the risk posed by the asset management industry including BlackRock and other firms. The FSOC began to do that I believe in 2016 and 2017 but the risks it focused on were ones having to do with open-end mutual funds that can experience massive withdrawals and be forced to sell off assets and create fire sales," Yellen said.
.@SenWarren: "If a $9 trillion investment company failed, would that likely have a significant impact on our economy?"@SecYellen: "It's important to look very carefully at the risks posed by the asset management industry, including by @BlackRock and other firms." pic.twitter.com/3ssTnYQO7Q— AFR (@RealBankReform) March 24, 2021
Yellen continued, claiming "it's not obvious to me that designation is the correct tool." "Rather than focus on designation of companies, I think it’s important to focus on an activity like that and to consider what the appropriate restrictions are."
Yellen: "It's not obvious to me that designation is the correct tool"— AFR (@RealBankReform) March 24, 2021
Warren: "Designation is what gives the Fed its increased oversight powers, is that correct?"
Yellen: Yes@SenWarren: "Is BlackRock currently designated so it receives that increased oversight?"
Yellen: No pic.twitter.com/eyh10s3RzK
Though Yellen's flat tone never cracked while she calmly told Yellen that there are other more appropriate ways to mitigate this risk that, presumably, wouldn't directly hamper BlackRock's ability to book outrageous profits, Warren's prodding was apparently combative enough for Bloomberg to describe the exchange as "a clash". With the exception of the dog pile that scuppered Neera Tanden's nomination to OMB, Senate Dems have shied away from criticizing Biden and members of his cabinet. Though it's early days yet; perhaps the novelty of being back in power hasn't yet worn off on the Democrats.
Yellen might have a point: As Warren herself pointed out, BlackRock's $9 trillion asset pile is greater than the annual GDP of Germany, or Japan. Even if a few mutual funds outright imploded, it would be barely a flesh wound. Unlike the largest US banks, which comprise most SIFI designees, BlackRock doesn't lend money to businesses and individuals, periodically booking losses, as banks do.
Unlike the big banks, BlackRock didn’t get a capital injection from the federal government during the 2008 financial crisis. Lenders also rely on funds from depositors and the Federal Reserve to earn money. Asset managers like BlackRock charge fees (though even this fee revenue has been under pressure lately as BR cuts fees on more ETFs). Of course, Warren probably knows all of this, and that under Trump, FSOC moved away from designation-dependent compliance and instead toward a more "activity based" approach.
But the notion that it could be vulnerable to a "run" of customer deposits maybe isn't as far-fetched as Yellen and her fellow academics might think.
So there is one pretty obvious way that BlackRock poses systemic risk. If its investors lost confidence and pulled their funds en masse, it would cause a massive disruption to the financial system. So perhaps that alone should justify SIFI designation (or a break up).— John Carney (@carney) March 24, 2021
I don’t see why anyone would assume there can’t be a “run on BlackRock.” It is dependent on the confidence of its customers. Confidence is fragile. If customers lose confidence suddenly because of some scandal or accounting breach or cyber attack, that could be catastrophic.— John Carney (@carney) March 24, 2021
On a related topic, Yellen said during her testimony that she supported banks being allowed to continue to buy back their own shares,claiming their capital base is more than secure enough. That's another position than Warren might oppose.