RTE presenter Richard Crowley: Do you have confidence that the outcome, that the results of these forthcoming stress tests will provide all of the information that you need to make a definitive decision?
Central Bank of Ireland governor, Patrick Honohan: It will use all of the information that is possibly there. We have engaged some, at high speed (it’s amazing when you pay large sums of money that the best consultants in the world can come flocking)! but we had to get, this was the instructions, we have got the most reputable people in the world, they’re doing very very detailed exercises of a type that we would never have embarked on I think, and the level of detail… So it will be based on the best information possible. We can’t say this is the only number but since we won’t be getting any new information (things change of course), we won’t be getting any new level, we’ll never repeat this level of the information. The capital that we put in should last for a while.
In January of this year, a new company came onto the national stage when the Central Bank of Ireland (CBI) appointed the Boston Consulting Group, Barclays Capital and BlackRock Solutions Inc to carry out the stress test of the banks in the first quarter of 2011 as demanded by the IMF and EU as part of the bailout deal. The Boston Consulting Group (BCG) will be well-known to any business student – remember their cash-cows, stars and dogs in the context of their product life cycle matrix? BCG is a world-renowned consultancy and it is responsible for project-managing our stress tests. Barclays Capital is the investment banking division of Barclays, the well-known British high street bank and it is to “advise the [Central] Bank on the restructuring of the banking sector, while also contributing advice on PCAR and PLAR”. But what about this third company, BlackRock Solutions which is working on the meat of the stress tests?
In retrospect, it seems amazing that the Irish media greeted BlackRock casually as if it was a life-long acquaintance. The name “Blackrock” is of course familiar here – it’s the name of an upmarket suburb of Dublin as well as the former name of an Irish property company. That property company was called Blackrock International Land, probably most famous for being a spin-off of Fyffes and owning the Xerox Technology Park in Dundalk but changed its name in 2010 to Balmoral International Land. And the reason it changed its name was that BlackRock, the company now doing our stress tests, had a trademark dispute with it over the use of the name “Blackrock”. Which is why there’s a registered trade mark symbol in the title of this entry. This entry examines the company upon which Enda Kenny, Patrick Honohan, Eamon Gilmore, the IMF and the EU as well as the entire nation is relying to tell us the amount of additional capital required by our beleaguered banking sector. Who are they?
The company we have conducting our stress tests is a small division of the BlackRock group called BlackRock Solutions. The BlackRock group itself is reputedly the world’s biggest asset manager with assets under management of USD 3.56 trillion at the end of 2010 with 8,400 employees and offices in 30 countries including at the IFSC in Dublin. It built strong relationships with US regulators and was chosen by the Federal Reserve to value assets at Bear Stearns and AIG and indeed manages certain assets of these companies today. It is presumably this experience that recommended the group to our own CBI – “what’s good enough for the Fed is good enough for Dame Street”. It should be noted that the Memorandum of Understanding with the IMF/EU made it clear that the stress tests were to be carried out by a fresh pair of eyes not compromised by the Irish banking sector. Let’s remind ourselves what the IMF/EU agreement says with respect to the stress tests : “The diagnostic study should not be conducted by an audit or consultancy firm that has provided such services to the bank in the last three years. The central bank should also contract a specialized firm to help staff to oversee the consistency and integrity of the exercise”
Last night on Prime Time the Central Bank governor indicated that he was acting under instructions when he engaged BlackRock. Presumably instructions from the IMF or EU. I cannot find any tendering process on the government’s etendering system for this engagement with BlackRock (there is a tender won by Barclays Capital in February 2011 but nothing for BlackRock or indeed BCG). It has not been disclosed how much BlackRock is to be paid for its work on the stress tests but an article in the Irish Times in January 2011 suggested that the three firms involved in the stress tests would be paid an overall total of less than €20m. Bloomberg reported in January 2011 BlackRock CEO, Larry Fink saying with respect to the assignment with the CBI “this is bigger than AIG with the Federal Reserve; this is bigger than what we did with the Bear Stearns; this is a gigantic assignment”.
The BlackRock Solutions unit which is undertaking the stress tests is headed by Rob Goldstein and had a turnover of USD $460m in 2010. It provides people and software to help value and analyse assets, liabilities and derivatives. According to its own case studies the unit has been “engaged by a European central bank to advise with respect to domestic banks’ exposure to troubled loans in Eastern Europe” and “selected by a leading bank holding company to provide advice and valuation services with respect to a $20 billion diversified credit portfolio managed by a partially-owned, European-based asset management”
The BlackRock group has a number of operating units and one that is of interest on here is BlackRock Realty because it might end up as a client of NAMA, either in the sense that it buys assets or potentially manages assets – remember Enda Kenny thinks NAMA’s management of assets should be outsourced to 3-4 asset management companies. In 2008 BlackRock took a drubbing on its investments in commercial mortgage-backed securities which tanked in the aftermath of the sub-prime crisis and it was famously involved in what was described as one of the worst New York real estate deals of the US housing bubble – a USD $5.4bn investment in 11,000 apartments on 80 acres in New York. The deal, vividly written about in the NY Magazine, was intended to see a return through upgrading properties and separately challenging the regulated rents of some tenants. As the NY Times said “the new owners failed in their efforts to increase net income by steadily renovating and deregulating vacant apartments while raising rents substantially” and it is understood BlackRock lost heavily on the investment. So BlackRock itself is far from infallible though you should bear in mind that the above two examples are in the context of a colossal company with a great many projects under management.
Last week Reuters reported that BlackRock was teaming up with a UK small business landlord to invest up to GBP £100m “in freehold multi-let industrial or office buildings in London and the adjacent South East region”. The joint venture may well end up bidding for NAMA properties. There must therefore be a concern that BlackRock ends up on both sides of the transaction in any future deleveraging of our banks or indeed sales by NAMA.
BlackRock Solutions prides itself on being able to develop models that can assess values and markets. But before we all convert to a cargo cult to worship these BlackRock models that will tell us later this month how much more we need shovel into our banking sector, let’s remember that ultimately these models will need deal with something as ordinary as forecasting how much longer a borrower will continue servicing their mortgage on an three bed semi on an unfinished estate in Leitrim and must bear in mind imminent changes to our bankruptcy laws, an ingrained tendency to emigrate and a nation that gave the word the term “boycott” (and I am aware of auction sales of distressed property where no-one will bid out of respect for the foreclosed seller). And that must be a key concern : that BlackRock will not be able to robustly forecast losses which mean that the stress tests provide unreliable information.
We will learn some more about BlackRock in the coming weeks. The IMF has said that the results of the stress tests should be clearly communicated so as to instill confidence in our banks. But let’s remember that (a) BlackRock is not infallible (b) it may be on the other side of transactions if bank assets are sold and (c) although a global company it is valuing assets, liabilities and derivatives in an Irish context in which its abilities might well be tested.