Inside BlackRock’s Financial Markets Advisory Consulting Business

BlackRock’s discrete advisory arm drives little of the firm’s revenue. It has a small staff. But its value to BlackRock, the largest money manager, is priceless.

Jerome Powell appeared, gripping the lectern in front of a blue curtain. It was late July 2020, four months into the pandemic, and the

Federal Reserve
chief was addressing a screen of journalists probing him about the US economy.

One of the reporters noted that Powell’s public calendar showed calls with Larry Fink, BlackRock’s chief executive, in March, April, and May. The Fed had chosen BlackRock that spring to assist with its vast securities-buying programs, helping the central bank buy securities such as corporate bonds and, for the first time, exchange-traded funds exposed to corporate bonds.

The reporter asked what the two men had discussed. And, if they spoke about those programs, how did Powell manage potential conflicts of interest during those calls? After all, BlackRock was carrying out large ETF purchases for the Fed, including its own products.

“He’s typically trying to make sure that we are getting good service from the company that he founded and leads,” Powell plainly told the New York Times reporter Jeanna Smialek, adding that though he couldn’t recall exactly what he and Fink discussed, possible conflicts of interest between BlackRock and the Fed were managed “extremely carefully.”

The exchange was hardly the first time no-bid contracts between the Fed and BlackRock’s Financial Markets Advisory unit raised questions. (The central bank does not regulate BlackRock with the same supervision as large banks, since the asset manager is not labeled a systemically important financial institution.)

Larry Fink is a genius of soft power. Jeff Hauser, the Center for Economic and Policy Research’s Revolving Door Project

While the Fed’s ETF buying wasn’t limited to BlackRock’s own products, the firm managed $667 billion in bond ETFs as of March, a corner of the iShares business where BlackRock has doubled down. An analysis by The Wall Street Journal showed that investors plowed into funds they expected the Fed to buy up — and that funds the Fed did ultimately purchase, including BlackRock’s, became more popular as other investors bet that prices would rise.

Still, Powell’s response served as a potent preview of changes to come. At least three senior leaders previously with BlackRock later joined President Joe Biden’s administration, prompting new questions around the way the firm gains influence and wields power.

BlackRock’s unrivaled ascent to become the world’s largest money manager with $9 trillion in assets; its dominance of the risk-management-tech industry since forming just three decades ago; and its chief executive’s transformation into the ultimate finance and sustainability influencer are owed in no small part to FMA.

FMA was established in 1994 and employs 200 of the firm’s 16,700 employees. It’s deliberately kept a low profile and has long accounted for a small slice of BlackRock’s overall revenue.

But its size belies its influence: In the 27 years since its launch, it’s become the crisis manager of choice that governments, central banks, insurance companies, and others turn to when they need to value complex assets or, more recently, evaluate sustainability frameworks. FMA has intervened in various situations: It handled Bear Stearns assets in the depths of the financial crisis, in concert with the Fed, and it advised Greece on how to dig its economy out of the country’s debt crisis.

BlackRock has erected stringent information barriers to prevent conflicts of interests that could arise from one of the world’s largest money managers advising governments and central banks.

Still, former employees told Insider that FMA has served as a clear source of public-facing clout for BlackRock. It is also a unit that evolves with the assignments it handles, which has resulted in a high rate of turnover relative to other parts of the firm, former employees said.

BlackRock Chief Executive Larry Fink speaks during an event hosted by the IRC in New York City in 2018.

BlackRock Chief Executive Larry Fink during an event hosted by the International Rescue Committee in New York in 2018.

Eugene Gologursky/Getty Images for IRC

“Larry Fink is a genius of soft power,” said Jeff Hauser, the founder and director of the Center for Economic and Policy Research’s Revolving Door Project, which examines executive-branch appointees with an eye to preventing those in office from serving their own interests. “He doesn’t give speeches about the illegitimacy of government and stark libertarian things. He is a kinder, gentler banker who is climate-aware.”

The group drove less than 1% of BlackRock’s $16.2 billion in revenue last year (the firm does not disclose FMA’s annual revenue). But unlike everything else about the asset-management industry, it’s not really about money. It’s about influence, eight former employees who left the firm between 2017 and 2020 said in interviews with Insider.

“On paper they are only bringing in a few million,” one former employee said. “But the value is far greater.”

FMA primarily advises firms within financial services. With large and small banks and other clients outside of finance, such as technology companies, FMA advises on corporate-treasury and balance-sheet matters.

For instance, if a company is acquiring or divesting assets, FMA may work alongside another firm’s investment-banking division in analyzing and valuing parts of that deal. It had also advised companies on anti-money-laundering policy, but has wound down much of that work in recent years, three former employees said. In 2017, FMA shut down a service focused on financial-crimes-compliance advisory.

FMA works hand in hand with Aladdin, its sprawling risk-management tech platform that institutional investors use to detect risk in their portfolios. Aladdin is easily BlackRock’s crown jewel: a way to differentiate itself as something that resembles a technology company as money-management fees come under pressure at BlackRock and its rivals.

FMA, now primarily situated in its two centers of New York and London, is also seen as a way to introduce or market Aladdin to new clients: “As much as possible, we tried not to just do work in Excel and PowerPoint, but use tools in-house,” one former employee said. The Financial Times reported last year that at least $21.6 trillion sits on the platform from just a third of its base of 240 clients at the time.

“FMA, why it’s so exciting, is the FMA clients become Aladdin clients,” Rob Kapito, BlackRock’s president, said in December 2011 during an industry event held by Goldman Sachs, a transcript of the event showed. “The FMA clients have extended their advisory relationships to be multiyear.”

FMA, like Aladdin and BlackRock’s wider asset-management operations, sees the business of sustainability — such as advising on climate risk — as a major growth area. More companies and governments are tackling sustainability policy, and they’re turning to BlackRock for advice. Some lawmakers, at least in Europe, have taken notice.

BlackRock has sought to become a standard-bearer by incorporating environmental, social, and governance considerations into its investments and asking companies that it owns through its array of funds to make similar choices. FMA has pushed into this area more so in the past two to three years, people familiar with the business said. It plans to hire more people with a mix of finance, consulting, and ESG-focused backgrounds as a result.

The work in that area could mean advising a company on its own ESG considerations or aligning it with Paris Agreement goals, for instance.

One sustainability-focused assignment for the European Commission that FMA won early last year against eight other bidders has drawn scrutiny in recent months.

The assignment was going to a firm that could stand to benefit from favorable sustainability rules as it operates in European countries, argued European ombudsman Emily O’Reilly and some lawmakers who raised concerns, such as European Parliament member Damien Carême.

European Ombudsman Emily O'Reilly speaks during the annual news conference in Brussels, Belgium, May 17, 2018.

European ombudsman Emily O’Reilly in Brussels in 2018.

Francois Lenoir/Reuters

FMA won a contract, at a deep discount to what rivals offered, to produce a study for the commission detailing best practices for developing and integrating ESG factors in the European Union’s banking sector.

After a watchdog received complaints about the contract and opened a case examining the assignment last year, the commission said in April that it would consider pushing companies, when bidding for European Union assignments, to disclose possible conflicts of interest.

“We found that, yes, they had looked at conflicts of interest, but in a very narrow, traditional way — if you think of connections, relationships, that sort of thing,” O’Reilly told Insider in a recent interview. “They weren’t looking at the big picture.”

O’Reilly said in a report that FMA beat out bidders with an offer of 280,000 euros ($343,000). That was about half the contract’s estimated value of 555,000 euros, a report from O’Reilly’s office said.

“FMA has taken a wide-ranging and inclusive approach, including academia, civil society, banks, supervisors, and market practitioners, and looks forward to completing its work and delivering its final report to the commission,” the company said.

While most asset managers have expanded their ESG focus in recent years, BlackRock’s unmatched size and highly visible sustainability efforts stood out to those who complained. BlackRock manages $353 billion in sustainable investments, Fink told analysts in April. He said that figure will rise to more than $1 trillion by 2030.

“The next time BlackRock or a similar company — if there is a company similar to BlackRock at the moment on Earth — walks in, they will be a little bit more alert to it,” said O’Reilly, whose office does not make legally binding decisions but rather oversight recommendations.

FMA, today led by global head Charles Hatami — who also leads BlackRock’s Financial Institutions Group — and FMA coheads Brandon Hall and Ben Leax, rose to prominence during the 2007 to 2009 financial crisis.

The Fed chose FMA to manage vehicles — a portfolio referred to as Maiden Lane after the Federal Reserve Bank of New York’s location in lower Manhattan — that held assets from collapsed Bear Stearns and AIG.

Agnes Budzyn, a former longtime employee who joined the firm in 2007, wrote in a blog post that her team’s goal was to analyze complex assets and “liquidate the risky ones.”

“We quickly grew to realize, however, how interconnected these global asset classes were,” she wrote. “As we and others around the world moved to wind down risky portfolios, we collectively watched in horror as a chain reaction occurred globally.”

“I joined BlackRock because of the team,” Budzyn wrote, describing FMA as “essentially a start-up couched in a legacy institution. We were young, scrappy, and eager.” Budzyn said she split days early on, during the financial crisis, between working on deals, speaking with clients, “and trying to determine what else they didn’t know but needed to know.”

That year, BlackRock’s assignment drew scrutiny from some lawmakers and activists who were concerned about potential preferential treatment for a firm in the private sector.

“In effect, it appears that BlackRock is serving as a government contractor providing complex financial services to the Federal Reserve,” Henry Waxman, the chairman of the House Oversight Committee at the time, wrote to Tim Geithner, the New York Fed president, in April 2008.

The potential for conflict is “great and it is just very difficult to police,” Sen. Chuck Grassley, an Iowa Republican, told The New York Times in May 2009. At the heart of Grassley’s own concern was that BlackRock had a line of vision into the Fed’s activities, which the asset manager could use to its financial advantage.

During each assignment, company and Fed officials said that BlackRock was chosen for its expertise during a period of such severe economic stress that they needed to move quickly to choose an agent without a contest, and that conflicts are managed through a fierce firewall.

Canadia Prime Minister Justin Trudeau greets BlackRock Chief Executive Larry Fink at the Secretary General's High-Level meeting on Financing during 73rd United Nations General Assembly in 2018.

Canadian Prime Minister Justin Trudeau with Fink at the Secretary General’s High-Level meeting on Financing during 73rd United Nations General Assembly in 2018.

Caitlin Ochs/Reuters

The company said the firm’s information barriers in place between FMA and BlackRock’s investment businesses are “well established, having been in place for over a decade and repeatedly audited and reviewed by clients, regulators, and BlackRock control functions.”

The Fed said on Wednesday that it would start gradually unloading the assets it purchased through one of the facilities the central bank launched last year with the help of BlackRock.

FMA won its first assignment in 1994. That year, the scandal roiling Wall Street stemmed from Kidder Peabody, the General Electric subsidiary that said one of its traders had created phony profits in an effort to cover up significant losses.

GE, led by Jack Welch at the time, tapped a team from the six-year-old BlackRock to value and sell off Kidder’s $4 billion portfolio of mortgage-backed bonds. Fink knew mortgage-backed securities well. He was part of a team at First Boston in the 1980s that helped popularize the instrument.

FMA is part of a bigger puzzle of influence. A former employee

The work for GE would become a classic example of FMA’s bread-and-butter assignments: helping execute complex transactions, such as valuing troubled assets. After FMA’s heyday during the financial crisis, its work expanded outside of the US and into Europe. FMA won assignments in Ireland and Greece; the European Central Bank in 2016 asked the business to support it in stress-testing European banks to assess their health.

In Greece, FMA evaluated 10 million loans in three months, The New York Times reported in 2012, to show the volume and intensity of work the group could handle as part of a larger asset manager. Craig Phillips, a key FMA architect who left the firm to join the Trump administration, was the face of these efforts.

Phillips’ vision was that FMA would be a consulting arm “powered by Aladdin,” and that the platform coupled with regulatory expertise would catapult FMA to compete with traditional consulting practices, a former employee said.

At the time, The Wall Street Journal described Phillips in a profile as a smart person who could be a bully, and whose team turned in lower job-satisfaction ratings than other divisions.

“Mr. Phillips’ blunt criticism was often perceived as bullying that sometimes brought his staff to tears,” The Journal reported, citing interviews with Phillips’ former colleagues.

Hatami, previously the cohead of the Europe, Middle East, and Africa segment of FMA before he took over in late 2016, is generally better liked and more personable than Phillips, two former employees said. Hatami joined the firm in 2010, and he’s a member of BlackRock’s Global Operating Committee.

Charles Hatami, on far left, with Lori Fink and Joshua Fink during a charity event in New York in 2010.

Financial Markets Advisory head Charles Hatami with Lori Fink and Joshua Fink in New York in 2010.

ILIR BAJRAKTARI/Patrick McMullan via Getty Images

When Hatami took over FMA, he shifted the group away from some of the regulatory-compliance-focused work that it was doing for clients to refocus FMA on capital markets, data, and analytics advisory assignments. More recently, he led the charge to work on more ESG-related assignments.

But FMA’s culture and BlackRock’s broader track record of handling employees’ allegations of discrimination and harassment were pulled into focus earlier this year when a former employee, Mugi Nguyai, alleged in a public post that he was discriminated against while working in FMA.

BlackRock has taken steps to better address employees’ complaints, such as forming a team within its employee-relations unit to closely review concerns about inappropriate behavior when employees raise them. Last August, FMA established a racial-equity working group to facilitate conversations around diversity and inclusion.

Former employees, who spoke on the condition of anonymity to candidly discuss a former employer and to preserve industry relationships, detailed a business where they viewed the work they were doing as unique and meaningful to them, but also inconsistent. Some felt as though there were frequent pivots in priority to meet client demand.

That’s the nature of a business that thrives in crisis periods when work is plentiful, some suggested. But what some described as a lack of direction at times has given way to a relatively high degree of turnover, with employees leaving for other parts of the firm or leaving BlackRock altogether in recent years, said most of the former employees Insider interviewed.

At one point, an employee created a spreadsheet to track the degree of turnover the unit was seeing over years. The spreadsheet sorted turnover by traits such as gender and seniority to keep an informal record of who had exited, a former employee who viewed the document said.

“It was almost a running joke, that change is the only constant,” another former staffer said.

While former employees described high turnover, some said FMA can also be a pipeline to powerful roles within the company.

Mark Wiedman, the head of the firm’s international and corporate strategy, and Martin Small, the head of US wealth advisory who previously led the iShares exchange-traded fund business for the US and Canada, both came from FMA. So did Jessica Tan, the head of corporate strategy, and Zach Buchwald, the head of the institutional client business for the Americas.

The group reshuffled leadership last fall. Kunal Khara, who ran the Americas for FMA, left to lead a team focused on financial institutions within the Aladdin business, Insider first reported.

Coheads Hall and Leax, both longtime BlackRock leaders, assumed his role.

Carrying out valuation-related work is still part of FMA’s offering, but the group is also considering emerging advisory areas such as cryptocurrencies.

While FMA is not engaged in such an assignment, the cryptocurrency space that is increasingly embraced by institutional investors could be an area where it could lend services to clients in the future, a person familiar with the matter said.

But it doesn’t have the same presence in DC that it once did. A little over a year ago, FMA pulled employees out of BlackRock’s office there, three former employees said. They thought the shift was a result of less regulatory-focused work than the unit had previously thought it would have for the employees based there.

For instance, when the Trump administration weakened financial-crisis-era rules around stress-testing small and midsize banks, there was less stress-testing work for consultants to do, the former employees said.

“The BlackRock brand is, ‘We can provide some really great analytical services, and we are a powerhouse by AUM,'” one former employee said, referring to assets under management. “On the FMA side, it was ‘It’s incredible how flexible the management team was in changing market dynamics.'”

As another former employee put it, “FMA is part of a bigger puzzle of influence.”