8/27/2014 BlackRock Hired by ECB as ABS-Program Consultant - Bloomberg

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BlackRock Hired by ECB as ABS-
Program Consultant
By Paul Gordon and Alastair Marsh Aug 27, 2014 12:37 PM ET 0 Comments Email Print
The European Central Bank
hiredBlackRock Inc. (BLK), the worlds
biggest money manager, to advise on
developing a program to buy asset-
backed securities.
BlackRock Solutions, a unit of the New
York-based company, will provide advice
on the design and implementation of a
potential ABS-purchase plan, an ECB
spokesman said in response to e-mailed
questions. Safeguards against any
conflict of interest are included in the
agreement, the spokesman said. The value of the contract wasnt given.
ECB President Mario Draghi said in June that the central bank is intensifying preparations to
purchase ABS as it strives to revive the faltering euro-area economy. The measure could
help revitalize a $1.9 trillion market that has contracted 34 percent since 2009, and may
ultimately be a part of a large-scale program of quantitative easing.
Hiring an adviser who knows the ABS market and has experience investing in it before,
during and after the crisis is clearly positive, said Dipesh Mehta, a director of securitization
research at Barclays Plc in London. However, the appointment in itself is simply another
step on the path toward QE. It is the format of QE that is key, with many questions to be
answered on what bonds to buy and how to do it without jeopardizing the existing investor
base.
External Audits
Brian Beades, a spokesman for
BlackRock, declined to comment on the
appointment. The companys shares fell 1
percent to $333.24 as of 11:19 a.m. in
New York. They advanced 6.3 percent this
year before today, compared with the 4.1
percent increase in the Standard &
Poors 18-company index of asset
managers and custody banks.
Photographer: Jerome Favre/Bloomberg
BlackRock Inc. Chief Executive Officer Laurence D. Fink,
61, has reorganized the firms...
Photographer: Martin Leissl/Bloomberg
European Central Bank President Mario Draghi said in
June that the central bank is...
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8/27/2014 BlackRock Hired by ECB as ABS-Program Consultant - Bloomberg
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BlackRock was one of four co-managers
of a Federal Reserve program during the height of the credit crisis in 2008 to buy residential
mortgage-backed securities in the U.S. The Fed also called on the company to analyze the
assets of Fannie Mae and Freddie Mac after the government took an 80 percent stake in the
two mortgage giants.
BlackRock is required to ensure effective separation between its project team working for the
central bank and its staff involved in any other ABS-related activities, the ECB spokesman
said. External audits related to the management of conflicts of interest will also be made
available.
The company, headed by Chief Executive Officer Laurence D. Fink, has more than $4
trillion of assets under management. It is among the largest investors in European ABS,
with portfolios spanning debt backed by commercial mortgages to auto loans, according to
data compiled by Bloomberg.
Program Design
The final decision on the design and implementation of any ABS-purchase program will be
taken by the ECBs Governing Council, and the execution will remain the responsibility of the
central bank, the spokesman said.
Asset-backed securities are bundles of individual loans such as mortgages, auto credit and
credit-card debt that are sold on to investors, allowing banks to share the risk of default and
encouraging them to offer more credit.
An ECB program could herald a softening of opinion toward the products once blamed for
deepening the financial crisis. Regulators have been wary as sometimes-complicated
structures can obscure the true riskiness of the underlying assets, as was the case with
securities backed by the U.S. sub-prime mortgage market, which imploded in 2007.
Rule Clarification
Draghi has repeatedly said the market is being held back by regulators. Lenders from
Barclays to Deutsche Bank AG have said capital rules for the debt are becoming so onerous
they may shun some ABS, while Lloyds Banking Group Plc and New York-based MetLife Inc.
are among investors to withdraw from the market as they wait further clarification on the
rules.
I would see an ECB buying program for European ABS as a strong endorsement, said
Calvin Davies, The Hague-based head of residential real estate and securitized investments
at ING Investment Management, who helps manage 16 billion euros ($21 billion) of ABS. A
program could be designed and implemented to prime the pump by stimulating issuance of
good-quality transactions into the market, rather than potentially crowding out existing or new
8/27/2014 BlackRock Hired by ECB as ABS-Program Consultant - Bloomberg
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private investors.
Less than 1.6 percent of asset-backed debt outstanding in Europe in mid-2007 has defaulted,
while the cumulative default rate in the U.S., where securities backed by the U.S. sub-prime
mortgage market imploded, was 19.3 percent over the same period, Standard & Poors said
in a report yesterday.
Deflation Risk
The option of buying ABS was among a range of ECB measures announced in June.
Officials also cut the benchmark interest rate to a record low, took the deposit rate negative
and extended an offer of unlimited liquidity until at least 2016. Starting next month, the ECB
will offer funding to banks linked to real-economy loans in an attempt to boost credit supply.
The Frankfurt-based central bank is battling to avert deflation in the euro-area. The economy
stalled last quarter and a report this week is predicted to show inflation slowed in August to
0.3 percent, the weakest since 2009.
Draghi warned last week that investors inflation expectations are falling across all horizons,
a situation he has previously said would justify broad-based purchases of government bonds
and privately held securities.
ECB Executive Board member Benoit Coeure said today that for an ABS-purchase program
to reach its full potential, governments must guarantee at least some of the debt.
Europe is facing a very fundamental choice if it wants to move to an ABS market that is as
deep and liquid as the U.S. market, Coeure said in an interview with Risk magazine
distributed by the ECB. To reach this goal, the securitization market will require a
significantly different amount of public sponsoring than is currently the case.
To contact the reporters on this story: Paul Gordon in Frankfurt
at pgordon6@bloomberg.net; Alastair Marsh in London at amarsh25@bloomberg.net
To contact the editors responsible for this story: Emma Charlton
at echarlton1@bloomberg.netJana Randow