Conspiracy theorists could have a field day. Why is the New York Fed suddenly joining a revolt against the banking system it has worked for two years to shore up? Why is Bank of America a target? Did Pimco and BlackRock gain an advantage in their valuation of the mortgage-backed securities because they are advisers to the New York Fed?
Two years after the jumbled days of the financial crisis, it is easy to forget that government and the private sector have had more hook-ups than an episode of “Jersey Shore.”
At some point, these relationships were bound to get messy in a big way, and now they have.
As The Wall Street Journal reported on Tuesday, institutional investors led by BlackRock Inc. and Allianz SE’s Pacific Investment Management Co., or Pimco, are asking Bank of America Corp. and Bank of New York Mellon Corp. to repurchase or “put back” as much as $16.5 billion in soured mortgage-backed securities.
All told, $47 billion in mortgage-backed securities packaged by Bank of America’s Countrywide unit could be at risk, though the Charlotte, N.C., bank says the squawking is overblown.
The issue underscores ways in which the financial system has been changed by rescue acquisitions, government aid and the revolving door between New York and Washington.
For starters, BlackRock is 34%-owned by Bank of America as a result of the bank’s emergency takeover of Merrill Lynch & Co. That means BlackRock is making a claim against its biggest shareholder.
The quagmire deepened when Bloomberg News reported Tuesday that Bank of America’s foes in the mortgage-backed securities battle include the Federal Reserve Bank of New York.
The New York Fed can’t be faulted for acting in its self-interest. The Fed’s regional bank owns billions of dollars of mortgage-backed securities through its rescues of securities firm Bear Stearns Cos. and insurer American International Group Inc.
But the New York Fed has been part of a broader federal policy to aid the banking system, under now-Treasury Secretary Timothy Geithner and the current chairman, William Dudley.
Among the beneficiaries of that effort are BNY Mellon and, even more, Bank of America, which got $45 billion in bailout funds. Overall, the Federal Reserve bought $1.25 trillion in mortgage-backed securities.
The New York Fed also has tight relationships with BlackRock and Pimco. Both firms are paid advisers to value to the Fed’s portfolio. Pimco gets paid to value $118 billion of assets guaranteed in the rescue of Bank of America. BlackRock manages Maiden Lane, the Fed fund holding the disputed mortgage-backed securities.
The institutional connections are just the start of the tangle. There is a human element, too. J.P. Morgan Chairman and Chief Executive James Dimon is one of three bank CEOs on the New York Fed’s nine-person board of directors. Those CEOs’ banks compete with Bank of America and other banks targeted in the requests.
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