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Can this man save Wall Street, page 2

by Katrina Brooker, senior writer
October 29, 2008: 6:32 AM ET

Fink left First Boston in 1988 and went to run the asset-management business for the Blackstone Group, but feuds with co-founder Steve Schwarzman over equity prompted him to leave and start BlackRock in 1994.

Over the course of the next decade he watched mortgages become a multitrillion-dollar market with a dangerous side effect: The system put a huge distance between the original borrowers and the investors on the hook for their loans. No one running the firms that traded and held the securities was really paying attention to whether the borrowers would be able to pay back the money, or who would be on the hook if they defaulted.

"When you think about the ingenuity of Wall Street, anything can happen - good and bad. The capital markets do not have a barometer of what's good and bad. The capital markets are pure capitalism. When there's demand, pure capitalism produces supply. Whether the demand is appropriate - that's another question," says Fink.

Last year, when consumers began defaulting - first on their home loans and then on everything else - BlackRock was ready. The firm's core business remains managing other people's money through mutual funds, pension funds, and 401(k) plans, but it has always had an in-house SWAT team to help companies in trouble analyze their portfolios.

In 2000 this group was named BlackRock Solutions and got its own office space across the street from the asset-management team. Beginning in 2006 the team felt that mortgage-backed securities were a tinderbox, and BlackRock advised clients to start purging them from their balance sheets.

"What happened at First Boston was minor. What's happening now is 1,000 times harder," says Fink during an interview in early October. As he speaks in a small, nondescript conference room at BlackRock headquarters five floors above New York's 52nd Street, the Royal Bank of Scotland is becoming nationalized, Iceland's banking system is imploding, and the world's commercial-paper markets are as frozen as a glacier. Fink's call sheet reads like a who's who of the market meltdown: Edward M. Liddy, the new CEO of AIG (AIG, Fortune 500); John Mack, CEO of Morgan Stanley (MS, Fortune 500); and Paulson, for starters.

BlackRock's first big assignment in the current crisis was the State of Florida. In November 2007 the state's CFO called BlackRock because a press report said the state's investment pool - a kind of bank for local governments - had subprime mortgages in its portfolio (mostly sold to the state by fellow BlackRock client Lehman Brothers). And those mortgages were headed for trouble. A panic erupted: Schools, fire departments, and police stations around the state all started to withdraw from the fund. In weeks the fund shriveled from $27 billion to $14 billion.

"[County officials were] almost in tears, saying, 'I can't make payroll for teachers, firemen, police,'" says Barbara Novick, BlackRock's vice chairman and head of account management.

Desperate, Florida's fund managers needed BlackRock to evaluate the state's subprime portfolio. Within days its team had analyzed the state's portfolio, and by the end of December had mapped out a plan for the state to dispose of its bad assets. Since then companies have hired BlackRock Solutions to analyze, manage, or dispose of $1 trillion in distressed assets - quadruple the business it did a year ago.

The nerve center of BlackRock Solutions looks pretty much like any Wall Street trading floor. There are rows and rows of computers - 2,000 in all. Hunched over them are a cadre of analysts of every stripe: a physicist, a nuclear engineer, an electrical engineer and, of course, economists, MBAs, and accountants. Their job is to construct computer models designed to answer the only question companies care about right now: How much is the collapse of the debt markets going to cost us?

BlackRock's experts can take just about any kind of loan-based security and analyze it from top to bottom - literally starting with some deadbeat signing up for an interest-only mortgage in Bakersfield, Calif., and following it through the bowels of the financial system until it comes out as an ingredient in a credit default swap on the books of a Swiss bank based in Geneva.

Currently BlackRock runs tens of millions of risk models a day. On each of those, computers continually run through an ever-changing number of potential risk scenarios, some 200 million of them per week - everything from what happens if the U.S. starts defaulting on its debt to what happens if China stops buying it. This type of analytical power is what has drawn the world's most desperate companies to BlackRock.

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
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