Wednesday, November 14, 2007

Blackrock and Goldman bets on credit crunch to impact financials

BlackRock's Fink Says Subprime Credit Losses to Rise (Update4)

By Sree Vidya Bhaktavatsalam

Nov. 13 (Bloomberg) -- Laurence Fink, who helped create the market for mortgage-backed securities, said the credit losses that have already cost banks and securities firms $45 billion are about to get worse.

Fink, chief executive officer of New York-based fund manager BlackRock Inc., said today at an investor conference that ``many institutions don't understand what the credit crunch is going to do to earnings and their balance sheet.'' At the same conference, Goldman Sachs Group Inc., CEO Lloyd Blankfein said his firm is continuing to bet that mortgage-backed securities and collateralized debt obligations will fall.

The outlook is another indication that the contagion from losses on mortgages to people with poor credit is continuing to spread. Bank of America Corp. Chief Financial Officer Joe Price said the second-largest U.S. bank may write down $3 billion of subprime-related debt in the fourth quarter.

At the investor conference in New York, sponsored by Merrill Lynch & Co., Blankfein said Goldman, the world's most profitable investment bank, doesn't plan to take any significant writedowns on mortgage-related assets. Goldman shares rose 8.5 percent to $233.04 at 4 p.m. in New York Stock Exchange composite trading, and other financial stocks also climbed.

``We continue to be net short in these markets,'' Blankfein, 53, said in response to a question about the New York-based firm's position.

Financial Shares Rally

Banks and brokerages in the Standard & Poor's 500 Index have rallied 7.6 percent since reaching a two-year low on Nov. 7. Bank of America, based in Charlotte, North Carolina, climbed 5.2 percent today to $46.27. Lehman Brothers Holdings Inc. jumped 9.2 percent to $63.49 after UBS AG analyst Glenn Schorr said the New York-based securities firm's potential CDO losses are ``negligible.''

``I don't know when it's over, but it's not over yet,'' Fink, 55, said. ``The bottom has not been achieved yet.''

The selloff of financial stocks had gained steam after Merrill Lynch announced a record $8.4 billion credit writedown on Oct. 24, which led to the ouster of CEO Stan O'Neal. Deutsche Bank AG yesterday said credit losses may reach $400 billion, while Lehman last week predicted losses would reach $250 billion over the next five years.

At the same time, money managers including Bank of America and Baltimore-based Legg Mason Inc. have collectively set aside almost $500 million to prop up money-market funds that invested in debt issued by structured investment vehicles, known as SIVs.

Money-Fund Trouble

The 10 largest managers of U.S. money funds have about $50 billion in short term debt of SIVs, some issued by vehicles such as Cheyne Finance Plc that defaulted as investors shunned the funds on concerns about losses from securities linked to subprime mortgages, according to reports from the companies.

``You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks,'' Gregory Peters, head of credit strategy at Morgan Stanley said in an interview in New York. ``That's all toppling at once.''

JPMorgan Chase & Co. CEO Jamie Dimon said SIVs, whose assets have dwindled by at least $75 billion since July, will ``go the way of the dinosaur.''

``SIVs don't have a business purpose,'' Dimon, 51, said at the Merrill Lynch conference today.

New York-based JPMorgan joined Citigroup Inc. and Bank of America in forming an $80 billion fund to help revive the market for short-term debt. The banks are pushing to have the fund in place by year-end because SIVs have been unable to get credit as subprime mortgage losses drive investors from all but the safest debt. Their effort has been coordinated by the U.S. Treasury, run by former Goldman CEO Henry Paulson.

BlackRock

BlackRock, the largest U.S. publicly traded asset manager, has been in contact with the Treasury, Fink said. BlackRock will raise ``multibillion dollars'' to invest in distressed securities that are resulting from the ``chaos'' in the market, Fink said. He declined to elaborate.

Fink, who is the most likely candidate to be offered O'Neal's job, said today his firm has had a succession plan in place for at least two years.

``We have taken succession planning very seriously,'' Fink said. ``We have been focusing on it for two or three years; it has been a multi-year process,'' he said, without offering specifics. He did not say whether he has been offered the Merrill Lynch position.

PNC Financial Services Group Inc. CEO James Rohr, who sits on the board of BlackRock, confirmed Fink's earlier comments about succession planning. Rohr said in today's investor conference that he's not familiar with Fink's plans.

``I hope he doesn't leave,'' Rohr said, adding that BlackRock had ``a lot of talent.'' PNC holds 34 percent of BlackRock's stock, according to BlackRock's Web site.

Laurence Fink

Fink, formerly at First Boston Corp., was the youngest-ever managing director there when he got the title at age 29 in 1982. In 1983, while running the fixed-income department, he was one of two bankers to invent a security that repackaged mortgage-backed bonds into new securities with different responses to changes in interest rates, called collateralized mortgage obligations.

The other was Lewis Ranieri, whose tenure overseeing the business at Salomon Brothers is chronicled in Michael Lewis's 1989 book, ``Liar's Poker.''

Fink formed BlackRock as a bond specialist in 1988, with capital from New York-based private-equity firm Blackstone Group LP. Fink led the acquisition of Merrill Lynch's fund unit last year in a $9.4 billion deal. BlackRock's assets have since increased 31 percent to $1.3 trillion.

BlackRock shares rose 3.6 percent to $195.67.

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