BlackRock Inc., the chosen seller of a pile of securities once held by failed banks, faces a dilemma between flooding the market and risking higher costs to hold the debt.
The selection of a top-tier manager by the Federal Deposit Insurance Corporation, and assurances that the sales would be “gradual and orderly,” helped assuage any concerns the government might choose to quickly offload the securities, according to analysts. Regulators amassed the assets, mostly in the form of mortgage-backed securities, from failed lenders Signature Bank and Silicon Valley Bank.
BlackRock and the FDIC declined to comment.
Still, BlackRock doesn’t have an unlimited amount of time to conduct its sales. The FDIC hasn’t given a timeline for the sales, but as a practical matter, it can’t wait forever. It’s paying the Federal Reserve interest on credit lines to hold the securities, and holding the assets for a long time brings other difficulties.
“The longer they’re held, the less liquid and more off-the-run the securities likely become,” said Erica Adelberg, mortgage strategist for Bloomberg Intelligence. “Holding assets also involves custodial fees and paydowns, and the FDIC needs this cash to pay for things like reimbursing depositors from the receiverships.”
The securities BlackRock needs to sell also largely date from before the Fed tightened interest rates last year, but trading of these low-interest rate securities is relatively thin, Adelberg wrote in an analysis. That’s an additional challenge BlackRock faces as it liquidates the portfolio.
In the aftermath of the 2008 financial crisis, the Fed and Treasury Department awarded contracts to BlackRock to manage $130 billion of bad debt formerly on the books of Bear Stearns and American International Group Inc. The Fed turned to BlackRock to help oversee debt-buying programs to help stabilize the economy at the onset of the pandemic in 2020.
While markets seem comfortable at the moment that the sales will be orderly, the amount of supply is formidable, analysts cautioned. Gross supply of agency MBS last month was $56 billion, far less than the roughly $90 billion in market value of the securities that BlackRock now needs to dispose of, according to a note by Walt Schmidt of FHN Financial.
The securities’ market value is lower than their face value, a result of changes in market interest rates since the assets were initially purchased by SVB Financial Group, Schmidt said.
“Ninety billion dollars in paper is, quite frankly, a lot,” said Schmidt.
