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BlackRock, big funds seen winning U.S. bailout job

BOSTON (Reuters) - Large U.S. asset managers with strong fixed-income records, such as BlackRock Inc BLK.N, PIMCO and Trust Company of the West, are seen as favored to oversee the U.S. government's $700 billion financial rescue fund.

For these and other firms in the race, the main attraction would be a chance to make reputational, rather than financial, gains as the fees for managing the assets are expected to be low.

“In order to manage fixed-income products very well, you generally need scale. That’s why in the fixed-income space it’s very difficult to break in, because you need the size,” said Roger Smith, an analyst at Fox-Pitt, Kelton.

In an attempt to clean up the worst financial disaster since the Great Depression, the U.S. Congress has legislated a move to let the government buy illiquid mortgage assets from banks and other financial institutions.

To handle these purchases, the Treasury is hiring money managers as well as appointing an adviser to oversee the overall program. On Monday, the Treasury named Neel Kashkari, assistant secretary for international economics and development, as head of the program.

The Treasury said last week it planned to recruit about two dozen fresh staff to help run the program and between five and 10 asset managers to look after its investments.

It outlined on Monday the principles that it hopes will mitigate the conflict of interest of outside contractors performing services in conjunction with the program.

Companies wishing to do work for the Treasury will have to present a report on possible conflicts of interest and how they will mitigate those conflicts.

BlackRock, the biggest publicly traded money manager in the United States, has both scale and strong pedigree. Its chairman and chief executive officer, Laurence Fink, is already known as Wall Street's 'Mr Fix-It' after being selected by the Federal Reserve to help manage Bear Stearns' portfolio as it was being bought by JP Morgan Chase JPM.N.

Fink was also one of the first people on Wall Street to package mortgage obligations and popularize the new product. BlackRock, which manages roughly $1.4 trillion, largely avoided the toxic debt but has raised new funds to capitalize in distressed markets.

BlackRock's biggest shareholder is Merrill Lynch MER.N, which had loaded up on the bad debt and agreed to be taken over by Bank of America BAC.N.

“BlackRock has among the strongest relationships with the U.S. government and we believe BlackRock will be among the first companies selected to manage business on behalf of the U.S. Treasury,” Credit Suisse analyst Craig Siegenthaler wrote in a note to clients last week.

Pacific Investment Management Co (PIMCO), a unit of German insurer Allianz ALVG.DE, is another leading candidate for managing the bailout fund, analysts say.

PIMCO founder and Chief Investment Officer Bill Gross has long been considered the world’s most influential bond investor. PIMCO has made no secret of its desire to be involved in the government fund and has said it would even manage it for free if others also do that.

PIMCO oversees more than $812 billion in assets.

Other managers and firms that might be picked include Jeffrey Gundlach, chief investment officer for Trust Company of the West, or TCW; Dan Fuss, chairman of Loomis Sayles; Tad Rivelle, Metropolitan West Asset Management; and Legg Mason’s Western Asset Management bond unit, analysts say.

Smith of Fox-Pitt, Kelton also saw a role for alternative investment managers, such as private equity firm Blackstone Group BX.N and hedge fund firm Fortress Investments FIG.N.

Analysts said that relative to the total assets that the firms manage, the earnings from overseeing the government fund would be small.

According to Smith, fees of five basis points on $250 billion deployed initially with the managers would earn annual revenue of $125 million and dropping fees to 1 basis point would yield just $25 million.

“When you have these humongous mandates, the fee structure is much lower than with the smaller mandates, especially if you got PIMCO out there telling you they’d work for free,” he said.

“But the managers are going to want to be involved, more so because they are going to want to know what’s going on and because it could help improve the prestige and reputation of the firm,” Smith said. “That’s really it, more than the potential for financial gains,” he added.

Editing by Richard Chang

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