Warren presses Yellen to ramp up BlackRock oversight

Sen. Elizabeth Warren (D-Mass.) pushed Treasury Secretary Janet Yellen on Wednesday to force investment firm BlackRock into tougher federal oversight under the 2010 Dodd-Frank financial reform law.

During a Senate Banking Committee hearing, Warren urged Yellen — the former chair of the Federal Reserve — to put the massive asset manager under strict supervision before the next time financial markets buckle.

“I understand that when the stock market is going up, it is easy to ignore risks that can be building up in the system. That was the mindset of the regulators that led up to the 2008 crash, and that is how taxpayers ended up on the hook for a $700 billion bailout of the giant banks,” Warren said.

“When the party is going strong, it’s the job of the regulators to take away the punch bowl,” she added.

Under Dodd-Frank, an interagency group of financial regulators chaired by Yellen called the Financial Stability Oversight Council (FSOC) can designate firms as “systemically important financial institutions” (SIFIs) if it determines that the company’s collapse could trigger a broader financial crisis. 

Put simply, SIFIs are banks and financial firms that the U.S. government considers “too big to fail.” SIFIs are subject to Fed stress tests and must develop plans for how they could be disassembled without causing a crisis if the firm is on the verge of collapse.

While U.S banks with more than $250 billion in assets are automatically considered SIFIs, Warren is among many Democrats and Wall Street skeptics in favor of applying the designation to BlackRock and other major financial firms.

BlackRock is the world’s largest nonbank investment company and manages nearly $9 trillion in assets — more than the individual gross domestic product of every single country except the U.S. and China.

“Does, potentially, a $9 trillion investment company pose some risk to the American economy if it should fail?” Warren asked Yellen, arguing in favor of BlackRock’s systemic importance.

Yellen, however, said that FSOC would be more likely to focus on specific activities instead of the size of firms.

She said that while asset managers face risks if sharp withdrawals from mutual funds cause fire sales across financial markets, “it’s not obvious to me that designation is the correct tool” to address those risks. 

Warren countered that the point of SIFI designation was to give regulators the ability to crack down on certain activities with greater authority over and visibility into large firms.

“Designation is what is what gives the Fed its increased oversight power,” Warren said.

In a statement, BlackRock said that while it supports “financial regulatory reform that increases transparency, protects investors and facilitates responsible growth,” the firm did not require special supervision.

“The past two administrations in the US, and numerous global regulators, have studied our industry for a decade and concluded that asset managers should be regulated differently from banks, with the primary focus being on the industry’s products and services,” said BlackRock.

The debate between Warren and Yellen — both ardent Dodd-Frank supporters — is one of the earliest instances of Democratic lawmakers pushing the Biden administration to be more aggressive on financial regulation.

Progressives have largely been pleased with Biden’s picks for key financial posts, including several that were aides to Warren. Deputy Treasury Secretary nominee Wally Adeyemo and Consumer Financial Protection Bureau Director nominee Rohit Chopra were both early officials at the Consumer Financial Protection Bureau under Warren, and National Economic Council Deputy Director Bharat Ramamurti was a senior policy advisor for Warren in the Senate.

Even so, Warren and other progressive leaders have pledged to push the Biden administration to crack down on misconduct in the financial sector, tighten protections for consumers and push firms toward stronger climate change and diversity positions.

Updated at 3:06 p.m.