By Shah Gilani
Contributing Editor
Money Morning

The U.S. Treasury Department recently announced it has preliminarily granted BlackRock Inc. (NYSE: BLK), a mega-money-management and risk-advisory firm, a second-round interview to potentially buy toxic assets from beleaguered U.S. banks.  The Treasury’s plan was to let a chosen few investment firms borrow cheaply from the Fed in order to massively leverage up their capital pools to purchase toxic assets, and then to backstop almost all potential losses with taxpayer money.

This plan was itself crafted in large measure with help from BlackRock.

It’s as if the moral hazards of cronyism, leverage, liaise-faire government and the doctrine of too-big-to-fail never happened.

The Background on BlackRock

In 1988, The Blackstone Group LP (NYSE: BX) - then a young-and-aggressive leveraged buyout shop that would eventually go public and is now the largest private equity company in the world - bankrolled a small asset-management startup called Financial Management Group. Heralding its roots out of Blackstone, Financial Management Group later changed its name to BlackRock.

BlackRock was originally run by Ralph L. Schlosstein, a former Lehman Brothers Holdings Inc. (OTC: LEHMQ) managing director of the mortgage-backed bond group, who stepped down as BlackRock’s president last year, and Laurence D. Fink, a former First Boston Group [now part of giant Credit Suisse Group AG (NYSE ADR: CS)] and a master-of-the-universe, fixed-income mortgage trader. That the expertise of the firm’s founders was in mortgage-backed securities is hardly ironic in this story.

As it happens, the story goes that Fink was one of the early pioneers at First Boston who helped create collateralized mortgage obligations (CMOs) out of fairly transparent mortgage-backed securities. Collateralized mortgage obligations, not unlike a virus, eventually yielded a whole host of spin-off products, now collectively lumped under the banner of collateralized debt obligations, or CDOs. For the most part, CDOs are like IEDs (improvised explosive devices) strewn along the road of once-straightforward securitized products. Sometime, in the not-too-distant future, when you look up the term “toxic assets” in your Barron’s “Dictionary of Finance and Investment Terms,” the definition will include a picture of the collateralized debt obligation family of products.

In 1994, Blackstone sold BlackRock to PNC Bank Corp. (NYSE: PNC), and in 1999 BlackRock went public (PNC still holds a 34% stake in BlackRock). Also in 1999, under Fink’s watchful eye, BlackRock Solutions was formed to provide risk-advisory and risk-management services. And again - not ironically - it is BlackRock Solutions that purports to have the “solution” to valuing toxic assets and the insight on how to manage associated risk with these products - the very same toxic assets that Fink helped to create.

As it turns out, however, BlackRock isn’t exactly the Rock of Gibraltar when it comes to its stability of performance, its timing or its risk management - whether that’s for its clients, itself, or the U.S.