Business and finance

Wall Street’s New Leviathan

“Thou art Peter, and upon this rock I will build my church.” (Matthew 16:18) Chances are high you’ll find a person who knows about this Peter, the bedrock of Christianity – it is the religion with the greatest number of adherents, after all. About two millennia later, the modern-day Peter has emerged, albeit less popular.  Americans pride themselves on being intelligent people, the folks who are good at everything – from fast food to babysitting world peace. Even if we were to believe these claims, one thing they’re not good at is answering a simple question – ‘How much is too much?’  This unanswered question has hurt the States time and again, and yet, answering it is still an ex-post job and not ex-ante. A decade after Wall Street fell victim to its own greed, regulations and investment trends of people who grew up through this collapse have shifted all headwinds to the buy-side, making them the new apex predators of what the country chooses to call capitalism.  While the buy-side firms are becoming as large as pre-crash investment banks, one particular name stands apart from the rest – literally and figuratively. It controls $9.5 trillion worth of assets and chances are, you have not heard of this firm - BlackRock. The firm and its asset growth are the true embodiment of the word exponential. Compared to the century-old financial behemoths such as Deutsche Bank, Goldman Sachs and Morgan Stanley, BlackRock was founded in 1988, a meagre three-decade-old company.  Founder Larry Fink was the man behind the infamous Mortgage-Backed Securities (MBS) market, which led to the 2008 crisis and subsequently his fall at Wall Street’s bulge bracket. Investment company First Boston used this as an opportunity and made him start an asset management firm: BlackRock, with an emphasis on risk management as their ace in the hole.  Starting with a humble $5 million credit line from Blackstone, Fink and BlackRock quadrupled their assets within the year, a pace that continues till date - the firm adds a trillion to its asset base every year or so, which is the equivalent of saying it adds the total asset base of leading asset management firms till date, to its balance sheet every year.  BlackRock is like a Swiss-Army knife. As you’d expect, it is difficult to find a sector where the firm is not in. Currently, it is an institutional investor, money manager, consultant and private equity firm. It effectively is involved on all sides of the table in most industries. A funny example is that of the environment. In 2017, announcements were made to support ESG practices within owned firms and improve the investment landscape in sustainable practices with new products. Two years later, BlackRock was a major shareholder in every big oil company and in seven of the leading producers of the other black rock – coal.  When this became public knowledge, protests were staged outside of BlackRock‘s France division, leading Fink to announce an exit from coal and fossil fuel assets. Alongside, revelations were made of letters to the boards of companies to improve sustainability and gender diversity practices or risk losing business with BlackRock.  Other times, it simply has stakes in leading competitors – Apple and Microsoft, Deutsche Bank, JP Morgan Chase and Wells Fargo, just to name a few. It simply cannot lose money unless the entire sector goes bust.  You can figure out other conflicts as well – a company goes to raise debt and BlackRock, a major shareholder, is already out to be a buyer of this debt. BlackRock is an advisor to most firms it’s an investor in. The ownership structure should ring a few alarms as well – Vanguard, another asset manager and a direct competitor of BlackRock, is its biggest shareholder. Many institutions that BlackRock invests in, are shareholders of BlackRock themselves.  There is another part of BlackRock’s business that took flight in 1999 and is dubbed as “a tech start-up” by CEO Fink – Aladdin, the risk management system. One would be damned if their start-up was managing risk for $21.6 trillion worth of assets including those of the Federal Reserve Board and the European Central Bank. BlackRock’s internal ‘Tech 2025’ plan aims to make Aladdin the standard, and perhaps the only used risk management platform in the industry. But that’s a monopoly for another time. At this point, BlackRock is begging to be labelled as the present-day Illuminati, but that isn’t the case. However, it is a marionettist in its own right, and here is where things get murky. Back in the mid-to-late 00’s, Goldman Sachs was well known for hiring prominent policymakers who would go on to be part of America’s cabinet and ensure nothing went too awry for Wall Street. After 2008, one would expect that things would change and the blurred lines between White House and Wall Street would be redrawn but that’s the exact opposite of what happened. Who do you call when a set of financial products is threatening to, or rather, causing the biggest financial crisis in almost a century? Of course, it’s the creator! When the MBS markets were rearranging the food chain by the minute, one was eyeing the newly vacated spot of the apex predator – BlackRock. The Federal Reserve called in Fink and his team to manage the mess and has been a loyal customer ever since – be it Aladdin’s risk management, or an appropriate response to the coronavirus pandemic.  As the pandemic hit, the Fed announced that it will purchase assets other than Treasury bonds as well – Corporate Bonds and Exchange Traded Funds (ETFs). Who else do we know as a major firm dealing in Corporate Bonds and ETFs? Do the math. The funds the Fed poured money in were a hit among retail investors and no prizes for guessing the issuer of the funds. If you are conversant with US law, you must have thought at least once about how BlackRock is not under the purview of ‘too big to fail’ or why the Dodd-Frank reform, which has riddled the powerhouses of the sell-side with multiple regulations on risk-taking, is not handicapping their earning potential? The answer is the same as that with Goldman – it has multiple former executives in Washington and multiple former Washington policymakers reside at the 52nd Street in Manhattan.  This cosy revolving door is not just limited from Manhattan to Washington rather extends to Ottawa and Mexico City. For example, PEMEX, Mexico’s state-owned oil company was opened to private investment, and BlackRock quickly jumped in. Then it acquired a loss-making, scandalous private equity firm in the country, I Cuadrada, and a month down the line, Sierra Oil, a year-old portfolio company of the former, which had not had a project in its short life was awarded two major exploration contracts as the sole bidder.  BlackRock also holds the distinction of being the first global asset manager which has set up an onshore shop in China. There are multiple examples, from private to public sectors where the private firm has played on both sides of the court to benefit itself, earning the title of a white-collar mafia. Europe has dealt a stricter hand with criticism of the European Commission for awarding BlackRock a contract with a significant conflict of interest. While the common person was never directly under attack from this leviathan but as it extends its power, it now faces a direct confrontation with the people – housing. The American Dream has always consisted of owning a place you can call home, however, that soon might not be the case as BlackRock and multiple other funds are outbidding individuals or paying the entire amount upfront with no inspection. These bids are too sweet for developers to pass.  If you thought this was excessive, mega-funds are buying out entire neighbourhoods for a few factors above the listed prices and immediately putting them out on exorbitant rents. A new monopoly is unfolding before us and one can only hope America finds an answer to its age-old dilemma sooner. “For what does it profit a man to gain the whole world and forfeit his soul?” (Mark 8:36)

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