The Secret King of Money & Power

Who is the most influential when it comes to ‘money & power’ around the world? Goldman Sachs comes up quickly, others point at the Federal Reserve but the real king of global money-managment is rarely mentioned, because the name is pretty unfamiliar outside financial circles.

Within 3 months of 1986, a 34 year old manager in the fixed income division of the investmentbank ‘First Boston’, lost 100 million USD due to a wrong interest rate prediction. A mistake, not tolerated by his bosses, and Laurence Douglas ‘Larry’ Fink was given the boot.

A few months after Fink got fired, the son of a shoe salesman and an english teacher, co-founded ‘BlackRock’.
Today, New York-based BlackRock is with about 4,5 trillion USD of assets the single largest financial institution in the world and manages more wealth than Japan and Germany have in GDP.
BlackRock is a holding company that has become a major shareholder in roughly 40% of all publicly traded US-companies and one of the largest shareholders in countless companies around the world, from Canada to Brazil, Germany, Japan or China.
Owning 5 or 6 % in shares of a company is not much per se, but you can call anytime and the boss will listen and eventually act according to your proposals.

And because BlackRock does not ‘only’ manage money, but also advises institutions like central banks, finance ministries or sovereign wealth funds, BlackRock’s influence rocks up to 15 trillion USD, thats about 75 times the GDP of Romania.

Winner of the crisis

BlackRock was founded as a subsidiary of the Blackstone Group, a multinational private equity firm. But in 1994, a conflict with Blackstone’s Stephen Schwarzman led to a separation. BlackRock went public in 1999 and started to acquire companies througout the 2000s. The best move was the purchase of Barclays Global Investors for 13.5 billion USD which turned BlackRock into the world’s largest asset manager overnight, when BlackRock became the owner of Barclays portfolio of exchange-traded funds (ETFs) known as iShares.

When the financial crisis struck the US in 2008, the Treasury and Federal Reserve turned to BlackRock and Larry Fink for support. BlackRock advised the government on the rescues, bailouts and purchases of Bear Stearns, AIG, Citigroup, Fannie Mae and Freddie Mac.

Today, it’s fair to say, there is pretty much nothing in the financial market that BlackRock is not somehow involved in.

> Is BlackRock dangerous?

In light of the recent troubles at the high-yield bondmarket, the question surfaces, if a giant like BlackRock is a threat to the financial system.
Critics like investor Carl Icahn accused the money management firm of pumping air into a bubble in high-yield debt by pushing seemingly safe investments on individual investors that were actually filled with what he claims are risky bonds. Icahn compared what BlackRock is doing today to what the banks did in 2007 when they sold billions of dollars of faulty subprime mortgage bonds.

Bond-guru Bill Gross of Janus Capital points the finger on something else why BlackRock is potentially dangerous. Mutual funds, hedge funds, and ETFs, are part of the ‘shadow banking system’ where these modern ‘banks’ are not required to maintain reserves or even emergency levels of cash. What could cause a run on the shadow banks?

– A central bank mistake leading to lower bond prices and a stronger dollar.
– Greece, with the inevitable aftermath of default/restructuring leading to additional concerns for eurozone peripherals.”
– China, which Gross calls the ‘mystery meat’ of economic sandwiches — you never know what’s in there. The sure warning sign emanating from China is that credit there has expanded more rapidly in recent years than any major economy in history.
– Geopolitical risks, which Gross says are too numerous to mention and too sensitive to print.
– Finally, Gross equates the current levered financial system with the ‘butterfly effect’ from chaos theory, saying that small changes can upset the status quo.’

Larry Fink made a mistake in 1986 that caused a loss of 100 million USD and him loosing his job.
Today, the stakes are much higher and BlackRock is simply to big to fail. It would be the end of a fairy tale. Is it a coincidence that the risk management system of BlackRock is called ‘Aladdin’?