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Rob’s comments in italicsDerek’s comments in normal font
Introduction to BlackRock
Our subject today is BlackRock, which is an entity that I have to admit before 2020, I was not aware of. So what is it and what do people need to know?
BlackRock is a fund manager, which essentially means that it takes the aggregate investments of a large number of people or a large number of organizations, who in turn are collecting investments from large numbers of people and buys the stocks and shares and bonds and any other investments they want to make. They claim they are able to do this in a more effective way than those people could do themselves.
BlackRock's Reach and Influence
A large proportion of the capital they are operating is from various US pension funds. Various individual states have pension funds for their government employees. Large corporations have pension funds for their employees. And of course, a lot of people manage their own pensions, either because they're independent professionals or entrepreneurs or business owners, or because they want an additional provision for their old age that they create under their own initiative.
So, as I think we mentioned when we were looking at the way pensions are working out these days, it's essentially an arrangement where over the course of your working life you pay in regular amounts. The income and the capital gains from those investments get reinvested, which in theory, should allow it to grow exponentially to the point where it can produce an income of a similar order of magnitude to your final earnings.
The remarkable thing is the extent of BlackRock’s hold over the entire corporate landscape. If you want to go and buy a fizzy drink, should you be reckless enough to do that, you could buy Coke. Alternatively, of course, you could buy one from its major competitor. When you actually look at the ownership of the shares in Pepsi Cola and you would find that one of the top investors, typically with a high single-figure investment, is BlackRock. If you look at Coca Cola you’ll find the same thing.
Similarly, if you're in the computer world, you might choose Apple or you might choose Microsoft. And then if you look at the ownership of Microsoft and Apple, you'll find that BlackRock is one of the top three shareholders of both of those corporations.
So what are the implications?
One of the buzzwords that you may have come across recently is ESG: environmental, social and governance. These are supposed to be guidelines for running large businesses in such a way as they are responsible and looking after the planet. I think it's highly dubious whether this is just yet another attempt to steal the clothes of the opposition. Having recognized that there's public concern about these matters, this buzzword has been created. The ESG framework was in fact proposed by Larry Fink, who is the founder of BlackRock.
Larry Fink and BlackRock
I'll go a little bit into the history of this, because in itself it is quite extraordinary. Larry Fink was a fund manager at First Boston Bank, and in 1986, he managed to lose $100 million with a mistaken bet on the likely movement of interest rates. You would have thought that would be the end of his career. But two years later, he had managed to put together a series of proposals where he had decided that he could evaluate risks better. He took the proposals for doing that, two of them, which, funnily enough, was called Blackstone Investment Management. He managed to persuade the owners of Blackstone that they should give him a chance to try out his investment. Based on that, they offered him a $5 million line of credit in return for a 50% stake in that particular operation, which was originally a subsidiary of Blackstone. (It wasn't yet called BlackRock.)
By 1992, he'd managed to grow that $5 million up to $17 billion of assets. They decided that this was getting good returns for his investors, which is why they were coming back to him. But it's still a pretty astonishing rate of growth. So at that point they decided to spin it off as a separate company. That's when they called it BlackRock. There was sort of something of an in-joke that BlackRock and Blackstone would be confused between the two of them. By 1994, he was falling out with the owners of Blackstone and they sold their half share for $240 million. That turned out to be a very good deal for Larry Fink and not such a good deal for the ones who sold their shareholding! Seven years later by 1999, BlackRock was now managing $165 billion of funds.
Now they're up to something like $10 trillion. They have a computerized trading system, which is called Aladdin, which they developed. Aladdin is used by many other Wall Street investment firms, and there's a total of $20 trillion that are using the Aladdin software. I think this in itself has a great deal of capacity for systemic weaknesses appearing in the market. If everybody's singing from the same hymn sheet, the price movements are going to be avalanching all in the same direction.
The Scale of BlackRock's Influence
I think it's worth referring back to the episode we did on big numbers as well, just to underscore how big a trillion actually is.
I'll just summarize very briefly so that a million pounds or dollars is the typical lifetime earnings of an average person. If you're happy enough to accept my thumbnail definition of an average person as being the one who earns an average of $25,000 a year. In a working life of 40 years, that comes to a million dollars. So a billion is the lifetime income of 1000 people and a trillion is the lifetime earnings of a million people.
It's quite a big difference.
Yes. And of course, you know, a few other numbers in there to pack this out. Various figures are thrown about for the total wealth in the world. It's somewhere in the high tens of millions. The federal debt of the United States was $33 trillion the last time I looked at it. But in itself that's a revealing characteristic because it shows the amount of funds that are directly or indirectly influenced by BlackRock are of the same order as the entire American state.
BlackRock probably has a much greater GDP than the majority of nation states.
Absolutely, yeah. Incidentally, another interesting fact about Larry Fink is that in 1983, three years prior to his losing their $100 million, Larry Fink originated the concept of collateralized mortgage options. Which was the system for purchasing a large number of mortgages, putting them into various funds which were split into various levels of risk and various levels of return. Of course, this was the financial instrument which was a major contributor to the 2008 financial meltdown.
BlackRock's Future Involvement in Public Projects
An interesting thing I learned this morning. Rachel Reeves, our new Labour Party chancellor of the Exchequer, is talking about managing to invest in the infrastructure of Great Britain by a scheme of public-private partnerships and actually mentioned BlackRock as being likely to be helpful in doing that.
The whole notion of this way of handling public finances is something we should cover in another episode. Anyway, the Labour Party and Gordon Brown years were heavily into public-private partnerships. This has resulted in a lot of rather shoddily built schools and poorly supported hospitals which had cost an entire enormous amount of money and will continue to do so in the future. It was essentially an accounting measure to ostensibly reduce the government borrowing, but of course by having part of it financed, they still finance that with borrowing. But as the government is able to get the best interest rates of anybody raising the same amount of money through some private bond issue is inevitably going to be more expensive.
Then of course, you've got all of the whatever other payments there are to the so-called private investors. It's really more a transfer of taxation into the pockets of financiers. It would be very interesting to watch that space and see how that works out.
What are we arguing then? For people just to be aware of what's going on and have a sort of top-level understanding?
I think that's all I can really offer at the moment. As we've said elsewhere, if you're looking out for your own pension, you want to join up the dots and see who is investing on your behalf, how they're investing and whether BlackRock are involved with this and whether there are alternatives.
At some point, I imagine BlackRock are going to be invited to rebuild Ukraine, Gaza, all of these places. You might not necessarily want your pension going to that end!
Yeah, that is fair comment. And another point to be made is that, of course, BlackRock is heavily invested in all of the arms manufacturers, all of the mining companies, all of the energy companies, all of this great tentacle of capitalist enterprises between them are the real existential threat to the planet.
Are there known resources that people can go and look at to learn more about this?
Well, James Corbett, Corbettreport.com has got several pieces on BlackRock and a very great deal more detail than I've been able to convey in this talk, but that is a very good source.
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