How powerful should one company be?

Behind the curtains, away from the common man's attention, BlackRock Inc. works in the shadows.

8/21/20214 min read

low angle photo of city high rise buildings during daytime
low angle photo of city high rise buildings during daytime

Behind the curtains, away from the common man's attention, BlackRock Inc. works in the shadows. While the names of JP Morgan & Chase, Goldman Sachs is not unheard of in the field of investment management, BlackRock often flies under the radar. And over 33 years, it has built itself into the largest Asset Management Company in the world managing over $9.5 trillion assets as of second quarter of 2021. Additionally, it runs a technology platform, Aladdin which oversees at least $21.6 trillion worth of assets worldwide. Aladdin is a network of computers that the company uses to monitor trades and portfolios of its clients. It also acts as a central nervous system for a lot of big players in the investment management industry.

Let's dive a little deeper into the BlackRock story.

In 2008, the Federal Reserve, the central banking system of the United States appointed BlackRock's Financial Management and Accounting division to handle the toxic assets of AIG, Bear Sterns, etc., and bail them out. The company owned major stakes in the firms they were bailing out. The operations of the company are riddled with conflicts of interest. During that period, it was also given many other government contracts without any competitive bidding, all of it veiled in secrecy.

BlackRock made its fortune in Exchange Traded Funds. ETFs are bought and sold just like stocks but they are structured to passively track specific indices. For example, Nippon India ETF Nifty BeES tracks the Nifty 50 Index. The performance of the index will influence the performance of the ETF. In the aftermath of the 2008 financial crisis, BlackRock took over the iShares series of ETFs after its takeover of Barclays Global Investors in 2009. The company gained trillions in assets. Today, iShares is one of the biggest ETFs in the world.

Fast forward to 2020, the company has grown its Assets Under management over 5 times since 2008. When the pandemic hit, the Federal Reserve reached out to BlackRock to handle an emergency asset-purchasing program. BlackRock was assigned to purchase billions of bonds on behalf of the government as part of the massive debt-buying program that was rolled out to boost the US economy during the coronavirus outbreak. Yet again, there was no competitive bidding process where other asset managers could bid for the contract.

This calls for a lot of speculations as to why BlackRock has become such a behemoth and has so much influence over a huge number of assets. An investigation conducted by a research group called Investigate Europe concluded that BlackRock:

  • undermines competition through owning shares in competing companies

  • blurs boundaries between private capital and government affairs by working closely with regulators

  • advocates for the privatization of pensions schemes to channel savings capital into its funds

This year BlackRock acquired Aperio, a California-based investment provider for approximately $1 billion in cash. In 2019, it acquired eFront, a French startup that runs alternative investments management software, for $1.3 billion. The company has acquired a lot of its competitors and cutting-edge technology companies in the finance sector.

The company operates in a circular ownership structure. Here, company A owns shares of company B which in turn also owns shares of company A, thus resulting in a circular nature. Steele, a leading company in Ethics & Compliance Management says that by setting up a circular ownership structure, companies can mask true ownership and control through various complex ownership loops. Currently, Blackrock has a significant share in top companies and banks of the United States like Apple, Microsoft, Amazon, Facebook, Google, JP Morgan & Chase, Bank of America, etc. It also holds major shares in companies working in healthcare, energy, media and communications, real estate, etc.

BlackRock wields a strong influence over the US government since many of its top executives that have joined the company were previously in top posts in the government. According to Insidersources, the company has hired 84 ex-government officials, regulators, and central bankers since 2004. In 2019, former Federal Reserve Vice Chairman Stanley Fischer joined BlackRock Inc. as a senior adviser. This is not limited to the US only. Many officials from other national governments have also joined the firm. Having close ties with the government has allowed the company to skirt around the regulations that are put forward for large financial institutions.

A Bloomberg article quotes BlackRock as the "Fourth Branch of the Government". The article also quotes Graham Steele, who formerly worked at the Federal Reserve Bank of San Francisco. He says, “They are so intertwined in the market and government that it’s a really interesting tangle of conflicts”. BlackRock has witnessed a meteoric rise in the past decade. This begs a question, How much power is too much for one company? When it rises to a level at which it influences a majority of publicly traded companies, and has considerable clout over government, then it instigates a question. How is the company using its power? Without oversight, we cannot guarantee a fair playground for all the players in a field.

If you want to read more about the topic,

Resources:

  • https://www.businessinsider.in/finance/news/here-are-9-fascinating-facts-to-know-about-blackrock-the-worlds-largest-asset-manager-popping-up-in-the-biden-administration/articleshow/79569493.cms

  • https://www.forbes.com/sites/pedrodacosta/2020/04/20/a-glaring-new-conflict-of-interest-undermines-public-trust-in-federal-reserve/?sh=4a467524135d

  • https://www.vanityfair.com/news/2010/04/fink-201004

  • https://www.reuters.com/business/finance/blackrock-wins-chinese-regulatory-approval-onshore-mutual-fund-business-2021-06-11/

  • https://ellenbrown.com/2020/06/22/meet-blackrock-the-new-great-vampire-squid/?blogsub=confirming#blog_subscription-3

  • https://www.investopedia.com/terms/i/investment-management.asp

  • https://www.investigate-europe.eu/en/2018/blackrock-the-company-that-owns-the-world/

  • https://gvwire.com/2018/07/09/how-blackrock-wields-vast-influence-over-government-and-the-economy/