From Asset Manager to Economic Influencer: BlackRock's reach in America
BY BHAVYA SINGH/ AUGUST 5, 2023
The US economy plays a significantly important role in the world economy which is intricately connected by a global supply chain. It is therefore important to consider the influence and power held by very few individuals and companies in the US, and one such company is BlackRock.
t is given that the United States is undoubtedly one of the most powerful economies in the world. Being a highly developed mixed economy, it is the largest economy in terms of nominal GDP and the second largest in terms of purchasing power parity. The U.S. dollar is the international reserve currency of the world backed by large treasury markets. In this era of globalisation, the U.S. accounts for 25.4% of the global economy in nominal terms. When a country has such a huge worldwide influence, it is only fair to look into the factors affecting its economy. One such factor affecting the U.S. economy is capitalism.
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According to the New York Times Magazine, in the United States, the richest 1% of Americans own 40% of the country’s wealth, while a large share of the working-age population 18-65 live in poverty.
According to the New York Times Magazine, in the United States, the richest 1% of Americans own 40% of the country’s wealth, while a large share of the working-age population (18-65) live in poverty. This clearly indicates the concentration of economic power in the hands of a few individuals and organisations. This concentration of power in America can largely be attributed to three companies, BlackRock, Vanguard and State Street. In this article, we will focus specifically on BlackRock for the simple reason of ‘cross ownership’.
Pictured: Illustration by unknown via Pinterest
Cross ownership is the single ownership of two or more related businesses that allows the owner to control competition. BlackRock and Vanguard are the biggest shareholders of State Street, State Street and Vanguard are the biggest shareholders of Blackrock, which in turn have assets under management worth USD 10 trillion (almost half of America’s total GDP). Founded in 1988, BlackRock is a leading global investment management corporation headquartered in New York City. It has grown to become one of the largest asset management companies in the world offering a wide range of investment and risk management services to institutional and individual clients.
While identifying the U.S. as a capitalist economy, we take into consideration some of the biggest corporations from America including Google’s parent company Alphabet, Amazon, Apple, Microsoft, Meta, Twitter, Tesla, McDonald’s, Pepsi, Coca-Cola, Pfizer, Walmart Stores, Johnson and Johnson etc. All of the above mentioned companies have something in common. One of their most important strategic investors and their asset manager is BlackRock. BlackRock has invested in a plethora of such companies, ranging from various industries, including entertainment and media, weaponry, agriculture, and fossil fuel. Being a major shareholder and asset manager of the biggest corporations of the world, its influence is unparalleled in the market (especially in securities like ETFs, shares, bonds etc.). ETFs or exchange traded funds are extremely popular, as they offer investors to pool their money and invest them in stocks, bonds, and other assets according to the investor’s needs. According to Statista, BlackRock alone has a share of 36.9% in the ETF market of the U.S.
This capitalist structure, concentration of power and influence leads to a question of accountability on the social and economic impacts of the firms. Even though BlackRock claims to have adopted a comprehensive ESG (Environment, Social, and Governance) policy corresponding to sustainability and business ethics, a lot of its investments are contradictory to it. BlackRock owns 7.1% of Exxon Mobil, world's largest oil and gas company which is alone responsible for almost 2% of global emissions.
Similarly, when it comes to assessing BlackRock’s take on Corporate Social Responsibility (a company's commitment to conducting business ethically and contributing positively to society), it holds a 16.18% stake in Sturm Ruger, American Firearm manufacturing company, a 15.26% position in Vista Outdoor, parent company of many ammunition makers and an 8.3% stake in Smith & Wesson, firearm manufacturer. According to Axios, BlackRock says that none of these shares are held in actively managed funds. Instead, they're in passive funds tied to third-party indexes (i.e., BlackRock doesn't choose which stocks to include). There are innumerable reports, blogs, and articles explaining the plain profit-oriented intention of massive companies like BlackRock, whose small initiatives and messages displaying their Corporate Social Responsibility seem rather rhetoric.
Pictured: Illustration by unknown via pinterest
There are innumerable reports, blogs, and articles explaining the plain profit-oriented intention of massive companies like BlackRock, whose small initiatives and messages displaying their Corporate Social Responsibility seem rather rhetoric.
According to Macrotrends, the return on investment on its stock price has increased from around 4% in 2009 to 14% in 2023. Soon after its incorporation, BlackRock spent years developing a risk management software called ‘Aladdin’, also regarded as one of the best risk management softwares in the world at present, developed and managed by Sudhir Nair (Global head of Aladdin). It manages assets worth USD $21 trillion of all the largest corporations.
On one hand, BlackRock investment managers use ‘Aladdin’ to drive their day-to-day investments. At the same time, this platform is also offered to its clients which allows them to tap into the same technology and intellectual capital available to BlackRock’s own employees. In other words, it serves as both a core business platform and an outsourced service offering. With the help of this software, BlackRock kept expanding, acquiring and investing in most of its competitor firms and the most lucrative markets of the world while also providing portfolio management assistance to its own customers as an asset manager.
The growth and success of Blackrock is directly linked to technology and the U.S. economic crises.
Pictured: Illustration by unknown via Pinterest
Moreover, it is important to note that a capitalist in the market may or may not be able to influence a country’s economy for its own benefit, but its influence on the government may raise questions. Majorly on the intent of both the capitalist and the government, especially if it is a giant capitalist like BlackRock. The growth and success of
Blackrock is directly linked to technology and the U.S. economic crises. According to Mint, BlackRock Inc. was hired by U.S. regulators to help sell USD 114 billion in securities it amassed from failed lenders Signature Bank and Silicon Valley Bank, returning the asset manager to its role as an adviser to the government in times of crisis. The failure of these banks was attributed to a very high percentage of uninsured deposits and liquidity risks. After being one of the most important and powerful people in the world of finance, Lawrence D. Fink (CEO of BlackRock) also became a pioneer figure by helping in combating the economic crisis of the country. He was directly consulted by the Federal Reserve to manage the 2008 recession.
Another interesting aspect here is considering the reasons for the 2008 recession. It hit due to multiple factors, one of those being that too many banks took too much risk. The shadow banking system failed and created economic uncertainty in the market. According to Investopedia, “The shadow banking system describes financial intermediaries that participate in creating credit but are not subject to regulatory oversight. Shadow banks, often known as nonbank financial companies (NBFCs), can usually operate with little to no oversight from regulators.” Considering this definition, according to The Strategy Story, Blackrock is the world's largest shadow bank.
One more factor is that BlackRock, like many other financial institutions, was heavily invested in mortgage-backed securities (MBS) and other complex financial products which were lended to risky borrowers. BlackRock and other market participants underestimated the risks associated with these assets. Although, it is important to note that BlackRock's role in the 2008 recession was not unique to the firm. Many other financial institutions were involved in similar activities, and the crisis was the result of a complex interplay of many other factors as well, including lending standards, regulatory shortcomings, and excessive risk-taking throughout the financial industry. However, we cannot ignore the influence of BlackRock before, during and after the recession.
In addition to this during the coronavirus pandemic, the Federal Reserve again turned to BlackRock. According to the New York Times, “The nation’s central bank said it tapped BlackRock, the world’s largest asset manager, to help oversee the Fed’s efforts to stabilise the bond market amid the economic turmoil caused by the coronavirus pandemic.” Both during the recession and the pandemic, the company ended up making huge profits by managing large funds and clearing debts on behalf of the government and the largest banks in America.
Blackrock’s risk management system and financial expertise has made the government ask for their assistance in times of economic blunders, leading to eventual growth and influence of the company. But is it beneficial for a single organisation to hold such influence? Even if a company holds such power, it should be largely responsible for its actions and must advocate accountability for greater societal benefit. It is important for the U.S. government to realise the effect of concentration of power and whether the large capitalists will be able to budge from their single-minded goal of profit.
Keywords
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Black rock, U.S. economy, Cross ownership, comprehensive ESG,'Aladdin’, Lawrence D. Fink, mortgage-backed securities, risk management system
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References
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Kalapat, A. (2020, September 18). BlackRock, the story of the world’s largest shadow bank. The Strategy Story.
https://thestrategystory.com/2020/09/18/blackrock-shadow-bank/
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