Larry Fink

The New Masters of the Universe: The $5-Trillion Man

The Davos World Economic Forum 2015
Larry Fink, the man behind the $5 trillion behemoth that is BlackRock. Source: Bloomberg

He may not become Secretary of the Treasury; that would have required a win by Hillary Clinton. But Larry Fink, 64, a loyal supporter of the Democratic Party, will quickly adapt to the Republican president-elect Donald Trump. Already in June, Mr. Fink said that the candidate Trump and his promises must be taken seriously.

As chief executive and chairman of the gigantic company BlackRock, the world’s largest asset manager, Larry Fink is a figurehead in the financial industry. The man from New York, who grew up in California, is an active player in all corners of the global economic system and has an opinion on just about everything, ranging from the effect of negative interest (damaging) to growth (under threat) to employment (weak because of digitalization).

With 13,000 employees and $5 trillion in managed assets, BlackRock does in fact live up to its name as a towering crag in the financial landscape.

As a large shareholder in so many big companies, Mr. Fink systematically exercises influence behind the scenes.

Mr. Fink learned his trade on Wall Street as a financial engineer at First Boston (later acquired by Credit Suisse). There, he developed many of the arcane products that played a major role in the financial crash of 2007-2008. In 1986, Mr. Fink falsely predicted how interest rates would develop and caused his employer to lose $100 million. Out of necessity, he became self-employed.

He co-founded BlackRock in 1988, at the time as part of Blackstone group. The firm split with its parent some six years later. In 1999, BlackRock made an initial public offering and hasn’t looked back since. Acquisitions of Merrill Lynch’s investment business in 2006 and the market-listed funds of Barclays in 2009 made Mr. Fink’s company the world’s largest asset manager – with more potential to grow.

The company holds various impressive stakes. In the United States, BlackRock is – with a 5.7-percent stake – a large shareholder of Apple, to whose supervisory board Mr. Fink sent his director, Sue Wagner. That was an exception – normally he keeps his distance from such boards in order to avoid becoming entangled in insider trading regulations.

BlackRock also holds substantial stakes in other U.S. giants such as Microsoft (5.8 percent), Exxon Mobil (6.0 percent) and General Electric (5.7 percent). In Germany, top companies include Bayer (7.0 percent), Daimler (5.2 percent), BASF (6.1 percent), VW (nearly 4 percent) and Siemens (5.6 percent) – as well as financial firms Deutsche Bank (6.2 percent) and Allianz (5.4 percent).

Some of these investments weren’t made voluntarily. As the world’s largest provider of so-called passive investments, BlackRock has to purchase shares in every company listed on Germany’s blue-chip DAX stock index, for instance, in order to replicate it. Blackrock has more than $1 trillion in iShares exchange-traded funds, the business taken over from Barclays; this constitutes a 50-percent market share in the index business in Europe. In general, the passive funds engender not passivity but activity.

“The disadvantage is that you own many crummy companies,” Mr. Fink said recently. As a passive investor, that means you have to focus on these firms even more closely, he said.

As a large shareholder in so many big companies, Mr. Fink systematically exercises influence behind the scenes. He does this through the 30 members of his company’s Corporate Governance and Responsible Investment Team. The group, which is spread across New York, San Francisco, London, Tokyo and Hong Kong, works to assure that the same agenda is pursued in all companies where BlackRock has a stake.

Once a year, Mr. Fink personally pens a letter to chief executives, admonishing them to think about the long term. He also keeps an eye on proceedings at the Global Economic Forum in Davos, holding private talks with company top brass. Mr. Fink’s outsize monitoring function is evident, for example, in the hurried flight in 2011 from London to New York by Stuart Gulliver in order to assure himself of Mr. Fink’s support for his appointment as head of HSBC.

“We basically play a constructive and moderate role in company decisions,”Mr. Fink says self-effacingly for the record.

Critical shareholder groups have their doubts about Larry Fink, arguing that BlackRock does far too little to prevent executives from boosting their own salaries and bonuses, for example. It comes as no surprise that Mr. Fink’s own princely salary of $28.6 million also causes controversy. Many stockholders are bothered by the cash flow of the firm’s c0-founder. Mr. Fink is “overpaid,” thundered the multi-millionaire and philanthropist Steve Silberstein, pointing out that the head of BlackRock raised his annual salary by $2 million even when profits at the firm increased by only 2 percent.

A feeling of unease remains. The money-market funds of the group – a business similar to banking – are eyed by government regulators with the same suspicion as its own software Aladdin, which is utilized by many asset managers and bankers. In total about 20,000 users of the software in banks, insurance companies and investment firms see the financial world through the eyes of BlackRock, while 6,000 computers prepare the data at East Wenatchee in the state of Washington.

BlackRock often brings aboard well-known figures, such as its present vice-chairman Philipp Hildebrand, formerly the head of the Swiss central bank, the SNB. Or it tapped Friedrich Merz, once the leader of the Christian Democrats of Chancellor Angela Merkel, to head the supervisory board of Blackrock’s German subsidiary. Prominence guarantees contacts.

The world’s largest financial company – for many observers also the most dangerous – clearly puts its faith in lobbying. BlackRock is obliged to maintain a good relationship with the political establishment that decides, for example, on retirement benefits. That’s key, since his own firm seeks to invest citizens’ old-age savings as intensively as possible in the capital markets.

Right after the financial crisis, BlackRock partner Barbara Novick was appointed the head of a special team that represents the interests of investors in Washington. She was able to alter plans for a new legal framework for the derivatives trade, so as to better protect the security of investors. Her job is to prevent BlackRock being labeled “systemically-relevant” in the United States and hence become subject to tighter regulations.

But even Mr. Fink himself realizes that financial regulaotrs are focusing more attentively on so-called shadow banks like his own: “If I were on the side of government supervisors, many in the industry wouldn’t like me. Because I’d proceed far more aggressively than many advocate in order to prevent individual funds becoming a danger to the entire financial system.”

Mr. Fink means smaller, risk-taking funds – not those of Blackrock. But the German financial supervisor BaFin is watching. The regulator wasn’t satisfied with transparency at BlackRock, for example, and accordingly rejected the Americans’ participation in the Frankfurt-based bank BHF.

So not even Larry Fink achieves all he sets out to do. The year 2006 brought the failure of a large real-estate project in Manhattan, the Stuyvesant Town-Peter Cooper Village, in which BlackRock had invested some $5.4 billion. Its own clients lost lots of money; the Californian pension fund Calpers alone lost $500 million.

Robert Kapito, co-founder and president of Blackrock, wants to see that such flops aren’t repeated: “Larry likes to be the one standing in the spotlight. I enjoy looking after the business and customers,” he said.

 

To contact the author: jakobs@handelsblatt.com

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