I'm standing in front of the headquarters of a company that manages $10. 6 trillion. That's more than half the United States GDP.
Last time I covered the shady consulting group McKinsey, and you guys asked for one thing. Blackrock. So here we are.
Blackrock is the subject of a lot of speculation online. there is a robot that controls more wealth than any country on Earth. really the commander in chief is Larry Fink.
They have stock in 95% of fortune 500 companies. And they've been hired by governments across the world to help manage financial crises and even just conduct normal operations. That means that pretty much any time you interact with the economy working, buying stuff, driving a car, going to the bank, anything you're interacting with Blackrock.
But that $10. 6 trillion isn't really their money. Don't worry.
We'll come back to that. And they claim they're just passive investors, which seems harmless, right? While I love a good conspiracy and I know there was a cornucopia on the fruit of the loom logo.
How much of a conspiracy is this really? I wanted to get to the truth behind Blackrock and the other nearly identical asset managers, State Street and Vanguard, known as the Big Three. Are they actively controlling the world and shaping it in their favor?
or are they passive investors just riding the wave of American economic expansion? Stay with me. We'll get to the spooky stuff soon.
But first, let's talk through some finance basics that give Blackrock their power. What an asset manager actually does the main product they provide index funds, their favorite loophole, passivity and their position in our economy. The not at all terrifying sounding universal ownership.
Blackrock is an asset manager, and the service they offer is taking a customer's money and making more money out of it. Their existence relies upon an important invention of the 70s. This waterbed's only $119!
more exciting. The index fund. It was pioneered by the first CEO of Vanguard, and it offers investors a way to invest in many stocks at once.
So instead of betting a lot on a few individual companies, you bet a little bit on every company in the whole index. Basically just the whole market itself. the index at least steers a steady course.
It's like instead of betting on a single horse, you're betting on all the horses at once. And index funds are a form of mutual fund. The more general way people pool their money together to make big investments.
But someone needs to be the one to pooll all that money together and manage it. And that's an asset manager, i. e.
Blackrock. Index funds and ETFs are their main products and they're pretty similar. They're popular because they're lower risk, have more consistent returns and are cheaper for asset managers because they don't have to pay a guy to place bets all day, which studies show they are not very good at.
just ignore the folly of short term speculation. It's absolutely a loser's game. So if the market is up 7% today, so is your index fund.
Instead of constantly buying and selling shares which is what active investors do, Blackrock and these big asset managers buy a little bit of every company and just hold onto those shares basically indefinitely. This is called passive investing, a title that affords them a lot of legal leeway they otherwise wouldn't get. They own so much that it would be impossible for them to sell out of any one stock in one fell swoop.
When you think about passive- we can't sell a company as long as they're in the index. Most of the money asset managers manage comes from institutional investors. Those are big pension funds.
Insurance companies, non-profits and university endowments. But while all the money they manage is in the hands of these big institutions, most of it actually comes from regular people. Public and private pension plans, 401 K owners, college tuition and anyone with insurance.
This is your money, but it doesn't always come back to you, nor do you get a say in the companies it gets invested in. while they want good returns on those investments, contrary to how we think about Wolf of Wall Street type investors, that's not actually their main goal. They make their profits from the fees they charge to their clients, not from the returns on the money they invest.
I spoke with Benjamin Braun, a professor of political economy at the London School of Economics. He's written a bunch of studies on asset managers role in our economy and society. The fees you earn if you're Blackrock increase when the market value of the assets you manage increases.
you maximize your assets under management by winning over new clients and by getting the clients that you already have to you more money. When you have $10 trillion, you have to put them somewhere, and eventually that somewhere becomes everywhere. Universal ownership refers to, holding shares in the entire universe, firms listed on the stock market.
the big three asset managers Blackrock Vanguard state Street hold a sizable but still relatively small stake in all listed corporations. Blackrock is a 3 to 10% shareholder in all of these companies. This may not sound like a lot, but it's enough that selling all of it at once would likely crash that entire stock, kind of locking them into the whole not selling passive thing.
5% in any individual company is actually very significant because if and when shareholder ship is dispersed, 5% makes you in all likelihood the single largest shareholder in that company. That's why, for example, a lot of academic studies, 5% is taken as a threshold for control. there's almost no difference between, Vanguard, Blackrock, State Street and even bunch of other asset managers in terms of their business model.
So then you can start and wonder, okay, so if the big three together hold 25% of the shares in any individual company, then you're definitely above the threshold. Let's zoom in on Amazon. The big three owns 16% of all outstanding Amazon shares.
Jeff Bezos only owns 9%. in theory, universal owners should have an interest maximizing profits in the long term across the entire economy. And that is not how they operate in practice.
The amount of stock you have determines the number of votes you get. Blackrock is almost always in the top three, maybe five if they're feeling broke. So that is a lot of votes.
And let's not forget, it's not BlackRock's money that's invested. It's your dad's pension fund and your insurer's massive pile of savings. It sounds crazy, but when you put your money in a pension fund, you sign away your voting rights to the pension fund manager.
And then when the pension fund manager puts all their pension funds under an asset manager's control, they sign away all those votes to the asset manager, kind of pyramid scheme vibes. And how do they actually use those votes? A 2017 study found that asset managers almost always voted with what the company executives recommended.
And why are they always voting with company management? Back in the 80s, company managers used to spend company money on company things like corporate jets, fancy offices, or occasionally paying their employees. And this made the investors sad because they wanted those profits.
So they started offering company managers, in addition to bonuses and benefits, stock options. Executives' total pay was now forever tied to how much the company made. They can push managers, corporate managers to act more in the interest of shareholders, meaning in the interest of, corporate profits and do more to maximize corporate profits.
This funnels money back to investors, who now include management and away from any hope of making companies work better, or including employees in the profits that their labor created. Back in the day, like my grandparents day, more regular people had stocks and the idea was that every shareholder could vote on things like board elections, mergers and acquisitions, executive compensation And once in a while, wages. Sort of like democracy for people with disposable income.
Government is the people's business, and every man, woman and child becomes a shareholder with the first penny of tax paid. In 1945, 94% of stocks were owned by households. But that's not really how it works anymore.
Today, households have more like 40% of the stock market, and about half of that belongs to the top 10%. Okay. Thank you all very much.
Thank you. Thank you. Today, the top 1% own 50% of corporate equity and mutual fund shares, while the top 10% own 86%.
Did you think this yellow part was everyone else? Nope. The tiny green part on the bottom is the least wealthy half of Americans.
You often hear this argument that, What is good for shareholders is good for everyone because especially in the US, where retirement assets are overwhelmingly invested in corporate equities, everyone is a shareholder. But that's simply not true. the bottom 50% virtually owns no shares at all, the vast majority of shares are held by the top 10%.
And within that, even, shareholdings are quite concentrated within the top 1%. and while the strategies corporations choose -because asset managers vote for them- affect everyone, they only benefit half the population even a little bit, and frequently hurt the other half, those without any shares at all. Take the example of worker pay.
Blackrock and other asset managers play a huge part in wage stagnation. if you're a corporation, you can increase profits only in so many ways. and you can always, in a short term increase returns to shareholders by squeezing workers.
So this kind of Uber monopolization really hurts working people, consumers and even small businesses. And this is where it gets interesting. There's evidence that this type of universal ownership is in part responsible for why everything is so expensive these days, For example, they have significant stakes in Nike, Adidas, Lululemon, and Under Armour.
If one outperforms the other it's the same from BlackRock's point of view, and sometimes it can even lose investors money altogether. If companies were to start lowering prices to compete. That's the universal ownership logic in action but it's also an anti-competitive logic in action.
The fact that all five airlines, all the major banks, for example, in the US, have the same large shareholders creates a danger and a risk that, these corporations will not engage in competition in the same way they would if they each had different shareholders because, in that world, each shareholder would, root for their company and would hope to outperform the market by the company waged a bet on. It's sort of like a neo-monopoly where companies don't even have to merge and buy each other anymore, because they all send profits to the same guys no matter what. And their large stakes In basically every company affords them friends in high places.
From just 2014 to 2015 Blackrock performed over 1,500 private engagements with the companies held in their portfolio. Blackrock reportedly believes that meetings behind closed doors can go further than votes against management, and they typically give management a year before voting against them. They also have a lot of friends in the government.
There's a sort of revolving door between Blackrock, the government and the international bodies that create monetary policy. Things like the US Treasury, Federal Reserve, the central banks of Canada, some European countries and Sweden, as well as the International Monetary Fund and the World Economic Forum. Since 2004, Blackrock has hired at least 84 former government officials, regulators and central bankers worldwide.
The intersection of politics and business has never been more ongoing. Larry Fink himself is on the board of the WEF, and even tried to get himself selected as Hillary Clinton's treasury secretary in 2016. And in 2008, they got themselves a pretty sweet deal.
Traders say this is the craziest day they have ever seen in these markets. Veteran traders say they’ve never seen anything like it. In the aftermath, the government created the Financial Stability Oversight Council to oversee entities like Blackrock that control a lot of money but aren't banks.
The FSOC pointed to Blackrock as an organization that's so big that its failure could cause another collapse and tried to put additional oversight on them. But Blackrock doubled their political lobbying spending, including running a super targeted ad campaign on the DC Metro, and managed to dodge the oversight that other large financial institutions receive. And let's come back to that loophole they like to call passivity.
the people who decide if they're passive enough to continue not to be overseen by the government is Blackrock themselves. Basically, Blackrock and other asset managers have to submit annual letters to Self-certify that they've been compliant with the terms of passive investment. That's like being allowed to write whatever you want on your taxes and then audit yourself.
Except if you also had $10 trillion, which, unless you're watching this and you're literally Larry Fink- hey, bestie- I'm going to safely assume you don't. The part that really blows my mind is that while this one company already has their eggs in basically every basket and is making money off seemingly everyone, it goes even deeper than that. The biggest investors in Blackrock are Vanguard and State Street.
And the biggest investors in Vanguard are Blackrock and State Street. And the biggest investors in State Street are, you guessed it, Blackrock and Vanguard. Asset managers are the shareholders of asset managers.
And this is true for all financial firms and not only, in fact, for stock market listed firms but private equity firms buying up private insurers. So the financial sector effectively owns itself. The biggest companies that they own own them back, creating this loop that sucks money in and never seems to spit it back out.
They play all sides of the game because at a certain point, you can't lose when you play against yourself. So going back to our original questions: does Blackrock own everything? No.
but do they control everything? Kinda. They profit off of every bit of your life while controlling just the minimum amount they need to make sure they can continue profiting off of every bit of your life, and they get paid by teachers retirement funds to do it.
And they get away with this by constantly exchanging money for power and utilizing legal loopholes. It's worth being pedantic here for a second. They don't own everything.
They own shares in everything, which gives them an outsized amount of control. So while they're not necessarily the ones making all the nitty gritty decisions in every company, it is their influence, and this giant structure of universal ownership that continues to make their pie bigger and are smaller. It's the ultimate endgame of the Investor Management Alliance.
Remember the part about how they're responsible for reporting their own passivity to the government? The Consumer Financial Protection Bureau and the FDIC are working to change that and make it so that asset managers that own large chunks of banks like Blackrock are regulated like banks. The asset managers, of course, are not happy, And they are lobbying against this so regulating them much further is going to prove difficult.
And this is a solution to one part of a much larger problem. We no longer have the old system of shareholder democracy. We have something more like a shareholder oligarchy, where the people with the most power over where our money and stuff goes are incentivized to make that stuff worse and more expensive and not work for us.
But Blackrock didn't create this system, they just used it to their advantage. And I think we deserve a better one where the people who create the wealth have a say in where it goes. Thanks for watching the Class Room-where controlling the world is important to us.
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