Original Title: "22 Minutes, 6700 Words, Deep Dive into BlackRock's Rise"
Original Source: Mansa Finance
Original Translation: lenaxin, ChainCatcher
BlackRock's capital tentacles have penetrated over 3000 global listed companies, from Apple and Xiaomi to BYD and Meituan. Its shareholder list covers core areas such as the Internet, new energy, and consumer goods. When we use food delivery apps or subscribe to funds, this financial giant managing $11.5 trillion in assets is quietly reshaping the modern economic order.
BlackRock's rise began during the 2008 financial crisis. At that time, Bear Stearns faced a liquidity crisis due to 750,000 derivative contracts (ABS, MBS, CDO, etc.), and the Federal Reserve urgently commissioned BlackRock to assess and dispose of its toxic assets. Founder Larry Fink, with the Aladdin system (a risk analysis algorithm platform), led the liquidation of institutions such as Bear Stearns, AIG, and Citigroup, and monitored Fannie Mae's $5 trillion balance sheet. Over the next decade, BlackRock, through strategies such as acquiring Barclays Global Investors and leading the expansion of the ETF market, built a capital network spanning over 100 countries.
To truly understand BlackRock's rise, we need to look back at the early experiences of its founder, Larry Fink. Fink's story is full of drama, from a genius financial innovator to a fall from grace due to one failure, then rising again to ultimately build BlackRock into a financial giant. His journey can be described as a fascinating financial epic.
"With the end of WWII, a large number of soldiers returned to the US, nearly 80 million babies were born over twenty years, accounting for one-third of the US population. The Baby Boom generation was enthusiastic about investing in stocks and real estate, as well as advance consumption, leading to the lowest personal savings rate in the US dropping to 0-1% annually."
Fast forward to the 1970s, the American post-WWII baby boomers gradually entered the age group of 25 and older, triggering an unprecedented real estate boom. In the initial mortgage market, banks entered a long repayment cycle after lending. The bank's ability to re-lend was limited by the borrower's repayment status. This simple operating mechanism was far from sufficient to meet the rapidly growing loan demand.
Lewis Ranieri, Vice Chairman of Solomon Brothers, a famous Wall Street investment bank, designed a groundbreaking product. He bundled thousands of mortgage rights held by banks together, then divided them into small pieces to sell to investors. This meant that banks could quickly retrieve funds and use them to issue new loans.
The result was that the bank's lending capacity was greatly amplified, and this product immediately attracted investment from many long-term capital sources such as insurance companies, pension funds, etc., causing a significant decrease in mortgage rates. At the same time, it addressed the needs of both the financing and investment sides, which is the so-called MBS (Mortgage Backed Securities). However, MBS was still not sophisticated enough. This was akin to indiscriminately slicing a big cake, evenly distributing the cash flow, creating a one-pot stew. It couldn't meet the differentiated needs of investors.
In the 1980s, a more creative rising star appeared in the first-wave Boston investment banks than Rinaldi: Larry Fink. If MBS was an undifferentiated evenly distributed big cake, Larry Fink added a process. He first divided the big cake into four layers of thin cakes. When repayment occurred, the A-rated bond principal was repaid first, followed by the B-rated bond principal, then the C-rated bond principal. The most imaginative part was the fourth layer, not the D-rated bond principal, but the principal of the Z-rated bond (Z-Bond). Until the principal of the first three levels of bonds was fully repaid, the Z-rated bond did not receive any interest, only accrual. Interest was added to the principal for compound interest calculation until the principal of the first three levels of bonds was fully repaid, and only then did the Z-rated bond start receiving returns. The risk and return from A to Z were linked in this way, dividing the repayment schedule step by step to meet the differentiated needs of different investors. This product is known as CMO (Collateralized Mortgage Obligations).
It can be said that Rinaldi was the one who opened Pandora's Box, and Fink opened a box within that box. At the invention of MBS and CMO, neither Rinaldi nor Fink could have anticipated how intensely these two products would impact world financial history. At that time, the financial world only saw them as genius-like creations. At the age of 31, Fink became the youngest partner in this world-class investment bank, First Boston. He led a Jewish team called the "Little Israel." A business magazine named him one of the top five young financial leaders on Wall Street. When CMO was introduced, it was widely welcomed in the market, generating huge profits for First Boston. Everyone thought Fink would soon become the CEO of the company, but it was precisely at the last step when Fink was ascending to the peak that a collapse occurred.
Both MBS and CMO faced a very tricky problem. When interest rates sharply rise, the repayment period lengthens, locking in investments and missing out on high-interest financial opportunities. When interest rates sharply fall, there is a wave of early repayments, disrupting cash flow. Whether interest rates rise sharply or fall sharply, it will have a negative impact on investors. This phenomenon of being stuck at both ends is called negative convexity, and the Z-bond further amplifies this negative convexity. A higher duration is very sensitive to interest rate changes. From 1984 to 1986, the Federal Reserve made consecutive interest rate cuts, lowering rates by a total of 563 basis points in two years, ultimately creating the largest rate cut in forty years. Many borrowers chose to refinance into new contracts with lower rates, resulting in an unprecedented wave of mortgage prepayments.
In the CMO issuance, the Fink's team accumulated a large amount of unsold Z bonds, becoming a brewing volcano. These Z bonds were originally priced at around $150, but after reassessment, they were worth only $105. The impact was enough to destroy the entire mortgage securities department of First Boston Bank.
What's even more unfortunate is that Fink's team had been using short-selling long-term government bonds to hedge risks. Then, on October 19, 1987, the infamous Black Monday occurred — a stock market crash where the Dow Jones Industrial Average plummeted by 22.6% in a single day. A large number of investors flooded into the government bond market for safe haven, causing bond prices to skyrocket by 10 points in a day. Under this double blow, First Boston ended up losing $100 million. The media once praised, "Only the sky is Larry Fink's limit." But now, Larry Fink's sky has collapsed. His colleagues no longer speak to him, and the company no longer allows him to be involved in any important business. This subtle form of exile eventually led Fink to resign voluntarily.
Fink was accustomed to living in the spotlight and understood very well that Wall Street's love for success far surpassed humility. This well-known humiliation was something he would never forget. In fact, one of the reasons Fink worked so hard on the CMO issuance was to make First Boston the leading institution in the mortgage bond field. To achieve this, he had to compete with Ranieri, representing Solomon Brothers, for market share.
When Fink graduated from UCLA, he first applied to Goldman Sachs. He was rejected in the final interview round and it was First Boston that accepted him when he was most eager for an opportunity. It was also First Boston that gave him a very real lesson about Wall Street. Almost all media reports later would decisively state, "Fink failed due to a wrong bet on interest rate hikes." However, a witness who had worked with Fink at First Boston later pointed out the key issue. Although Fink's team had also built a risk management system back then, calculating risks with the computing power of the 80s was like using an abacus to calculate big data.
In 1988, just a few days after leaving First Boston, Fink organized an elite group to his home to discuss a new venture. His goal was to establish an unprecedented strong risk management system because he would never allow himself to fall into the trap of assessing risks poorly again.
In this elite group personally selected by Fink, there were his four former colleagues from First Boston: Robert Kapito, who had always been Fink's loyal comrade; Barbara Novick, a strong-minded portfolio manager; Benett Grub, a mathematical genius; and Keith Anderson, a top-notch securities analyst. Additionally, Fink brought in his good friend from Lehman, Ralph Schlosstein, who had served as President Carter's domestic policy advisor, and Schlosstein brought in Susan Wagner, who had been the Deputy Director of Lehman's mortgage department. Finally, Hugh Frater, the Executive Vice President of Pittsburgh National Bank, joined. These eight individuals later became the recognized eight co-founders of BlackRock.
At that time, what they needed most was seed funding, and Fink reached out to Blackstone's Stephen Schwarzman. Blackstone was a private equity firm co-founded by former U.S. Secretary of Commerce (and former Lehman CEO) Peter Peterson and Stephen Schwarzman. In 1988, during the heyday of corporate mergers and acquisitions, Blackstone primarily focused on leveraged buyouts, but the opportunities for such buyouts were not always prevalent. Therefore, Blackstone was also seeking diversification, and Schwarzman was very interested in Fink's team. However, Fink's $100 million loss at First Boston was well known. Schwarzman had to call his friend, Bruce Wasserstein, head of First Boston's M&A business, to ask for his opinion. Wasserstein told Schwarzman, "To this day, Larry Fink remains the most talented person on Wall Street."
Immediately, Schwarzman extended a $5 million line of credit and $150,000 in seed funding to Fink. Thus, a department named Blackstone Financial Management Group was established under Blackstone's umbrella. Fink's team and Blackstone each held a 50% stake. Initially, they did not even have a separate workspace and had to rent a small area in Bear Stearns' trading hall. However, the situation developed far beyond expectations, and Fink's team quickly repaid all the loans shortly after opening. Within a year, they had grown the fund's assets under management to $2.7 billion.
The key to their rapid rise was a computer system they had developed, later named the "Asset, Liability, Debt, and Derivative Investment Network." The acronym for this system is Aladdin, which metaphorically references the mythological figure of Aladdin's lamp from "One Thousand and One Nights," implying that the system could provide investors with insightful wisdom like a magic lamp.
The first version was coded on a $20,000 workstation placed between the office fridge and coffee maker. This system, which leveraged modern technology for risk management and used massive data models to replace traders' experiential judgments, undoubtedly led the pack in its time. For Fink's team's success, it was like hitting the jackpot for Blackstone's Schwarzman. However, their equity relationship began to sour.
Due to the rapid expansion of the business, Fink hired more talent and insisted on granting stock options to new employees. This led to a rapid dilution of Blackstone's shares from 50% to 35%. Schwarzman informed Fink that Blackstone could not endlessly transfer shares. Ultimately, in 1994, Blackstone sold its stake to Pittsburgh National Bank for $240 million, with Schwarzman personally cashing out $25 million, coinciding with his divorce from his wife, Ellen, at the time.
Bloomberg Businessweek jokingly remarked: "Sue's profits were just enough to cover Ellen's divorce settlement." Many years later, Sue Shihmin recalled the split with Fink and admitted that he didn't see it as making $25 million but losing $4 billion. In reality, he had no choice, and upon reviewing the logic of the whole situation, you would realize that Fink diluting Blackstone's stake was more like a deliberate move.
After Fink's team separated from Blackstone, they needed a new name. Sue Shihmin requested Fink to steer clear of the words black and stone. However, Fink proposed a slightly humorous idea to Shihmin, mentioning that "the development after the J.P. Morgan and Morgan Stanley split was intertwined. So, he was prepared to use the name 'BlackRock' to pay tribute to Blackstone." Amid laughter, Sue Shihmin agreed to this request, and that is how the name BlackRock came about.
Subsequently, BlackRock's assets under management gradually rose to $165 billion in the late 1990s. Their asset risk management system became increasingly relied upon by many financial giants.
In 1999, BlackRock went public on the NYSE, and the surge in financing capability gave BlackRock the ability to rapidly expand its scale through direct acquisitions. This marked the transition from a regional asset management company to a global giant.
In 2006, a significant event occurred on Wall Street when Merrill Lynch's CEO, Stanley O'Neal, decided to sell Merrill Lynch's vast asset management division. Larry Fink immediately recognized this as a once-in-a-lifetime opportunity and invited O'Neal to breakfast at an Upper East Side restaurant. After just 15 minutes of conversation, they sketched out the merger framework on the menu. Through an equity swap, BlackRock ultimately merged with Merrill Lynch Asset Management, with the new company retaining the name BlackRock. Overnight, its assets under management skyrocketed to nearly $1 trillion.
One key reason for BlackRock's incredible rapid rise in the first 20 years was that they addressed the issue of information asymmetry between investment parties. In traditional investment trading, the buyer's information acquisition was almost entirely from the seller's marketing. Those in the seller's camp, such as investment bankers, analysts, and traders, monopolized core capabilities like asset pricing. This was akin to going to a market to buy vegetables, where buyers could never know more about vegetables than sellers. However, BlackRock used the Aladdin system to manage client investments, allowing you to make a more professional judgment on the quality and price of a cabbage than the seller.
In the spring of 2008, the United States was in the most dangerous moment of the most severe economic crisis since the Great Depression of the 1930s. The nation's fifth-largest investment bank, Bear Stearns, was on the brink and filed for bankruptcy in federal court. Bear Stearns' transactions were spread globally, and if it collapsed, it was highly likely to trigger a systemic collapse.
The Federal Reserve held an emergency meeting and at 9 a.m. that day, devised an unprecedented plan, authorizing the Federal Reserve Bank of New York to provide a $30 billion special loan to directly acquire Bear Stearns through JPMorgan Chase.
JPMorgan Chase proposed a $2 per share acquisition offer, which almost led to a rebellion by Bear Stearns' board of directors on the spot. Remember, Bear Stearns' stock price had reached $159 in 2007. The $2 price was an insult to this 85-year-old prestigious firm, and JPMorgan Chase had their concerns as well. It was said that Bear Stearns still held a large amount of "illiquid mortgage assets." The so-called "illiquid mortgage assets" were seen as a ticking time bomb by JPMorgan Chase.
All parties involved quickly realized the complexity of this acquisition and that two critical issues needed to be addressed. The first was the valuation issue, and the second was the toxic asset divestiture issue. Everyone on Wall Street knew who to turn to. New York Federal Reserve Bank President Geithner reached out to Larry Fink, who, after obtaining authorization from the New York Fed, had BlackRock move in to conduct a comprehensive liquidation of Bear Stearns.
They had worked there twenty years ago, renting office space in Bear Stearns' trading floor at that time. The story gets even more dramatic at this point. Imagine Larry Fink, the undisputed godfather of the mortgage-backed securities sector, taking center stage in the role of a fire chief, and himself being one of the key instigators of the subprime crisis.
With BlackRock's assistance, JPMorgan Chase completed the acquisition of Bear Stearns at a price of around $10 per share, signaling the demise of the once-famous Bear Stearns. Meanwhile, the name BlackRock became even more prominent as the three major U.S. rating agencies—S&P, Moody's, and Fitch—had assigned AAA ratings to over 90% of subprime mortgage-backed securities, tarnishing their reputation during the subprime crisis. It can be said that at that time, the entire U.S. financial market valuation system collapsed, and BlackRock, equipped with a robust analytical system, became an irreplaceable executor in the U.S. bailout plan.
In September 2008, the Federal Reserve embarked on another, even more dire, rescue plan. The largest U.S. insurance company, American International Group (AIG), had seen its stock price plummet by 79% in the first three quarters mainly because of its $527 billion in outstanding credit default swaps on the brink of collapse. A credit default swap, known as CDS, is essentially an insurance policy where the CDS will compensate in the event of a bond default, but the issue is that purchasing a CDS does not require you to hold the bond contract. This is akin to a large group of people without cars being able to purchase unlimited collision insurance. If a $100,000 car has an issue, the insurance company may have to pay $1 million.
CDS was turned into a gambling tool by these market speculators. At that time, the scale of subprime mortgage-backed bonds was about $7 trillion, but the CDSs guaranteeing these bonds amounted to several tens of trillions. At the time, the annual GDP of the United States was only around $13 trillion. The Federal Reserve quickly realized that if Bear Stearns' problem was a bomb, then AIG's problem was a nuclear bomb.
The Federal Reserve had to authorize $85 billion to urgently rescue AIG by acquiring a 79% equity stake. In a sense, AIG was turned into a state-owned enterprise. BlackRock once again received special authorization to perform a full valuation and liquidation of AIG, becoming the Fed's executive director.
Through combined efforts, the crisis was eventually contained. During the subprime crisis, BlackRock was also authorized by the Federal Reserve to oversee the bailout of Citigroup and to regulate the $5 trillion balance sheet of the two GSEs. Larry Fink was recognized as the new king of Wall Street, establishing close ties with U.S. Treasury Secretary Paulson and New York Fed President Geithner.
Geithner later succeeded Paulson as the new Treasury Secretary, while Larry Fink was jokingly referred to as the U.S. Shadow Treasury Secretary. BlackRock transitioned from a relatively pure financial company to one that was both political and commercial.
In 2009, BlackRock once again faced a major opportunity. The prominent UK investment bank Barclays Group ran into operational difficulties and agreed to sell its iShares fund business to the private equity firm CVC. The deal had already been reached, but it included a 45-day auction clause. BlackRock lobbied Barclays, stating, "Instead of selling iShares separately, it would be better to merge all of Barclays Group's asset business with BlackRock."
Finally, BlackRock acquired Barclays Global Investors at a price of $13.5 billion. This transaction was considered the most strategically significant acquisition in BlackRock's development history because iShares under Barclays Global Investors was the world's largest ETF issuer at the time.
Exchange-Traded Funds (ETFs) are known for short as ETFs. Since the bursting of the dot-com bubble, the concept of passive investing has rapidly gained popularity, and the global ETF scale gradually exceeded $15 trillion, with iShares now under BlackRock's umbrella. This move briefly gave BlackRock a 40% share of the U.S. ETF market, and the massive fund size necessitated broad asset allocation to diversify risk.
On one hand, there is active investment, and on the other, passive tracking through products like ETFs and index funds, which require holding most or all of the equity of sectors or index constituent companies. Therefore, BlackRock holds stakes in a wide range of large publicly traded companies globally, with most of their clients being pension funds, sovereign wealth funds, and other large institutions.
Although in theory BlackRock simply manages assets on behalf of clients, it wields significant influence in practice. For example, in Microsoft and Apple shareholder meetings, BlackRock has repeatedly exercised its voting rights, participating in key issue resolutions. If you look at the statistics of large US-listed companies, which represent 90% of the total market capitalization, you will find that BlackRock, Vanguard, and State Street, the three giants, are either the largest or second-largest shareholders in these companies. The total market value of these companies is around $45 trillion, far exceeding the US GDP.
This high degree of equity concentration is unprecedented in global economic history. Additionally, asset management companies like Vanguard also lease BlackRock's Aladdin system. Therefore, the amount of assets actually managed by the Aladdin system is tens of trillions of dollars more than what BlackRock manages.
In 2020, during another market crisis, the Federal Reserve expanded its balance sheet by $3 trillion to stabilize the market. Once again, BlackRock acted as the Fed's trusted steward, taking over the corporate bond purchase program. Several BlackRock executives left to join the US Treasury and the Federal Reserve after their tenure. Conversely, former US Treasury and Federal Reserve officials went on to work at BlackRock after leaving government positions. This frequent two-way flow of personnel, known as the "revolving door," has sparked intense public scrutiny. A BlackRock employee once commented, "Even though I'm not a fan of Larry Fink, if he were to leave BlackRock, it would be like Ferguson leaving Manchester United." Today, BlackRock's assets under management have surpassed $115 trillion. Larry Fink's navigation between government and business terrifies Wall Street, and this dual-color evidence confirms his profound understanding of the industry.
The true financial power lies not in the trading hall, but in understanding the essence of risk. When technology, capital, and power converge, BlackRock has evolved from an asset manager to a beacon of the capital order.
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