An article on BlackRock's family history: how is the king of asset management refined?

Source: Mansa Finance Edited by: lenaxin, ChainCatcher

BlackRock's capital tentacles have penetrated more than 3,000 listed companies around the world, from Apple and Xiaomi to BYD and Meituan, and its shareholder list covers core areas such as the Internet, new energy, and consumption. While we use food delivery software or subscribe to funds, the financial giant with $11.5 trillion in assets under management is quietly reimagining the modern economic order.

BlackRock's rise began with the 2008 financial crisis. At that time, Bear Stearns was in a liquidity crisis due to 750,000 derivatives contracts (ABS, MBS, CDO, etc.), and the Federal Reserve urgently commissioned BlackRock to evaluate and dispose of its toxic assets. Founder Larry Fink led the liquidation of Bear Stearns, AIG, Citigroup and other institutions with the Aladdin System, a platform for risk analysis algorithms, and monitored Fannie Mae's $5 trillion balance sheet. Over the next decade, BlackRock has built a capital network spanning more than 100 countries through strategies such as acquiring Barclays Asset Management and leading ETF market expansion.

To truly understand BlackRock's rise, we need to go back to the early experiences of its founder, Larry Fink. Fink's story is full of drama, from being a genius financial innovator to falling to rock bottom due to a failure, to getting back on his feet and ultimately building BlackRock, a financial giant.

From Genius to Failure – The Early Experiences of BlackRock Founder Larry Fink

Postwar Baby Boom and Real Estate Boom in the United States

"After the end of World War II, a large number of military personnel returned to the United States, nearly 80 million babies were born in 20 years, accounting for one-third of the total population of the United States, and the baby boomers' enthusiasm for investing in stocks and real estate and spending ahead of time caused the personal savings rate in the United States to drop to a minimum of 0-1% per year."

Back in the '70s, the post-war generation of baby boomers in the U.S. gradually moved into the age group of 25 and over, triggering an unprecedented real estate boom, and in the initial mortgage market, banks began to enter a long repayment cycle. A bank's ability to re-lend is limited by the borrower's repayment. This simple operating mechanism is far from being able to meet the rapidly growing demand for loans.

The invention and impact of MBS (mortgage-backed bonds).

Lewis Ranieri, vice chairman of Salomon Brothers, a well-known Wall Street investment bank, designed a groundbreaking product. He bundled up thousands of mortgage claims in the bank's possession and sold them to investors in smaller pieces, meaning the bank could quickly recoup the money and use it to make new loans.

As a result, the bank's lending capacity was dramatically amplified, and the product immediately attracted investment from many long-term capital, such as insurance companies and pension funds, resulting in a significant decline in mortgage interest rates. At the same time, it solves the needs of both the financing side and the investment side, which is the so-called MBS (Mortgage Backed Securities) mortgage backed bonds (aka: mortgage-backed bonds), but MBS is still not refined enough, which is equivalent to chopping the pie indiscriminately and sharing the cash flow model like a pot of stew. Unable to meet the differentiated needs of investors.

CMO (Collateralized Collateralized Bonds) Design and Risk

In the '80s, First Boston Investment Bank had a more creative up-and-comer than Claudio Ranieri: Lary Fink, and if MBS was an undifferentiated pie, Larry Fink added another process. He first cut the flatbread into four layers of pancakes, and when the repayment occurs, the principal of the A-rated bond is returned first, then the principal of the B-rated bond, and then the principal of the C-rated bond, and the most imaginative is the fourth layer, which is not the principal of the D-rated bond, but is called the Z-rated bond principal (Z-Bond). Until the first tier of bonds is repaid, Z-rated bonds do not even have interest, but are only not paid.

The interest is added to the principal and compounded to roll, until the principal of the first three levels of bonds is fully repaid, and the income of Z-rated bonds is paid, from A-Z risk to return, this kind of repayment schedule is separated step by step to meet the differentiated needs of different investors, which is the so-called CMO( collateralized bond ).

It can be said that Ranieri was the one who opened Pandora's box, and Fink opened the magic box within the box, and at the beginning of the invention of MBS and CMO, Ranieri and Fink could not have predicted how drastically these two products would have on the history of world finance. At the age of 31, Fink became the youngest partner in the history of First Boston, the world's top investment bank. He led a team of Jews known as "Little Israel", a business magazine named him to the top five young financial leaders on Wall Street, and the launch of a CMO was widely sought after by the market, generating huge profits for First Boston, and everyone thought that Fink would soon be promoted to head of the company, but it was Fink's final step to the top that collapsed.

Black Monday and the bitter lesson of $100 million

Whether it's an MBS or a CMO, there's a very tricky problem. When interest rates rise sharply, the repayment period will be extended, which will lock in investments and miss out on high-interest financial opportunities. When interest rates drop sharply, a wave of early repayments will cut off cash flow. Whether interest rates rise or fall sharply, there will be a negative impact on investors. This phenomenon of blockage at both ends is the so-called negative convexity, which is further amplified by Z-bonds. In 84-86, the Federal Reserve cut interest rates by 563 bps (basis points) in two years, ultimately creating the largest decline in 40 years, and a large number of borrowers chose to replace new contracts with lower interest rates, resulting in an unprecedented wave of repayments in the mortgage market.

In the CMO issuance, the Fink team had a large backlog of failed Z bonds, which became a crater about to erupt. The Z-bonds, which were originally priced at around $150, were recalculated to be worth only $105, and were hard enough to destroy First Boston's entire mortgage securities division.

To add insult to injury, the Fink team had been shorting long-term Treasuries to hedge their risk, and on October 19, 1987, there was the famous Black Monday in history – the stock market crash, with the Dow Jones Industrial Average plummeting 22.6% in one day. A large number of investors poured into the Treasury market to avoid risk, causing the price of Treasury bonds to skyrocket by 10 points in a single day, and under this double whammy, First Boston ended up losing $100 million. The media once exclaimed, "Only the sky is the limit for Larry Fink." And now, Larry Fink's sky has collapsed, his colleagues no longer talk to Fink, and the company does not let him participate in any important business, this subtle way of expulsion finally led Fink to leave voluntarily.

Larry Fink's Glory and Failure at First Boston

Fink, accustomed to living in the spotlight, knows that Wall Street's love of success is far greater than humility, and this humiliation is well known to him to be unforgettable. In fact, one of the reasons why Fink worked hard to issue a CMO was that he wanted First Boston to become the number one institution in the mortgage bond space, so he had to compete with Ranieri, who represented Salomon Brothers, for market share.

When Fink first graduated from UCLA, he first applied to Goldman Sachs, and in the final round of interviews, he was brushed off, and it was First Boston who accepted him when he was most eager for the opportunity, and it was First Boston who taught him the most realistic lesson on Wall Street. Almost all of the media, when they later reported on the incident, arbitrarily stated: "Fink failed by making a wrong bet on an interest rate hike." But then an eyewitness who worked with Fink at First Boston pointed out the crux of the matter. Although the Fink team also established a risk management system back then, measuring risk at the level of computers in the 80s is like calculating big data with an abacus.

The birth of the Aladdin system and the rise of BlackRock

Founding of BlackRock

In 1988, just days after leaving First Boston, Fink organized an elite group to his home where he discussed a new venture. His goal is to build a risk management system that has never been stronger than ever, as he will never allow himself to fall into a situation where he cannot assess risk again.

In this elite group handpicked by Fink is four of his colleagues at First Boston. Robert Capito has always been Fink's loyal comrade-in-arms; Barbara Novik is a strong-minded portfolio manager; Bennett Grubb is a math prodigy; Keith Anderson is a leading securities analyst. In addition, Fink poached his good friend from Lehman, Ralph Southern, who was President Carter's domestic policy adviser, and Southern brought in Susan Waldner, who was Lehman's deputy director of the mortgage department. Finally, he joined Hugh Freett, executive vice president of the National Bank of Pittsburgh. These eight people were later recognized as the co-founders of BlackRock's Big Eight.

At that time, what they needed most was a start-up capital, and Fink called Schwarzman at Blackstone. Blackstone is a private equity firm founded by former U.S. Secretary of Commerce (formerly Lehman CEO) Peterson, with his contemporary, Schwarzman. 1988 was an era of mergers and acquisitions, and Blackstone focused on leveraged buyouts, but opportunities for leveraged buyouts were not always available. So Blackstone is also looking for diversification, and Schwarzman is interested in Fink's team, but it's no secret that Fink lost $100 million at First Boston. Schwarzman had to call to ask for the opinion of his friend, Bruse Wasserstein, head of mergers and acquisitions at First Boston. Washerstein told Schwarzman that "to this day, Larry Fink remains the most talented man on all of Wall Street."

Schwarzman immediately issued a $5 million line of credit and $150,000 in start-up capital for Fink, and a division called Blackstone Financial Management Group was established under the Blackstone Group. Fink's team and Blackstone each owned 50 percent of the shares, and initially, they didn't even have an independent workplace, so they had to rent a small space on Bear Stearns' trading floor. However, the situation far exceeded expectations, and the Fink team paid off all the loans shortly after opening. and expanded the fund's management to $2.7 billion in one year.

Development of the Aladdin system

The key reason for their rapid rise was the computer system they built, which was later named the "Asset Liability and Debt & Derivative Investment Network", whose core functions were combined with five key acronyms to form the English: Aladdin, a metaphor for the mythological imagery of Aladdin's magic lamp in "One Thousand and One Nights". The implication is that the system can provide investors with intelligent insights like a magic lamp.

The first version was encoded on a $20,000 bit system workstation and placed between the refrigerator and coffee machine in the office. This system, which uses modern technology as a risk management technology and replaces traders' empirical judgment with a massive amount of information calculation model, has undoubtedly come to the forefront, and the success of the Fink team is equivalent to winning the jackpot for Blackstone's Schwarzman. But the equity relationship between them has also begun to rupture.

Parting of ways with the Blackstone Group

As the business grew rapidly, Fink recruited more talent and insisted on allotment of shares to new hires. This resulted in a rapid dilution of Blackstone's stake, from 50% to 35%. Schwarzman told Fink that it was impossible for Blackstone to transfer shares endlessly. Eventually, Blackstone sold his stake to the National Bank of Pittsburgh for $240 million in 1994, and Schwarzman personally cashed out $25 million at the time of his divorce from his wife, Allen.

"Business Week" joked: "Schwarzman's income is just enough to make up for the divorce compensation to Allen", many years later, Schwarzman recalled the break with Fink, thinking that he did not make 25 million, but lost $4 billion, the reality is that he has no choice, in fact, looking back at the logic of the whole thing, you will find that Fink's dilution of Blackstone's stake is more like intentional.

Origin of BlackRock's name

After Fink's team became independent from Blackstone, they needed a new name, and Schwarzman asked Fink to avoid the words black and stone. But Fink made a slightly humorous idea to Schwarzman, saying that "J· P Morgan's development after the split with Morgan Stanley complemented each other, so he was ready to use the name "Black Rock" to pay homage to Black Stone. Schwarzman laughed and agreed to the request, which is where BlackRock's name comes from.

Since then, BlackRock's AUM has gradually climbed to $165 billion in the late 90s. Their asset risk control system is increasingly relied on by many financial giants.

BlackRock's rapid expansion and technological advantage

In 1999, BlackRock was listed on the New York Stock Exchange, and the leap in fundraising capabilities gave BlackRock the ability to rapidly scale through direct mergers and acquisitions. This is the starting point for the transformation from a regional asset manager to a global giant.

In 2006, a pivotal event occurred on Wall Street, when Merrill Lynch president Stanley O'Neal decided to sell Merrill Lynch's vast asset management division. Larry Fink immediately realized that this was a once-in-a-lifetime opportunity, and he invited O'Neal to an Upper East Side restaurant for breakfast. After only 15 minutes of conversation, the two signed off on the merger framework from the menu. BlackRock eventually merged with Merrill Lynch Asset Management through an equity swap, and the new company name was still BlackRock, and its assets under management soared to nearly $1 trillion overnight.

A big reason for BlackRock's incredibly rapid rise in the first 20 years was that they solved the problem of an imbalance in information between buyers and sellers of investments. In traditional investment transactions, the way the buyer obtains information comes almost exclusively from the seller's marketing, and the investment bankers, analysts, and traders who belong to the sell-side camp have a monopoly on core competencies such as asset pricing. It's like going to the market to buy vegetables, and we can't know more about vegetables than the ones who sell them. BlackRock uses the Aladdin system to manage investments for clients, so that you can judge the quality and price of a cabbage more professionally than selling vegetables.

Savior in the financial crisis

BlackRock's key role in the 2008 financial crisis

In the spring of 2008, the United States was at its most dangerous moment in the worst economic crisis since the Great Depression of the thirties. Bear Stearns, the nation's fifth-largest investment bank, came to a dead end and filed for bankruptcy in federal court. Bear Stearns deals with people all over the world, and if Bear Stearns falls, it is very likely to trigger a systemic collapse.

The Federal Reserve held an emergency meeting, and at 9 a.m. that day, it laid out an unprecedented plan to authorize the Federal Reserve Bank of New York to provide JPMorgan Chase & Co. with a $30 billion special loan to directly acquire the custodian Bear Stearns.

JPMorgan Chase & Co. made a $2 per share offer, which almost made Bear Stearns' board of directors revolt on the spot, considering that Bear Stearns' stock price reached $159 in 2007. The $2 price tag is nothing short of an insult to the 85-year-old giant, and JPMorgan Chase has their concerns. It is said that Bear Stearns also holds a large number of "illiquid mortgage assets". The so-called "illiquid mortgage assets" are simply bombs in JPMorgan's view.

The parties quickly realised that the acquisition was complex and that there were two issues that needed to be addressed urgently. The first is the issue of valuation, and the second is the issue of toxic divestitures. All of Wall Street knows who to turn to. Federal Reserve Bank of New York President Geithner approached Larry Fink, and after obtaining authorization from the New York Fed, BlackRock moved into Bear Stearns to carry out a general liquidation.

They were based here twenty years ago, when they rented an office on the Bear Stearns trading floor. At this point in the story, you'll find it very dramatic. You know, Larry Fink, who took center stage as a fire captain, is the absolute godfather of the home mortgage securities field, and he himself is one of the initiators of the subprime mortgage crisis.

With BlackRock's assistance, JPMorgan Chase completed the acquisition of Bear Stearns for about $10 per share, and the thunderous name of Bear Stearns came to an end. The name BlackRock has become more and more resounding, and the three major U.S. rating agencies, Standard & Poor's, Moody's, and Fitch, have assigned AAA ratings to more than 90% of subprime mortgage securities, and their reputation has been discredited in the subprime mortgage crisis. It can be said that at that time, the valuation system of the entire U.S. financial market collapsed, and BlackRock, with its powerful analysis system, became an irreplaceable executor in the U.S. rescue plan.

Bear Stearns, AIG and the Fed's bailouts

In September 2008, the Fed embarked on another, more dire bailout. AIG, the largest international insurance company in the United States, has seen its share price fall 79% in the first three quarters, largely due to the near-collapse of its $527 billion credit default swap. A credit default swap is abbreviated as CDS(Credit Default Swap) is essentially an insurance policy that will be paid out by the CDS if the bond defaults, but the problem is that buying a CDS does not require you to hold a bond contract. This is equivalent to a large group of people who do not own a car can buy unlimited car damage insurance, if a 100,000 yuan car has a problem, the insurance company may have to pay 1 million.

CDS was played as a gambling tool by this group of market gamblers, and the size of subprime mortgage bonds at that time was about 7 trillion, but the number of CDS guaranteed for the bonds was actually tens of trillions. At that time, the annual GDP of the United States was only 13 trillion. The Fed soon discovered that if Bear Stearns' problem was a bomb, then AIG's problem was a nuclear bomb.

The Fed had to authorize $85 billion to urgently purchase a 79% stake in Bamboo AIG. In a sense, Uncle turned AIG into a state-owned enterprise, and BlackRock was once again specially authorized to conduct a comprehensive valuation liquidation of AIG and become the executive director of the Federal Reserve.

As a result of these efforts, the crisis was contained, and during the subprime mortgage crisis, BlackRock was authorized by the Federal Reserve to bail out Citibank and oversee a $5 trillion balance sheet. Larry Fink is widely regarded as the king of Wall Street of the new generation, and he has established close ties with US Treasury Secretary Paulson and New York Fed President Geithner.

Geithner later succeeded Paulson as the new Treasury Secretary, and Larry Fink was nicknamed the US Underground Treasury Secretary, and BlackRock went from a relatively pure financial enterprise to both politics and business.

The birth of a global capital giant

Acquisition of a dominant position in Barclays' asset management and ETF markets

In 2009, BlackRock ushered in another major opportunity, when Barclays, a well-known British investment bank, was in trouble, and reached an agreement with private equity firm CVC to sell its iShares fund business. The deal would have been struck but included a 45-day bidding clause, with BlackRock lobbying Barclays saying, "Rather than selling ISHARES separately, it would be better to merge the entire asset business of the Balek Group with BlackRock as a whole."

In the end, BlackRock added Barclays Asset Management to the territory for $13.5 billion. The deal is considered to be the most strategic acquisition in BlackRock's history, as ISHARES, owned by Barclays Asset Management, was the world's largest issuer of exchange-traded funds at the time.

ETF has a more concise name: ETF0192837465656574839201Exchange-Traded Fund(. Since the bursting of the dot-com bubble, the concept of passive investment has accelerated in popularity, and the scale of global ETFs has gradually exceeded 15 trillion, bringing ISHARES into the bag. At one point, BlackRock accounted for 40% of the market share of ETFs in the United States, and the sheer size of the capital required a wide allocation of assets to diversify risk.

On the one hand, it is active investment, and on the other hand, it is passively tracked through ETFs, index funds and other products, and it is necessary to hold all or most of the company's equity in the sector or index constituent stocks, so BlackRock has a wide range of shares in the world's large listed companies, and most of their customers are pension funds, sovereign wealth funds and other large institutions.

) BlackRock's influence in corporate governance

Although theoretically speaking, BlackRock only manages assets for customers, but it has a very strong influence in actual execution, such as in the shareholders' meetings of Microsoft and Apple, BlackRock has repeatedly exercised voting rights and participated in voting on major issues. Counting the large companies that account for 90% of the total market capitalization of listed companies in the United States, you will find that BlackRock, Vanguard, and State Street are either the largest or second largest shareholders among these companies, and the combined market value of these companies is about $45 trillion, far exceeding the GDP of the United States.

This high concentration of equity is unprecedented in the history of the global economy. In addition, asset management companies such as Pioneer Pilot are also renting the Aladdin system provided by BlackRock, so the actual amount of assets under management of the Aladdin system is more than 10 trillion US dollars more than the amount of assets managed by BlackRock.

The light-bearer of the capital order

In 2020, in another market crisis, the Federal Reserve expanded its balance sheet by 3 trillion to save the market, and BlackRock once again acted as the Fed's royal steward, taking over the corporate bond purchase program, and a number of BlackRock executives left to join the U.S. Treasury Department and the Federal Reserve. The U.S. Treasury Department and the Federal Reserve officials left their posts and then took up positions at BlackRock, and this "revolving door" phenomenon of frequent two-way flow of political and business personnel has aroused very strong public opinion. A BlackRock employee once commented, "I don't like Larry Fink, but if he leaves BlackRock, it's like Ferguson leaving Manchester United." Today, BlackRock has more than $115 trillion in assets under management. Larry Fink's two-pronged career in politics and business is a testament to Wall Street's deep understanding of the industry.

The real financial power is not on the trading floor, but in the grasp of the essence of risk, when the trio of technology, capital and power sounds, BlackRock has transformed from an asset manager to a leader of the capital order.