A single article looks at BlackRock's history of making a fortune: How was the 11.5 trillion US dollar asset management king made?

Original source: Mansa Finance

Original translation: lenaxin, ChainCatcher

BlackRock's capital tentacles have penetrated more than 3,000 listed companies around the world, from Apple, Xiaomi to BYD and Meituan, and its shareholder list covers core areas such as the Internet, new energy, and consumption. When we use takeaway software or subscribe for funds, the financial giant, which manages $11.5 trillion assets, is quietly reshaping the modern economic order.

BlackRock's rise began in the 2008 financial crisis. At that time, Bear Stearns fell into a liquidity crisis due to 750,000 derivative contracts (ABS, MBS, CDO, etc.), and the Federal Reserve urgently entrusted BlackRock to evaluate and dispose of its toxic assets. With the Aladdin system (risk analysis algorithm platform), founder Larry Fink led the liquidation of institutions such as Bear Stearns, AIG, Citi, etc., and monitored Fannie Mae's $5 trillion balance sheet. In the past decade, BlackRock has built a capital network spanning more than 100 countries through strategies such as acquiring Barclays Asset Management and leading the expansion of the ETF market.

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 a talented financial innovator to a fall from a failure to a new step back and eventually creating the financial giant BlackRock, his experience is a brilliant financial epic.

**From a genius to a loser – the early experience of BlackRock founder

Larry Fink**

Baby boom and real estate boom in the United States after the war

"After the end of World War II, a large number of soldiers 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. The baby boomers are keen on investing in stocks and real estate and early consumption, which has caused the lowest U.S. personal savings rate to drop to 0-1% per year."

Time goes back to the 1970s, a generation of baby boom in the United States gradually entered the age group of 25 years old, triggering an unprecedented boom in real estate. In the initial mortgage market, banks entered a long collection cycle after lending money. The bank's ability to re-lend is limited by the borrower's repayment. This simple operating mechanism is far from meeting the rapidly growing loan needs.

The invention and influence of MBS (mortgage mortgage bonds)

Lewis Ranieri, vice chairman of the famous investment bank on Wall Street, designed a groundbreaking product. He packed together thousands of mortgage claims in the bank and sold them into small pieces to investors, which means the bank can quickly recover funds and use them to issue new loans.

The result is that banks' lending capabilities have been greatly amplified, and this product immediately attracted investments from many long-term capitals such as insurance companies and pension funds, causing a sharp drop in mortgage interest rates. At the same time, the demands on both the financing and the investment side are solved. This is the so-called MBS (Mortgage Backed Securities) mortgage-backed bonds (also known as mortgage-backed bonds). However, MBS is still not exquisite enough. This model of chopping the big cake without distinction and dividing the cash flow equally is like a pot of stew. It cannot meet the differentiated needs of investors.

Design and Risk of CMO (Married Secured Bonds)

In the 1980s, a rising star who was more creative than Ranieri appeared in the First Boston Investment Bank: Lary Fink. If MBS is an indiscriminate, evenly split pie, then Larry Fink added a process. He first cut the big cake into four layers of pancakes. When repayment occurs, he will give priority to returning the principal of the A-level bond, then repaying the principal of the B-level bond, and then returning the principal of the C-level bond. The most imaginative thing is the fourth layer, not the principal of the D-level bond, but called the principal of the Z-Bond. Before the first three-level bonds were repaid, the Z-level bonds did not even have interest, but only remembered and did not pay them.

Add interest to the principal and compound interest. Only when the principal of the first three-level bonds is fully paid off, will the Z-level bond income be paid, linking AZ risk and return. This product that separates the repayment period step by step to meet the differentiated needs of different investors is the so-called CMO (mortgage-secured bond).

It can be said that Ranieri was the one who opened Pandora's box, and Fink opened the box in the box. At the beginning of MBS and CMO invention, Ranieri and Fink were completely unpredictable. How severe the impact these two products will have on world financial history. At that time, the financial community only regarded it as a genius creation. At the age of 31, Fink became the first Boston world-class investment bank and the youngest partner ever. He led a Jewish team known as "Little Israel". A business magazine listed him as one of the top five young financial leaders on Wall Street. Once the CMO was launched, it was widely sought after by the market and created huge profits for the first Boston. Everyone believed that Fink would soon be promoted to the head of the company, but it was Fink's last step toward the peak that collapsed.

Black Monday and $100 million

Both MBS and CMO have a very difficult problem. When interest rates rise sharply, the repayment cycle will be extended, which will lock in investment and miss out on high-interest financial management opportunities. When interest rates drop sharply, the early repayment wave will cut off cash flow. Whether interest rates rise sharply or fall sharply, they will have a negative impact on investors. This phenomenon of blocking at both ends is the so-called negative convexity, and Z bonds further amplify this negative convexity. Larger durations are very sensitive to interest rate changes. From 1984 to 1986, the Federal Reserve cut interest rates continuously, lowering 563 BP (basis points) within two years, eventually creating the largest drop in 40 years. A large number of borrowers chose to replace new contracts with lower interest rates, resulting in an unprecedented wave of repayment in the mortgage market.

During the CMO issuance, Fink's team built up a large number of Z bonds that failed to take action, becoming a crater that was about to erupt. These Z bonds were originally priced at around $150, and after recalculation, they were only worth $105, and their blow was enough to destroy the entire mortgage securities division of the First Boston Bank.

What's even more unlucky is that Fink's team has been using shorting long-term government bonds to hedge risks. On October 19, 1987, the famous Black Monday in history occurred - the stock market crash, with the Dow Jones Industrial Average falling 22.6% in one day. A large number of investors flocked to the Treasury bond market to hedge risks, causing the Treasury bond price to soar by 10 points in a day. Under this double blow, the First Boston eventually lost $100 million. The media once praised, "Only the sky is Larry Fink's limit." And now, Larry Fink's sky collapsed, his colleagues no longer talked to Fink, and the company did not allow him to participate in any important business. This subtle method of eviction eventually led Fink to voluntarily leave.

Larry Fink 's glory and failure in the first Boston

Fink was used to life in the spotlight and knew very well that Wall Street's love for success was far more than humility. This well-known humiliation made him unforgettable for his life. In fact, one of the reasons why Fink worked hard to issue CMO is that he hoped that Boston would become the number one institution in the field of mortgage bonds. For this reason, he had to compete for market share with Ranieri, who represented the Solomon brothers.

When Fink first graduated from UCLA, he first applied for Goldman Sachs. He was eliminated in the last round of interviews. It was the first Boston accepted him when he was most eager for opportunities, and it was also the first Boston taught him the most realistic lesson on Wall Street. Almost all media later reported this incident, they arbitrarily said: "Fink failed because of a wrong bet on the increase in interest rates." But later a witness who worked with Fink in First Boston pointed out the key to the problem. Although Fink’s team also established a risk management system back then, calculating risks based on the level of computers in the 1980s was like calculating big data with an abacus.

The birth of the Aladdin system and the rise of BlackRock

The founding of BlackRock

In 1988, just a few days after leaving the First Boston, Fink organized an elite group to his home to discuss his new career. His goal is to build an unprecedentedly powerful risk management system, because he will never allow himself to fall into a situation where he cannot assess risks again.

In this elite group that Fink personally selected includes four of his colleagues in First Boston. Robert Capito has always been Fink's loyal comrade; Barbara Novik is a strong-minded portfolio manager; Bennett Grubb is a math wizard; Keith Anderson is a top securities analyst. In addition, Fink poached his good friend from Lehman, Ralph Southtern, who was formerly a domestic policy adviser for President Carter, and Southtern brought Susan Wadner, who was formerly deputy director of Lehman's mortgage department. Finally, Hugh Frett, executive vice president of Pittsburgh National Bank. These eight people were later recognized as co-founders of BlackRock's eight major co-founders.

At that time, what they needed most was a start-up capital, and Fink sent it to Su Shimin of Blackstone Group. Blackstone is a private equity firm co-founded by former U.S. Secretary of Commerce (formerly Lehman CEO) Peterson, along with him. In 1988, when corporate mergers and acquisitions were in full swing, Blackstone made leveraged acquisitions as its main business, but the opportunity to carry out leveraged acquisitions is not often present. So Blackstone is also looking for diversified development. Schwarzman is very interested in Fink's team, but everyone knows that Fink lost $100 million in the first Boston. Schwarzman had to call for advice from his friend, Bruse Wasserstein, the head of the First Boston M&A business. Wasserstein told Schwarzman, "To this day, Larry Fink is still the most talented person on Wall Street."

Schwarzman immediately issued a $5 million credit line and $150,000 startup capital for Fink, so a department called Blackstone Financial Management Group was established under the Blackstone Group. Fink's team and Blackstone held 50% of the shares respectively. Initially, they didn't even have an independent workplace and could only rent a small venue in the trading hall of Bear Stearns. However, the situation has developed far exceeded expectations, and the Fink team paid off all the loans shortly after opening. And in one year, the fund management scale expanded to US$2.7 billion.

Development of Aladdin System

The key reason for their rapid rise was the computer system they established, which was later named "asset liability and debt & derivative investment network". The core function of the five key first letters are combined to form the English: Aladdin, a metaphor for the mythical image of the Aladdin magic lamp in "One Thousand and One Nights", meaning that the system can provide investors with intelligent insights like a magic lamp.

The first version is coded on a $20,000-bit system workstation, placed between an office refrigerator and a coffee machine. This system that uses modern technology as risk management technology and uses massive information computing models to replace traders' experience and judgment has undoubtedly reached the forefront of the times. The success of Fink's team is equivalent to winning the grand prize for Blackstone's Su Shimin. But the equity relationship between them also began to break.

Parting ways with Blackstone Group

As the business scale expanded rapidly, Fink recruited more talents and insisted on allocating shares to new employees. This allowed Blackstone's shares to be quickly diluted, down from 50% to 35%. Su Shimin told Fink that Blackstone could not transfer shares endlessly. In the end, Blackstone sold its equity to Pittsburgh National Bank for $240 million in 1994, and Schwarzmin personally cashed out $25 million, when he divorced his wife Allen.

"Business Weekly" joked: "Su Shimin's income just happened to make up for the divorce compensation for Allen." Many years later, Su Shimin recalled the break with Fink, thinking that he did not make 25 million yuan, but lost 4 billion US dollars. The reality is that he had no choice. In fact, looking back at the logic of the whole thing, you will find that Fink diluting Blackstone's shares was more intentional.

Origin of BlackRock 's name

After Fink’s team became independent from Blackstone, they needed to give a new name. Schwarzman asked Fink to avoid the two words Black and Stone. But Fink proposed a slightly humorous idea to Su Shimin, saying that "the developments after J.P. Morgan and Morgan Stanley's split are complementary, so he is ready to use the name "Black Rock" to pay tribute to Black Rock." Su Shimin agreed to this request while laughing, which is the origin of BlackRock's name.

Since then, BlackRock's asset management scale gradually rose to US$165 billion in the late 1990s. Their asset risk control system is increasingly relied on by many financial giants.

BlackRock 's rapid expansion and technological advantages

In 1999, BlackRock was listed on the New York Stock Exchange, and the leap in financing capabilities gave BlackRock the ability to rapidly expand its scale through direct mergers and acquisitions. This is the starting point for the transformation from regional asset management companies to global giants.

In 2006, something important happened on Wall Street. Merrill Lynch President Stanley O'Neal decided to sell Merrill Lynch's huge asset management department. Larry Fink immediately realized that it was a once-in-a-lifetime opportunity, so he invited O'Neal to have breakfast at a restaurant in the Upper East Side. The two of them only had 15 minutes of conversation and signed the merger case framework using the menu. BlackRock eventually merged with Merrill Lynch Asset Management through equity swaps. The new company name is still BlackRock, and its asset management scale soared to nearly one trillion US dollars overnight.

One important reason for BlackRock’s incredibly rapid rise in the first 20 years is that they solved the imbalance between investment buyers and sellers. In traditional investment transactions, the way buyers obtain information comes almost entirely from sellers' marketing, and investment bankers, analysts, and traders affiliated with the seller's camp monopolize the core capabilities such as asset pricing. It's like going to the market to buy vegetables. We can't understand vegetables better than those who sell vegetables. BlackRock uses the Aladdin system to manage investments for customers, so that you can judge the quality and price of a cabbage more professionally than those who sell vegetables.

The Savior in the Financial Crisis

BlackRock’s key role in the 2008 financial crisis

In the spring of 2008, the United States was at the most dangerous moment in the worst economic crisis since the Great Depression in the 1930s. Bear Stearns, the fifth largest investment bank in the United States, came to a desperate situation and filed for bankruptcy in the federal court. Bear Stearn’s trading targets are spread all over the world, and if Bear Stearn falls, it is very likely to cause a systematic collapse.

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

JPMorgan Chase proposed a $2 acquisition offer, which almost caused Bear Stearn’s board of directors to revolt on the spot. You should know that Bear Stearn’s stock price reached $159 in 2007. The $2 price is simply an insult to the 85-year-old wealthy family, and JPMorgan Chase has their concerns. It is said that Bear Stearn also holds a large number of "low liquidity mortgage assets". In JPMorgan Chase's view, the so-called "mortgage assets with poor liquidity" are simply bombs.

All parties to the action quickly realized that the acquisition was so complex that there were two urgent problems that needed to be resolved. The first is the valuation issue, and the second is the issue of toxic asset divestiture. Everyone in Wall Street knows who to look for. New York Federal Reserve Bank President Geithner found Larry Fink, and after obtaining the authorization of the New York Fed, BlackRock entered Bear Stearns to conduct a comprehensive liquidation.

They worked here twenty years ago, when they rented offices in the Bear Stearns trading hall. As the story goes here, you will find it very dramatic. You should know that Larry Fink, who has entered the center of the stage as a firefighter, is an absolute godfather in the field of housing mortgage securities. He himself is one of the initiators of the subprime mortgage crisis.

With the assistance of BlackRock, JPMorgan completed the acquisition of Bear Stearn for about $10 per share, and the well-known name of Bear Stearn declared dead. The name BlackRock is becoming more and more famous. The three major rating agencies in the United States, S&P, Moody's and Fitch, once awarded AAA ratings to more than 90% of subprime mortgage securities, and their reputation was disgraced in the subprime mortgage crisis. It can be said that the entire US financial market valuation system collapsed at that time, and BlackRock, which had a strong analysis system, became an irreplaceable executor in the US rescue plan.

Bear Stearns, AIG and the Fed 's rescue operations

In September 2008, the Federal Reserve began another rescue plan with a more severe situation. AIG, the largest insurer in the United States, fell 79% in the first three quarters, mainly because the $527 billion credit default swap they issued was on the verge of collapse. Credit default swap is simply called CDS (Credit Default Swap) essentially an insurance policy. If a bond defaults, the problem is that buying CDS does not require you to hold a bond contract. This is equivalent to a large group of people without cars who can purchase car damage insurance without restrictions. If a car with a cost of 100,000 yuan is in trouble, the insurance company may have to pay 1 million yuan.

CDS was played by this group of market gamblers. At that time, the scale of subprime mortgage bonds was about 7 trillion yuan, but the CDS guaranteed for bonds was as high as tens of trillion yuan. At that time, the United States' annual GDP was only 13 trillion yuan. 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 Bamboo AIG by purchasing 79% of the equity. In a sense, Lai Shu turned AIG into a state-owned enterprise. BlackRock once again obtained special authorization to conduct a comprehensive valuation and liquidate AIG and become the executive director of the Federal Reserve.

With the efforts of many parties, the crisis was eventually curbed. During the subprime mortgage crisis, BlackRock was also authorized by the Federal Reserve to operate a bailout to Citibank and supervise the two houses' $5 trillion balance sheet. Larry Fink is recognized as the new generation of Wall Street kings. He has established close ties with US Treasury Secretary Paulson and New York Fed President Geithner.

Geithner later replaced Paulson as the new Treasury Secretary, while Larry Fink was nicknamed the US Underground Treasury Secretary, and BlackRock moved from a relatively pure financial enterprise to a political and businessman.

The birth of global capital giants

Acquisition of Barclays Asset Management and ETF market dominance

In 2009, BlackRock ushered in another major opportunity. Barclays Group, a famous British investment bank, fell into operational difficulties and reached an agreement with private equity company CVC to sell its Anshuo fund business. The deal was originally reached, but included a 45-day bidding clause. BlackRock lobbying Barclays said: "Instead of selling ASUO alone, it is better to merge all of Barclays' assets with BlackRock as a whole."

In the end, BlackRock included Barclays Asset Management in its territory for $13.5 billion. This transaction is considered to be the most strategic merger and acquisition in BlackRock's development history, because Anshuo, under the jurisdiction of Barclays Asset Management, was the world's largest trading open-end index fund issuer at that time.

Trading open-end index fund has a simpler name: ETF (Exchange-Traded Fund). Since the bursting of the Internet bubble, the concept of passive investment has accelerated its popularity, and the global ETF scale has gradually exceeded 15 trillion yuan, winning Anshuo. BlackRock once accounted for 40% of the US ETF market share, and its huge amount of funds determined that assets must be widely allocated to diversify risks.

On the one hand, it is active investment, and on the other hand, it is passively tracked through products such as ETFs and index funds. It requires holding all or most of the company's equity in sectors or index components. Therefore, BlackRock holds extensive shares in large listed companies around the world, and most of their customers are large institutions such as pension funds and sovereign funds.

BlackRock’s influence in corporate governance

Although theoretically, BlackRock only manages assets for customers, it has a very strong influence in actual implementation. For example, in Microsoft and Apple's shareholder meetings, BlackRock repeatedly exercised its voting rights and participated in voting on major matters. By counting large companies that account for 90% of the total market value of listed companies in the United States, you will find that BlackRock, Pioneer Navigation, and State Street are either the largest shareholders or the second largest shareholders among these companies. The total market value of these companies is about US$45 trillion, far exceeding the US GDP.

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

The Lightkeeper of the Capital Order

In 2020, in another market crisis, the Federal Reserve expanded its balance sheet by 3 trillion yuan to save the market. BlackRock once again acted as the Federal Reserve's royal steward, taking over the corporate bond purchase plan. After resigning, many BlackRock executives joined the U.S. Treasury Department and the Federal Reserve. After resigning from the U.S. Treasury Department and Federal Reserve officials resigned, they worked at BlackRock. This phenomenon of frequent two-way flow of political and business personnel has caused very strong public doubts. A BlackRock employee once commented, "Although I don't like Larry Fink, if he leaves BlackRock, it's like Ferguson leaves Manchester United." Today, BlackRock's asset management scale has exceeded US$115 trillion. Larry Fink’s wandering around the political and business for two times made Wall Street afraid. This double orange color confirms his deep understanding of the industry.

The real financial power is not in the trading hall, but in the mastery of the nature of risk. When technology, capital and power sound a trio, BlackRock has transformed from an asset manager to a lantern of the capital order.