The Rise of BlackRock in Perspective: How Did the $11.5 Trillion Asset Management Giant Emerge?

Original Article Title: "22 Minutes, 6700 Words, In-Depth Insight into the Rise of BlackRock"

Original Source: ManSa Finance

Original Translation: lenaxin, ChainCatcher

BlackRock's capital tentacles have penetrated over 3000 listed companies globally, from Apple and Xiaomi to BYD and Meituan. Its shareholder list covers core areas such as the Internet, new energy, and consumption. As 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 Fed urgently commissioned BlackRock to assess and dispose of its toxic assets. Founder Larry Fink, using the Aladdin system (risk analysis algorithm platform), led the liquidation of institutions like Bear Stearns, AIG, and Citigroup, and monitored Fannie Mae's $5 trillion balance sheet. Over the next decade, BlackRock, through acquisitions like Barclays Global Investors and leading the expansion of the ETF market, established a capital network spanning over 100 countries.

To truly understand BlackRock's rise, we need to go back to its founder Larry Fink's early experiences. Fink's story is full of drama, from a genius financial innovator to a failure due to one setback, then rising again to ultimately build BlackRock into this financial giant; his journey is a fascinating financial epic.

From Genius to Failure—Early Experiences of BlackRock Founder Larry Fink

Post-WWII Baby Boom and Real Estate Boom in the United States

"After WWII, a large number of soldiers returned to the US, nearly 80 million babies were born in twenty years, accounting for one-third of the US population. The Baby Boomer generation was enthusiastic about investing in stocks, real estate, and early consumption, leading to the lowest personal savings rate in the US dropping to 0-1% annually."

Fast forward to the 1970s, the post-WWII Baby Boomer generation in the US gradually entered the 25 and older age group, triggering an unprecedented real estate boom. In the initial mortgage market, banks entered a long repayment cycle after making loans. 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.

The Invention and Impact of Mortgage-Backed Securities (MBS)

Lewis Ranieri, Vice Chairman of the renowned Wall Street investment bank Solomon Brothers, designed a groundbreaking product. He bundled thousands of mortgage debts held by banks together, then divided them into small pieces to sell to investors. This meant that banks could quickly recover funds and use them to issue new loans.

The result was a sharp amplification of the bank's lending capacity, and this product immediately attracted investments from many long-term capital sources such as insurance companies and pension funds, leading to a significant decrease in mortgage rates. At the same time, it addressed the needs of both the funding side and the investment side, 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, which failed to meet investors' differentiated demands.

The Design and Risk of CMOs (Collateralized Mortgage Obligations)

In the 1980s, a more creative rising star emerged from the first Boston investment bank than Ranieri: Larry Fink. If MBS was an undifferentiated evenly sliced big cake, Larry Fink added an extra step. He first cut the big cake into four layers of thin cakes. When repayments occurred, the A-level bond principal was repaid first, followed by the B-level bond principal, then the C-level bond principal. The most imaginative part was the fourth layer, not the D-level bond principal, but the principal of a bond known as the Z-bond. Until the principal of the first three levels of bonds was fully repaid, the Z-bond received no interest, only accumulating unpaid interest.

The interest was added to the principal for compound interest calculation until the principal of the first three levels of bonds was fully settled, only then did the Z-bond start receiving returns. Ranging from A to Z in terms of risk and reward, this product, which segmented repayment schedules step by step to meet the diverse demands of different investors, is known as CMO (Collateralized Mortgage Obligation).

One could say that Ranieri was the one who opened Pandora's Box, and Fink opened a box within that box. At the inception of MBS and CMO, neither Ranieri nor Fink could anticipate how these two products would have such a dramatic impact on world financial history. At the time, the financial industry viewed them merely as genius creations. At the age of 31, Fink became the youngest partner in the world's leading investment bank, First Boston. He led a Jewish team known as the "Little Israel." A business magazine listed him as one of Wall Street's top five young financial leaders. After the launch of CMO, it was well received in the market, generating enormous profits for First Boston. Everyone believed Fink would soon become the head of the company, but it was precisely at the final step of Fink's pinnacle that a collapse occurred.

Black Monday and the $100 Million Painful Lesson

Both MBS and CMO faced a very tricky problem. When interest rates rose significantly, the repayment period extended, locking in investments and missing out on high-interest financial opportunities. When interest rates dropped significantly, a wave of early repayments severed cash flow. Whether interest rates rose sharply or fell significantly, it had a negative impact on investors. This phenomenon of being stuck at both ends is known as negative convexity, and the Z-bond further magnified this negative convexity. A higher duration is highly sensitive to interest rate changes. From 1984 to 1986, the Federal Reserve continued to cut interest rates, reducing rates by 563 basis points over two years, ultimately creating the largest rate drop in forty years. Many borrowers chose to refinance with newer contracts at lower rates, leading to an unprecedented wave of mortgage repayments.

In the CMO issuance, the Fink's team accumulated a large number of unsold Z bonds, turning into a looming volcano ready to erupt. These Z bonds were originally priced at around $150, but after reassessment, they were only valued at $105, with a striking force strong enough to crush the entire mortgage securities department of First Boston Bank.

What's even more unfortunate is that Fink's team had been using short positions on long-term government bonds to hedge risks. However, on October 19, 1987, the world witnessed the infamous Black Monday -- a stock market crash where the Dow Jones Industrial Average plummeted by 22.6% in a single day. A massive influx of investors rushed 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." And now, Larry Fink's sky has collapsed. His colleagues no longer speak to him, and the company bars him from any critical business involvement. Through this subtle form of ostracism, Fink eventually chose to resign.

The Rise and Fall of Larry Fink at First Boston

Fink was accustomed to living in the limelight and understood Wall Street's preference for success far outweighing humility. The unforgettable humiliation this time made him deeply regretful. In fact, one of the reasons Fink worked so hard to issue CMOs was to make First Boston the premier institution in the mortgage bond market, a position he had to fight for against Lannely, representing Solomon Brothers.

When Fink first graduated from UCLA, he went to interview at Goldman Sachs. After being rejected in the final round of interviews, it was First Boston that accepted him when he was desperate for an opportunity. It was also at First Boston that he learned Wall Street's harshest lesson. Almost all media reports later simplistically concluded, "Fink failed due to an incorrect bet on interest rate hikes." However, a witness who had worked with Fink at First Boston pointed out the key issue. Although Fink's team had also established a risk management system back then, calculating risk with the computing power of the 80s was like using an abacus to process big data.

The Birth of the Aladdin System and the Rise of BlackRock

The Establishment of BlackRock

In 1988, just a few days after leaving First Boston, Fink organized an elite group to discuss his new venture at his home. His goal was to build an unprecedentedly powerful risk management system because he would never allow himself to fall into an unassessable risk situation again.

In this elite group handpicked by Fink were four of his former colleagues from First Boston. Robert Kapito had always been Fink's loyal comrade; Barbara Novick was a strong-minded portfolio manager; Bennett Grubb was a mathematical prodigy; Chris Anderson was a top securities analyst. Additionally, Fink poached his good friend from Lehman, Ralph Sosstern, who had been a domestic policy advisor to President Carter, and Sosstern brought in Susan Wade, the former vice president of Lehman's mortgage department. Finally, Hugh Frater, the executive vice president of Pittsburgh National Bank, joined. These eight individuals were later recognized as BlackRock's eight co-founders.

At that time, what they needed most was seed funding, and Fink reached out to Stephen Schwarzman of Blackstone Group. Blackstone was a private equity firm founded by former US Secretary of Commerce (and former Lehman CEO) Peter Peterson, along with his then-partner Stephen Schwarzman. In 1988, during the heyday of corporate mergers and acquisitions, Blackstone's main business was leveraged buyouts, but opportunities for such buyouts were not always available. So Blackstone was also looking to diversify, and Schwarzman was very interested in Fink's team. However, Fink's $100 million loss in the First Boston incident was well known. Schwarzman had to call his friend, Bruce Wasserstein, the head of First Boston's M&A business, for advice. Wasserstein told Schwarzman, "Larry Fink is still the most talented person on Wall Street today."

Schwarzman immediately issued a $5 million line of credit and $150,000 in seed funding for Fink, and 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 didn't even have a separate workplace and had to rent a small space in Bear Stearns' trading floor. Nevertheless, things developed far beyond expectations, and Fink's team repaid all the borrowed funds shortly after opening. Within a year, they had expanded the fund management scale to $2.7 billion.

Development of the Aladdin System

The key reason for their rapid rise was a computer system they developed, later named the "Asset, Liability, Debt & Derivative Investment Network" with the acronym Aladdin, a metaphor for the mythical image 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 machine. This system, which used modern technology for risk management and computational models based on vast information to replace traders' experiential judgments, undoubtedly advanced with the times. The success of Fink's team was like hitting the jackpot for Blackstone's Schwarzman. However, their equity relationship began to deteriorate.

Parting Ways with Blackstone Group

Due to rapid business expansion, Fink recruited more talent and insisted on granting stock options to new employees. This led to a rapid dilution of Blackstone's stake from 50% to 35%. Schwarzman told Fink that Blackstone could not endlessly transfer shares. Eventually, in 1994, Blackstone sold its stake to Pittsburgh National Bank for $240 million, with Schwarzman personally pocketing $25 million, coinciding with his divorce from his wife, Ellen, at that time.

Business Weekly jokingly remarked: "Su Shimin's profits are just enough to cover Alan's divorce settlement," Many years later, Su Shimin recalled his split with Fink and admitted that he didn't think he made $25 million but lost $4 billion. In reality, he had no choice. In fact, looking back at the whole situation, one would find that Fink diluting Blackstone's holdings seemed more intentional.

Origin of the Name BlackRock

After the Fink team separated from Blackstone, they needed a new name. Su Shimin asked Fink to avoid the words "black" and "stone." However, Fink proposed a slightly humorous idea to Su Shimin, saying, "J.P. Morgan's split from Morgan Stanley is complementary in development, so he is ready to use the name 'BlackRock' to pay tribute to Blackstone." Su Shimin agreed to this request in jest, and that's how BlackRock got its name.

Subsequently, BlackRock's assets under management gradually rose to $165 billion in the late 1990s. Their asset risk control system became increasingly relied upon by many financial giants.

BlackRock's Rapid Expansion and Technological Edge

In 1999, BlackRock went public on the NYSE, and the surge in financing capabilities enabled BlackRock to rapidly expand its scale through direct acquisitions. This marked the transformation from a regional asset management company to a global giant.

In 2006, a significant event occurred on Wall Street. Merrill Lynch's CEO, Stanley O'Neal, decided to sell Merrill Lynch's vast asset management division. Larry Fink immediately recognized this as a golden opportunity and invited O'Neal to have breakfast at an Upper East Side restaurant. After just 15 minutes of conversation, they outlined the merger deal on a menu. Through an equity swap, BlackRock merged with Merrill Lynch Asset Management, and the new company continued under the name BlackRock, instantly skyrocketing its assets under management 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 buyers and sellers. In traditional investment trading, the buyer’s information primarily came 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 buying groceries at a market where we could never know more about vegetables than the sellers. BlackRock used the Aladdin system to manage customer investments, allowing you to make a more professional judgment about the quality and price of a cabbage than the seller.

Savior in the Financial Crisis

BlackRock's Key Role in the 2008 Financial Crisis

In the spring of 2008, the United States was in the most perilous 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 global, and if it collapsed, it was highly likely to trigger a systemic meltdown.

The Federal Reserve held an emergency meeting and, at 9 a.m. on that day, devised an unprecedented plan, authorizing the Federal Reserve Bank of New York to provide a $300 billion special loan to facilitate the direct acquisition of Bear Stearns by JPMorgan Chase.

JPMorgan Chase proposed a $2 per share acquisition offer, which almost caused a rebellion among Bear Stearns' board members on the spot. It's worth noting that Bear Stearns' stock price reached $159 in 2007. The $2 price was considered an insult to this 85-year-old prestigious firm, and JPMorgan Chase had their own concerns. It was said that Bear Stearns still held a significant amount of "illiquid mortgage-related assets." The term "illiquid mortgage-related assets" was seen as a bomb by JPMorgan Chase.

All parties involved quickly realized that this acquisition and its complexities raised two pressing issues that needed to be addressed. The first was the valuation issue, and the second was the toxic asset separation issue. Everyone on Wall Street knew who to turn to. New York Fed President Geithner reached out to Larry Fink, who, upon receiving approval from the New York Fed, had BlackRock move in to carry out a comprehensive liquidation at Bear Stearns.

Twenty years ago, they had offices here, renting space in Bear Stearns' trading floor. As the story unfolds, you will find it quite dramatic. You see, Larry Fink, who took center stage as the firefighting captain, was an absolute godfather figure in the mortgage-backed securities industry, and he himself was 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 approximately $10 per share, marking the demise of the once-famous Bear Stearns. Meanwhile, the name BlackRock became even more prominent. The three major U.S. rating agencies, S&P, Moody's, and Fitch, had granted AAA ratings to over 90% of the subprime mortgage-backed securities, tarnishing their reputation during the subprime crisis. It could be said that the entire U.S. financial market valuation system collapsed, and BlackRock, with its robust analytical system, became an irreplaceable executor in the U.S. market bailout plan.

Bear Stearns, AIG, and the Fed's Market Bailout

In September 2008, the Federal Reserve embarked on another, even more dire, bailout plan. The largest U.S. insurance company, American International Group (AIG), had seen its stock price drop by 79% in the first three quarters, primarily due to its $527 billion worth of credit default swaps on the brink of collapse. A credit default swap, abbreviated as CDS, is essentially an insurance policy where the CDS would pay out in case of a bond default, even if the purchaser of the CDS does not hold the bond contract. This scenario is akin to a large group of people without cars purchasing unlimited auto insurance. If a $100,000 car encounters a problem, the insurance company may have to pay out $1 million.

CDS has been turned into a gambling tool by these market speculators. At that time, the scale of subprime mortgage bonds was about $7 trillion, but the CDSs guaranteeing these bonds amounted to several tens of trillions. At that 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 bailout AIG by acquiring a 79% equity stake. In a sense, AIG was turned into a state-owned enterprise, and BlackRock once again received special authorization to perform a comprehensive valuation and liquidation of AIG, becoming the Fed's operational director.

Through the efforts of many parties, the crisis was eventually contained. During the subprime crisis, BlackRock was also authorized by the Federal Reserve to assist Citigroup and oversee the $5 trillion balance sheet of the two GSEs. Larry Fink was recognized as the new king of Wall Street, establishing a close relationship 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. underground Treasury Secretary. BlackRock transitioned from a relatively pure financial company to a hybrid of politics and business.

The Birth of a Global Capital Giant

Acquisition of Barclays Global Investors and Dominance in the ETF Market

In 2009, BlackRock once again encountered a major opportunity. The UK's renowned investment bank Barclays Group ran into operational difficulties and reached an agreement with the private equity firm CVC to sell its iShares fund business. The deal was already done, but it included a 45-day bidding clause. BlackRock lobbied Barclays, saying, "Instead of selling iShares separately, it is better to merge all of Barclays Group's asset business with BlackRock as a whole."

Finally, BlackRock acquired Barclays Global Investors for $13.5 billion. This transaction was considered the most strategically significant acquisition in BlackRock's development history, as iShares under Barclays Global Investors was the world's largest exchange-traded open-end index fund issuer at the time.

Exchange-traded open-end index funds have a more concise term: ETF (Exchange-Traded Fund). Since the bursting of the dot-com bubble, the concept of passive investment has rapidly gained popularity, and the global ETF scale gradually exceeded $15 trillion, with iShares now under BlackRock's wing. This allowed BlackRock to temporarily hold a 40% share of the U.S. ETF market, and the massive fund size required broad asset allocation for risk diversification.

On one hand, there is active investment, while on the other hand, there is passive tracking through ETFs, index funds, and other products that need to hold all or most of the stock equity in sectors or index component companies. Therefore, BlackRock holds stakes in a wide range of large publicly traded companies globally, with their clients mostly being pension funds, sovereign wealth funds, and other large institutions.

BlackRock's Influence in Corporate Governance

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 and participated in key decision-making. When looking at the statistics of large U.S. publicly 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 combined market value of these companies is around $45 trillion, far exceeding the U.S. GDP.

This high concentration of ownership is unprecedented in global economic history. Furthermore, asset management companies like Vanguard also lease BlackRock's Aladdin system. Therefore, the assets managed in the Aladdin system exceed BlackRock's managed assets by over $10 trillion.

Guardian of the Capital Order

In 2020, during another market crisis, the Federal Reserve expanded its balance sheet by $3 trillion to stabilize the market. BlackRock once again acted as the Fed's appointed steward, taking over the corporate bond purchase program. Several BlackRock executives resigned and moved on to roles in the U.S. Treasury and the Federal Reserve. Conversely, former U.S. Treasury and Federal Reserve officials have taken up positions at BlackRock after leaving public office. This frequent two-way movement of personnel, known as the "revolving door," has sparked intense public scrutiny. A BlackRock employee once commented, "Although I don't like 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 image confirms his profound understanding of the industry.

The true financial power lies not in the trading halls but in grasping the essence of risk. When technology, capital, and power converge in a triad, BlackRock has evolved from an asset manager to a guardian of the capital order.

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