Some people say BlackRock is a huge company that controls everything from governments to businesses.
In this episode, we'll discover what BlackRock actually does, how it works, and if it really deserves its mysterious reputation.
[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:20] I'm Alastair Budge, and today we are going to be talking about an organisation called BlackRock.
[00:00:27] If you have spent much time in dark corners of social media, you might have seen claims that this mysterious organisation controls everything from companies to governments, with its tentacles and influence knowing no bounds.
[00:00:42] So in this episode, we’ll learn about what it really does, how it works, and ask ourselves whether BlackRock really owns the world.
[00:00:52] OK then, let’s get right into it.
[00:00:56] The 1980s were a boom time on Wall Street.
[00:01:01] Ronald Reagan had assumed office in January of 1981, and after a brief mini-recession at the start of the decade, the American economy bounced back.
[00:01:13] This was partially fuelled by increasing deregulation, especially of the financial sector.
[00:01:21] Whizzes on Wall Street were creating new and innovative ways to make money, ways of chopping up and repackaging every element of the financial world and reselling it to other people.
[00:01:35] One of these new financial instruments was something called a mortgage-backed security.
[00:01:41] In case you don’t know what this is, it is essentially a collection of thousands of different home loans, mortgages, that are piled together and then chunks can be sold off to investors.
[00:01:54] In theory, it’s a clever idea from the investor side, because the probability of one person losing their job and not being able to pay their mortgage is relatively high but the probability of 1,000s of people all losing their jobs at the same time and not being able to repay their mortgage is much lower.
[00:02:14] In other words, pooling together these loans lowers the risk of the investment.
[00:02:20] And it’s also a clever idea from the bank’s side, from the perspective of the organisation that makes the loan in the first place.
[00:02:30] Banks make money by handing out loans, by issuing debt, but there are regulations about how much debt any bank can have on its balance sheet.
[00:02:41] But, if they sell this debt, it is no longer their problem. It vanishes from their balance sheet, and they can then make more home loans, thereby making more money.
[00:02:54] So, the banks make more money, and the investors can invest in a relatively safe asset, because they would receive monthly repayments from thousands of different people who were paying off their mortgages.
[00:03:07] And, of course, the people in the middle who facilitated this transaction, the investment bankers and advisors who brought together the home loan providers and the investors, they would make a tidy commission for their work.
[00:03:24] One such person was a man named Larry Fink.
[00:03:29] By the mid-1980s he had got a name for himself as one of the most successful bankers on Wall Street for his ability to create these packages of loans and then sell them on to investors, and he had made his employer, the investment bank First Boston, a reported billion dollars in the process.
[00:03:53] It seemed that he could do no wrong, money seemed to be sprouting out of his ears.
[00:04:00] But then in 1986, he made a bad call.
[00:04:05] He had become too confident and made a large bet, on behalf of his firm, about the direction in which interest rates were going.
[00:04:14] He believed that they would rise.
[00:04:16] He was confident in his decision and assumed that it would result in hundreds of millions of dollars of profit for the firm, and millions if not tens of millions of dollars in his Christmas bonus.
[00:04:30] But, he got it wrong.
[00:04:33] Interest rates moved in the other direction, they fell, and in a single quarter, this decision cost his employer–the bank–$100 million.
[00:04:45] He went from Wall Street darling to the man nobody and no bank wanted to touch with a ten-foot barge pole.
[00:04:54] He wasn’t technically fired, at least according to him.
[00:04:59] After all, he had made the bank $130 million the quarter before that, so it was still up $30 million.
[00:05:08] But he had lost his golden boy status, he was no longer invincible.
[00:05:15] What happened next was a realisation, a realisation that if he wanted to succeed he needed to get better at understanding and evaluating risk.
[00:05:27] It was this single realisation that, now almost 40 years later, would turn into a company that, if it were a country, would be the third biggest country in the world, and be responsible for almost 10% of all economic activity around the world:
[00:05:46] The company, of course, is BlackRock.
[00:05:50] So, what does BlackRock actually do and why has it become the subject of controversy?
[00:05:57] Well, when it first started, in 1988, it was an asset management firm focused on risk management.
[00:06:06] That sounds like a bit of a mouthful, and a boring mouthful at that, but let me try to explain what it means in plain English, and why it is important in the context of BlackRock.
[00:06:19] Any investment has an element of risk.
[00:06:22] If you invest money in your friend’s fledgling idea for a company that they think could be massively successful, but all that they have is an idea and they have no track record in business, well it might take off, you might make lots of money but it’s probably quite a risky investment.
[00:06:40] You might lose all of your money.
[00:06:43] Statistically speaking, you almost certainly will.
[00:06:48] On the other hand, if you leave the money in a savings account at the bank, you are almost certainly not going to lose it, but you are never going to make much money from the investment. You might even end up losing a bit when you take into account inflation.
[00:07:04] The point is, risk is positively correlated with reward.
[00:07:10] The more risk you take on, the higher the reward you stand to receive, but the lower the probability of getting it.
[00:07:19] The thing that Larry Fink came to realise after his big $100 million loss was that his previous employer never really understood the risk of what it was doing. Sure, it had a vague understanding, but it couldn’t quantify it, it couldn’t always put a number on it, and therefore it was unable to price it correctly.
[00:07:43] The idea behind BlackRock was to develop models, software and tools that allowed the company to accurately analyse the risk of anything, thereby reducing the risk of a big loss, and making better investment decisions.
[00:08:00] Its pitch to potential clients was “We’ll manage your investments for you and because we have this superior understanding of risk, we will be better custodians of your money”.
[00:08:15] It worked, and just over a decade later the company was managing over $165 billion in assets.
[00:08:23] And for companies that didn’t want BlackRock to take full control of their assets but wanted BlackRock’s risk management expertise, well, it had a piece of software called Aladdin that would do hundreds of millions of calculations each week and model every conceivable change in the global markets, and allow financial institutions to better understand and manage the risk associated with their investments.
[00:08:49] Not particularly sexy, but incredibly valuable.
[00:08:54] BlackRock continued to grow, but it was with the global financial crisis of 2007-2008 that it really started to gain serious influence.
[00:09:06] If you were nodding your head earlier when we were talking about Larry Fink’s innovation in bundling home loans together and selling them to investors and thinking “I’ve heard that one before”, yes this is exactly the same financial instrument that played a major role in bringing down the global economy in 2007.
[00:09:27] Wall Street banks had been packaging bad loans up and selling them to investors, and when it turned out that homeowners were unable to keep up with the repayments on their loans, the banks and investors holding the bad loans went belly up. Some went bust, went bankrupt, while others had to be bailed out by the government.
[00:09:50] And it was here that BlackRock and its famously risk-averse CEO, Larry Fink, found themselves in high demand.
[00:10:01] As one of the architects of the mortgage-backed security, back in the 1980s, ironically Larry Fink was one of the best-placed people to help banks and the US government understand exactly how bad the situation was and fix the mess.
[00:10:18] He found himself, or rather, BlackRock found itself, advising the US government and a whole host of financial institutions on what to do with all of this debt.
[00:10:30] This brought in hundreds of millions of dollars in advisory fees, but more importantly, it made Larry Fink the go-to guy on Wall Street, and BlackRock the go-to firm, when it came to particularly complicated transactions involving debt.
[00:10:48] Alongside this, BlackRock started to buy up a bunch of other companies and to get into the retail investor market.
[00:10:58] In its early years, and until the 2010s really, BlackRock had focussed on what’s called institutional investors: banks, pension funds, insurance companies - large companies who would give hundreds of millions or even billions of dollars to BlackRock to manage and invest on their behalf.
[00:11:20] But Larry Fink saw an even greater opportunity in the retail market, individual investors.
[00:11:28] Instead of having thousands of clients who might each invest hundreds of millions with BlackRock, he wanted to have hundreds of millions of clients who would invest thousands of dollars with him.
[00:11:40] He didn’t want to only have a handful of big fish, he wanted to have an ocean full of little fish.
[00:11:50] How BlackRock went about this was by offering something called exchange-traded funds, ETFs for short.
[00:11:58] In case you don’t know what these are, they are large collections of shares or bonds or financial instruments of some sort.
[00:12:06] Any individual can invest in a BlackRock ETF.
[00:12:11] What this means in practice is that rather than saying “I want to buy shares of Apple”, you can say “I want to buy shares of every big company in the world”, or “big American companies”, or “big European companies”, or “big pharmaceutical companies”.
[00:12:29] This is called “passive” investment, so instead of giving your money to a human who tries to pick winning investments and outsmart the market, if you invest in an ETF you effectively buy all the shares within a certain category.
[00:12:47] The advantage of this is firstly risk management. By owning a small chunk of everything you reduce the risk of losing money, and you are essentially betting on an entire market rising over time, rather than a small selection of winning investments.
[00:13:05] The secondary advantage is cost.
[00:13:08] Active investing can be expensive - an actively managed fund might charge anywhere up to 2% a year, but a passively managed investment like an ETF can be as low as 0.03%.
[00:13:25] BlackRock only started offering ETFs in 2009, after acquiring another business, but the amount of money it manages in ETFs is now comparable to the amount of institutional money it controls.
[00:13:39] And, added together, the total is more than $10 trillion.
[00:13:45] Yes, that is a trillion with a “t”. If it were a country, it would be the third biggest country in the world.
[00:13:54] This $10 trillion is invested into tens of thousands of different companies, and it owns large chunks, typically 5% or more, of almost every large public company in the world.
[00:14:08] So if you look at the ownership structure of any of these large public companies, you will almost always see BlackRock.
[00:14:17] Now, this has sprouted a bunch of conspiracy theories, people making all sorts of claims about BlackRock being at the centre of some secret cabal, some top-secret powerful group, that is pulling the strings of the global economy.
[00:14:32] When researching this episode, I looked through a bunch of these on TikTok and the theory that some people are pushing is essentially that BlackRock owns the world because they “own” all of the largest companies in the world.
[00:14:48] They “own” the media, so they can tell the media what stories to publish, they “own” the tech companies, so they have access to all of our private data, they “own” the banks, so your money is their money, and they “own” the defence industry, so they can make a country go to war.
[00:15:07] They don’t “own” these companies, or at least they aren’t a majority owner.
[00:15:12] They typically own somewhere between 5 and 7%.
[00:15:17] But again, to go back to the question of what “own” means, they own shares on behalf of other people.
[00:15:25] So, who are these people?
[00:15:27] Well, there are the institutional investors, such as pension funds whose job it is to manage other people’s pensions, perhaps even your pension.
[00:15:37] It’s other institutional investors, and it is also retail investors, millions of people around the world who choose to keep anything from a few hundred dollars to hundreds of thousands of dollars and more with BlackRock.
[00:15:52] And to try to unwind this conspiracy one level further, what many people peddling these theories don’t understand, or do understand but don’t mention because it would undermine their entire argument, is that, in the case of the multiple trillions held in ETFs at least, BlackRock doesn’t choose which companies to buy or sell.
[00:16:15] The entire point of an ETF is that it is algorithmically required to hold shares in every company in that ETF.
[00:16:25] Nobody at BlackRock says “ok, I think we should buy more Apple” or “we don’t like Pfizer so we’re going to sell its shares”.
[00:16:33] The more popular an ETF is, the more shares within that ETF BlackRock is required to buy.
[00:16:41] And if people want to sell a particular ETF, an algorithm at BlackRock will sell the underlying shares in the companies in that ETF.
[00:16:52] So, to portray BlackRock as some evil beast that is secretly buying up the shares of large companies for nefarious ends is simply incorrect; these purchases are largely dictated by an algorithm that reflects the choices of millions of individuals around the world.
[00:17:11] Now, this is not to say that BlackRock is without influence; clearly this is not true.
[00:17:19] It holds considerable stakes in some of the biggest companies in the world. In some cases, BlackRock votes at shareholder meetings on behalf of its investors, meaning that it can influence corporate decisions on everything from hiring to diversity to sustainability.
[00:17:37] And its CEO, Larry Fink, is not afraid to speak his mind.
[00:17:43] He caused serious controversy back in 2018 when he suggested that companies needed to have a positive contribution to society, writing “Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce?”, end quote.
[00:18:05] This was perceived by some as pushing a “woke” agenda, and of BlackRock trying to use its power to influence companies into taking certain decisions, for example around environmental or hiring policies.
[00:18:21] But by others, it was seen as “greenwashing”, of BlackRock pretending to care about the environment and social issues while maintaining investments in everything from fossil fuel to arms manufacturing companies.
[00:18:34] Another area where it has come under scrutiny is the very close links between BlackRock and the world of politics.
[00:18:44] In the UK, the former Chancellor of the Exchequer–the Finance Minister–was hired by BlackRock after leaving office.
[00:18:52] A bunch of senior staff under Barack Obama went straight to BlackRock, and at least one has since rejoined the government, serving under Joe Biden.
[00:19:04] Now, you could look at most Wall Street institutions and find former government officials and public servants, there is a revolving door between finance and government.
[00:19:14] BlackRock isn’t unique in this category, and practically every company that has the means tries to develop closer links with the government.
[00:19:23] Ethically questionable, perhaps, but undeniably good for business.
[00:19:28] And BlackRock, clearly, is particularly good at it.
[00:19:32] So, to wrap things up, there are tons of videos on social media with clickbait titles like “BlackRock is evil”, or “this evil company controls the world”.
[00:19:44] Yes, the title for this episode does contain the words “The Company That Owns The World”, but I hope you noticed that it has a question mark after it.
[00:19:54] Yes, BlackRock manages a vast amount of money, and yes it is hugely influential, but to say that it owns the world is somewhat of a simplification.
[00:20:07] The reality is that it’s more like a mirror for our own decisions.
[00:20:12] It is a way for anyone, anywhere in the world, to pay a very small fee to stick a needle into the pumping vein of capitalism and have a chance of making a good return on their money.
[00:20:25] As to whether that makes it evil, whether it makes it good or bad, well I’ll let you be the judge of that.
[00:20:34] OK then, that is it for today's episode on BlackRock.
[00:20:38] I hope it's been an interesting one, that you've learnt something new, and if you’d never heard of BlackRock before, well then this has shone some light on this massive and somewhat mysterious business.
[00:20:49] As always, I would love to know what you thought of this episode.
[00:20:52] Have you heard of BlackRock before? If so, what had you heard, and has anything you’ve heard today changed your mind, or at least got you thinking?
[00:21:02] I would love to know, so let’s get this discussion started.
[00:21:06] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:21:14] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:21:19] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:20] I'm Alastair Budge, and today we are going to be talking about an organisation called BlackRock.
[00:00:27] If you have spent much time in dark corners of social media, you might have seen claims that this mysterious organisation controls everything from companies to governments, with its tentacles and influence knowing no bounds.
[00:00:42] So in this episode, we’ll learn about what it really does, how it works, and ask ourselves whether BlackRock really owns the world.
[00:00:52] OK then, let’s get right into it.
[00:00:56] The 1980s were a boom time on Wall Street.
[00:01:01] Ronald Reagan had assumed office in January of 1981, and after a brief mini-recession at the start of the decade, the American economy bounced back.
[00:01:13] This was partially fuelled by increasing deregulation, especially of the financial sector.
[00:01:21] Whizzes on Wall Street were creating new and innovative ways to make money, ways of chopping up and repackaging every element of the financial world and reselling it to other people.
[00:01:35] One of these new financial instruments was something called a mortgage-backed security.
[00:01:41] In case you don’t know what this is, it is essentially a collection of thousands of different home loans, mortgages, that are piled together and then chunks can be sold off to investors.
[00:01:54] In theory, it’s a clever idea from the investor side, because the probability of one person losing their job and not being able to pay their mortgage is relatively high but the probability of 1,000s of people all losing their jobs at the same time and not being able to repay their mortgage is much lower.
[00:02:14] In other words, pooling together these loans lowers the risk of the investment.
[00:02:20] And it’s also a clever idea from the bank’s side, from the perspective of the organisation that makes the loan in the first place.
[00:02:30] Banks make money by handing out loans, by issuing debt, but there are regulations about how much debt any bank can have on its balance sheet.
[00:02:41] But, if they sell this debt, it is no longer their problem. It vanishes from their balance sheet, and they can then make more home loans, thereby making more money.
[00:02:54] So, the banks make more money, and the investors can invest in a relatively safe asset, because they would receive monthly repayments from thousands of different people who were paying off their mortgages.
[00:03:07] And, of course, the people in the middle who facilitated this transaction, the investment bankers and advisors who brought together the home loan providers and the investors, they would make a tidy commission for their work.
[00:03:24] One such person was a man named Larry Fink.
[00:03:29] By the mid-1980s he had got a name for himself as one of the most successful bankers on Wall Street for his ability to create these packages of loans and then sell them on to investors, and he had made his employer, the investment bank First Boston, a reported billion dollars in the process.
[00:03:53] It seemed that he could do no wrong, money seemed to be sprouting out of his ears.
[00:04:00] But then in 1986, he made a bad call.
[00:04:05] He had become too confident and made a large bet, on behalf of his firm, about the direction in which interest rates were going.
[00:04:14] He believed that they would rise.
[00:04:16] He was confident in his decision and assumed that it would result in hundreds of millions of dollars of profit for the firm, and millions if not tens of millions of dollars in his Christmas bonus.
[00:04:30] But, he got it wrong.
[00:04:33] Interest rates moved in the other direction, they fell, and in a single quarter, this decision cost his employer–the bank–$100 million.
[00:04:45] He went from Wall Street darling to the man nobody and no bank wanted to touch with a ten-foot barge pole.
[00:04:54] He wasn’t technically fired, at least according to him.
[00:04:59] After all, he had made the bank $130 million the quarter before that, so it was still up $30 million.
[00:05:08] But he had lost his golden boy status, he was no longer invincible.
[00:05:15] What happened next was a realisation, a realisation that if he wanted to succeed he needed to get better at understanding and evaluating risk.
[00:05:27] It was this single realisation that, now almost 40 years later, would turn into a company that, if it were a country, would be the third biggest country in the world, and be responsible for almost 10% of all economic activity around the world:
[00:05:46] The company, of course, is BlackRock.
[00:05:50] So, what does BlackRock actually do and why has it become the subject of controversy?
[00:05:57] Well, when it first started, in 1988, it was an asset management firm focused on risk management.
[00:06:06] That sounds like a bit of a mouthful, and a boring mouthful at that, but let me try to explain what it means in plain English, and why it is important in the context of BlackRock.
[00:06:19] Any investment has an element of risk.
[00:06:22] If you invest money in your friend’s fledgling idea for a company that they think could be massively successful, but all that they have is an idea and they have no track record in business, well it might take off, you might make lots of money but it’s probably quite a risky investment.
[00:06:40] You might lose all of your money.
[00:06:43] Statistically speaking, you almost certainly will.
[00:06:48] On the other hand, if you leave the money in a savings account at the bank, you are almost certainly not going to lose it, but you are never going to make much money from the investment. You might even end up losing a bit when you take into account inflation.
[00:07:04] The point is, risk is positively correlated with reward.
[00:07:10] The more risk you take on, the higher the reward you stand to receive, but the lower the probability of getting it.
[00:07:19] The thing that Larry Fink came to realise after his big $100 million loss was that his previous employer never really understood the risk of what it was doing. Sure, it had a vague understanding, but it couldn’t quantify it, it couldn’t always put a number on it, and therefore it was unable to price it correctly.
[00:07:43] The idea behind BlackRock was to develop models, software and tools that allowed the company to accurately analyse the risk of anything, thereby reducing the risk of a big loss, and making better investment decisions.
[00:08:00] Its pitch to potential clients was “We’ll manage your investments for you and because we have this superior understanding of risk, we will be better custodians of your money”.
[00:08:15] It worked, and just over a decade later the company was managing over $165 billion in assets.
[00:08:23] And for companies that didn’t want BlackRock to take full control of their assets but wanted BlackRock’s risk management expertise, well, it had a piece of software called Aladdin that would do hundreds of millions of calculations each week and model every conceivable change in the global markets, and allow financial institutions to better understand and manage the risk associated with their investments.
[00:08:49] Not particularly sexy, but incredibly valuable.
[00:08:54] BlackRock continued to grow, but it was with the global financial crisis of 2007-2008 that it really started to gain serious influence.
[00:09:06] If you were nodding your head earlier when we were talking about Larry Fink’s innovation in bundling home loans together and selling them to investors and thinking “I’ve heard that one before”, yes this is exactly the same financial instrument that played a major role in bringing down the global economy in 2007.
[00:09:27] Wall Street banks had been packaging bad loans up and selling them to investors, and when it turned out that homeowners were unable to keep up with the repayments on their loans, the banks and investors holding the bad loans went belly up. Some went bust, went bankrupt, while others had to be bailed out by the government.
[00:09:50] And it was here that BlackRock and its famously risk-averse CEO, Larry Fink, found themselves in high demand.
[00:10:01] As one of the architects of the mortgage-backed security, back in the 1980s, ironically Larry Fink was one of the best-placed people to help banks and the US government understand exactly how bad the situation was and fix the mess.
[00:10:18] He found himself, or rather, BlackRock found itself, advising the US government and a whole host of financial institutions on what to do with all of this debt.
[00:10:30] This brought in hundreds of millions of dollars in advisory fees, but more importantly, it made Larry Fink the go-to guy on Wall Street, and BlackRock the go-to firm, when it came to particularly complicated transactions involving debt.
[00:10:48] Alongside this, BlackRock started to buy up a bunch of other companies and to get into the retail investor market.
[00:10:58] In its early years, and until the 2010s really, BlackRock had focussed on what’s called institutional investors: banks, pension funds, insurance companies - large companies who would give hundreds of millions or even billions of dollars to BlackRock to manage and invest on their behalf.
[00:11:20] But Larry Fink saw an even greater opportunity in the retail market, individual investors.
[00:11:28] Instead of having thousands of clients who might each invest hundreds of millions with BlackRock, he wanted to have hundreds of millions of clients who would invest thousands of dollars with him.
[00:11:40] He didn’t want to only have a handful of big fish, he wanted to have an ocean full of little fish.
[00:11:50] How BlackRock went about this was by offering something called exchange-traded funds, ETFs for short.
[00:11:58] In case you don’t know what these are, they are large collections of shares or bonds or financial instruments of some sort.
[00:12:06] Any individual can invest in a BlackRock ETF.
[00:12:11] What this means in practice is that rather than saying “I want to buy shares of Apple”, you can say “I want to buy shares of every big company in the world”, or “big American companies”, or “big European companies”, or “big pharmaceutical companies”.
[00:12:29] This is called “passive” investment, so instead of giving your money to a human who tries to pick winning investments and outsmart the market, if you invest in an ETF you effectively buy all the shares within a certain category.
[00:12:47] The advantage of this is firstly risk management. By owning a small chunk of everything you reduce the risk of losing money, and you are essentially betting on an entire market rising over time, rather than a small selection of winning investments.
[00:13:05] The secondary advantage is cost.
[00:13:08] Active investing can be expensive - an actively managed fund might charge anywhere up to 2% a year, but a passively managed investment like an ETF can be as low as 0.03%.
[00:13:25] BlackRock only started offering ETFs in 2009, after acquiring another business, but the amount of money it manages in ETFs is now comparable to the amount of institutional money it controls.
[00:13:39] And, added together, the total is more than $10 trillion.
[00:13:45] Yes, that is a trillion with a “t”. If it were a country, it would be the third biggest country in the world.
[00:13:54] This $10 trillion is invested into tens of thousands of different companies, and it owns large chunks, typically 5% or more, of almost every large public company in the world.
[00:14:08] So if you look at the ownership structure of any of these large public companies, you will almost always see BlackRock.
[00:14:17] Now, this has sprouted a bunch of conspiracy theories, people making all sorts of claims about BlackRock being at the centre of some secret cabal, some top-secret powerful group, that is pulling the strings of the global economy.
[00:14:32] When researching this episode, I looked through a bunch of these on TikTok and the theory that some people are pushing is essentially that BlackRock owns the world because they “own” all of the largest companies in the world.
[00:14:48] They “own” the media, so they can tell the media what stories to publish, they “own” the tech companies, so they have access to all of our private data, they “own” the banks, so your money is their money, and they “own” the defence industry, so they can make a country go to war.
[00:15:07] They don’t “own” these companies, or at least they aren’t a majority owner.
[00:15:12] They typically own somewhere between 5 and 7%.
[00:15:17] But again, to go back to the question of what “own” means, they own shares on behalf of other people.
[00:15:25] So, who are these people?
[00:15:27] Well, there are the institutional investors, such as pension funds whose job it is to manage other people’s pensions, perhaps even your pension.
[00:15:37] It’s other institutional investors, and it is also retail investors, millions of people around the world who choose to keep anything from a few hundred dollars to hundreds of thousands of dollars and more with BlackRock.
[00:15:52] And to try to unwind this conspiracy one level further, what many people peddling these theories don’t understand, or do understand but don’t mention because it would undermine their entire argument, is that, in the case of the multiple trillions held in ETFs at least, BlackRock doesn’t choose which companies to buy or sell.
[00:16:15] The entire point of an ETF is that it is algorithmically required to hold shares in every company in that ETF.
[00:16:25] Nobody at BlackRock says “ok, I think we should buy more Apple” or “we don’t like Pfizer so we’re going to sell its shares”.
[00:16:33] The more popular an ETF is, the more shares within that ETF BlackRock is required to buy.
[00:16:41] And if people want to sell a particular ETF, an algorithm at BlackRock will sell the underlying shares in the companies in that ETF.
[00:16:52] So, to portray BlackRock as some evil beast that is secretly buying up the shares of large companies for nefarious ends is simply incorrect; these purchases are largely dictated by an algorithm that reflects the choices of millions of individuals around the world.
[00:17:11] Now, this is not to say that BlackRock is without influence; clearly this is not true.
[00:17:19] It holds considerable stakes in some of the biggest companies in the world. In some cases, BlackRock votes at shareholder meetings on behalf of its investors, meaning that it can influence corporate decisions on everything from hiring to diversity to sustainability.
[00:17:37] And its CEO, Larry Fink, is not afraid to speak his mind.
[00:17:43] He caused serious controversy back in 2018 when he suggested that companies needed to have a positive contribution to society, writing “Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce?”, end quote.
[00:18:05] This was perceived by some as pushing a “woke” agenda, and of BlackRock trying to use its power to influence companies into taking certain decisions, for example around environmental or hiring policies.
[00:18:21] But by others, it was seen as “greenwashing”, of BlackRock pretending to care about the environment and social issues while maintaining investments in everything from fossil fuel to arms manufacturing companies.
[00:18:34] Another area where it has come under scrutiny is the very close links between BlackRock and the world of politics.
[00:18:44] In the UK, the former Chancellor of the Exchequer–the Finance Minister–was hired by BlackRock after leaving office.
[00:18:52] A bunch of senior staff under Barack Obama went straight to BlackRock, and at least one has since rejoined the government, serving under Joe Biden.
[00:19:04] Now, you could look at most Wall Street institutions and find former government officials and public servants, there is a revolving door between finance and government.
[00:19:14] BlackRock isn’t unique in this category, and practically every company that has the means tries to develop closer links with the government.
[00:19:23] Ethically questionable, perhaps, but undeniably good for business.
[00:19:28] And BlackRock, clearly, is particularly good at it.
[00:19:32] So, to wrap things up, there are tons of videos on social media with clickbait titles like “BlackRock is evil”, or “this evil company controls the world”.
[00:19:44] Yes, the title for this episode does contain the words “The Company That Owns The World”, but I hope you noticed that it has a question mark after it.
[00:19:54] Yes, BlackRock manages a vast amount of money, and yes it is hugely influential, but to say that it owns the world is somewhat of a simplification.
[00:20:07] The reality is that it’s more like a mirror for our own decisions.
[00:20:12] It is a way for anyone, anywhere in the world, to pay a very small fee to stick a needle into the pumping vein of capitalism and have a chance of making a good return on their money.
[00:20:25] As to whether that makes it evil, whether it makes it good or bad, well I’ll let you be the judge of that.
[00:20:34] OK then, that is it for today's episode on BlackRock.
[00:20:38] I hope it's been an interesting one, that you've learnt something new, and if you’d never heard of BlackRock before, well then this has shone some light on this massive and somewhat mysterious business.
[00:20:49] As always, I would love to know what you thought of this episode.
[00:20:52] Have you heard of BlackRock before? If so, what had you heard, and has anything you’ve heard today changed your mind, or at least got you thinking?
[00:21:02] I would love to know, so let’s get this discussion started.
[00:21:06] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:21:14] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:21:19] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:20] I'm Alastair Budge, and today we are going to be talking about an organisation called BlackRock.
[00:00:27] If you have spent much time in dark corners of social media, you might have seen claims that this mysterious organisation controls everything from companies to governments, with its tentacles and influence knowing no bounds.
[00:00:42] So in this episode, we’ll learn about what it really does, how it works, and ask ourselves whether BlackRock really owns the world.
[00:00:52] OK then, let’s get right into it.
[00:00:56] The 1980s were a boom time on Wall Street.
[00:01:01] Ronald Reagan had assumed office in January of 1981, and after a brief mini-recession at the start of the decade, the American economy bounced back.
[00:01:13] This was partially fuelled by increasing deregulation, especially of the financial sector.
[00:01:21] Whizzes on Wall Street were creating new and innovative ways to make money, ways of chopping up and repackaging every element of the financial world and reselling it to other people.
[00:01:35] One of these new financial instruments was something called a mortgage-backed security.
[00:01:41] In case you don’t know what this is, it is essentially a collection of thousands of different home loans, mortgages, that are piled together and then chunks can be sold off to investors.
[00:01:54] In theory, it’s a clever idea from the investor side, because the probability of one person losing their job and not being able to pay their mortgage is relatively high but the probability of 1,000s of people all losing their jobs at the same time and not being able to repay their mortgage is much lower.
[00:02:14] In other words, pooling together these loans lowers the risk of the investment.
[00:02:20] And it’s also a clever idea from the bank’s side, from the perspective of the organisation that makes the loan in the first place.
[00:02:30] Banks make money by handing out loans, by issuing debt, but there are regulations about how much debt any bank can have on its balance sheet.
[00:02:41] But, if they sell this debt, it is no longer their problem. It vanishes from their balance sheet, and they can then make more home loans, thereby making more money.
[00:02:54] So, the banks make more money, and the investors can invest in a relatively safe asset, because they would receive monthly repayments from thousands of different people who were paying off their mortgages.
[00:03:07] And, of course, the people in the middle who facilitated this transaction, the investment bankers and advisors who brought together the home loan providers and the investors, they would make a tidy commission for their work.
[00:03:24] One such person was a man named Larry Fink.
[00:03:29] By the mid-1980s he had got a name for himself as one of the most successful bankers on Wall Street for his ability to create these packages of loans and then sell them on to investors, and he had made his employer, the investment bank First Boston, a reported billion dollars in the process.
[00:03:53] It seemed that he could do no wrong, money seemed to be sprouting out of his ears.
[00:04:00] But then in 1986, he made a bad call.
[00:04:05] He had become too confident and made a large bet, on behalf of his firm, about the direction in which interest rates were going.
[00:04:14] He believed that they would rise.
[00:04:16] He was confident in his decision and assumed that it would result in hundreds of millions of dollars of profit for the firm, and millions if not tens of millions of dollars in his Christmas bonus.
[00:04:30] But, he got it wrong.
[00:04:33] Interest rates moved in the other direction, they fell, and in a single quarter, this decision cost his employer–the bank–$100 million.
[00:04:45] He went from Wall Street darling to the man nobody and no bank wanted to touch with a ten-foot barge pole.
[00:04:54] He wasn’t technically fired, at least according to him.
[00:04:59] After all, he had made the bank $130 million the quarter before that, so it was still up $30 million.
[00:05:08] But he had lost his golden boy status, he was no longer invincible.
[00:05:15] What happened next was a realisation, a realisation that if he wanted to succeed he needed to get better at understanding and evaluating risk.
[00:05:27] It was this single realisation that, now almost 40 years later, would turn into a company that, if it were a country, would be the third biggest country in the world, and be responsible for almost 10% of all economic activity around the world:
[00:05:46] The company, of course, is BlackRock.
[00:05:50] So, what does BlackRock actually do and why has it become the subject of controversy?
[00:05:57] Well, when it first started, in 1988, it was an asset management firm focused on risk management.
[00:06:06] That sounds like a bit of a mouthful, and a boring mouthful at that, but let me try to explain what it means in plain English, and why it is important in the context of BlackRock.
[00:06:19] Any investment has an element of risk.
[00:06:22] If you invest money in your friend’s fledgling idea for a company that they think could be massively successful, but all that they have is an idea and they have no track record in business, well it might take off, you might make lots of money but it’s probably quite a risky investment.
[00:06:40] You might lose all of your money.
[00:06:43] Statistically speaking, you almost certainly will.
[00:06:48] On the other hand, if you leave the money in a savings account at the bank, you are almost certainly not going to lose it, but you are never going to make much money from the investment. You might even end up losing a bit when you take into account inflation.
[00:07:04] The point is, risk is positively correlated with reward.
[00:07:10] The more risk you take on, the higher the reward you stand to receive, but the lower the probability of getting it.
[00:07:19] The thing that Larry Fink came to realise after his big $100 million loss was that his previous employer never really understood the risk of what it was doing. Sure, it had a vague understanding, but it couldn’t quantify it, it couldn’t always put a number on it, and therefore it was unable to price it correctly.
[00:07:43] The idea behind BlackRock was to develop models, software and tools that allowed the company to accurately analyse the risk of anything, thereby reducing the risk of a big loss, and making better investment decisions.
[00:08:00] Its pitch to potential clients was “We’ll manage your investments for you and because we have this superior understanding of risk, we will be better custodians of your money”.
[00:08:15] It worked, and just over a decade later the company was managing over $165 billion in assets.
[00:08:23] And for companies that didn’t want BlackRock to take full control of their assets but wanted BlackRock’s risk management expertise, well, it had a piece of software called Aladdin that would do hundreds of millions of calculations each week and model every conceivable change in the global markets, and allow financial institutions to better understand and manage the risk associated with their investments.
[00:08:49] Not particularly sexy, but incredibly valuable.
[00:08:54] BlackRock continued to grow, but it was with the global financial crisis of 2007-2008 that it really started to gain serious influence.
[00:09:06] If you were nodding your head earlier when we were talking about Larry Fink’s innovation in bundling home loans together and selling them to investors and thinking “I’ve heard that one before”, yes this is exactly the same financial instrument that played a major role in bringing down the global economy in 2007.
[00:09:27] Wall Street banks had been packaging bad loans up and selling them to investors, and when it turned out that homeowners were unable to keep up with the repayments on their loans, the banks and investors holding the bad loans went belly up. Some went bust, went bankrupt, while others had to be bailed out by the government.
[00:09:50] And it was here that BlackRock and its famously risk-averse CEO, Larry Fink, found themselves in high demand.
[00:10:01] As one of the architects of the mortgage-backed security, back in the 1980s, ironically Larry Fink was one of the best-placed people to help banks and the US government understand exactly how bad the situation was and fix the mess.
[00:10:18] He found himself, or rather, BlackRock found itself, advising the US government and a whole host of financial institutions on what to do with all of this debt.
[00:10:30] This brought in hundreds of millions of dollars in advisory fees, but more importantly, it made Larry Fink the go-to guy on Wall Street, and BlackRock the go-to firm, when it came to particularly complicated transactions involving debt.
[00:10:48] Alongside this, BlackRock started to buy up a bunch of other companies and to get into the retail investor market.
[00:10:58] In its early years, and until the 2010s really, BlackRock had focussed on what’s called institutional investors: banks, pension funds, insurance companies - large companies who would give hundreds of millions or even billions of dollars to BlackRock to manage and invest on their behalf.
[00:11:20] But Larry Fink saw an even greater opportunity in the retail market, individual investors.
[00:11:28] Instead of having thousands of clients who might each invest hundreds of millions with BlackRock, he wanted to have hundreds of millions of clients who would invest thousands of dollars with him.
[00:11:40] He didn’t want to only have a handful of big fish, he wanted to have an ocean full of little fish.
[00:11:50] How BlackRock went about this was by offering something called exchange-traded funds, ETFs for short.
[00:11:58] In case you don’t know what these are, they are large collections of shares or bonds or financial instruments of some sort.
[00:12:06] Any individual can invest in a BlackRock ETF.
[00:12:11] What this means in practice is that rather than saying “I want to buy shares of Apple”, you can say “I want to buy shares of every big company in the world”, or “big American companies”, or “big European companies”, or “big pharmaceutical companies”.
[00:12:29] This is called “passive” investment, so instead of giving your money to a human who tries to pick winning investments and outsmart the market, if you invest in an ETF you effectively buy all the shares within a certain category.
[00:12:47] The advantage of this is firstly risk management. By owning a small chunk of everything you reduce the risk of losing money, and you are essentially betting on an entire market rising over time, rather than a small selection of winning investments.
[00:13:05] The secondary advantage is cost.
[00:13:08] Active investing can be expensive - an actively managed fund might charge anywhere up to 2% a year, but a passively managed investment like an ETF can be as low as 0.03%.
[00:13:25] BlackRock only started offering ETFs in 2009, after acquiring another business, but the amount of money it manages in ETFs is now comparable to the amount of institutional money it controls.
[00:13:39] And, added together, the total is more than $10 trillion.
[00:13:45] Yes, that is a trillion with a “t”. If it were a country, it would be the third biggest country in the world.
[00:13:54] This $10 trillion is invested into tens of thousands of different companies, and it owns large chunks, typically 5% or more, of almost every large public company in the world.
[00:14:08] So if you look at the ownership structure of any of these large public companies, you will almost always see BlackRock.
[00:14:17] Now, this has sprouted a bunch of conspiracy theories, people making all sorts of claims about BlackRock being at the centre of some secret cabal, some top-secret powerful group, that is pulling the strings of the global economy.
[00:14:32] When researching this episode, I looked through a bunch of these on TikTok and the theory that some people are pushing is essentially that BlackRock owns the world because they “own” all of the largest companies in the world.
[00:14:48] They “own” the media, so they can tell the media what stories to publish, they “own” the tech companies, so they have access to all of our private data, they “own” the banks, so your money is their money, and they “own” the defence industry, so they can make a country go to war.
[00:15:07] They don’t “own” these companies, or at least they aren’t a majority owner.
[00:15:12] They typically own somewhere between 5 and 7%.
[00:15:17] But again, to go back to the question of what “own” means, they own shares on behalf of other people.
[00:15:25] So, who are these people?
[00:15:27] Well, there are the institutional investors, such as pension funds whose job it is to manage other people’s pensions, perhaps even your pension.
[00:15:37] It’s other institutional investors, and it is also retail investors, millions of people around the world who choose to keep anything from a few hundred dollars to hundreds of thousands of dollars and more with BlackRock.
[00:15:52] And to try to unwind this conspiracy one level further, what many people peddling these theories don’t understand, or do understand but don’t mention because it would undermine their entire argument, is that, in the case of the multiple trillions held in ETFs at least, BlackRock doesn’t choose which companies to buy or sell.
[00:16:15] The entire point of an ETF is that it is algorithmically required to hold shares in every company in that ETF.
[00:16:25] Nobody at BlackRock says “ok, I think we should buy more Apple” or “we don’t like Pfizer so we’re going to sell its shares”.
[00:16:33] The more popular an ETF is, the more shares within that ETF BlackRock is required to buy.
[00:16:41] And if people want to sell a particular ETF, an algorithm at BlackRock will sell the underlying shares in the companies in that ETF.
[00:16:52] So, to portray BlackRock as some evil beast that is secretly buying up the shares of large companies for nefarious ends is simply incorrect; these purchases are largely dictated by an algorithm that reflects the choices of millions of individuals around the world.
[00:17:11] Now, this is not to say that BlackRock is without influence; clearly this is not true.
[00:17:19] It holds considerable stakes in some of the biggest companies in the world. In some cases, BlackRock votes at shareholder meetings on behalf of its investors, meaning that it can influence corporate decisions on everything from hiring to diversity to sustainability.
[00:17:37] And its CEO, Larry Fink, is not afraid to speak his mind.
[00:17:43] He caused serious controversy back in 2018 when he suggested that companies needed to have a positive contribution to society, writing “Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce?”, end quote.
[00:18:05] This was perceived by some as pushing a “woke” agenda, and of BlackRock trying to use its power to influence companies into taking certain decisions, for example around environmental or hiring policies.
[00:18:21] But by others, it was seen as “greenwashing”, of BlackRock pretending to care about the environment and social issues while maintaining investments in everything from fossil fuel to arms manufacturing companies.
[00:18:34] Another area where it has come under scrutiny is the very close links between BlackRock and the world of politics.
[00:18:44] In the UK, the former Chancellor of the Exchequer–the Finance Minister–was hired by BlackRock after leaving office.
[00:18:52] A bunch of senior staff under Barack Obama went straight to BlackRock, and at least one has since rejoined the government, serving under Joe Biden.
[00:19:04] Now, you could look at most Wall Street institutions and find former government officials and public servants, there is a revolving door between finance and government.
[00:19:14] BlackRock isn’t unique in this category, and practically every company that has the means tries to develop closer links with the government.
[00:19:23] Ethically questionable, perhaps, but undeniably good for business.
[00:19:28] And BlackRock, clearly, is particularly good at it.
[00:19:32] So, to wrap things up, there are tons of videos on social media with clickbait titles like “BlackRock is evil”, or “this evil company controls the world”.
[00:19:44] Yes, the title for this episode does contain the words “The Company That Owns The World”, but I hope you noticed that it has a question mark after it.
[00:19:54] Yes, BlackRock manages a vast amount of money, and yes it is hugely influential, but to say that it owns the world is somewhat of a simplification.
[00:20:07] The reality is that it’s more like a mirror for our own decisions.
[00:20:12] It is a way for anyone, anywhere in the world, to pay a very small fee to stick a needle into the pumping vein of capitalism and have a chance of making a good return on their money.
[00:20:25] As to whether that makes it evil, whether it makes it good or bad, well I’ll let you be the judge of that.
[00:20:34] OK then, that is it for today's episode on BlackRock.
[00:20:38] I hope it's been an interesting one, that you've learnt something new, and if you’d never heard of BlackRock before, well then this has shone some light on this massive and somewhat mysterious business.
[00:20:49] As always, I would love to know what you thought of this episode.
[00:20:52] Have you heard of BlackRock before? If so, what had you heard, and has anything you’ve heard today changed your mind, or at least got you thinking?
[00:21:02] I would love to know, so let’s get this discussion started.
[00:21:06] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:21:14] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:21:19] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
