Sept. 13 (Bloomberg) -- In June 2008, American International Group Inc. was desperately trying to figure out what to do with its $80 billion in money-losing credit-default swaps, which were backed by mortgages. Then Larry Fink came calling.
The chief executive officer of BlackRock Inc. was pitching his firm’s proprietary software to value the derivatives, says Robert Willumstad, AIG’s then-newly installed CEO. Willumstad hired BlackRock, Bloomberg Markets magazine reports in its October special issue on the 50 Most Influential people in global finance.
Fink’s team wrapped up their assignment that August, advising AIG to hold the derivatives until the housing market improved. Just weeks later, on Sept. 14, Lehman Brothers Holdings Inc. declared bankruptcy and the markets tanked, taking the derivatives -- and AIG -- down with them. When the U.S. government bailed out AIG two days later, it ousted Willumstad, and the Federal Reserve Bank of New York stepped in. The New York Fed needed someone to manage AIG’s toxic assets. It, too, turned to Fink.
If a beleaguered government or a giant corporation is wrestling with a financial conundrum, BlackRock’s Fink will often be the first one to step in. His client list includes the governments of Germany, Greece, Ireland and Sweden as well as companies such as General Electric Co. and JPMorgan Chase & Co.
“Fifteen years ago, everybody thought our business model was boring,” Fink, 59, says of his firm’s focus on managing money for institutions. “Wall Street was much more trendy.”
Now, with big banks under increasing scrutiny from regulators, customers and shareholders, BlackRock’s business has gotten a lot more interesting.
“They built this entity that was incredibly in demand once the credit bubble popped and there was so much challenge in valuing assets,” says Gregory Fleming, a former president of Merrill Lynch & Co. who helped BlackRock go public in 1999.
Willumstad says he preferred BlackRock to an investment bank. “In the midst of the crisis, most of the banks themselves were part of the problem,” he says.
While Fink has expanded his influence with such high-profile assignments as sorting through the wreckage of Bear Stearns Cos. and AIG, the advisory business only represented about 6 percent of BlackRock’s $9.08 billion in revenue last year. The company still depends for the bulk of its profit on its “boring” model: the fees it earns from managing other people’s money.
Today, BlackRock is the world’s largest money manager, with assets of $3.56 trillion as of June 30 -- about the same size as Germany’s gross domestic product last year. The company’s two biggest businesses are its actively managed bond and stock funds and its exchange-traded funds, which typically hold baskets of securities that track an industry or a market benchmark.
Being the biggest isn’t enough for Fink, a former First Boston Corp. mortgage trader who started BlackRock in 1988 with seven colleagues and $1 billion. Now he wants to increase the company’s reach with mom-and-pop investors. Fink says individuals should put more of their retirement money in riskier products such as hedge funds, real estate and private equity.
“People are shying away from equities, which I happen to think is wrong,” says Fink, who during a July interview wears a cream-colored shirt with ladybug-shaped cuff links. He has a golden tan from gardening and hiking in North Salem, New York, where he and his wife, Lori, own a house.
“I don’t see how you make your necessary return earning 1.5 percent on the 10-year U.S. Treasury bill. You will not have the pool of savings that you need to retire.”
Not coincidentally, the riskier offerings are areas where BlackRock is expanding and where the fees it earns are higher than those for plain stock and bond funds.
Opinionated and plain-spoken, Fink has been taking public stances more frequently, whether it’s to admonish U.S. President Barack Obama to reduce the national debt or to advocate for more regulation and transparent labeling of ETFs. “Larry’s very forthright,” says Ken Langone, a co-founder of Home Depot Inc. who served on the board of directors of the New York Stock Exchange in 2003 with Fink. “When you get down to talking to Larry, you know exactly where Larry is. Exactly.”
The son of a shoe salesman and an English professor, Fink says he’s a lifelong Democrat who raised funds for Obama in 2008 and backs him for re-election.
Fink’s frankness extends to owning up to his firm’s mistakes, says Ralph Schlosstein, a co-founder of BlackRock who left in 2007 and is now at Evercore Partners Inc., a boutique investment bank. When the California Public Employees’ Retirement System, the biggest U.S. public pension fund, took a $500 million loss in 2009 for its stake in BlackRock’s failed investment in the Stuyvesant Town-Peter Cooper Village apartment complex in New York, Fink apologized personally to the fund’s board. “If clients don’t get perfection, that upsets him,” Schlosstein says.
So far, Fink hasn’t been able to assuage customers who are unhappy with the returns of BlackRock’s stock and bond funds. Investors withdrew $13.7 billion more than they deposited in these funds last year, while its smaller rival Pacific Investment Management Co. had net deposits of $60 billion. In the three years ended on June 30, BlackRock’s actively managed mutual funds trailed 54 percent of their peers on an annualized basis, according to Morningstar Inc. data.
BlackRock became the world’s largest manager of ETFs with its purchase in 2009 of Barclays Global Investors Inc., yet its lead is shrinking. BlackRock’s U.S. market share declined 1.6 percentage points this year, to 41 percent as of July 31, while rival Vanguard Group Inc. gained 1.8 points to 18 percent, according to data from State Street Global Advisors, the No. 2 ETF firm, with 24 percent of the market. And Vanguard attracted $33.9 billion in the first seven months of this year, 73 percent more than BlackRock’s $19.6 billion.
BlackRock’s sheer size has made some of its potential customers wary. In April, Spain decided against hiring the company to carry out stress tests on the country’s banks because Economy Minister Luis de Guindos feared it would be conflicted.
“Don’t you think BlackRock wants to buy assets in Spain?” he told Bloomberg News at the time. “If you are going to be the referee and at the same time you want to buy assets, there’s a very clear conflict of interest.”
BlackRock’s head of global rates investments said in June that the firm was looking for ways to invest in Spanish debt. Fink says there wouldn’t have been any conflict because BlackRock keeps the management of its client investments separate from its advisory activities.
“BlackRock is so large and they’re interconnected to so many investments; just by nature it’s hard for them to be independent,” says Mark Williams, a former Federal Reserve Bank examiner who teaches risk management at Boston University. “If they throw themselves into a consulting role, they increase the chance of insider conflicts.”
Advising clients is BlackRock’s fastest-growing business, with Fink forecasting an increase of 15 to 20 percent annually during the next three years. Fink hired former Swiss central banker Philipp Hildebrand to oversee the firm’s relationships with non-U.S. clients. Fink spends much of his time visiting clients in London, Hong Kong and Dubai, pitching his firm’s proprietary software, which is an outgrowth of a program created in 1994 to help GE sell toxic mortgage assets.
BlackRock used the same program to manage the AIG and Bear Stearns assets that the Fed had repackaged into three separate vehicles named Maiden Lane I, II and III. By July of this year, BlackRock had raised enough money selling the debt to investors to repay all $72.7 billion of the AIG and Bear Stearns bailout money, plus interest, Fink says.
Could that success, BlackRock’s growing roster of government clients and Fink’s increased outspokenness on economic policy mean that he’s grooming himself for a role in a second Obama administration?
Langone says Fink would make a great Treasury secretary to succeed Timothy F. Geithner, who plans to step down. “Because of his judgment, his experience and his leadership capabilities and his willingness to make tough decisions,” Langone says.
Fink himself demurs. “I love my job,” he says. “I expect to be here longer than some people have speculated.”
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