Appropriator Financial Fabric, the Case of BlackRock

ECONOMICS, 14 Sep 2020

Roberto Sansón Mizrahi | Opinion Sur - TRANSCEND Media Service

25 Aug 2020 – Intricate and extended fabrics of economic organizations that appropriate good part of the surplus generated by the productive effort of humanity proliferate in the world today. These fabrics have their epicenter in central countries but their tentacles reach every place in the world. They are able to leap on profitable opportunities as well as to retract with no losses when circumstances change. The case of the fabric articulated by BlackRock and its impacts.

BlackRock Inc is relatively unknown outside financial circles, but it owns the largest share in the biggest 299 companies in the world. Edward Munoz/Reuters

Large international corporations devoted to the appropriation of natural resources and productive efforts that others unfold always existed, but never before they have formed globalized fabrics of entities that discretionally manage the most lucrative part of the world’s financing and investment. They form the spinal cord of the contemporary unbridled process of concentration of wealth and decisional power that sustains the current trajectory.

What is dramatic is that those who contribute resources to powerful funds articulated into appropriator webs include wealthy groups as well as pension funds from teachers, public officials, universities, that are dragged towards lucrative complicities contrary to their interests and those of their communities.

These fabrics of multimillionaire entities are structured based on interweaving among them. Some invest in others to manage part of their resources, although at the same time they develop their own investment portfolios with third parties’ resources that supplement theirs. If analyzed at one moment, these fabrics would be assimilated to a web of entities that raise and allocate resources. However, if seen in motion, they resemble chaos of energies discharged by a changing number of decisions of different nature and magnitude. The resulting process is far from being lineal as in its dynamic redirections and outbursts of diverse origin and scope occur. These small or large commotions can be the consequence of environmental, sanitary, political events but also destabilizing economic incongruences that generate inequalities, inequities, and injustices.  This complex context of forces is inherently unstable with interests’ fights (some antagonistic, others might converge), imposition of privileges, permanent abuses of power and a merciless greed already institutionalized that overflies as organizing and legitimizing principle of the course imposed to humanity and the planet.

Thus, tensions, differentiations, antagonisms and contradictions that are developed within appropriator financial fabrics affect the sustainability of hegemonies. Anyway, even with the succession of predominance, the dynamic of those webs tends to establish oligopolistic tendencies where one or few leaders can articulate in their favor the rest of the funds that manage investments. Each financial group defends its interests but, allied with the rest, they also exercise their power to force regulatory frameworks full of illegitimate measures that they turn legal. From there, one of the main engines of the concentrating process that favors the richest 1% of the world’s population emerges.

Those who benefit from an appropriating fabric believe that their preeminence will be sustained eternally and that they will continue operating with the same impunity. However, history of humanity teaches that there has never been an immutable economic order or social system. Therefore, the most lucid part of oppressors always tries to be inserted inside the new emergent powers while they reinforce media, judicial, and political trenches to slow down and condition transitions.

In this way, though the most dynamic segments of these appropriating fabrics resist losing their hegemony, they are ready to adapt themselves and mutate when faced with unstoppable changes in circumstances. This action could be assimilated to the dynamic of viruses dreaming with an intervention that could nip this dynamic in the bud. This is not possible as there are no vaccines to tackle concentrating chaos though some distant similarity could be pointed out. As in health, it is necessary to transform the sanitary context to diminish favorable conditions for the viruses to enter and propagate; a context of economic and political circumstances exists that facilitates the development of appropriating financial fabrics. This context includes deregulation of capital flows, impunity for tremendous crimes committed by large evaders, concealment and flight of ill-gotten capitals, inequity of tax systems, injustices in the allocation of public expending, concentrations in international trade, conversion of markets into oligopolistic spaces, media manipulation and biased orientation of large digital corporations, commodification of health, education, and even our emotions. No coincidences exist but causalities that accumulate and sustain the prevailing order. Dismantling that which favors the existence of appropriating fabrics is not a simple challenge; on the contrary, it demands addressing many intervention fronts to liberate and recuperate democracies that have been captured by those powerful minorities.

Without the intervention of righteous rationality, dynamics will continue to converge towards ever more accelerated and gigantic ways of concentration, a destructive process that does not wear out by replacing hegemonies. A new course and another way of functioning geared towards achieving good living for all and the firm protection of the environment demand transforming decisions exogenous to the hegemonic order.

Appropriator fabric articulated by BlackRock

One of the most blatant cases of appropriator fabric is led by BlackRock, the largest investment fund, which acts as articulating pole of a myriad of powerful financial entities. BlackRock manages substantial resources, both their own and those of third parties who trust their allocation criteria. Services and expertise it offers their clients, as well as its organization can be checked in BlackRock’s official website On top of that, it was recently chosen as financial agent for the United States government, thus opening the gate for multiple conflict of interests that are concealed to the non-specialists.

Scope and investment criteria

In 2019, BlackRock managed assets for 7.4 trillion dollars using different investment criteria. The most frequently used investment criteria, 5 trillion dollars, was to invest with a passive strategy and low costs in iShares, that is, funds that are traded on stock exchanges and are diversified. Yield depends on a stock-exchange index (can be variable income, commodities, bonds, monetary resources, etc.) and not on the ability of the trust manager for buying and selling. The second investment criterion, $2 trillion, uses active investment strategies, with higher management cost because they devote resources to choosing case by case where to invest. A third investment criterion, more than $500 billion, are cash management strategies,

Its portfolio includes a wide variety of funds that together they invest in sovereign bonds and thousands of enterprises such as ExxonMobil, General Electric, Coca-Cola, Johnson & Johnson, JP Morgan but also powerful emergent of the digital era such as Alfabeth -Google, Amazon, Facebook, Microsoft and Apple. This investment mixture lets them influence traditional corporations as well as those where information and ecommerce dominate.

BlackRock octopus. CodePink

Results

In January 15, 2009, main executives informed about 2019 results highlighting their record net income of 429 billion dollars, 226 billion obtained from iShares, 110 billion from active investments, and 93 billion from cash management. Furthermore, they mentioned that their shareholders received 3.8 billion dollars combining what they obtained in dividends with the increase in share value of the stock bought of their own company (buyback). In the second quarter of 2020, they obtained the results mentioned in this link.

Support for their hegemony

Although BlackRock is not the owner but the custodian of stocks and bonds in which it invested third parties’ resources, as it exercises vote rights of those investments, both entrepreneurs and governments that received the resources recognize its power. Moreover, the scale of the resources managed gives them advantages regarding other investors as it can better identify and take advantage of opportunities using their firepower to obtain bigger profits and influence in their favor over public polices of sovereign countries.

Anyway, the rest of the funds that invest through BlackRock retain degrees of decisional autonomy in a double sense. On the one hand, they can develop their own portfolios of allocations with similar or different profiles as BlackRock’s investment portfolio. On the other hand, they preserve the power of withdrawing from BlackRock as channel of third parties’ resources or even as shareholders.

Thus, it is worth knowing who the owners of BlackRock are, and then focusing on one event that shocked BlackRock structure in May 2020: the exit of its major shareholder.

Main BlackRock owners

Main BlackRock shareholders appear in the following table, with an important caveat: they are all in turn managers of third parties’ assets.

Top 10 Owners of BlackRock Inc (en conjunto suman el 48,51 % del total)

Stockholder Stake  Shares
owned
Total value ($) Shares
bought / sold
Total change
PNC Bank, NA (Investment Management     22.04%     34,004,697      18,501,615,591    -11,068      -0.03%
The Vanguard Group, Inc.     5.62%      8,666,199      4,715,192,214    -136,007      -1.55%
BlackRock Fund Advisors     3.97%      6,123,448      3,331,706,822    +262,271      +4.47%
Capital Research & Management Co….     3.95%      6,091,446      3,314,294,854    -1,270,934      -17.26%
SSgA Funds Management, Inc.     3.23%      4,982,330      2,710,835,930    -132,598      -2.59%
Wellington Management Co. LLP     3.08%      4,743,375      2,580,822,904    +17,147      +0.36%
Managed Account Advisors LLC     2.09%      3,226,374      1,755,437,830    +890,047      +38.10%
JPMorgan Investment Management, I…     1.59%      2,449,368      1,332,676,635    +281,558      +12.99%
Norges Bank Investment Management     1.57%      2,423,172      1,318,423,653    -359,102      -12.91%
Morgan Stanley Smith Barney LLC (…     1.37%      2,115,871      1,151,224,252    +64,955      +3.17%

In addition, Mutual Funds invest in BlackRock, those funds where financial experts invest resources from many people in very different companies. The main 10 mutual funds appear in the following table.

Top 10 Mutual Funds holding BlackRock Inc  (suman 14,22% del total)

Mutual fund Stake  Shares
owned
  Total value ($) Shares
bought / sold
Total change
Vanguard Total Stock Market Index…   2.68%  4,127,095    2,245,511,119  +560,739     +15.72%
Washington Mutual Investors Fund   2.41%  3,722,830    2,025,554,575  +473,997     +14.59%
Vanguard 500 Index Fund   2.08%  3,200,585    1,741,406,293  +487,379     +17.96%
Government Pension Fund – Global …   1.55%  2,382,686    1,296,395,626  -359,102    -13.10%
SPDR S&P 500 ETF   1.07%  1,643,910        894,434,992  -11,346  -0.69%
American Balanced Fund   0.93%  1,429,700  777,885,473  +2,700  +0.19%
Vanguard Dividend Growth Fund   0.89%  1,379,729  750,696,752  -194,812    -12.37%
Fidelity 500 Index Fund   0.87%  1,347,572  733,200,449  +307,334     +29.54%
Vanguard Institutional Index Fund   0.87%  1,346,519  732,627,523  +203,808     +17.84%
Vanguard Wellington Fund   0.87%  1,337,629  727,790,563   0  0.00%

In this way, the two main types of shareholders control 62.73% of BlackRock ownership.

A shakeup of BlackRock structure: PNC exit, the unique large shareholder

Until May 15, 2020, PNC Financial Service Group controlled 22.04% of BlackRock ownership. On that day, they sold all their shares for 14.4 billion dollars.

PNC is a Pittsburg-based holding, in Pennsylvania, with two main subsidiaries: a retail bank, which is the ninth largest of the United States with more than 8 million clients and one entity Asset Management Group that in March 2020 managed third parties’ assets for 264 billion dollars.

Consequences of rearrangement of forces

A first consequence is that BlackRock deconcentrates even more the relative influence of its shareholders. The shareholder with the largest internal firepower 22.04% leaves the game. The one that follows them is Vanguard Group who controls 5.62% of BlackRock ownership, four times smaller than PNC but with five associated Mutual Funds that add another 7.39% of shares. Vanguard is, at the same time, the main competitor and ally of BlackRock regarding the game of intertwined investments. They are allies when investing in the same funds, enterprises, or countries as they bring their voting power; they compete when they choose investments excluding the other or when they need to select their own directors in the funds or enterprises where they jointly invest. Four other shareholders follow Vanguard (one of them formed by BlackRock’s advisors), they control between 3 and 4% of the shares. The participation of the rest of shareholders is smaller than 2% some and 1% many of them. As ownership structure atomizes, degrees of freedom to operate for the executives of BlackRock increase.

Another consequence is that the up to now untouchable image of BlackRock suffers for the abandonment of a powerful entity that with such sale of shares reinforces its capital in 14.4 billion dollars. Thus, PNC’s capacity for competing increases, even in markets where BlackRock dominates.

In addition, a larger capital allows PNC to solve two complementary challenges. On the one side, it increases the security armor of its retail bank in a dangerous instability phase of bankruptcies due to the double pandemic, sanitary and economic. On the other side, this same armor allows their other subsidiary to present itself strengthened in the current turbulent context to keep attracting and managing third parties’ assets.

How did BlackRock react? With quick reflexes, it mobilized all its instruments to preserve its hegemony through retaining shareholders, defending stock exchange value of its shares, maintaining or increasing their income flow as manager of third parties’ resources. Immediately, it asks the Board’s authorization for increasing dividends for their shareholders. It also devotes 1.2 billion cash to buy back its shares, what in turn sustains its stock exchange value, assures more profitability for shareholders (as the buyback grants shareholders more participation in the patrimony of BlackRock and distributed dividends). The CEO and other executives assure that they will further increase the profitability of their investments. In the case of funds that invest in enterprises, this implies demanding them more competitive aggressiveness including salary cutbacks and worse labor conditions. In the case of funds with bonds from countries that need to restructure their unsustainable debts this is translated into increasing as much as possible negotiating pressure to secure better contractual conditions for themselves.

In summary, those who lead appropriating fabrics know how to address difficulties without sacrificing income or putting their own interests at risk. As they usually do, they discharge costs of circumventing adverse situations forcing “downward” adjustments. They punish workers, suppliers, and consumers of large enterprises in which they had invested and impose restructuring of debts that perpetuate submission of non-central countries. Their first law is preserve the profitability of their shareholders and of course no touching of their millionaire compensations.

“On the other side,” large majorities survive thrown into abandonment and merciless shortcomings. The appropriation of surpluses sterilizes resources that countries could devote to good living of their peoples and the protection of their territories. Naïve is to ask if it matters to those who profit from appropriator fabrics. In meetings where decisions are made (boards and executive committees), issues and worries addressed always converge on the central purpose that propels them: which profit they have obtained and how can they increase it. The tremendous impact of their decisions onto humanity and the planet are not part of the agenda. If they are confronted to be held accountable for their actions, they argue that it is not theirs to considerate those responsibilities. They state that the mandate they received is maximizing profit and if their actions end up punishing populations or destroying the environment, those are collateral damages or, with the hypocrisy of those accustomed to abusing their power, they say those are undesirable externalities. It hurts and makes us revolt against the world of the appropriators.

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Opinion Sur is a non-governmental, nonprofit group from Argentina dedicated to promoting sustainable economic and social growth in developing countries. Opinion Sur creates original ideas and strategic action plans to share with policy makers, entrepreneurs, academics, NGOs, and the public through advisory services, and a series of products: two monthly online publications – Opinion Sur and Opinion Sur Joven. Through Opinion Sur Journal, a free and non-partisan online publication, it circulates ideas that contribute to the sustainable development of countries in the Southern Hemisphere. This publication, which is also available in Portuguese and Spanish, focuses on three complimentary areas: Development; Geopolitics; and Transformations. Currently, there are more than 70,000 subscribers spanning across the five continents. More…

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