Back in 2008, the subprime mortgage crisis saw the bankruptcy of Lehman Brothers, causing significant damage to many financial institutions. However, some institutions rose to prominence, such as BlackRock, which became the “biggest success on Wall Street in the past 10 years.”
Fast forward to today, and the US banking industry is in the midst of another crisis. Following the collapse of Silicon Valley Bank in March, another regional commercial bank, First Republic Bank, has now fallen on May 1st, barely surviving for two months. This marks the fourth bank failure in the current US banking crisis and the second-largest bankruptcy in American history.
Banking is a confidence game…We are watching dominoes fall, paying a huge systemic and economic price
Bill Ackman on recent regional bank’s bankruptcy risks
Although the takeover of First Republic Bank was relatively quick, its collapse still caused a significant drop in mid-sized and regional bank stocks on the US stock market the following day, with many falling over 5%. Bill Ackman, the founder of Pershing Square Capital Management, stated on May 4th that regulatory failures led to the bank’s bankruptcy, and regional banks in the US are facing risks.
Ackman went on to say, “Banking is a confidence game. At this rate, no regional bank can survive bad news or bad data. As stock prices inevitably plummet and deposits are continuously withdrawn, the next fragile bank begins to teeter.”
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“We are watching dominoes fall, paying a huge systemic and economic price.”
As early as March 15th, Larry Fink, the Chairman and CEO of Blackrock, expressed his concerns to investors in his annual letter, stating that the Silicon Valley Bank incident was a typical asset-liability mismatch event that could spread to the wider financial system and pose a threat.
Biggest Success on Wall Street since 2008 Crisis
Crisis often carries a connotation of danger, but it also presents opportunities. In the 2008 subprime mortgage crisis, Lehman Brothers’ bankruptcy caused severe damage to many financial institutions. However, some companies seized the moment and rose to become the “biggest success on Wall Street in the past decade.” One of these companies is BlackRock.
BlackRock is one of the largest asset management firms globally, founded in 1988 as a financial management company under Blackstone, a global private equity giant. It separated from Blackstone in 1992 and became an independent company named BlackRock, listing on the New York Stock Exchange in 1999.
Since its initial public offering in 1999, BlackRock has been the best-performing financial services stock in the S&P 500, with a total return of up to 7700%. It manages approximately $8.59 trillion in assets worldwide, covering stocks, fixed-income investments, cash management, alternative investments, and advisory strategies. (Data from BlackRock’s official website, as of December 31, 2022)
Let’s take you on a journey to explore the trillion-dollar giant that rose to prominence in the 2008 crisis and examine the lessons we can learn from BlackRock’s response to this banking crisis.
From Crisis to Opportunity
On September 13th, Larry Fink arrived at the New York airport, about to board a plane to Singapore for a meeting with the Asian Sovereign Wealth Fund. They hoped to secure a profitable contract with BlackRock. The situation on Wall Street was uneasy, to say the least.
Even before the boss of BlackRock had landed, Wall Street had collapsed, just like it had decades before.
Finally, on Monday morning, Fink landed and received some shocking news: Lehman Brothers had gone bankrupt, Merrill Lynch had been sold to Bank of America, and AIG was a giant on the verge of collapse.
Fink later said, “I felt like Charlton Heston in Planet of the Apes.” In this Hollywood movie, Heston played an astronaut who returns to Earth after a spaceship crash and thinks he’s landed on a strange planet. It’s only when he recognizes the wreckage of the Statue of Liberty on the beach that he realizes his civilization has been destroyed.
Crisis = Beginning of a transformation
But for Fink and his team, this was the beginning of a transformation – from an asset manager with smart analysts and a focus on bond business to a high finance and big politics player behind the scenes.
Shortly after the disaster, the US Treasury and the Federal Reserve contacted BlackRock to ask if they could handle the “toxic” securities in AIG’s books. The world’s largest insurance company had made an incorrect calculation on complex credit derivatives. Now, someone had to calculate the value of these securities and gradually clear them.
Such a task was clearly beyond the scope of Treasury officials and central bank officials.
After Bear Stearns’ mission, BlackRock’s securities experts began to deal with AIG’s “toxic” assets. Fink’s team of experts was not surprised by AIG’s difficulties. In the six months before the collapse, Robert Willenstad was hired as the new CEO of the insurance company. Shortly after taking office, he hired BlackRock because he wanted to be cautious and find out how serious AIG’s investment portfolio issues were.
His predecessor, Maurice “Hank” Greenberg, had been looking for new business areas and wanted a piece of the booming loan securitization. He liked Joe Cassano, the man Matt Taibbi called the “patient zero of the global economic crisis,” who came up with a seemingly brilliant idea: rating agencies would rate AIG as the highest AAA credit rating.
Why not make money with ratings? So AIG provided guarantees for bank-packaged loans – the CMO and CDOs that were popular with investors at the time. With AIG’s guarantee, packaged loans would also receive the highest credit rating. This was advantageous for the issuers of packaged loans because it made it easier for them to sell them to investors.
This was also advantageous for AIG, as the insurance company could charge fees for this kind of default guarantee. Since most of the loans sold in packages were US mortgage loans and there had never been a nationwide default, the risk seemed small.
AIG Nationalized and the Rise of BlackRock
In its heyday, AIG was a highly sought-after partner, especially in Europe where banks favored its securitized packaged debt. However, the financial crisis hit, and the loans that AIG so generously shared its credit rating with were suddenly seen as far riskier than anticipated.
As per the fine print in the Cassano contract, AIG was obligated to transfer a sum of money as collateral to banks such as Goldman Sachs or Deutsche Bank if its credit rating were downgraded, and this had to be done in cash to offset the securities’ higher risk. This meant AIG had to transfer cash to its counterparties, but finding the necessary funds became increasingly difficult for its management as a new wave of bad loans flooded the market. AIG’s trading partners demanded additional collateral, making it almost impossible for AIG to secure the needed funds.
AIG’s unfortunate successor, British executive Martin Sullivan, who was also a proud sponsor of the Manchester United Football Club, was apparently unaware of the company’s dire situation. As new doubts emerged over mortgage loans, banks insisted that AIG provide additional collateral. His replacement, Edward Liddy, tasked BlackRock with investigating the catastrophic derivatives created by Cassano to stabilize the situation, but it was too late. The demand for additional collateral from banks became too burdensome.
In September 2008, panic set in at AIG’s artfully designed skyscraper located on Pine Street in Lower Manhattan. Washington intervened, and AIG was nationalized, an unthinkable scene in the United States, which always considered itself a safe haven for free markets. However, the Washington takeover did not end BlackRock’s commission to manage and liquidate AIG’s “toxic” assets for the central bank.
BlackRock actually gained new business in the crisis.
History of Davos World Economic Forum
Davos World Economic Forum is a dream destination for anyone with ideas and ambitions. Every January, the world’s elites, or more precisely, the elites trusted by the organizers and sponsors, gather in the small town of Davos in the Swiss Alps.
The founder, Klaus Schwab, was born in 1938 in Ravensburg, Upper Swabia. When he was young, he participated in the “European Movement“. He was fascinated by some American views on combining business and management knowledge, such as companies being responsible not only to owners but also to other stakeholders, such as the country, employees, and customers.
In 1971, he organized a European Management Forum in Davos while he was a professor at the University of Geneva. He liked the place because it was away from the hustle and bustle and had a conference center. Last but not least, Davos was a place of knowledge.
Thomas Mann’s “The Magic Mountain” was staged on the Schatzalp in Davos. In 1928, when a university was truly founded, even Einstein gave a honorary speech.
The forum, which Schwab repeated every year, attracts more and more participants, thanks to the mountain air, ski slopes, and great ideas. In 1987, he renamed it the World Economic Forum.
The World Economic Forum is funded by membership fees, and almost all of the world’s largest companies are members. Strategic partners of the World Economic Forum can have a say in project settings, including Allianz, SAP, Audi, Siemens, Volkswagen, and Deutsche Post, among other German companies.
According to the World Economic Forum, these partners were selected based on their commitment to “improving the world situation.”
The Inside Story of Davos World Economic Forum
The Davos World Economic Forum is an annual event that attracts world leaders, business executives, economists, and other influential figures. While many participants are well-known, some lesser-known individuals also attend, such as BlackRock at the time. However, gaining entry to the exclusive inner circle of the “real Davos” takes more than just the appropriate credentials and identification badges.
To truly participate in the conversations that matter, one needs access to the right hotel suites where politicians and business leaders can have “speed-dating” sessions in a more relaxed setting. Only those who belong to this circle can come and go from the Bélvedère Hotel, where central bank officials, other bankers, hedge fund managers, prophets and heirs, astrophysicists, monks, Silicon Valley representatives, and more come together in an atmosphere of mutual recognition.
Larry Fink, CEO of BlackRock, encountered some difficulties when he first joined the Davos crowd. In the summer of 2012, Fink hired Philipp Hildebrand, the former head of the Swiss National Bank, for a top position. Fink announced the appointment in a press release, praising Hildebrand’s professional expertise, judgment, and integrity.
Compared to his previous work, the job offer from Fink could be seen as a step back for Hildebrand. Prior to joining BlackRock, he had been a controversial figure in Switzerland, with some calling him a “bridge banker” due to his ties to Wall Street and New York. Some critics felt that Hildebrand was unsuitable to be the head of the Swiss National Bank even before the US dollar exchange scandal, despite his acceptance by the UK and US financial markets.
Joining the Davos
Philipp Hildebrand is a Swiss millionaire who not only has good relationships with bankers and hedge fund managers but is also a first-class financial diplomat.
Hildebrand is a member of the Strategic Committee of the French Treasury, an organization that manages France’s debt and assets. After the Brexit failure, the former British Prime Minister Theresa May appointed Hildebrand as a member of the board of trustees of the British Museum, one of the highest honors in the UK.
He served as Vice-Chairman of the Financial Stability Board of the Basel International Organization, which was established after the 2008 financial crisis to prevent such crises from happening again. The then-Chairman was Mario Draghi, former Goldman Sachs director, who later became the President of the European Central Bank.
Hildebrand has more in common with Draghi; both are members of the “Group of Thirty,” an exclusive circle of 30 current and former central bank officials, academics, and bankers.
According to the organization’s website, the elite club was established in the 1970s by the Rockefeller Foundation to “deepen understanding of international economic and financial market issues” and “explore possibilities for market participants and regulatory agencies.”
Members of the organization include former Federal Reserve Chair Janet Yellen, who was rudely dismissed by Trump after just one term, and former European Central Bank President Jean-Claude Trichet.
Former German Central Bank President Axel Weber and former Governor of the People’s Bank of China Zhou Xiaochuan also attended the meeting. Larry Summers, who served as Secretary of the Treasury in the Clinton administration before becoming Harvard University President for a time, and then becoming one of Obama’s closest advisers, was also there.
Hildebrand maintains close relationships with Summers, just as he is familiar with Timothy Geithner and former President Clinton. Geithner is an old acquaintance of Fink in New York.
Another close friend is Mark Carney, who was Hildebrand’s best man. Carney, a former Goldman Sachs banker, was the first Governor of the Bank of Canada and served as the Governor of the Bank of England from 2013 to 2020.
With Hildebrand’s help, Fink opened a door that had previously been closed to him, even though he had trillions of dollars. Yes, rumors have it that before he was invited, Davos considered him a nobody.
However, later, the “California kid” became a member. Of course, when he was young, tidying shoelaces and cleaning shoeboxes in his father’s shoe store, he never thought of such a day.
A New York consultant and senior Davos expert observed: “He’s not as smooth as many bankers or politicians.” She said that Fink’s communication at Davos is still close “to trading…”.
As having a past as a Wall Street trader, he hasn’t completely abandoned his roots. According to rumors within Davos circles, Fink has a penchant for flaunting his prestigious name and has a bit of a gossipy side. Nevertheless, Fink has certainly delivered.
Compared to its immense influence, BlackRock is relatively low-key, almost intentionally hiding its presence. Despite this, the investment management company has managed to become one of the most powerful players in the financial world.