BlackRock: The financial leviathan that bears down on Europe’s decisions

BlackRock: The financial leviathan that bears down on Europe’s decisions2019-04-17T13:26:23+00:00

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Credit: Alexia Barakou for Investigate Europe

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BlackRock: The financial leviathan that
bears down on Europe’s decisions

April 17th, 2019

By Jordan Pouille

First published Wednesday, May 8, 2018 in Mediapart

BlackRock is the world’s most powerful financial institution, managing over $6 trillion in assets. As both an adviser to central banks and the largest shareholder in the industrial jewels of a nation, BlackRock has begun whispering in the ears of European states. Its key challenges: to counteract all financial regulation and drive funded retirement for all.

There’s a story told by a former employee of BlackRock, the kind we all tell around the coffee machine. Larry Fink, CEO of the world’s most powerful fund, is on his private plane heading for Europe. Above the Atlantic, he asks the captain to make course for Germany. He calls his regional manager in Frankfurt and demands a meeting with Angela Merkel, if possible in five hours, after he lands.

The subordinate works like a man possessed but, in the end, doesn’t get the desired meeting. He offers Mr Fink a consolation prize: the vice president of the car manufacturer BMW, just for him. The meeting kicks-off, the small talk has just got going when suddenly Larry Fink takes out his phone and begins preparing his next meeting, leaving his interlocutor lost for words. Such glibness on the part of its founder illustrates the omnipotence of his company.

Son of a shoe shop manager and an English teacher, he founded his company with a dozen colleagues 30 years ago, having learned his craft in a New York investment bank. At the age of 65 he is a multi-billionaire. His fund manages assets of $6,280 billion, a third of them in Europe. The primary source of this money is pension funds, principally those of Californian and New York state officials. All have funded pensions and are hoping to see their own savings, already supplemented by their employer, blossom in the financial markets under BlackRock management.

The fund employs 13,900 people spread around 30 countries, tasked with selling financial products or investing in new companies. But over the years, and especially since the financial crisis, BlackRock has expanded its power well beyond asset management. We find it as an auditor of banks engaged by regulatory authorities and as an adviser to states on privatisation. In the autumn of 2017, it was invited by the French government to sit on the “comité Action publique 2022″ (CAP 2022), a kind of second Attali Commission, meant to sketch out the future contours of the French state. Behind the scenes in Europe it is very busy countering any attempt to increase regulation.

In Europe, BlackRock is a name that says very little to anyone beyond the sphere of finance. The universe of asset managers and their obscure index funds seems to be the preserve of insiders. But its power is impressive. To question anyone involved in finance about BlackRock as to whether they are merely administrators, or small or big players, or stewards of wealth, is to run the risk of facing countless rejections, sometimes civil, sometimes not so.

In France alone, the fund is a 5 to 10 % shareholder, via a string of subsidiaries, of Eiffage, Danone, Vinci, Lagardère, but also of Renault, Peugeot, Société Générale, Axa, Vivendi, Total, Sanofi, Legrand, Schneider Electric, Veolia, Publicis, etc etc. BlackRock is a shareholder, often the principal one, in at least 172 of the 525 French companies listed on the stock exchange. And of 17,000 companies around the world, at each general meeting of which it never fails to vote.

“As soon as BlackRock appears as one of your shareholders, your company stands out from the crowd and gains a huge amount of prestige,” says the journalist Grégoire Favet, who we’re used to seeing picking through the details of French finance on the set of his BFM Business TV show. “When you are Larry Fink, you can talk as equals with the director of the IMF or a head of state. Mr. Fink has already been received twice at the Élysée since the election of Emmanuel Macron,” says Mr Favet.

Paramedic rescue force during the financial crisis

Created in 1988, BlackRock gained its current power in the wake of the 2008 financial crisis. With the fall of Lehman Brothers, Wall Street was in the throes of free-fall: no one knew what thousands of their financial portfolios contained, what was hidden behind the derivatives, what was toxic and what was not, what was dangerous and what wasn’t.

BlackRock quickly understood how it could benefit from the situation. Since its creation the firm has developed its own risk management tool, called Aladdin. “It is able to analyse the risks of investing in any stock, to highlight where to sell bonds to attract the best price, to track all transactions, to bring together all the data and have to hand information vital to investors,” explains the Financial Times.

Taking advantage of the panic, BlackRock put Aladdin at the disposal of other financiers, for a price of course. But the fund also offered its services to the financial authorities, who were seeking its help in evaluating the health of large banks considered systemic: the investment bank Bear Stearns for example, the insurance giant American International Group and the financial conglomerate Citigroup. BlackRock also picked up a contract to monitor Fannie Mae and Freddie Mac, the public mortgage credit institutions that the federal government had just rescued.

As early as 2009, elected representatives however began posing questions. “How is it,” asked Republican Senator Charles Grassley, “that only one company is qualified to manage these assets recovered by the government?” Auditing on behalf of the public sector, investing in the private sector. Two self-evidently incompatible hats, but a mix of functions that BlackRock now cleverly reproduces across Europe.

Adviser to European central banks

In 2011, the central bank of Ireland decided also to solicit BlackRock Solutions, the consultancy arm of the fund, without a call for tenders, to evaluate the state of the six main Irish banks. Three of them had just been bailed out in panic by the state to avoid bankruptcy. Crumbling under debt, Ireland had to call on Europe and the IMF in the framework of an 85 billion euro “rescue” plan. It also wanted to conduct “stress tests” to check the solidity of the banking environment in the event of any new glitches.

Later, in the face of sceptical Irish deputies, the finance minister at the time said he had appealed to BlackRock under pressure from international institutions that had lent money to Ireland, grouped in the so-called “Troika”, of euro crisis fame. These were the European Central Bank (ECB), the European Union and the IMF. It was a “gigantic mission,” acknowledged Larry Fink. “The largest ever entrusted to us by a government.”

BlackRock Solutions, the consulting branch, thus acquired new references. Its help would be sought again in 2012, and again in 2013, to assess the capital requirements of Irish banks. On November 4 2013, the BlackRock Fund purchased 3% of one of these banks, Bank of Ireland, and reported holding 162 billion euros in assets domiciled in Ireland. 

Chirac’s former adviser at the head of the French branch

In Greece in 2011, also under pressure from the Troika, the Central Bank of Greece called on BlackRock Solutions to dissect the loan portfolios of 18 banks, then again in 2013 for the portfolios of the four largest banks. Cautious, BlackRock used a false operating name, Solar, rented modest offices in a residential area of Athens, and gave its employees armed escort. A final mission was conducted in 2015. Today, the operator has built a shopping centre for 300 million euros in Athens. It owns shares in two banks, in the main energy supplier and in the national lottery, which is in the process of being privatised.

“Nothing indicates that BlackRock employees who came to test our banks passed on information to other teams,” says an investor in Athens assured of anonymity. BlackRock would not have risked demolishing its reputation for so little! But for this investor, the problem goes higher.

“When you climb the hierarchical ladder, you end up reaching a level where you have access to information from the entire company, consulting and investment. So, when Larry Fink meets a Greek, Spanish or Irish head of state, which interest does he choose to address? The audit part or the investment part? Why not both, at his discretion?

This ambivalence ends up creating waves. In Spain, four of the largest real estate developers today have BlackRock among their investors, as do the six largest Spanish banks. But in May 2012, the state asked the firm to evaluate the bad debts and real estate assets of its credit institutions and their recapitalisation needs. Spanish parliamentarians have detected possible conflicts of interest in this and have pushed the economy minister, Luis de Guindos, now vice-president of the ECB, to about-turn and opt for the German firm Roland Berger instead.

The same awkwardness surfaced in the Netherlands, when in December 2012 the central bank asked BlackRock Solutions to analyse the loan portfolio of the national banking giant ING, then, in July 2013, the real estate assets of all Dutch banks. At the time BlackRock already owned more than 5% of ING across some twenty sectors. Questioned by a Member of Parliament, Finance Minister Jeroen Dijsselbloem, who at the time was also President of the Eurogroup, justified his actions by referring to the existence of a Chinese wall between BlackRock’s advisory and fund management activities.

Ironically, to avoid any conflict of interest itself, the Dutch central bank had decided in 2007 to entrust the management of the pension funds of its employees to…BlackRock.

Revolving doors and lobbying

To extend its influence in Europe, BlackRock has surrounded itself by well-known personalities, such as George Osborne, UK Finance Minister from 2010 to 2016 under David Cameron, who is now editor of The Evening Standard newspaper and works one day a week as a consultant at BlackRock. His remuneration matches his fame: 650,000 pounds (739,600 euros) per year.

As he reformed UK pensions in his last two years at his department, George Osborne met BlackRock executives on five occasions, allowing its asset managers to access an annual market of 25 billion pounds. Rupert Harrison, Osborne’s chief of staff, was also hired by the fund. “Given his experience in implementing the recent pension reform in the UK, he is uniquely positioned to help us expand our pension offer,” the US firm said in a statement.

In Germany, it is Friedrich Merz, former head of the CDU in Parliament, the party of the former CDU leader Angela Merkel, who currently manages the local operations of the asset manager. In Switzerland, Philippe Hildebrand, the former head of the Swiss central bank, was recruited. In Greece, BlackRock has opted for Paschalis Bouchoris, the former head of a government privatisation programme.

As for France, its president is Jean-François Cirelli, former economic advisor to Jacques Chirac, then deputy chief of staff for Jean-Pierre Raffarin. This alumnus of the École Nationale d’Administration led GDF (Gaz de France) from 2004, steering the group towards privatisation. Then, during the last presidential election, he joined Alain Juppé’s campaign committee, as did the current Prime Minister, Édouard Philippe.

And in Brussels? BlackRock has been installed on the first floor of 35 Place de Meeûs since 2010, in front of a park where European officials throng in the lunchtime sun during the week. According to the European Union’s Transparency Register, in 2012 BlackRock claimed to have spent some 150,000 euros on its Brussels business. In 2014 it was 10 times that.

Between November 2014 and March 2018, the US operator solicited, and obtained, meetings with members of the European Commission on 33 occasions. According to a source in the European Parliament, BlackRock also organises “information days” for parliamentary assistants “to explain how a product works or how passive funds can be used to enhance economic growth. In the end, these parliamentary assistants will be able to best advise the members,” she says.

Daniela Gabor, Professor of Macroeconomics at the University of Western England (UWE) in Bristol, has been following a lot of debates in Brussels on the regulation of finance since 2013, when the EU’s Internal Market Commissioner, Michel Barnier, promised to strengthen the rules of the financial system.

“The British commissioner who took over from Barnier, Jonathan Hill, wanted the commission to work hand-in-hand with the financiers and every time a debate or a hearing was organised, BlackRock’s people were there,” recalls Daniela Gabor.

“Then I realised that it was no longer the banks that had the power but the asset managers. We are often told that a manager is there to invest our money for our old age. But it’s much more than that,” she says. “In my opinion, BlackRock reflects the renunciation of the welfare state. Its rise in power goes hand-in-hand with ongoing structural changes; changes in finance, but also in the nature of the social contract that unites the citizen and the state.”

Daniela Gabor explains that the European Central Bank, which commissions BlackRock to audit banks, has no power over the company. “BlackRock’s argument is simple: we do not do leverage, we do not act like banks, so we do not need to be regulated as a systemic institution.”

In fact, BlackRock slips under all radars. “They can be regulated for reasons known as micro-prudential, to protect their customers, but not as a financial institution tasked with ensuring overall financial stability,” she says.

AMF and BlackRock, two fellow travellers

On the French side, BlackRock, like any asset manager, must declare to the Autorité des Marchés Financiers (AMF) if it crosses certain thresholds – 5 % and then 10 % – during a takeover of a company listed on the Paris Stock Exchange. In addition, the AMF checks the commercial prospectuses of its financial products submitted to potential customers. And nothing else. A member of the Stock Exchange watchdog body expresses surprise at our questions about the weakness of controls over this fund manager. “For its European operations, BlackRock is headquartered in England. It’s with them that you have to inquire. We give only one stamp.”

When, for example, BlackRock declares to the AMF that it holds 5.16% of the Casino Group through two subsidiaries, the financial database of Thomson One, part of Thomson Reuters Group, has in its records for the same period a figure of 9.66%, via six different subsidiaries. The same for Safran, which declared 6.22% at the AMF, less than the 9.03% indicated by Thomson One.

The French regulator is mute in the face of these discrepancies in the figures. The same oddities are there with the German regulator concerning companies like Deutsche Wohnen, Vonovia, Deutsche Post and Bayer AG. The regulator is promising a “clarification”.

If the AMF does not seem over-attentive towards BlackRock, BlackRock for its part doesn’t stint in giving out advice. “We invite the AMF to reduce legal barriers” or “we will be happy to help the AMF to develop a tailored approach” are some of the propositions featuring in a letter it sent to the stock market authorities in 2013. The goal is simple: avoid all regulation.

BlackRock surveys are regularly included in AMF publications. The monthly newsletter of the Observatoire de l’Épargne provides BlackRock surveys on the attitudes of French savers:

“Are the French confident enough to invest?” (June 2016), “Do French women save more than French men?” (April 2016), “Are more French people planning their holidays than their retirement?” (December 2013).

BlackRock has a response to everything

Last November, the AMF organised a round table at which the president of BlackRock France was among the speakers. Jean-François Cirelli highlighted their shared chemistry. “We want national regulators to keep their feet close to the ground. […] How can we strengthen the idea with the public authorities, with our customers, that we all must invest for retirement in the capital markets? How can we take advantage of the post-Brexit era? The AMF has published a report on [how better] to invest in equities over the long-term and this travels in that direction also.”

Keeping an eye on potentially favourable reform of French retirement savings, whose contours were refined by Minister Bruno Le Maire, on the European front BlackRock can already count on the zeal of Valdis Dombrovskis. This Latvian is European Commissioner for Financial Stability but is also one of the commission vice-presidents. He is behind the pan-European Individual Retirement Savings Product (PEPP), a new type of retirement savings product scheduled to be launched next year within the EU and currently undergoing testing by private and public-sector researchers. The voluntary contribution programme is called Resaver, and it’s BlackRock that Valdis Dombrovskis has entrusted with the task of managing participants’ savings.

Conflict of interest

The power of influence over sovereign states acquired by BlackRock in a few years begs questioning. So too its multiple roles. One issue in particular raises questions: the “horizontal” power that BlackRock has built up in certain sectors through its investments in companies – aeronautics, construction, spirits, small electrical equipment, etc. Quickly, the company has found itself a shareholder of all the big names in the same sector.

In chemicals for example, BlackRock dominates on both sides of the Atlantic with significant holdings – between 5 and 10% – in all major global chemical groups: Bayer, BASF, DuPont, Monsanto, Linde and the French companies Arkema and Air Liquide.

These companies, competitors at first glance, find themselves with the same shareholder who can, at a whim, push for concentration, specialisation or sale. This situation created no noise until two economists, José Azar and Martin Schmalz of the University of Michigan, published a report on common ownership in 2016. According to their thinking, BlackRock customers would have nothing to gain from the fact that companies in which the manager was also a shareholder would engage in bitter fighting. The two researchers looked at the commercial aviation sector and saw an upward alignment of ticket prices among the top five US airlines, in which BlackRock and its rival Vanguard have stakes.

In Germany, the competition authority has expressed concern. It said: “There is a significant potential risk of distorting competition through horizontal shareholdings between companies in the same economic sector.” In France, the competition authority is kicking the issue outside the field of play. “We do not have any specific work reflecting on this issue underway right now,” it said. But on 16 February 2018, European Competition Commissioner Margrethe Vestager delivered a speech on the theme and promised to launch a study to measure the scale of horizontal shareholding.

Naturally, BlackRock would prefer to distance itself from such controversies, presenting instead the image of a company committed to the well-being of humanity. In a letter sent on 12 January 2018 to the bosses of the companies of which he is a shareholder, Larry Fink invited all to work more actively for the common good. His French representative for one might find this hard.

Jean-François Cirelli is a member of the “comité Action publique 2022”, created by Prime Minister Philippe to reflect on the public services of tomorrow. When asked about the nature of his contribution, he defines public service as access to employment and the mechanism of supplementary pension financing.

“I think about two things. One, what needs to be done so that Pole emploi (public employment agency) can better respond to employment trends and better guide the unemployed. And two, should Agirc Arrco (complementary compulsory pension) contributions be collected by Urssaf (network of private organisations that collect contributions out of salaries), which already collects more than 400 billion euros, rather than letting Agirc Arrco collect them themselves?”

Then he adds: “And I confirm, there is nothing BlackRock in there. By the way, I purposely took on issues which don’t pose conflicts of interest.”

This story is part of our in-depth investigation into the investments and wide-ranging influence of BlackRock.

Find out more and read the story in one of our partner publications in your national language

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