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Sep 15, 2016

DealBook | To Story: At BlackRock, Wall Street Rock Star's $5 Trillion Come Back - September 15, 2016

The New York Times
Landon Thomas Jr.
It was not the most convincing of replies.

‘I Am Aladdin’

Over the last 10 years, Mr. Fink has transformed BlackRock from a bond shop catering to pension funds and insurance companies into an asset-gathering machine that uses advanced technology to reimagine how investors buy, sell and assess the risks of a wide variety of securities. Via its $1 trillion-plus in exchange-traded funds, BlackRock has been instrumental in creating newly liquid markets in high-yield and corporate bonds — a direct attack on the business model of banks like Deutsche Bank.

Fink’s Upward Trajectory

In over two decades at BlackRock, Laurence D. Fink has watched the firm grow to manage $5 trillion.
  • 1983

    Laurence D. Fink presides over one of the first collateralized mortgage obligation deals on Wall Street — a $1 billion offering by Freddie Mac.
  • 1986

    Mr. Fink loses $100 million in a mortgage bet gone bad.
  • 1988

    Mr. Fink and seven other executives start an investment group focused on buying bonds under the umbrella of the private equity firm Blackstone.
  • 1992

    The firm adopts the name BlackRock and oversees $17 billion.
  • 1994

    General Electric contracts BlackRock’s Aladdin risk platform to wind down the brokerage firm Kidder, Peabody & Company.
  • 1999

    BlackRock goes public with $165 billion in assets under management.
  • 2003

    Mr. Fink, a New York Stock Exchange board member, is embroiled in a dispute over the pay of Richard A. Grasso, the exchange’s chief.
  • 2006

    BlackRock acquires Merrill Lynch’s investment management division, gaining a large equity business. Assets under management are $1.1 trillion.
  • 2007

    Mr. Fink is nearly named chief executive of Merrill Lynch.
  • 2009

    Treasury hires BlackRock to analyze toxic securities.
  • BlackRock acquires Barclays Global Investors and its exchange-traded funds. BlackRock manages E.T.F.s with $495 billion of the E.T.F. market’s overall $777 billion. BlackRock’s total assets under management swell to $3.3 trillion.
  • 2013

    BlackRock’s E.T.F.s reach $752 billion. The overall E.T.F. market is $1.6 trillion. BlackRock’s total assets under management are $4 trillion.
  • 2016

    In August, BlackRock stock hits a new high. Its E.T.F.s are worth $1.1 trillion, while the overall E.T.F. market grows to $2.3 trillion. BlackRock’s total assets under management reach $5 trillion.
And through its big data-mining risk platform, Aladdin, or Asset Liability and Debt and Derivatives Investment Network, BlackRock says it has developed the market’s most highly evolved framework for stress-testing how securities will respond to certain situations — such as a sudden rise in interest rates or what happens in the event of a political surprise, like Donald J. Trump being elected president.
Staffed by 2,300 of BlackRock’s 13,000 employees, Aladdin promises to help firms trade, analyze and keep a compliant eye on the assets they manage. In an era of severe regulatory scrutiny, the service has become quite popular. Seventy-five firms — including Deutsche Bank’s asset management unit and Freddie Mac — managing a total of $10 trillion, now use it.
For a man who, in his speeches, consistently spends more time talking about technology and risk analytics than the vagaries of the capital markets, Mr. Fink is no techie. Like many Wall Street titans of his vintage, the 63-year-old Mr. Fink rarely sends emails. An infrequent texter, he does most of his communicating by phone, in meetings or over a plate of spicy pasta at his go-to Italian restaurant in Midtown Manhattan.
Mr. Fink maintains a grueling schedule, mixing regular bicoastal trips in the United States with frequent client jaunts to China and the Middle East. “This job requires an enormous commitment,” he said. “The pace is relentless. There will be a day when I wake up one day and say I just can’t do it anymore.”
That day remains well in the future, he says. Still, with BlackRock’s growth in size and sway, the issue of who, if anyone, from within the firm is qualified to succeed Mr. Fink has become an existential question for the company’s board of directors.
The problem is typical when replacing a founder: Mr. Fink has increased assets to $5 trillion from zero, and the imprint of his domineering personality has become so profound that virtually anyone will suffer to some degree in comparison, considering his track record.
After all, in 1983, he structured one of the first collateral mortgage obligations, and along with Lewis Ranieri at Salomon Brothers made it possible for large investors to enter the market for mortgages. A quarter of a century later, Mr. Fink recognized that the time was right for E.T.F.s and — in the depths of the financial crisis — bought Barclays’s iShares business, a deal analysts consider one of the shrewdest in recent Wall Street memory.
And beyond a soaring stock price, there are few better ways for a financial chief to command the respect of his peers than to slip through the grasp of regulators. So when Mr. Fink and his high-powered lobbyists in Washington were able to make the case, after the 2008 financial crisis, that major fund companies like BlackRock posed no risks to the markets because of their size, it only added to his aura.
There is a moment in Don DeLillo’s “Cosmopolis,” his meditation on the alienating effects of money and machines, when the protagonist financier offers a bit of advice to a colleague. There’s only one thing worth pursuing professionally and intellectually, he says: the interaction between technology and capital — its inseparability.
That, more or less, is what Mr. Fink told Dexter Senft, his computer expert at First Boston in 1982. “We are bringing the computer onto the trading floor, Dexter,” Mr. Fink recalls saying at the time. “If we can do this, it will change our business forever.”
Not only would Mr. Fink and his bond wizards be able to sell billions of dollars of new securities, giving birth to today’s market for asset backed mortgages, they could also analyze how these securities would trade in certain situations.
The immense losses at First Boston in 1986 taught a lesson that eventually shaped BlackRock. Mr. Fink realized that his clients on the “buy side” (the fund managers, insurance companies and pension funds shopping for investments) had become dependent on the ability of the “sell side” (the Wall Street investment banks) to analyze mortgages. That was because few buy-side clients had invested in computers and technology to the level First Boston had.
Most money management firms highlight their investment returns first, and risk controls second. BlackRock has taken a reverse approach: It believes that risk analysis, such as gauging how a security will trade if interest rates go up or down, improves investment results.
That is where Aladdin comes in. Aladdin is a network of code, trades, chat, algorithms and predictive models that on any given day can highlight vulnerabilities and opportunities connected to the $15 trillion the firm tracks — $10 trillion of which belongs to outside firms that pay BlackRock a fee to have access to the platform.
Aladdin fills the monitors of most BlackRock employees. One portfolio manager even went so far as to hang a nearly cinema-size screen on his office wall in order to get the full Aladdin experience. And at the company’s investor day in June, Mr. Fink and other top executives mentioned Aladdin 82 times — more than any other business line — even though the platform represents just 5 percent of the $11.3 billion in revenues BlackRock took in last year.
Or consider a recent marketing video that shows Mr. Fink and other top executives gazing at the camera and intoning one after the other, “I am Aladdin.”

Moment in the Sun

From Mr. Fink’s early days on Wall Street, his ambition has been stoked by a sense that he has not been receiving the proper credit for his achievements. At First Boston, even though he was among the earliest to popularize trading in mortgage securities, his peers including Mr. Ranieri and others drew more public attention as innovators and moneymakers.
As a successful, albeit mostly anonymous, bond manager at BlackRock in the 1990s and 2000s, he saw acclaim, pay and influence go to the chief executives of Goldman Sachs, Merrill Lynch and Morgan Stanley. That began changing only in 2009, when he bought Barclays’s E.T.F. business. Last year he was among a small circle of Wall Street executives to attend the state dinner at the White House for the Chinese president, Xi Jinping.
A part of Mr. Fink — a fervent Democrat today — believes he would make a pretty good Treasury secretary, say people who have discussed politics with him. Although he recently persuaded Cheryl Mills, one of Hillary Clinton’s closest advisers, to join the board of BlackRock, the view is fairly strongly held that if Mrs. Clinton becomes president, there is little chance that she will tap a Wall Street insider for the Treasury job.
The future of finance, Mr. Fink has argued, lies with rules-based, data-driven investment styles. Damon Winter/The New York Times
With BlackRock’s stock having more than doubled since 2011, far outpacing the likes of Goldman and JPMorgan and trading close to its record high, it seems that the market has come around to Mr. Fink’s financial worldview: that a low cost, systematic style of investing will, over time, grow faster than the costlier “active investing” model in which individuals, not algorithms, make stock, bond and asset allocation decisions.
And the numbers in that regard are arresting. Through July, E.T.F.s and traditional index funds made up 30 percent of total mutual fund assets, according to the Investment Company Institute, a ratio that has doubled in just under 10 years.
Of course, with close to $1.5 trillion in actively managed funds, Mr. Fink is not ready to write off a segment of the industry that even after years of outflows clocks in at $11 trillion. And he underlines the importance of being able to offer the best of both active and passive investing styles to BlackRock clients.
But inside the firm and out, there is little doubt that he is betting the ranch on E.T.F.s and similarly themed investments choices. These include so-called factor strategies, in which a bet is made on a certain investment outcome — like value stocks outpacing growth stocks, or a basket of low-volatility equities beating the broader indexes.
In San Francisco, a team of equity investors deploys data analysis to study the language that a chief executive uses during an earnings call. Does he seem unusually bearish this quarter, compared with last? If so, maybe the stock is a sell.
“We have more information than anyone,” Mr. Fink said.

A Not-So-Short List

Some analysts, in fact, argue that BlackRock should be valued as a technology company, as opposed to an asset manager.
Mark Wiedman, 45, a BlackRock executive who is on the short list to succeed Mr. Fink, believes that bond E.T.F.s, in particular, are creating a liquid market where a new generation of bond investors can freely buy and sell.
For years, he and Mr. Fink have been pitching insurance companies and pension funds to stop buying individual bonds (from the likes of Deutsche Bank) and instead choose a BlackRock bond E.T.F. Now it’s happening.
“I think of E.T.F.s as technology,” Mr. Wiedman said, as he leaned back in a swivel chair in his office. “It is a product that bundles up a bunch of securities, puts them on a screen and makes them easier to trade.”
Like many top executives here, Mr. Wiedman can get a bit manic when discussing the subject: Midway through an interview, he felt the need to somewhat violently undo his tie and cast it aside.
Regulators are less enthusiastic. Global watchdogs like the Bank for International Settlements and the International Monetary Fund have described these bountiful flows into and out of BlackRock bond E.T.F.s as a liquidity illusion. Which means, according to Ken Monaghan, an investor in high-yielding corporate bonds, that easy-to-trade E.T.F.s have lured “tourist” investors — people seduced by the rich yields, but who may not be able to stomach a sustained market reversal.
And if they all leave at once, watch out.
“E.T.F.s do not create liquidity,” said Mr. Monaghan, of the global fund manager Amundi Smith Breeden. “These new investors are not permanent.”
Aside from Mr. Wiedman of BlackRock, the short list to succeed Mr. Fink includes Robert S. Kapito, 59, a founding partner and current president of the firm who is seen as the top choice if a handover occurs sooner rather than later. Other candidates are Rob Goldstein, the 42-year-old chief operating officer and driving force behind Aladdin’s growth; Mark McCombe, 50, a former HSBC executive who looks after the firm’s big clients; Rich Kushel, 50, who oversees multi-asset investment strategies for clients; and Gary Shedlin, 52, the chief financial officer. There is also Mark Wiseman, a new hire who joined the firm this month to oversee its equity business.
It is a long list, and purposely so. For Mr. Fink, recommending a successor to his board is probably the weightiest decision he will make as BlackRock chief. He has taken pains to not tip his hand. “I want to make sure that the day after I leave, the firm is better off without me,” he said.
This spring, Mr. Fink called together more than 100 of the firm’s most senior executives for two days of meetings in Barcelona, Spain. BlackRock was approaching its 30th anniversary and Mr. Fink was in a nostalgic mood. Yet there was an edge to his remarks.
Yes, BlackRock was thriving because of its focus on low-risk, low-cost funds and the all-seeing wonders of Aladdin. But now was not the time to coast.
“We cannot let someone brand us as a vampire squid,” warned Mr. Fink, referring to a defining article in Rolling Stone magazine that so described Goldman Sachs.
Nor was this a time to sit fat and happy on a big pile of assets and let the fees role in, an indirect slap at actively managed giants such as Franklin Templeton and Pimco, where assets under management have recently been declining.
Never before, he said, had the fund management industry been so competitive and changing. “If you think you know everything about our business, you are kidding yourself,” he said. “The biggest question we have to answer is: ‘Are we developing the right leaders?’”
And then, looking out over the striving BlackRock executives gathered before him, he put it to them directly. “Are you,” he asked, “prepared to be one of those leaders?”