Real Stories Never End

Laurence “Larry” Fink wanted to be a politician, so he studied political science at UCLA.

At some point during undergrad that dream faded and he found himself pursuing an MBA at UCLA with a focus in real estate.

After the MBA, Fink realized he didn’t actually want to do real estate. Like many young people today, his ambition combined with the lack of a specific vision led him to Wall Street. He got job offers from multiple banks, but his eyes were fixated on baby blue. He made it to the final interview at Goldman before experiencing rejection.

Fink’s first job was at First Boston in 1976, where he joined the investment bank as a mortgage-backed security trader.

For ten years, he climbed the ranks until his head hit the ceiling.

Fink’s success was undeniable:

• Co-Head of Taxable Fixed Income Division

• Head of the Mortgage and Real Estate Products Group

• Member of Management Committee

• youngest Managing Director in First Boston history

• Increased First Boston’s assets by $1B+

Larry’s ego expanded in proportion to his excellence.

Colleagues began to notice his newfound cockiness, and avoided him accordingly. Fink had a core group of comrades in the mortgage unit he ran, and they fed off of his energy. He was next in line for the CEO position and his guys wanted to follow him up the ladder.

In 1986, Fink’s desk lost $100M dollars - $290M today - when interest rates unexpectedly fell and their hedge didn’t work.

The party died, and less than 2 years later, Fink was looking for a new place to work.

Just a few days after resigning, he picked up the phone and started dialing. First, Ralph Schlosstein, an investment banker at Shearson Lehman Hutton that he’d built out a relationship with. He told Ralph about his idea for a better bond investment firm built on modern technology with enhanced risk management capabilities. Ralph loved it and told Susan Wagner and Hugh Frater, two of Shearson’s smartest bond specialists. Fink called Barbara Novick and Ben Golub, mathematically inclined product and risk management experts, respectively.

The team quickly coalesced around this concept and began to build.

But first, they needed capital.

Fink picked up the phone once more and called the king of capital himself. Stephen Schwarzman was the hottest name in private equity after successfully launching Blackstone with Peter Peterson.

Schwarzman agreed to a deal with the following terms:

• Blackstone allowed the new company to work out of its office

• Blackstone gave a $5M loan in exchange for a 50% stake in the company

• The company would be called Blackstone Financial Management

With financing out of the way, Blackstone Financial Management was free to start raising money for a new fixed income fund while simultaneously building the tech product that would prevent bond traders from losing large amounts of money due to inadequate hedges… Like Larry did at First Boston.

The tech product was dubbed “Asset, Liability, Debt and Derivative Investment Network”. Or Aladdin for short.

Blackstone Financial Management started making money just two weeks after operations began. In six years, they grew assets under management to $23B and added 150 employees to the team.

Fink and Schwarzman were at odds over how to compensate top talent.

Larry kept using stock options to attract new hires from banks and other institutions while Stephen was cautious about giving out the firm’s equity.

This seemingly small disagreement in the grand scheme of things led to a seismic rift between the two moguls. Soon, they started butting heads over the future of the business as well…

Fink started shopping around for a new owner. He needed a platform that would give him autonomy over Blackstone Financial Management.

Thomas O’Brien was a Notre Dame graduate with a Harvard MBA. He got a job at Pittsburgh National Bank, a fairly mid-sized financial institution at the time. PNB was dwarfed by Mellon Bank, a much larger company by assets. O’Brien labored tediously for years, and more importantly, made connections within and outside the bank that gave him leverage as he climbed up the ranks. His growth was nearly as fast as the company’s growth, and in 1988 he became CEO of PNC, the successor organization to PNB.

Thomas O’Brien thought Larry Fink was a genius.

PNC paid $240M for Blackstone Financial Management in 1995.

It was probably the company’s best decision ever.

Schwarzman admitted that selling BlackRock was his worst decision ever.

But at the time, Schwarzman thought it was a great sale; Blackstone’s initial $5M investment had paid off handsomely.

Fink finally had the freedom to control his fate and fortune. Or at least the perceived freedom. O’Brien and the team at PNC gave him the ultimate green light.

General Electric had just ventured into finance by taking a big bite out of Kidder Peabody, a once reputable investment bank that was tainted by an insider trading scandal. The aftertaste was repulsive; shortly after the acquisition, GE realized how toxic the bank’s balance sheet was. Peabody’s bond portfolio contained $10B worth of collateralized mortgage obligations that did not align with GE’s risk tolerance.

BlackRock served as an advisor and helped GE analyze the bond portfolio’s value. The job well done parlayed into larger wins in the future, when the government needed help analyzing the toxic securities that led to the Great Recession in 2008.

BlackRock’s role in helping smooth out the Great Recession gave them proximity to the government and incredible influence relative to other financial institutions.

The firm’s advantages continued to compound, and a string of acquisitions transformed BlackRock from a notable asset manager to the near monopoly known today:

• State Street Research (2004)

• Merrill Lynch Investment Managers (2006)

• Barclays Global Investors (2009)

The Barclays Global Investors acquisition was by far the most critical. BGI’s business was focused on passive investment strategies, most notably, ETFs, a sharp contrast to BlackRock’s active strategies in primarily fixed income. Integrating the two companies took the better part of three years.

Fink fired nearly half of BGI executives in an effort to clean shop and rid the house of potential traitors.

Once the bloodshed ceased, the new BlackRock shone with a magnificent luster. BGI’s integration with BlackRock’s system allowed for ETF production at scale. No other company today does ETFs like BlackRock does, and as a result, the company owns a large chunk of every company in the world.

What BlackRock did for investing is similar to what Henry Ford did for cars in the 1900s.

BlackRock’s success is impossible to ignore, and criticism comes with the territory.

In 2018, real estate mogul Sam Zell offered his two cents on BlackRock: “I didn’t know Larry Fink had been made God… I just wonder whether America is really ready for Vanguard and BlackRock to control the New York Stock Exchange, because that’s what’s happening.”

In 2022, Charlie Munger chimed in as well, claiming, “We have a new bunch of emperors, and they are the people that vote the shares in index funds. I think the world of Fink, but I am not sure I want him to be my emperor.”

Today, the public views BlackRock as the new Goldman Sachs, a vampire squid moonlighting as a financial institution while controlling whole sectors of the economy and government.

Headlines

• State Street and Apollo team up to launch the first of its kind private credit ETF. CNBC

• Anthropic raises $3.5B to fuel its AI ambitions. TechCrunch 

• Ramp, a 6-year-old fintech startup, has more than doubled its annualized revenue to $700M. TechCrunch 

• Snoop Dogg says he’s ditching Spotify for Tune.fm. MBW

• Bueckers, Fudd draft decisions complicated by WNBA economics. FOS

• Jimmy Butler opens Bigface coffee shop. NBC

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