Source: Mansa Finance

Compiled and edited by: lenaxin, ChainCatcher

BlackRock's capital reach has penetrated over 3,000 listed companies worldwide, from Apple, Xiaomi to BYD, Meituan, its shareholder list covers core areas such as the internet, new energy, and consumption. When we use food delivery software or apply for funds, this financial giant managing $1.15 trillion in assets is quietly reshaping the modern economic order.

BlackRock's rise began during the 2008 financial crisis. At that time, Bear Stearns fell into a liquidity crisis due to 750,000 derivative contracts (ABS, MBS, CDO, etc.), and the Federal Reserve urgently entrusted BlackRock to assess and dispose of its toxic assets. Founder Larry Fink, with his Aladdin system (risk analysis algorithm platform), led the liquidation of Bear Stearns, AIG, Citigroup, and monitored Fannie Mae's $5 trillion balance sheet. Over the following decade, BlackRock built a capital network spanning over 100 countries through acquisitions such as Barclays Asset Management and leading the expansion of the ETF market.

To truly understand BlackRock's rise, we need to go back to its founder Larry Fink's early experiences. Fink's story is full of drama, from a genius financial innovator to falling from grace due to a failure, and then rising again to eventually build BlackRock, one of the financial giants. His experience is a remarkable financial epic.

From Genius to Failure - Larry Fink's Early Experiences as the Founder of BlackRock

Post-War Baby Boom and Real Estate Boom in the United States

"After World War II, a large number of soldiers returned to the U.S., and within twenty years, nearly 80 million babies were born, accounting for one-third of the U.S. population. The baby boomer generation was enthusiastic about investing in stocks and real estate, and their early consumption led to the lowest personal savings rate in the U.S., which once fell to 0-1% per year."

Going back to the 1970s, the post-war baby boom generation gradually entered the age of over 25, triggering an unprecedented real estate boom. In the initial mortgage market, banks would issue loans and enter a long repayment cycle. The ability of banks to re-lend was limited by the repayment situation of borrowers. This simple operational mechanism could not meet the growing loan demand.

The Invention and Impact of MBS (Mortgage-Backed Securities)

Lewis Ranieri, vice chairman of the renowned Wall Street investment bank Salomon Brothers, designed an innovative product. He bundled thousands of home loan claims held by banks together and sold them in small pieces to investors, meaning banks could quickly recover funds and use them for new loans.

As a result, the lending capacity of banks was greatly expanded, and this product immediately attracted investments from insurance companies, pension funds, and other long-term capital, significantly lowering mortgage interest rates. It simultaneously met the needs of both the financing and investment ends, which is known as MBS (Mortgage Backed Securities), also called mortgage-backed bonds. However, MBS was still not refined enough; this approach was equivalent to slicing a big cake indiscriminately and sharing the cash flow equally, like a stew. It could not meet the differentiated needs of investors.

Design and Risks of CMO (Collateralized Mortgage Obligations)

In the 1980s, First Boston Investment Bank had a more creative young talent than Ranieri: Larry Fink. If MBS was a big cake divided equally, then Larry Fink added a step. He first sliced the big cake into four thin layers. When repayments occurred, the principal of the A-rated bonds would be repaid first, followed by the B-rated bonds, then the C-rated bonds. The most imaginative part was the fourth layer, not the D-rated bonds' principal, but the Z-rated bonds' principal (Z-Bond). Before the first three levels of bonds were fully repaid, the Z-rated bonds received no interest, only recorded but not paid.

Interest was added to the principal and compounded, and only after the first three levels of bonds were fully repaid would the Z-rated bond returns begin to be paid. From A to Z, risk and return are linked. This product, which separated repayment periods step by step to meet the differentiated needs of different investors, is known as CMO (Collateralized Mortgage Obligations).

It can be said that Ranieri was the one who opened Pandora's box, while Fink opened another box inside the Pandora's box. At the beginning of MBS and CMO, Ranieri and Fink could not foresee the tremendous impact these two products would have on world financial history. At that time, the financial community only regarded them as a genius creation. At the age of 31, Fink became the youngest partner in the history of First Boston, a top-tier investment bank. He led a team known as "Little Israel," a Jewish group. A business magazine ranked him as the top young financial leader on Wall Street. Once launched, CMO was widely welcomed by the market, creating huge profits for First Boston. Everyone believed Fink would soon become the company's leader, but it was precisely at the last step of his ascent that the collapse occurred.

Black Monday and the $1 Billion Loss

Both MBS and CMO had a very tricky problem. When interest rates rose sharply, the repayment period extended, locking in investments and missing high-interest financial opportunities. When interest rates fell sharply, a wave of early repayments cut off the cash flow. Whether interest rates rose or fell sharply, they would negatively affect investors. This phenomenon is known as negative convexity, and Z-bonds further amplified this negative convexity. Larger durations were extremely sensitive to interest rate changes. From 1984 to 1986, the Federal Reserve continuously cut interest rates, reducing them by 563 basis points in two years, creating the largest decline in forty years. Many borrowers chose to refinance with lower-rate contracts, causing an unprecedented wave of mortgage repayments.

In the CMO issuance, Fink's team accumulated a large amount of unsold Z-bonds, becoming a volcano ready to erupt. These Z-bonds were originally priced around $150, but after re-evaluation, they were worth only $105. This loss was sufficient to destroy the entire mortgage securities department of First Boston Bank.

Even worse, Fink's team had been shorting long-term Treasury bonds to hedge risks. On October 19, 1987, the famous Black Monday happened—the stock market crash. The Dow Jones Industrial Index fell by 22.6% in one day. A large number of investors rushed to the Treasury market for safety, causing Treasury prices to surge by 10 points in a day. Under this double blow, First Boston ultimately lost $1 billion. Media once praised, "Only the sky is Larry Fink's limit." But now, Larry Fink's sky collapsed. Colleagues no longer spoke to Fink, and the company did not let him participate in any important business. This subtle expulsion eventually led Fink to resign voluntarily.

Larry Fink's Glory and Failure at First Boston

Fink was used to living under the spotlight and understood that Wall Street loved success far more than humility. This well-known humiliation left an indelible mark on him. In fact, one of the reasons Fink vigorously issued CMOs was to make First Boston the leading institution in the mortgage bond field. For this, he had to compete with Ranieri from Salomon Brothers for market share.

Fink initially graduated from UCLA and applied for Goldman Sachs. He was eliminated in the final interview. It was First Boston that accepted him when he most needed an opportunity, and it was First Boston that gave him the most realistic lesson on Wall Street. Almost all media later reported this event, and they would recklessly say, "Fink failed because he wrongly bet on rising interest rates." However, a former colleague who had worked with Fink at First Boston pointed out the key issue. Although Fink's team had established a risk management system, using the computing power of 1980s computers to calculate risk was like using an abacus to calculate big data.

The Birth of the Aladdin System and the Rise of BlackRock

The Founding of BlackRock

Just a few days after leaving First Boston, Fink organized an elite group at his home to discuss a new venture. His goal was to establish an unprecedented powerful risk management system, because he never wanted to fall into an unassessable risk situation again.

In this elite group personally selected by Fink, there were four colleagues from First Boston. Robert Capito had always been a loyal comrade of Fink; Barbara Novick was a tough-minded portfolio manager; Bennett Grob was a mathematical genius; Keith Anderson was a top securities analyst. In addition, Fink brought his good friend from Lehman, Ralph Soster, who had previously served as an advisor to President Carter. Soster brought Susan Warden, the former deputy director of Lehman's mortgage loan department. Finally, they added Hugh Frey, the executive vice president of Pittsburgh National Bank. These eight people were later recognized as the eight founding partners of BlackRock.

At that time, what they needed most was start-up capital. Fink called Stephen Schwarzman of Blackstone Group. Blackstone was a private equity company founded by Peter Peterson, the former U.S. Commerce Secretary (former CEO of Lehman), and his colleague Stephen Schwarzman. In 1988, it was a time of intense corporate mergers and acquisitions. Blackstone mainly engaged in leveraged buyouts, but opportunities for leveraged buyouts were not always available. Therefore, Blackstone was also seeking diversification. Schwarzman was very interested in Fink's team, but Fink's $1 billion loss at First Boston was well known. Schwarzman had to call his friend, Bruce Wasserstein, the head of First Boston's merger and acquisition business, for advice. Wasserstein told Schwarzman, "Up to today, Larry Fink is still the most talented person on Wall Street."

Schwarzman immediately issued a $5 million credit line and $150,000 start-up capital for Fink. Thus, a department named Blackstone Financial Management Group was established within Blackstone. Fink's team and Blackstone each held 50% shares. Initially, they didn't even have an independent office space, so they rented a small area in the trading floor of Bear Stearns. However, the development of events exceeded expectations. Soon after the team started operations, they repaid all the loans and expanded the fund management scale to $2.7 billion within a year.

The Development of the Aladdin System

The key to the rapid rise was the system they established. This system was later named "Asset Liability and Debt & Derivative Investment Network" (asset liability and debt & derivative investment network). Its core function was five key initials combined to form the English word: Aladdin, symbolizing the mythological imagery of the lamp in "One Thousand and One Nights," implying that the system could provide wisdom insights to investors like a magic lamp.

The first version was coded on a $20,000 workstation and placed between the refrigerator and coffee machine in the office. This system, which used modern technology for risk management and replaced traders' experience judgment with massive information calculation models, was undoubtedly ahead of its time. Fink's team's success was like winning a lottery for Schwarzman of Blackstone. However, their equity relationship began to split.

Parting Ways with Blackstone Group

Due to the rapid expansion of business, Fink hired more talents and insisted on granting shares to new employees. This caused the shares of Blackstone to be rapidly diluted, from 50% to 35%. Schwarzman told Fink that Blackstone could not indefinitely transfer shares. Eventually, Blackstone sold its shares to Pittsburgh National Bank for $240 million in 1994, and Schwarzman personally cashed out $25 million. At that time, it was also the time when he was divorcing his wife Ellen.

"Business Week" joked, "Schwarzman's profit was just enough to cover the alimony for Ellen." Many years later, Schwarzman recalled the split with Fink, and he considered that he was not gaining $25 million, but losing $4 billion. In reality, looking back at the logic of the whole incident, you will find that Fink diluting Blackstone's shares seemed to be intentional.

The Origin of the Name BlackRock

After Fink's team separated from Blackstone, they needed a new name. Schwarzman asked Fink to avoid the words "black" and "stone." However, Fink proposed a slightly humorous idea, saying, "J.P. Morgan and Morgan Stanley split and developed in parallel. So he prepared to use the name 'Black Rock' to pay tribute to Blackstone." Schwarzman agreed to this request in a lighthearted manner, and this is how the name BlackRock came about.

Afterward, BlackRock's asset management scale gradually climbed to $165 billion in the late 1990s. Their asset risk control system was increasingly relied upon by many financial giants.

BlackRock's Rapid Expansion and Technological Advantages

In 1999, BlackRock went public on the New York Stock Exchange, significantly enhancing its fundraising capabilities, allowing BlackRock to rapidly expand through direct acquisitions. This marked the beginning of its transformation from a regional asset management company to a global giant.

In 2006, a significant event occurred on Wall Street. Merrill Lynch's CEO Stanley O'Neal decided to sell Merrill Lynch's vast asset management division. Larry Fink immediately realized this was a once-in-a-lifetime opportunity. He invited O'Neal to have breakfast at a restaurant in the Upper East Side. After a 15-minute conversation, they signed the merger framework on the menu. BlackRock eventually merged with Merrill Lynch's asset management division through equity swaps. The new company retained the name BlackRock, and its asset management scale soared to nearly $1 trillion overnight.

An important reason for BlackRock's incredible rapid rise in its first 20 years was solving the information imbalance between buyers and sellers in investment. In traditional investment transactions, buyers obtained information almost entirely from sellers' marketing. Investment bankers, analysts, and traders in the seller's camp monopolized core capabilities such as asset pricing. This is like going to the market to buy vegetables, where we cannot know the vegetables better than the vegetable sellers. However, BlackRock uses the Aladdin system to manage investments for clients, making you judge the quality and price of a cabbage more professionally than the vegetable seller.

The Savior in the Financial Crisis

BlackRock's Key Role in the 2008 Financial Crisis

In the spring of 2008, the United States was in the most dangerous moment of the worst economic crisis since the Great Depression of the 1930s. The fifth-largest investment bank in the U.S., Bear Stearns, was on the brink of bankruptcy, and it filed for bankruptcy with the federal court. Bear Stearns' transaction counterparts were spread globally, and if Bear Stearns collapsed, it could potentially trigger a systemic collapse.

The Federal Reserve convened an emergency meeting, and on the same morning at 9 o'clock, it formulated an unprecedented plan, authorizing the New York Federal Reserve Bank to provide a $3 billion special loan to JPMorgan Chase to directly acquire Bear Stearns.

JPMorgan Chase offered a bid of $2 per share, which almost caused the Bear Stearns board to rebel. Remember, Bear Stearns' stock price had reached $159 in 2007. A $2 price for this 85-year-old prestigious house was nothing short of an insult. And JPMorgan Chase also had its concerns. It is said that Bear Stearns still held a large amount of "illiquid mortgage-related assets." In JPMorgan Chase's view, these "illiquid mortgage-related assets" were actually bombs.

The parties involved quickly realized that this acquisition was very complex, and there were two urgent issues to solve. The first was the valuation issue, and the second was the toxic asset disposal issue. Everyone on Wall Street knew who to turn to. New York Federal Reserve Bank Governor Geithner found Larry Fink and, after obtaining authorization from the New York Fed, BlackRock was stationed at Bear Stearns to conduct a comprehensive liquidation.

Twenty years ago, they were working here. At that time, they rented offices in Bear Stearns' trading hall. As the story unfolds, you will find it very dramatic. Knowing that Larry Fink, who took the role of fire-fighting hero, was an absolute master in the housing mortgage securities field, he himself was one of the initiators of the subprime crisis.

With BlackRock's assistance, JPMorgan Chase completed the acquisition of Bear Stearns at approximately $10 per share. The name of Bear Stearns, which was well-known, announced its demise. Meanwhile, the name of BlackRock became increasingly prominent. The three major rating agencies in the U.S., S&P, Moody's, and Fitch, had granted AAA ratings to over 90% of subprime mortgage securities. During the subprime crisis, their reputation was completely destroyed. It can be said that the entire U.S. financial market valuation system collapsed. With a powerful analytical system, BlackRock became an irreplaceable executor in the U.S. rescue plan.

Bear Stearns, AIG, and the Fed's Rescue Efforts

In September 2008, the Federal Reserve initiated another more serious rescue plan. The largest insurance company in the U.S., AIG, saw its stock price fall by 79% in the first three quarters, mainly because the $527 billion in credit default swaps it issued were on the verge of collapse. Credit Default Swap, abbreviated as CDS, is essentially an insurance policy. If a bond defaults, the CDS will compensate. However, the problem is that purchasing a CDS does not require you to hold the bond contract. This is equivalent to a large number of people without cars being able to purchase unlimited car damage insurance. If a car worth 100,000 yuan has a problem, the insurance company may have to pay 1 million yuan.

CDS was played by these market gamblers as a betting tool. At that time, the size of subprime mortgage bonds was about $7 trillion, but the CDS guaranteeing these bonds was as high as tens of trillions. At that time, the U.S. annual GDP was only about $13 trillion. The Federal Reserve quickly realized that if the Bear Stearns issue was a bomb, then the AIG issue was a nuclear bomb.

The Federal Reserve had to authorize $85 billion to purchase 79% of AIG's equity in an emergency. In a way, it turned AIG into a state-owned enterprise. BlackRock once again received special authorization to conduct a comprehensive valuation and liquidation of AIG, becoming the director of the Fed's execution.

Through various efforts, the crisis was eventually contained. During the subprime crisis, BlackRock was also authorized by the Federal Reserve to handle the rescue of Citibank and supervise the $5 trillion balance sheet of the two housing finance agencies. Larry Fink was recognized as the new king of Wall Street. He established close ties with U.S. Treasury Secretary Paulson and New York Federal Reserve Bank Governor Geithner.

Geithner later succeeded Paulson as the new Treasury Secretary, and Larry Fink was humorously referred to as the underground Treasury Secretary of the U.S. BlackRock moved from a relatively pure financial enterprise to a hybrid of politics and business.

The Birth of a Global Capital Giant

Acquisition of Barclays Asset Management and Dominance in the ETF Market

In 2009, BlackRock faced another major opportunity. The British investment bank Barclays fell into operating difficulties and reached an agreement with the private equity firm CVC to sell its PIMCO business. This deal had already been reached, but it included a 45-day bidding clause. BlackRock lobbied Barclays, saying, "Instead of selling PIMCO separately, why not merge the entire asset management business of Barclays with BlackRock as a whole?"

Eventually, BlackRock acquired Barclays Asset Management for $13.5 billion. This transaction was considered the most strategically significant acquisition in BlackRock's history, as Barclays Asset Management's PIMCO was the largest exchange-traded fund (ETF) issuer in the world at that time.

Exchange-Traded Fund, a more concise term, is called ETF (Exchange-Traded Fund). Since the dot-com bubble burst, the concept of passive investment accelerated its popularity, and the global ETF scale gradually surpassed $15 trillion. Acquiring PIMCO allowed BlackRock to occupy 40% of the U.S. ETF market share. The massive fund volume determined that it must widely allocate assets to diversify risks.

On one hand, active investment; on the other hand, passive tracking through ETFs, index funds, and other products requires holding all or most of the equity of the sectors or index components. Therefore, BlackRock holds extensive stakes in large publicly traded companies globally. Their clients are mostly large institutional investors such as pension funds and sovereign wealth funds.

BlackRock's Influence in Corporate Governance

Although theoretically, BlackRock is merely managing assets for its clients, in practice, it has tremendous influence. For example, in Microsoft and Apple shareholder meetings, BlackRock often exercises voting rights and participates in major decisions. Statistics show that 90% of the total market value of U.S. listed companies are owned by BlackRock, Vanguard, and State Street, either as the first or second largest shareholders. The total market value of these companies is about $45 trillion, far exceeding the U.S. GDP.

This phenomenon of highly concentrated equity is unprecedented in economic history. Additionally, asset management companies such as Vanguard also rent the Aladdin system provided by BlackRock. Therefore, the amount of assets managed by the Aladdin system is actually more than the assets managed by BlackRock by tens of trillions of dollars.

The Light-Bearer of the Capital Order

In 2020, during another market crisis, the Federal Reserve expanded its balance sheet by $3 trillion to rescue the market. BlackRock once again acted as the Federal Reserve's appointed manager, taking over the corporate bond purchase program. Several BlackRock executives left their positions to join the U.S. Treasury and the Federal Reserve. Former U.S. Treasury and Federal Reserve officials later joined BlackRock. This "revolving door" phenomenon of frequent two-way movement between government and business sparked strong public criticism. A BlackRock employee once commented, "Although I don't like Larry Fink, if he leaves BlackRock, it's like Ferguson leaving Manchester United." Now, BlackRock's asset management scale has exceeded $11.5 trillion. Larry Fink's movements between the political and business worlds have made Wall Street fear him. This dual colorization reflects his deep understanding of the industry.

True financial power does not lie in the trading floor, but in the grasp of the essence of risk. When technology, capital, and power play a triple melody, BlackRock has evolved from an asset manager to a light-bearer of the capital order.