Power society The banks control everything
Blackrock is also a political power
The money corporations are not only significant owners of individual companies, but entire industries. Whether in the aviation or computer industry, in pharmaceutical sales or in electrical appliances, in many sectors all major suppliers now have the same shareholders. The five major US banks are also indirectly under the control of the new money giants.
In Europe, Blackrock in particular has widened its tentacles. There the Fink Group is already the largest or second largest shareholder in the British banking giant HSBC, the Spanish banks Bilbao and Santander, the Italian Banco Intesa and the Deutsche Bank. In the chemical industry, Blackrock even sits transatlantically on all sides. The group is one of the leading shareholders in Bayer and Monsanto, BASF and DowDuPont, in the gas manufacturer Linde as well as in its US competitor Praxair. Nevertheless, the competition authorities have not noticed this creeping concentration for a long time.
That only changed when the young German economist Martin Schmalz from the US University of Michigan published a spectacular study together with two colleagues in 2016. This was based on a simple but logical hypothesis: The common owners of companies in the same industry do not benefit from their companies undercutting each other. In the best case scenario, the value of their entire portfolio remains the same if one company gains sales at the expense of another. If profits shrink in price competition, it even sinks. Without tough competition, on the other hand, all companies can work together to increase profits and their value at the expense of consumers. "In theory, the problem was known for a long time," recalls Schmalz, "but nobody had investigated it, there was no empirical evidence."
So he and two colleagues analyzed the US aviation industry, where the phenomenon is most advanced. Blackrock and Vanguard had two of the four largest shareholders in all four major airlines, and researchers promptly struck gold. They demonstrated that customers have to pay up to ten percent higher prices than would have been expected in the tough competition that was common in the past. A similar result emerged for the banking industry. The higher the concentration of owners in a region, the higher the account fees and the less interest the customers received.
"The greatest threat to free competition of our time"
The studies shocked experts and authorities like a fire alarm at night. Since then, an unusual alliance has formed: traditional, market-liberal economists and lawyers are making a front against the new trillion rulers of the financial sphere. Professor Eine Elhauge, for example, a competition expert at Harvard University, warns that “horizontal shareholding” across industries is “the greatest threat to free competition of our time”. This development also explains “the gap between profits and investments” and “the growing economic inequality”. The German Monopoly Commission promptly launched its own investigation. There is "a significant potential to distort competition through indirect horizontal investments between portfolio companies in the same economic sector via institutional investors," wrote the cartel experts in their report for the federal government. Last December, the OECD, where the affluent states coordinate their economic policy, held an international hearing on the subject in Paris.
Most recently, the EU Commission also raised concerns. It is "increasingly common for the same investors to hold shares in different companies in the same industry," said EU Commissioner Margrethe Vestager, head of EU antitrust supervision. "For them, competition is not so attractive," remarked the pugnacious Dane pointedly. Your authority has therefore commissioned a detailed study on the consequences in the EU, the authority confirmed to Investigate Europe.
Vestager could also seek advice in America on this. The economist Fiona Scott Morton, now a professor at Yale, was for years a prosecutor in the antitrust department of the US Department of Justice and considers the taming of money managers "the most important task of antitrust defense." She therefore called for the shares of the financial corporations to be maximized Limit one percent per company when investing across entire industries. If that happened, however, the fund giants would have to change their business model.
They are trying to discredit Schmalz and his colleagues. Blackrock deputy boss Novick wrote in a statement that they used “questionable statistical methods”. Her colleague Christian Staub, who was head of Germany until 2017, appealed to the Federal Ministry of Economics against the expertise of the Monopolies Commission. The critics are "certified to have an empirical certainty without being checked for accuracy by other experts," he complained. As a result, the Ministry sent the Bundestag a statement in June 2017, as the Blackrock press department could have written. The government, it is said, sees “a fundamental problem in the empirical investigation of the phenomenon” because the factors for corporate decisions “cannot be clearly determined”. Consequently, it is only a "theoretical guess". In other words, there is no problem at all.
But the objections do not work. “Our studies have been thoroughly checked, and the economic guild has found them to be correct,” reports Schmalz. It is also "not about bad managers who secretly forge a cartel," says the financial economist. The brakes on competition even come into play when the Überall shareholders “do nothing.” Even if there is insufficient pressure, the will to compete is weaker, “there are no incentives.” The criticism of the new universal shareholders is by no means just academic Exercise, assures John Weche, the expert in charge of the Monopolies Commission. “It is absolutely clear that you have considerable influence today with shares of five to ten percent in listed corporations,” says Weche, and unlike the Blackrock bosses Fink and Novick always maintain that, as major shareholders in entire industries, they are by no means neutral towards the business policies of individual companies. Blackrock executives have repeatedly called on EU governments to encourage the merger of major European banks across all borders mainly benefit the group itself, because the value of its holdings would rise. Probably less good for competition, consumers would have to Often pay with higher fees like in the USA.
Despite all the warnings, no EU government has dared to tackle the threatening cartel of money managers. "It undermines the basic rules of our market economy, but most politicians fear the influence of the giant and do not even dare to ask critical questions," observed Michael Theurer, who has been a member of the FDP for many years and is now a member of the Bundestag.
Larry Fink is received in Europe like a head of state
Anyone looking for explanations for this will come across an astonishing phenomenon: Blackrock is itself a political power. The arms of the money octopus reach into the governments. This is already indicated by the symbolism in dealing with Larry Fink. When Fink travels to Europe, he is received like a guest of state. Whether in Rome, Paris, The Hague or Athens, the Lord of the Trillions always has a rendezvous with the head of state personally. "In the past few weeks I've had meetings with four heads of state," boasted Fink in April 2017 on business broadcaster Bloomberg TV.
French President Emmanuel Macron even met him twice last year. For this, Macron's finance minister first paid his respects to the money prince in New York. Then the President received him exclusively in the gilded splendor of the Elysée Palace. Then Fink was escorted to the Hôtel de Matignon for a tête-à-tête with Prime Minister Edouard Philippe. Fink was invited again in September, this time to the meeting on the upcoming privatization of state-owned companies.
At the same time, Blackrock has a well-equipped agency in Brussels. Since 2011, it has increased spending on EU lobbying tenfold from 150,000 euros to 1.5 million euros per year. Blackrock lobbyists often appear on the appointment lists of EU Commissioner and Vice President Valdis Dombrovskis and his chief of staff, who are responsible for financial market regulation. All proposals to regulate “shadow banks”, such as Blackrock, have not progressed very far since then. The real jackpot, however, beckons with the planned introduction of pan-European pension funds. Retirement privatization has been the main source of Blackrock's rise so far. Commissioner Dombrovskis now wants to release the associated funds from the employers. The savers should decide individually about the investment, and Blackrock could roll up another trillion market with competitive prices. There is already a pilot project for the project. The "Resaver" fund, funded by the EU Commission, offers old-age provision for scientists. Investment management promptly went to Blackrock.
To ensure success, prominent governors with good contacts work locally. This is what Friedrich Merz stands for in Germany, the former head of the Union parliamentary group in the Bundestag, who has headed Blackrock Germany's supervisory board since 2016. In France, too, an ex-politician, Jean-François Cirelli, is president of the national Blackrock branch. He used to work for President Jacques Chirac and his prime minister and on the campaign staff of a Conservative presidential candidate. Now he serves Macron in the commission for the dismantling of the French state. An important point on the agenda: the reorganization of private pension provision.
Blackrock drove the politicization of business in Great Britain even further. George Osborne, who lost his post as finance minister after the Brexit referendum, became the country's highest-paid lobbyist at Blackrock in February 2017. Blackrock pays him the equivalent of around 750,000 euros a year for four working days per month, which looks like a reward. During his tenure, the minister met at least five times with Blackrock representatives, and he gave the company a lecture for a fee equivalent to 40,000 euros. At the same time, the government was making lucrative decisions for the fund industry. Savers in pension funds no longer have to withdraw their pension in annual installments, but can now have the entire amount saved paid out and invest it themselves. In a subsequent conference call, Fink partner and Blackrock President Robert Kapito said that this set in motion savings of 25 billion dollars worth of old-age savings in the United Kingdom. In addition, Osborne provided the industry with a tax break of around 200 million euros annually.
Philipp Hildebrand is also well connected, who has been responsible for major customers in Europe as another vice-head of the group since 2012. He was previously President of the Swiss Central Bank. He is now in good contact with his former colleagues at the European Central Bank (ECB), the Bank of England and the Federal Reserve. Together they are a member of the “Group of Thirty”, a private club for discreet discussions among the powerful in the financial world. Hildebrand embodies a particularly strong tentacle from Blackrock: the direct connection to the central banks. With "BlackRock Solutions", as the consulting branch is called, the money octopus penetrates to the holy of holies of the business: the credit books of the banks, which also disclose all of the borrower's data.
It all started in December 2010 with a call from Dublin. The Irish central bank had failed miserably in supervision, and Ireland had to borrow € 50 billion from the other euro countries and the International Monetary Fund to save four big banks. But the IMF, the Bank of Ireland later reported, insisted on an "independent" external review which "led, of course, to the appointment of Blackrock". A tender did not take place, and Fink exulted investors about the "gigantic order". But that was just the beginning. Two more major orders followed in Dublin.
In 2012, the IMF brought the Blackrock troop into business in Greece, again without a tender. There the team initially operated clandestinely. Under the code name "Solar", Fink's reaction force moved into an office in a shabby neighborhood in Athens, and employees were instructed not to display any company logos. Surrounded by strip clubs and burned-out ruins, the consultants examined the data of all 18 Greek banks and formulated the plan for how they should be merged. In 2013, the Greek central bank again awarded the audit of the four major banks that had emerged to “Blackrock Solutions” and in 2015 the order for the processing of their bad loans. In July 2015, it emerged that Blackrock had bought Greek debt at rock-bottom prices. With the Artum company, the group also invested in the real estate business, which gained momentum with the forced privatization of state property. In keeping with this, of all people, Paschalis Bouchoris, the head of the state fund commissioned with it, moved to the head of the Greek Blackrock subsidiary. All of this happened under the supervision of officials from the EU Commission and the ECB, who otherwise control every step of the Athens government with an iron hand.
The fact that a company is playing with the best inside information on all sides was not an issue for the controllers of the euro finance ministers. On the contrary: the central banks in France, Spain and the Netherlands also hired Blackrock for banking supervision. The terms of the contracts are entirely secret. It was "confidential information from the financial regulator," said a central bank spokesman without any irony.
The final seal of trust for Blackrock was finally given by the ECB itself. As early as 2014, President Mario Draghi had the employees of his club friend Hildebrand develop a concept for the purchase of secured securities. Two years later, the ECB finally brought a Blackrock team into the house for several months to carry out the "stress test" for the 39 largest banks in the euro zone. The consultants thus participated in the supervision of all the banks in which their employer himself holds large blocks of shares. In support of this, the ECB announced that the approximately 1,000 employees of the ECB banking supervisory authority were "only sufficient for everyday work". “External support” is required for “large and temporary projects such as the stress test”, and Blackrock has won a corresponding tender. How many people the company sent and what is paid for their work is a secret - a bizarre process. Here, "a sovereign task is entrusted to a private company, that is fundamentally wrong," warns the banking economist Martin Hellwig, formerly head of the Monopolies Commission and until 2017 head of the Max Planck Institute for Common Goods. The ECB officials, on the other hand, have no problem with it. "The confidentiality of the information given" is "contractually secured," assured a spokesman. There is a "Chinese wall" between the hired consultants and the other activities of Blackrock, says an expert who is familiar with the processes. Each individual must sign a "declaration of confidentiality" and the taking of data is technically impossible. In any case, it makes no sense for Blackrock to “do insider business with our information.” If that came out, “it would destroy the company”.
Exclusive access to ECB banking supervision is a strategic advantage
That sounds plausible - and yet it obstructs the view of the essentials. Because the exclusive access to Europe's highest supervisory authority inevitably gives rise to "an enormous strategic advantage over all competitors," explains Hans-Peter Burghof, Professor of Banking at the University of Hohenheim. The access gives the group even more influence on the banks concerned in order to promote the sale of Blackrock funds there.
Of course, there is no solid evidence for this. But there are surprising processes. Blackrock is a major shareholder in ING, for example, and is involved in monitoring it through both the ECB and the Dutch central bank. For a year and a half, the bank's online subsidiary has also been a sales channel for Blackrock. To this end, the group bought into the fintech startup “Scalable Capital”, which markets the automatic financial investment via “Robo-Advisor”. In turn, ING took over advertising and sales for this company. To date, she has already collected around 800 million euros, largely invested in Blackrock funds.
Another indication of the Group's hidden power in the financial sector is its success in selling the Aladdin electronic analysis system, which asset managers use to test their portfolios and process their deals. That sounds harmless, but with no tentacle does the Blackrock octopus penetrate the world economy more deeply than with this one. Because Aladdin has long been a global organism of its own. In the USA there is a server park with more than 6000 computers. More than 200 financial institutions of all kinds are already using the system, including direct competitors of the group such as Deutsche Bank and the French BNP Paribas, who in turn count Blackrock among their most important shareholders.
With every new customer, Blackrock receives more information, which provides the group with a gigantic treasure trove of data on events on the financial markets. The system is already managing more than $ 20 trillion in assets worldwide, and the amount is growing by more than ten percent every year. “Blackrock will soon have a monopoly on the financial market like SAP does on operations,” predicts a Brussels banker.
Social engagement or just a PR exercise?
Lobbying for the privatization of old-age provision, access to government data, opening up new sales channels - the visible activities of the many arms of Blackrock serve only one purpose: growth and thus even more influence. But do the Blackrock managers use it to make the world a better place, as their boss Larry Fink promises in his letter? Is the world's largest shareholder pushing his companies to get better pay for those “left behind by globalization”, as he complained at the World Economic Forum in Davos in January?
That would be possible. Major shareholders like Blackrock "have a massive influence" confirms Michael Kramarsch from the management consultancy hkp-group, who has been advising corporate boards on dealing with their shareholders for many years. For this, shares of five to ten percent of the shares are sufficient. At the general meetings, only half of the shares are usually represented, "then seven percent of the shares become 14 percent of the votes". In addition, Blackrock is a lead investor; "If they keep their thumbs down, others will follow suit". But contrary to what Fink suggests, social goals play almost no role in the practice of the shareholder Blackrock. Just 30 of the 13,000 Blackrock employees are involved in controlling the management of the companies in which the group holds major shares. In the future there should be twice as many, announced Fink. In view of the participation in more than 17,000 companies, however, that changes little. Blackrock is paid “for the success of the investment, not for the management of the company,” explains Kramarsch.
In more than 90 percent of all shareholder resolutions, the Blackrock representatives simply follow the proposal of the respective management, according to the company's own statistics. And if not, then the company is only opposed to defending against hostile takeovers or against excessive salaries. The “stakeholders”, on the other hand, the employees and customers of whom Fink wrote, do not concern the shareholder Blackrock. This becomes apparent in the case of the planned merger of the German Linde AG with the US competitor Praxair, where Blackrock holds large blocks of shares on both sides. “Only the shareholders benefit from this,” reports Gernot Hahl, Chairman of the Group Works Council at Linde. “It's going to be very bitter for our people,” he says. Although Linde is a healthy company, 5000 jobs are to be cut in Germany alone. The managers also want to abolish the co-determination of employees on the supervisory board that applies in Germany. For this purpose, the company headquarters will be relocated to Ireland. However, none of this is an issue for shareholder Blackrock. "Nothing was mentioned in the supervisory board about an objection by a major shareholder," says Hahl.
The fact that the interests of employees count for little for Blackrock also became clear at a hearing in the British Parliament when the government was considering having employee representatives elected to supervisory boards following the German example. In contrast, one corporate official made the crude argument that there was "no evidence that the presence of employee representatives resulted in better decisions and we have examples of impairment despite the presence of directors of the employees". Fink is apparently not really serious about its commitment to combating inequality. "Nothing has to change in the relationship between capital and labor, that will not happen," he recently confessed quite openly. He has not yet made any suggestions on how to combat the “polarization” that he himself lamented.
So the social engagement of the new king of Wall Street is little more than a well orchestrated PR exercise. What counts is probably only the investment success. However, it is impressive, especially for Fink's own shareholders. Since January 2017, the price of Blackrock shares has increased by 40 percent.
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