BlackRock: Ahead of the Street

Larry Fink was once a prince of Wall Street. In the 1980s he became the youngest managing director ever at First Boston, where he was a pioneer in the mortgage bond market. He might have been fitted for the crown at the investment bank, now owned by Credit Suisse, but in 1986 his mortgage department lost $100 million in a single quarter. Two years later he was out.

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Today, as the head of BlackRock – the world's largest asset manager, with $3.7 trillion in assets – Mr Fink is at the pinnacle of US finance. But do not suggest that he is a Wall Street chieftain. Mr Fink has long defined himself as an anti-Wall Street figure.

"I have always said we are not Wall Street. We left Wall Street," says Mr Fink. "We have a different business model, which happens to be better for the environment we live in."

It is a sentiment in tune with the times, and one that has served BlackRock well. Unlike the Wall Street banks, Mr Fink's firm emerged from the financial crisis with its reputation enhanced and its business strengthened. And unlike many Wall Street executives, who in recent years have endured Congressional grillings and government investigations, Mr Fink has had good relations with the Obama administration.

In fact, Mr Fink – a committed Democrat – has made little secret of his wish to join a second-term Obama administration as Treasury secretary, replacing his friend Tim Geithner. But given that the top priority of the incoming Treasury secretary will be to fix the fiscal deficit, a job that requires detailed understanding of budget numbers and longstanding relations with Congress, it may be a long shot.

Whether he gets the job or not, his desire for the Treasury post is a sign that Mr Fink, who turned 60 this month, is restlessly pondering what to do next.

But if he finds himself at a turning point, so too does his firm. BlackRock's size and power has not received much attention from the public or regulators, but that could change. Some analysts suspect that, BlackRock will be considered a "systemically important financial institution" – a designation that brings with it capital requirements and tighter regulatory scrutiny. And after a period of rapid expansion, marked by a number of acquisitions, it appears to many investors that the firm's growth rate is going to slow.

To the first question, BlackRock answers that as an asset manager, its business model is fundamentally different from the banks – and safer. But regulators are considering whether asset managers such as BlackRock should be included among systemically important institutions.

BlackRock is trying to answer the second question by pushing into new businesses – most controversially by attempting to cut Wall Street out of the deal flow by creating an in-house electric exchange. This is a direct assault on the heart of Wall Street.

Having begun life as "the bond gorilla", in Mr Fink's words, it is now an equities powerhouse, and a leader in passive as well as active strategies. And BlackRock is also making a big push in alternative strategies. "We can compete with any private equity firm. We offer the same economics and the best information flow," he says.

Because it had no debt during the credit bubble years, BlackRock was able to buy assets from reluctant sellers, including Merrill Lynch and Barclays. It acquired Merrill's asset management arm and Barclays Global Investors, where its valuable exchange traded funds sit, in the process.

Still, investors in BlackRock stock remain wary of its ability to expand its huge base of assets. "The law of large numbers works against them," says Marc Irizarry, analyst for Goldman Sachs.

Mr Fink and Rob Kapito, his number two, have heard this argument before and deny suggestions that BlackRock is too big to manage. "Scale is a virtue," Mr Fink says. "Our performance has turned dramatically. I have not felt this confident on where we are going in over five years."

Mr Kapito is also keen to dispute the idea that BlackRock is taking on Wall Street. "Offering clients the ability to trade with each other with no bid offer spread isn't disintermediating the Street," he says. "It is just another alternative. We are helping to keep the market at better levels for clients."

Besides the sheer size of its business, there are other measures of BlackRock's growing influence. Mr Fink slips in and out of the offices of the world's financial and political elite with ease. Not long ago, he hired Philip Hildebrand, former governor of the Swiss National Bank, to keep his largest clients happy.

When the US government needed help to wind down AIG's toxic book of mortgage securities, the Federal Reserve awarded BlackRock the lucrative contract without seeking other bids.

The BlackRock team assembled for that project – which yielded a profit for US taxpayers – formed the nucleus of a group that now advises governments across Europe.

Jim Millstein, a former Treasury official who oversaw the winding down of AIG's portfolio, says BlackRock was awarded the mandate because it had few entanglements – unlike most Wall Street firms.

"It was the least conflicted and best endowed," he said. "It had a robust model."

BlackRock is also the largest shareholder of many companies. When Stuart Gulliver became chief executive of HSBC in January 2011, one of the first things he did was fly to New York to ask for Mr Fink's support.

The power of the firm also lies in Mr Fink's relations with some of the biggest pools of money in the world – especially the big sovereign wealth funds in Asia and the Middle East. When one of the financiers for his acquisition of BGI fell through, he raised billions for the deal in 24 hours from the Chinese, the Kuwaitis and the Singaporeans. Mr Fink spends about half his time on the road and carries about 10 different currencies in his wallet at any given time.

When Mr Fink left First Boston to establish BlackRock Financial Management in 1988 – building it under private equity and alternative investment firm Blackstone – it would have been hard to imagine that the business would one day dwarf that of his former employer.

Today, Steve Schwarzman, the founder of Blackstone, describes letting Mr Fink go as one of the biggest mistakes he ever made. (Given the fact that Blackstone originally had 100 percent of the business, he is probably right.)

Mr Fink severed the firm's relationship with Blackstone in 1995, later selling a $230 million stake to PNC, which has reaped about $8 billion from that initial investment. "They allowed us to evolve when Blackstone wouldn't," Mr Fink says. The firm went public in 1999 and PNC still retains 20 percent.

One of the seminal moments in the early BlackRock history came when General Electric asked for the firm's help in winding down Kidder Peabody's assets, after that Wall Street firm —purchased by GE in 1986 – imploded in 1994.

That marked the first time BlackRock applied its own technology on behalf of a customer. Today, BlackRock's Solutions business – which uses complex technology to assess the risks of portfolios – has become core to the firm and a huge differentiating factor. It has also led to the development of the Aladdin platform, which is now diverting trades away from Wall Street.

Only four of the founding generation are still at the firm. Susan Wagner, for many years Mr Fink's alter ego, retired this year but still sits on the board.

With the old guard leaving, Mr Fink has been making big changes at the top. Richard Kushel has been named deputy chief operating officer, which some insiders speculate gives him an edge over other contenders to move to the executive offices.

Mr Kushel has been put in charge of what the firm calls its strategic products management group.

And behind him are some rising stars including Mark Wiedman, currently in charge of iShares, the ETF business, and Mark McCombe, who Mr Fink hired from HSBC to run BlackRock in Asia.

Besides Mr Hildebrand, Mr Fink has brought in other high-profile outsiders, including Kendrick Wilson, a former US Treasury official.

In wishful moments, Mr Fink may hope that some day, after he has left the Treasury, Mr Geithner would consider joining BlackRock. But Mr Fink appreciates that any conversation with Mr Geithner about this while he is in his current position would be inappropriate.

Meanwhile, Mr Fink is becoming ever more active in trying to shape the political debate in Washington, whether he joins the Obama administration or not. For instance, he has publicly urged Congress to resolve the stand-off over the fiscal cliff.

Having a greater voice in Washington neatly dovetails with BlackRock's pitch to help investors deal with the lack of yield in the world.

Next week, Mr Fink will fly out to the US west coast to address the two big California pension funds, Calpers and Calstrs, on the need to focus on matching the assets they hold against the types of liabilities they will eventually have to pay.

Mr Fink worries that too many corporate pension funds are doing things for accounting reasons rather than sound economic reasons.

He is trying to get a more rational tax policy adopted, one which gives favorable tax treatment only for investments held for 36 months, rather than the current 12 months.

Mr Fink added his voice to the battle over taxes on the wealthiest Americans, saying that a low rate on the profits of private equity firms – the so-called "carried interest" rate – ought to be raised.

While Mr Fink and Mr Kapito have been discussing the succession with the board since 2005 when the founding generation first started to depart, and have nurtured lots of contenders, there still is no clear heir.

"It will be a great moment for me when I see the firm doing better without me than with me," says Mr Fink. "That's the difference between being a founder and being a CEO."