(Laurent Gillieron/Keystone via AP)
A new pecking order has emerged on Wall Street. Big banks remain powerful and incredibly profitable—quarterly income has hit record levels throughout 2018, largely due to benefits from the tax cuts. But a decade of financial crisis, regulatory pressures, and (most important) new investing trends has transferred power to a few dominant asset management firms. As more Americans plow retirement savings into passive funds, the buy side has overtaken the sell side.
Buoyed by an index fund collection called iShares that it purchased from Barclays, BlackRock is the world's largest asset manager, with $6.3 trillion of other people’s money under its control. BlackRock’s Aladdin risk-management system, a software tool that can track and analyze trading, monitors a whopping $18 trillion in assets for 200 financial firms; even the Federal Reserve and European central banks use it. This tremendous financial base has made BlackRock something of a Swiss Army knife—institutional investor, money manager, private equity firm, and global government partner rolled into one.
The BlackRock Transparency Project, an initiative from the Campaign for Accountability, a watchdog organization focused on public corruption, seeks to demystify the firm’s “access and influence” business model. BlackRock forges close relationships with governments to outpace competitors, attracting special benefits and avoiding onerous regulatory standards. Since 2004, researchers note, BlackRock has hired at least 84 former government officials, regulators, and central bankers worldwide. This can quickly bleed into conflicts of interest and official corruption.
For example, it's no secret that BlackRock
CEO Larry Fink built a shadow government of former agency officials in a bid to become Hillary Clinton’s Treasury secretary. That didn’t stop Fink from becoming part of the main private-sector advisory organization to Donald Trump until that panel disbanded after Charlottesville.
Links to leaders in both parties have enabled BlackRock to successfully fight designation as a systemically important financial institution, keeping its trillions outside the Dodd-Frank regulatory perimeter. The Treasury Department official leading efforts to relax that designation and keep asset managers outside its grip is Craig Phillips, a former BlackRock executive.
This model of fused BlackRock/government relations doesn't stop in the United States, as researchers at the BlackRock Transparency Project have laid out in a series of reports. The first focused on Canada's Infrastructure Bank, a public-private partnership for low-cost loans for road and bridge projects, which BlackRock advised on creating and helped staff with friendly executives. BlackRock subsequently stands to gain from the bank it helped construct.
The latest report, provided exclusively to the Prospect, details a deep tangle of relationships between BlackRock and the outgoing government of Enrique Peña Nieto in Mexico. This has bolstered BlackRock’s efforts to generate an infrastructure business in Mexico from scratch. Since 2012, BlackRock has purchased stakes in Mexican toll roads, hospitals, gas pipelines, prisons, oil exploration businesses, and a coal-fired power plant.
Alternative investments like infrastructure projects return higher yields than stocks or bonds. Operating fees are as much as triple those from fixed-income investments, making them lucrative for BlackRock as well. BlackRock’s 2013 annual report featured a section called “The Infrastructure Opportunity,” explaining how its prodigious funds—in particular, pension funds—could fill the gap governments needed to modernize and upgrade their public works.
To make an infrastructure play work, you need a willing government partner. When Peña Nieto took power in Mexico, nearly half of his expressed commitments involved using private capital for infrastructure, including $590 billion in public-private partnerships. BlackRock praised his boldness: “Mexico is an incredible growth story,” Fink said in 2013. “If I were 22 years old and I didn’t know what I wanted to do, I would move to Mexico right now because I think the opportunity is huge there,” he later added.
The opportunity was indeed huge, if you happened to be BlackRock. The firm benefited from the controversial opening of PEMEX, the state-run oil monopoly, to private investment. Within seven months, BlackRock had secured $1 billion in PEMEX energy projects. In June 2015, BlackRock acquired a scandal-ridden Mexican private equity firm called I Cuadrada for $71 million. A month later, Sierra Oil and Gas, a year-old portfolio company of I Cuadrada that had never drilled an oil well, won two major exploration contracts from PEMEX. Sierra was the only bidder.
In another suspicious deal, a contractor named Grupo Tradeco continually missed deadlines for building a private prison in Coahuila state, with accusations of 2.5 billion pesos in waste. But right before BlackRock bought the project, Peña Nieto increased the construction payments for the prison by 18 percent. A third deal involved BlackRock purchasing a contract to build a toll road between Toluca and Naucalpan. A month later, Peña Nieto signed an executive order to resolve a legal dispute over siting the road through what indigenous groups consider sacred land, expropriating 91 acres for the project.
Clearly, BlackRock benefited from its ties to Mexican officials and luminaries. The son of Carlos Slim, Mexico's richest man, is a BlackRock board member. Mexico’s former undersecretary of finance, Gerardo Rodriguez Regordosa, became a managing director in 2013. The CEO of BlackRock Mexico, Isaac Volin, was previously a national bank regulator, and in 2016 he became the general director of a PEMEX subsidiary. Peña Nieto himself met with Larry Fink prior to his election and numerous times afterward.
In addition,
BlackRock exploited changes in Mexican law allowing asset managers to take control of Mexican pension funds.
By placing hundreds of millions of dollars in pension money into its Mexican infrastructure business, BlackRock puts Mexico's state and local governments in an impossible position, says Josh Rosner, an adviser to the BlackRock Transparency Project and co-author of the report.
“If a BlackRock-owned infrastructure project becomes ‘a road to nowhere,' and the government wants to stop funding the project, BlackRock can put the official over a barrel and say, ‘You're putting a loss on pensioners,'” Rosner says. “This would force the public official to choose between a waste of public monies and the risk that they would suffer a political loss of voters.” Such an arrangement virtually guarantees conflicts of interest, and possible corruption, in these projects.
BlackRock's shopping spree in Mexico could be threatened by the July election of leftist Andrés Manuel López Obrador. AMLO, as he's often nicknamed, singled out the PEMEX deal with Sierra Oil and Gas, referring to BlackRock as “the white-collar financial mafia” on Facebook. AMLO’s handpicked energy minister, Rocío Nahle García, has called for the removal of Volin from PEMEX, amid what whe termed “marked favoritism” for companies like BlackRock.
Predictably, BlackRock reacted negatively to the AMLO victory, stating in a “geopolitical risk” report that “deterioration in Mexico’s economic policy” could ensue from it. But its position softened somewhat after a June meeting between AMLO and CEO Fink. So has AMLO’s. He initially promised to reverse all of Peña Nieto’s energy reforms, but now has said he’d merely review PEMEX contracts. And in meetings with BlackRock and dozens of investment funds, AMLO’s top adviser said, “We are really not leftist, we are center-left,” while vowing to stay the course on free trade, central bank independence, and a floating currency.
It seems AMLO has understood what Clinton adviser James Carville learned at the outset of his boss’s presidency: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.” In Mexico and around the world, a large share of that financier clout is wielded by BlackRock. Such power and influence, often at odds with the public good and combined with potential hazards for the overall financial system, demands additional scrutiny.
