A Comprehensive Look at BlackRock's Rise: How the $11.5 Trillion Asset Management King Was Forged?

Source: Mansa Finance

Edited by: lenaxin, ChainCatcher

BlackRock's capital reach has penetrated over 3,000 publicly listed companies globally, from Apple and Xiaomi to BYD and Meituan, with its shareholder list covering core areas such as the internet, new energy, and consumption. When we use food delivery apps or subscribe to funds, this financial giant managing $11.5 trillion in assets is quietly reshaping the modern economic order.

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

To truly understand BlackRock's rise, we need to return to the early experiences of its founder, Larry Fink. Fink's story is dramatic, from a genius financial innovator to a fall from grace due to a failure, and then rising again to ultimately build BlackRock into a financial giant—a journey that can be described as a remarkable financial epic.

From Genius to Failure—The Early Experiences of BlackRock Founder Larry Fink

Post-War Baby Boom and Real Estate Boom in the U.S.

"After World War II, a large number of soldiers returned to the U.S., and nearly 80 million babies were born over two decades, accounting for one-third of the total U.S. population. The baby boomer generation was keen on investing in stocks and real estate, as well as early consumption, causing the U.S. personal savings rate to drop to as low as 0-1% per year."

Rewind to the 1970s, the post-war baby boom generation gradually entered the age group over 25, triggering an unprecedented real estate boom. In the initial mortgage market, banks would lend money and then enter a long repayment cycle. The banks' ability to re-lend was limited by the borrowers' repayment situations. This simple operational mechanism was far from sufficient to meet the rapidly growing loan demand.

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

Lewis Ranieri, vice chairman of the famous Wall Street investment bank Salomon Brothers, designed a groundbreaking product. He packaged thousands of mortgage debts held by banks together and sold them in smaller pieces to investors, meaning banks could quickly recover funds and use them for new loans.

The result was a dramatic amplification of banks' lending capacity, and this product immediately attracted investments from insurance companies, pension funds, and other long-term capital, significantly lowering mortgage rates. At the same time, it addressed the needs of both the financing and investment sides, which is the so-called MBS (Mortgage-Backed Securities). However, MBS was still not sophisticated enough; this model, akin to indiscriminately slicing a large pie and evenly distributing cash flows, was like a stew. It could not meet the differentiated needs of investors.

The Design and Risks of CMO (Collateralized Mortgage Obligations)

In the 1980s, a more creative up-and-comer than Ranieri emerged at First Boston Investment Bank: Larry Fink. If MBS was a large pie divided indiscriminately, then Larry Fink added a step. He first sliced the pie into four layers of thin pancakes. When repayments occurred, the principal of Class A bonds would be repaid first, followed by Class B, and then Class C. The most imaginative part was the fourth layer, not the principal of Class D bonds, but what was called Class Z bonds (Z-Bond). Until the principal of the first three classes of bonds was fully repaid, the Z bonds received no interest, only accruing it.

Interest would be added to the principal and compounded until the principal of the first three classes of bonds was fully paid off, at which point the Z bonds would start to pay returns. This product, which separated repayment schedules step by step to meet the differentiated needs of different investors, is known as CMO (Collateralized Mortgage Obligations).

It can be said that Ranieri opened Pandora's box, and Fink opened the box within the box. At the inception of MBS and CMO, neither Ranieri nor Fink could have predicted how dramatically these two products would impact the history of global finance. At the time, the financial community regarded them as genius creations. At 31, Fink became the youngest partner in the history of First Boston, leading a team of Jewish professionals known as "Little Israel." A business magazine ranked him as one of Wall Street's top five young financial leaders. Once CMO was launched, it was widely embraced by the market, generating huge profits for First Boston. Everyone believed Fink would soon be promoted to head the company, but it was precisely at this last step toward the peak that disaster struck.

Black Monday and the Painful Lesson of $100 Million

Both MBS and CMO had a very tricky problem. When interest rates rose sharply, repayment cycles extended, locking in investments and missing high-yield financial opportunities. When interest rates fell sharply, a wave of early repayments would sever cash flows. Whether interest rates rose or fell significantly, it would negatively impact investors. This phenomenon of being stuck on both ends is known as negative convexity, and the Z bonds further amplified this negative convexity. The longer duration made them very sensitive to interest rate changes. From 1984 to 1986, the Federal Reserve continuously cut interest rates, lowering them by 563 basis points within two years, creating the largest drop in forty years. Many borrowers chose to refinance with lower-rate new contracts, leading to an unprecedented wave of repayments in the mortgage market.

During the issuance of CMO, Fink's team accumulated a large number of unsold Z bonds, becoming a volcano ready to erupt. These Z bonds, originally priced at around $150, were revalued at only $105, and their impact was enough to destroy the entire mortgage securities department of First Boston.

Worse still, Fink's team had been shorting long-term government bonds to hedge risks, and on October 19, 1987, the infamous Black Monday occurred—a stock market crash where the Dow Jones Industrial Average plummeted by 22.6% in one day. A large number of investors flocked to the government bond market for safety, causing bond prices to soar by 10 points in a single day. Under this double blow, First Boston ultimately lost $100 million. The media once marveled, "Only the sky is Larry Fink's limit." But now, Larry Fink's sky had collapsed; colleagues no longer spoke to him, and the company barred him from participating in any important business. This subtle form of expulsion ultimately led Fink to resign voluntarily.

Larry Fink's Glory and Failure at First Boston

Fink was accustomed to living in the spotlight and understood that Wall Street's love for success far outweighed humility. This well-known humiliation left an indelible mark on him. In fact, one reason Fink worked hard to issue CMOs was his hope that First Boston could become the leading institution in the mortgage bond field, for which he had to compete with Ranieri, representing Salomon Brothers, for market share.

When Fink graduated from UCLA, he first applied to Goldman Sachs, but was cut in the final round of interviews. It was First Boston that accepted him at a time when he was most eager for an opportunity, and it was First Boston that gave him the most realistic lesson on Wall Street. Almost all media later reported this incident, hastily concluding, "Fink failed due to a wrong bet on rising interest rates." However, a later eyewitness who had worked with Fink at First Boston pointed out the key issue. Although Fink's team had established a risk management system at that time, calculating risks with the computing technology of the 1980s was like using an abacus to calculate big data.

The Birth of the Aladdin System and BlackRock's Rise

The Founding of BlackRock

In 1988, just a few days after leaving First Boston, Fink organized an elite team at his home to discuss a new venture. His goal was to establish an unprecedentedly powerful risk management system because he would never allow himself to fall into a situation where he could not assess risks again.

In this elite team personally selected by Fink, there were four of his colleagues from First Boston. Robert Kapito had always been Fink's loyal ally; Barbara Novick was a tough-minded portfolio manager; Bennett Grub was a mathematical genius; and Keith Anderson was a top securities analyst. Additionally, Fink recruited his good friend from Lehman, Ralph Schlosstein, who had previously served as a domestic policy advisor to President Carter. Schlosstein brought along Susan Ward, who had been the deputy director of Lehman's mortgage department. Finally, Hugh Frater, the executive vice president of Pittsburgh National Bank, joined the team. These eight individuals would later be recognized as the eight co-founders of BlackRock.

At that time, they needed startup capital, so Fink called Stephen Schwarzman of Blackstone Group. Blackstone was a private equity firm co-founded by former U.S. Commerce Secretary (and former Lehman CEO) Peter Peterson and his colleague Schwarzman. The year 1988 was a time of rampant corporate mergers and acquisitions, and Blackstone's main business was leveraged buyouts. However, opportunities for leveraged buyouts were not always available. Therefore, Blackstone was also looking for diversification. Schwarzman was very interested in Fink's team, but the fact that Fink had lost $100 million at First Boston was well-known. Schwarzman had to call his friend, Bruce Wasserstein, head of First Boston's M&A division, for advice. Wasserstein told Schwarzman, "To this day, Larry Fink is still the most talented person on Wall Street."

Schwarzman immediately issued Fink a $5 million credit line and $150,000 in startup funds, thus establishing a department called Blackstone Financial Management Group under Blackstone. Fink's team and Blackstone each held 50% of the shares. Initially, they didn't even have an independent workspace and had to rent a small area in Bear Stearns' trading hall. However, the situation developed far beyond expectations, and Fink's team quickly repaid all their debts. Within a year, they expanded their fund management scale to $2.7 billion.

The Development of the Aladdin System

The key reason for their rapid rise was the computer system they established, which was later named the "Asset, Liability, Debt & Derivative Investment Network." Its core functionality, represented by the initials of five key components, formed the word "Aladdin," alluding to the mythical imagery of Aladdin's lamp in "One Thousand and One Nights," implying that the system could provide investors with wise insights like a magic lamp.

The first version was coded on a $20,000 workstation placed between the office refrigerator and coffee machine. This system, which replaced traders' experiential judgment with modern technology for risk management and massive information calculation models, undoubtedly positioned itself at the forefront of the era. The success of Fink's team was akin to winning the lottery for Schwarzman at Blackstone. However, their equity relationship began to fracture.

Parting Ways with Blackstone Group

As the business rapidly expanded, Fink recruited more talent and insisted on allocating shares to new employees. This caused Blackstone's stake to be quickly diluted from 50% to 35%. Schwarzman told Fink that Blackstone could not endlessly transfer shares. Ultimately, in 1994, Blackstone sold its stake to Pittsburgh National Bank for $240 million, with Schwarzman personally cashing out $25 million at a time when he was going through a divorce with his wife, Ellen.

Business Week quipped, "Schwarzman's earnings just about covered his divorce settlement with Ellen." Many years later, Schwarzman recalled his split with Fink, believing he didn't gain $25 million but lost $4 billion. The reality was he had no choice. In retrospect, you will find that Fink diluting Blackstone's stake seemed more intentional.

The Origin of the Name BlackRock

After Fink's team became independent from Blackstone, they needed a new name. Schwarzman requested that Fink avoid the words "black" and "stone." However, Fink humorously suggested, "J.P. Morgan and Morgan Stanley's split has been mutually beneficial, so I plan to use the name 'BlackRock' to pay tribute to Blackstone." Schwarzman agreed to this request in jest, and that is how the name BlackRock came about.

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

BlackRock's Rapid Expansion and Technological Advantage

In 1999, BlackRock went public on the New York Stock Exchange, and the leap in fundraising capabilities enabled 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 when Merrill Lynch President Stanley O'Neal decided to sell Merrill's massive asset management division. Larry Fink immediately recognized this as a once-in-a-lifetime opportunity, so he invited O'Neal to breakfast at a restaurant on the Upper East Side. The two discussed for only 15 minutes before signing a merger framework on the menu. BlackRock ultimately merged with Merrill's asset management through a stock swap, and the new company's name remained BlackRock, with its asset management scale skyrocketing to nearly $1 trillion overnight.

One important reason for BlackRock's incredible rapid rise in its first 20 years was that it solved the problem of information asymmetry between buyers and sellers in investment transactions. In traditional investment transactions, the way buyers obtained information was almost entirely through the marketing of sellers, with investment bankers, analysts, and traders from the seller's camp monopolizing core capabilities like asset pricing. It was like going to the market to buy vegetables; we could not possibly understand vegetables better than the sellers. BlackRock used the Aladdin system to manage investments for clients, allowing them to 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 U.S. was in the most dangerous moment of the most severe economic crisis since the Great Depression of the 1930s. Bear Stearns, the fifth-largest investment bank in the U.S., found itself in dire straits and filed for bankruptcy in federal court. Bear Stearns' trading partners were global, and if Bear Stearns collapsed, it could likely trigger a systemic collapse.

The Federal Reserve urgently convened a meeting and, at 9 a.m. that day, devised an unprecedented plan, authorizing the New York Federal Reserve Bank to provide a $30 billion special loan to JPMorgan Chase to directly acquire Bear Stearns.

JPMorgan proposed a purchase price of $2 per share, which nearly caused a revolt among Bear Stearns' board members, considering that Bear Stearns' stock price had reached $159 in 2007. A price of $2 was an insult to this 85-year-old prestigious firm, and JPMorgan had its concerns as well. It was said that Bear Stearns still held a large amount of "illiquid mortgage-related assets." What was referred to as "illiquid mortgage-related assets" was seen by JPMorgan as a bomb.

All parties quickly realized that this acquisition was complex and had two urgent issues to resolve: the valuation issue and the toxic asset separation issue. The entire Wall Street knew who to turn to. New York Federal Reserve Bank President Geithner approached Larry Fink, and after obtaining authorization from the New York Fed, BlackRock entered Bear Stearns to conduct a comprehensive liquidation.

Twenty years ago, they had worked here, renting office space in Bear Stearns' trading hall. At this point in the story, you will find it very dramatic. Larry Fink, who took center stage as the firefighter, was the absolute godfather of the mortgage-backed securities field and was one of the original creators of the subprime mortgage crisis.

With BlackRock's assistance, JPMorgan completed the acquisition of Bear Stearns at about $10 per share, and the once-renowned name Bear Stearns was extinguished. Meanwhile, the name 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-backed securities, and their reputations were tarnished during the subprime mortgage crisis. It can be said that at that time, the entire valuation system of the U.S. financial market collapsed, and BlackRock, with its powerful analytical system, became an irreplaceable executor in the U.S. bailout plan.

The Bailout Actions for Bear Stearns, AIG, and the Federal Reserve

In September 2008, the Federal Reserve began another bailout plan under even more severe circumstances. The largest insurance company in the U.S., AIG, saw its stock price plummet by 79% over the first three quarters, primarily due to the impending collapse of the $527 billion credit default swaps it had issued. Credit default swaps, or CDS, are essentially insurance policies that pay out in the event of a bond default, but the problem is that purchasing CDS does not require you to hold the bond contract. This is akin to a large group of people without cars being able to purchase unlimited car insurance; if a $100,000 car has an issue, the insurance company might have to pay out $1 million.

CDS had been turned into a gambling tool by these market gamblers. At that time, the scale of subprime mortgage bonds was about $7 trillion, but the CDS guaranteeing those bonds reached hundreds of trillions. At that time, the U.S. GDP was only about $13 trillion. The Federal Reserve quickly realized that if Bear Stearns' problem was a bomb, then AIG's problem was a nuclear bomb.

The Federal Reserve had to authorize $85 billion to urgently bail out AIG by purchasing a 79% stake. In a sense, this turned AIG into a state-owned enterprise, and BlackRock once again received special authorization to conduct a comprehensive valuation and liquidation of AIG, becoming the director of execution for the Federal Reserve.

Through multiple efforts, the crisis was ultimately contained. During the subprime mortgage crisis, BlackRock was also authorized by the Federal Reserve to manage the bailout of Citigroup and oversee the $5 trillion balance sheet of Fannie Mae and Freddie Mac. Larry Fink was recognized as the new king of Wall Street, establishing close ties with U.S. Treasury Secretary Paulson and New York Fed President Geithner.

Geithner later succeeded Paulson as the new Treasury Secretary, while Larry Fink was humorously referred to as the underground Treasury Secretary of the U.S., as BlackRock transitioned from a relatively pure financial enterprise to one that was both political and commercial.

The Birth of a Global Capital Giant

Acquisition of Barclays Asset Management and Dominance in the ETF Market

In 2009, BlackRock encountered another significant opportunity when the renowned British investment bank Barclays Group faced operational difficulties and reached an agreement with private equity firm CVC to sell its iShares fund business. This deal had already been reached but included a 45-day bidding clause. BlackRock persuaded Barclays, saying, "Rather than selling iShares separately, why not merge all of Barclays' asset businesses with BlackRock as a whole?"

Ultimately, BlackRock acquired Barclays Asset Management for $13.5 billion. This transaction is considered the most strategically significant acquisition in BlackRock's development history, as Barclays Asset Management's iShares was the largest issuer of exchange-traded funds (ETFs) globally at that time.

Exchange-traded funds, commonly referred to as ETFs, gained popularity as the passive investment concept accelerated after the burst of the internet bubble, with the global ETF scale gradually surpassing $15 trillion. Acquiring iShares allowed BlackRock to capture a 40% market share in the U.S. ETF market. The massive capital volume necessitated broad asset allocation to diversify risks.

On one hand, there was active investment, while on the other, passive tracking through products like ETFs and index funds required holding all or most of the shares of the constituent companies in a sector or index. Therefore, BlackRock held extensive stakes in large publicly listed companies globally, with most of their clients being large institutions such as pension funds and sovereign wealth funds.

BlackRock's Influence in Corporate Governance

Although theoretically, BlackRock merely manages assets for clients, in practice, it wields significant influence. For example, at shareholder meetings for Microsoft and Apple, BlackRock has repeatedly exercised its voting rights and participated in major decision-making votes. When analyzing large companies that account for 90% of the total market capitalization of U.S. listed companies, you will find that the three giants—BlackRock, Vanguard, and State Street—are either the largest or second-largest shareholders in these companies, which collectively have a market capitalization of about $45 trillion, far exceeding the U.S. GDP.

This phenomenon of highly concentrated shareholding is unprecedented in global economic history. Moreover, asset management companies like Vanguard also rent BlackRock's Aladdin system, meaning that the total assets managed by the Aladdin system actually exceed those managed by BlackRock by over $10 trillion.

The Beacon of Capital Order

In 2020, during another market crisis, the Federal Reserve expanded its balance sheet by $3 trillion to stabilize the market, and BlackRock once again acted as the Federal Reserve's trusted steward, taking over the corporate bond purchase program. Several BlackRock executives left to join the U.S. Treasury and the Federal Reserve, while officials from the U.S. Treasury and the Federal Reserve also took positions at BlackRock. This frequent two-way flow of personnel between politics and business, known as the "revolving door," has sparked intense public scrutiny. One BlackRock employee once commented, "Although I don't like Larry Fink, if he left BlackRock, it would be like Ferguson leaving Manchester United." Today, BlackRock's asset management scale has surpassed $115 trillion. Larry Fink's navigation between politics and business makes Wall Street wary, and this dual role underscores his profound understanding of the industry.

True financial power does not lie in the trading hall but in mastering the essence of risk. When technology, capital, and power resonate in a triple concerto, BlackRock has transformed from an asset manager into the beacon of capital order.