The Collapse and Reconstruction of the American Financial System: From JPMorgan to BlackRock (Part 1)

Original Title: "The Fall and Rise of American Finance"

Original Authors: Scott M. Aquanno, Stephen Maher

Original Compilation: MicroMirror

Preface

1: The Latest Stage of American Capitalism Development

The Rise and Fall of American Finance

A New Picture of Financialization

Rethinking Finance and Corporations

2: Classical Financial Capital and the Modern State

Financial Capital and Industrial Capital

From Bank Capital to Financial Capital

Financial Capital and Competition

State Power, Class Power, and Crisis

3: Managerialism and the New Deal State

Reshaping Capitalist Finance

The New Industrial Order

Class Struggle and the Crisis of Managerialism

4: Neoliberalism and Financial Hegemony

Financialization of Non-Financial Companies

Asset Accumulation and Market Finance

Financialization and Authoritarian Nationalism

The 2008 Crisis and the Problem of Decline

5: New Financial Capital and the State of Risk

Crisis Management and the State of Risk

The Rise of the Big Three

New Financial Capital

Private Equity, Hedge Funds, and Financial Capital

6: Crisis, Contradictions, and Possibilities

The Nationalization of Market Finance

Macroeconomic Policy of Financial Capital

The False Promise of Universal Ownership

Financial Democratization

1: The Latest Stage of American Capitalism Development

The financial crisis of 2008 marked a fundamental change in American capitalism. As the crisis management efforts of the Federal Reserve and the Treasury brought state power deeper into the core of the financial system, successive rounds of quantitative easing facilitated an unprecedented concentration of corporate ownership concentrated in a small group of large asset management firms. In the aftermath of the crisis, these firms—BlackRock, Vanguard, and State Street—replaced banks as the most powerful institutions in contemporary finance, accumulating ownership on a scale and scope never seen in the history of capitalism. These asset management firms became central nodes in a vast network that encompasses nearly all major companies in every economic sector.

This represents a historic shift in corporate power. Since the New Deal, the separation of ownership and control has been a core feature of corporate organization: those who own the company (shareholders) are formally distinct from those who control it. In the decades leading up to the crisis, the market regulated the relationship between shareholders and managers: shareholders could "exit" by selling their shares in poorly performing companies. However, with the rise of the Big Three after the financial crisis, the boundary between ownership and control has been blurred. As "passive investors," asset management firms can only trade to reflect their constantly changing positions in indices like the S&P 500 or NASDAQ. Unable to sell shares at will, they turned to more direct means of controlling industrial companies.

This financial influence over industrial firms has not been seen since the Gilded Age, when giants like J.P. Morgan dominated American capitalism. For over a century, the concentration of ownership was limited by a fundamental trade-off: investors could own a relatively small part of many companies or a large part of a few. In other words, as diversification increased, shareholdings in many companies were diluted, limiting investors' control over any specific company. Thus, investors could accumulate enough shares to exert substantial power over a relatively small number of companies. Since 2008, the rise of large asset management firms has reversed this situation: the Big Three have become the largest shareholders in almost all the biggest and most important companies.

Today, the Big Three collectively hold the largest or second-largest stake in companies that account for nearly 90% of the total market capitalization of the U.S. economy. This includes 98% of the companies in the S&P 500, which tracks the largest U.S. companies, with the Big Three averaging over 20% ownership in each. Equally striking is the speed at which this concentration has occurred since the 2008 crisis. From 2004 to 2009, State Street's assets under management (AUM) grew by 41%, while Vanguard's assets grew by 78%. However, BlackRock's unique significance in this power structure is reflected in its AUM exploding by an almost unbelievable 879% during these years, making it the largest global asset management firm by 2009.

The speed and scale of this transformation herald a new phase of American capitalism characterized by unprecedented ownership concentration and the concentration of corporate control around a small number of financial firms. Large asset management companies now play a highly active, direct, and powerful role in corporate governance, exerting influence over nearly every publicly traded company in the U.S. They have become "universal owners," managing all of America's social capital.

The Rise and Fall of American Finance

The close ties established between financial institutions and non-financial companies after 2008 constitute a new form of the fusion of financial and industrial capital, which Marxist political economist Rudolf Hilferding referred to as "finance capital" in 1910. Although the term has been widely misused, finance capital does not merely refer to financial capital, let alone bank capital. Instead, finance capital emerges from the combination of financial and industrial capital, establishing a new form of capital that synthesizes the original industrial and financial forms—a synthesis in Hegel's terms. Through this process, financial institutions play an active and direct role in the management of industrial firms. By shaping the strategic direction and organizational structure of the companies they control, financiers aim to maximize the returns on their monetary capital in the form of stock prices, dividends, and other interest payments.

Finance capital is a particular form of financialized capitalism. Generally, financialization refers to the process by which monetary capital—or the cycle of monetary prepayment followed by interest-bearing returns—gains greater dominance in social life and the economy. As is often observed, the expansion of monetary capital is a major feature of the neoliberal era. This is reflected in the principle of "shareholder value," whereby companies provide greater returns to investors through dividends and stock buybacks. The current form of finance capital represents a more concentrated form of financialization, with tighter links between financial and industrial capital. A core argument of this book is that neither the broader trend of financialization nor the emergence of finance capital indicates the decline of capitalism or the hollowing out of industry, as is often claimed. Instead, financialization is aimed at enhancing competitiveness, maximizing profits, increasing productivity, and exploiting labor.

Moreover, contrary to many accounts that describe financialization as a sudden break from pre-neoliberal, non-financialized capitalism, we argue that the roots of financialization lie in the post-war period, when it was the result of a series of state efforts to achieve "watertight" separation between finance and industry. Tracing the rise of financial power from the collapse of the J.P. Morgan empire in the latter two-thirds of the 20th century to the rise of BlackRock in the first two decades of the 21st century, we present a history of American finance that challenges popular narratives. In the arc we outline, the history of financialization has four distinct phases: classical finance capital, managerialism, neoliberalism, and new finance capital. These phases form a cycle that includes the decline of financial power, followed by a gradual, uneven, and contradictory reconstruction. Each phase is characterized by specific forms of state, corporate, and class power, with transitions marked not by sharp "breaks" but by continuity and change.

Hilferding's theory of finance capital stemmed from his study of the development of German capitalism at the turn of the 20th century; however, his analysis has also been widely applied in the U.S. During this classic period of finance capital (1880-1929), investment banks formed large companies by merging small firms. The power of these banks depended on their ownership of company stocks and their ability to extend credit. As investment banks provided substantial loans to industrial firms, the interests of both became tightly intertwined: industrial firms relied on credit, while investment banks sought to ensure that loans were repaid, thus monitoring corporate operations to protect their investments. The position of banks as the largest shareholders ensured their power over companies, allowing them to secure seats on boards and establish "interlocking directorates" for the companies they controlled.

As equity became increasingly dispersed in the first half of the 20th century, these networks of finance capital became more loosely connected. A new class of professional managers exercised increasingly autonomous control over industrial companies, with banks relegated to a purely supportive role. Regulations enacted after the stock market crash of 1929 sanctified the managerial era (1930-1979), formally separating the governance of banks from that of industrial companies and making "internal" corporate managers the dominant force in the economy. During this period, without significant holdings from large groups, these managers could control industrial firms without facing a unified challenge from investors. However, at the same time, the separation of banks from industrial companies led the latter to internalize a range of "financial" functions, developing extensive capabilities for raising and allocating funds independently. Thus, the financialization of non-financial companies originated at the core of the post-war "Golden Age."

The hegemony of industrial firms during this period was supported by the New Deal state, which had three key attributes. First, it was concerned with legitimacy. New Deal reforms, such as labor rights and social security, aimed to eliminate the intense class struggles of the 1930s. These measures enhanced the legitimacy of capitalism and incorporated workers into the structure of managerial hegemony. Second, these reforms led to a massive expansion of state fiscal spending, which was largely funded by taxation. Thus, the New Deal state was a tax state, with its redistribution programs leading to reduced levels of income inequality. This was also due to the success of unions, which were largely unconcerned with politics, in collective bargaining. Finally, industrial hegemony was supported by family industrial complexes that combined the most dynamic companies with state power, leading to the tremendous growth and diversification of so-called multinational corporations (MNCs) and facilitating the development of corporate organization in the form of multi-sector conglomerates.

As post-war prosperity slowed in the late 1960s, union wage struggles increasingly squeezed corporate profits, leading to a growing contradiction between legitimacy and accumulation: union rights and New Deal programs now posed obstacles to accumulation. This issue was resolved through the formation of a neoliberal authoritarian state, which constrained labor through unprecedented interest rate hikes and a new wave of globalization. With state power concentrated in institutions unencumbered by democratic pressures, particularly the Federal Reserve, elections and parties became less significant. This authoritarian structure was reinforced by the fact that the neoliberal state is a flawed state. As tax cuts were implemented to restore corporate profits, state projects increasingly relied on debt financing, tightening the fiscal constraints on state budgets. This also exacerbated inequality. The wealthy no longer paid taxes for redistribution programs but instead lent state funds to themselves to pay interest.

In the neoliberal era (1980-2008), industrial hegemony was replaced by a new financial power. To some extent, this was due to the integration of global financial markets, which provided the necessary infrastructure for companies to circulate value within internationalized production networks. Financial hegemony was also supported by the surge in worker pension funds managed by professional fund managers that began in the 1960s and 70s. A wave of concentration and centralization of corporate stocks occurred among these new "institutional investors," who wielded significant power over industrial companies. However, this form of financial power is fundamentally different from classical finance capital. Rather than individual banks directly controlling corporate networks, clusters of competing financial institutions imposed broad structural discipline.

However, financial hegemony was not imposed by external investor pressure but initially emerged within industrial firms as an adaptive response to diversification and internationalization over the decades following the war. In fact, this was an inherent aspect of the multi-sector conglomerate organizational form. Large companies were no longer organized around a single business but comprised many different businesses that often had little direct relationship with one another. Moreover, the scope of these operations became increasingly internationalized. This challenge led corporate groups to decentralize the operational management of business units, even as investment authority remained concentrated in top management. These so-called "general managers" did not manage specific production processes but managed monetary capital itself; by the time of the neoliberal era, they had become financial capitalists, sitting at the nexus of finance and industry.

With the development of internal capital markets within industrial firms, their financial departments and functions increasingly dominated. This was most evident in the transformation of corporate treasurers into chief financial officers, who served as key aides to the CEO, responsible for establishing "investor expectations" and undertaking necessary internal restructuring to meet those expectations. The financial capabilities of industrial firms also expanded as they sought to manage globalization risks through derivative trading. All of this ultimately led to the emergence of corporate organization in the form of multi-layered subsidiaries, with multinational corporations organizing production by integrating their internal divisions with second-tier external contractors, creating highly flexible and competitive global networks. Apple's reliance on Foxconn is just one prominent example.

New financial capital emerged after the 2008 crisis, as the decentralized financial power of neoliberal shareholder capitalism concentrated in large asset management firms. During the financial crisis, regulators sought to enhance systemic stability through carefully orchestrated bank mergers. When the dust settled, only four large banks—J.P. Morgan, Bank of America, Wells Fargo, and Citigroup—dominated the industry. Ironically, state intervention led to a shift from banks to a group of asset management firms, namely BlackRock, State Street, and Vanguard. As the state of risk formation significantly reduced the risks associated with equities, asset management firms facilitated a massive influx of funds into these assets. Bringing savings into equities further reduced risk, leading to sustained increases in stock prices, and the ownership of asset management firms also continued to concentrate.

A crucial foundation for the concentration of ownership by asset management firms is pension funds and other institutional investors, who increasingly delegate the management of their portfolios to these firms. By pooling the vast capital already accumulated in these funds, asset management firms further concentrated financial power, achieving an economic dominance not seen since the era of J.P. Morgan. This was facilitated by a historic shift towards passive management. Unlike active management, where high-paid fund managers seek to maximize returns by "beating the market," passive funds hold stocks indefinitely, trading only to track the performance of specific indices, allowing them to offer significantly reduced management fees and achieve high returns, especially when stock prices rise. But these passive investors are very active owners. Unable to constrain industrial firms through simple stock trading, they pursued more direct methods of influence characteristic of financial capital.

If the rise of asset management firms is part of a historic transformation in the organization of American capitalism, it is particularly centered around BlackRock's preeminent position. By 2022, BlackRock managed assets totaling $10 trillion. Including assets managed indirectly through its Aladdin software platform, this figure approaches $25 trillion. BlackRock is now one of the major owners of almost all large publicly traded companies in the U.S. The degree of capital concentration has never reached such astonishing levels. Its power is reflected not only in the scale of its managed assets but also in its special connections with the state. George W. Bush appointed Goldman Sachs' Hank Paulson as Treasury Secretary during his term, and both Hillary Clinton and Joe Biden considered BlackRock CEO Larry Fink for the position. Biden's chief economic advisor, Brian Deese, is also an executive at BlackRock. All of this indicates that a portion of the power of the new financial capitalists is on the rise.

A New Picture of Financialization

This book's analysis of the role of finance in the development of contemporary capitalism is markedly different from analyses in progressive policy platforms and critical academia. In fact, today, almost everyone agrees that, especially in the years following the 2008 crisis, finance is a corrosive and parasitic force on the "real" industrial economy. Many of the ills of neoliberalism, from economic crises to social inequality, are often attributed to "financialization." While progressives worry that without regulation to control financial power, American prosperity and competitiveness will weaken, Marxists typically view financialization as a symptom of "late capitalism" and a harbinger of the decline of the American empire. These ideas have fueled political debates between socialists and progressives, as well as the agendas of political figures from Hillary Clinton to Jeremy Corbyn.

Many observers follow Giovanni Arrighi's view that financialization is an inevitable phase in the growth and decline cycles of the capitalist world system. In this view, the decline of hegemonic states is closely linked to the growth of finance. However, Arrighi downplays the central role of finance in the early growth and vitality of capitalism. Investment banks were key players in the modern corporate organization of the 19th century, just as finance remains an indispensable part of the current multi-layered subsidiary forms of corporate organization. Finance is the nerve center of contemporary global capitalism, constituting the infrastructure through which value circulation is achieved via internationalized production systems. The increasing prominence of finance does not signify the decline of the American empire but rather underscores America's central position in the global economy.

Progressives like William Lazonick and Greta Krippner argue that the rise of finance has led to the "hollowing out" of production, echoing the narrative of decline. They contend that the financial sector is not concerned with investing in long-term growth and prosperity but rather with "quick profits." Thus, the rise of finance has brought "short-termism" to industrial firms, leading them to abandon investments in "good jobs" that supported post-war living standards for the "middle class," as well as the R&D necessary for American firms to maintain global leadership. Instead, firms have shifted funds to "non-productive" financial services and enriched themselves. Executive compensation in the form of stock options only enhances their incentives to engage in these dysfunctional strategies, leading them to inflate stock prices through buybacks for windfall gains.

However, the reason for the lower levels of inequality in the post-war period was not the benevolence or foresight of corporate managers but rather the balance of class power, particularly the ability of unions to win wage increases. As we will argue, these distributive bargains were supported by the unique conditions of post-war prosperity and the structure of world trade that existed before the emergence of free capital flows. The causes of rising inequality and the rollback of social programs associated with neoliberalism are not the rise of finance but rather capitalism's inability to sustain these compromises. As post-war prosperity ended, union wage struggles squeezed profits, leading to a decade-long crisis that could only be resolved through labor failures and the exploitation of large numbers of low-wage workers via globalization. Thus, financialization was key to restoring profitability and resolving the crisis of the 1970s, leading to a second golden age of capitalism, albeit one that was not as robust as the first "Golden Age."

Moreover, viewing finance fundamentally as short-termist overlooks the fact that some of contemporary capitalism's biggest stars, despite not being profitable in the short term, have attracted massive investments. For example, Uber has consistently operated at a loss, yet investors have remained optimistic about the development of autonomous vehicle technology, expecting it to make the company profitable at some point. Tesla has also focused on the long-term development of a new electric vehicle infrastructure, even as it incurs losses in car sales. Despite low or nonexistent profits, investors have poured vast sums into Amazon over the past decade, which The Economist described as "the largest bet on a company's long-term prospects in history." Similarly, many industrial companies have been willing to bear the enormous short-term costs of the global restructuring of neoliberalism over the decades to ensure their long-term competitiveness and profitability.

None of this is surprising. After all, why would financiers or corporate executives intentionally undermine the long-term value of their assets? Furthermore, the assumption that paying dividends or conducting stock buybacks must come at the expense of new investments is unfounded. In a low-interest-rate environment, there is no inherent contradiction between investing in production and R&D and conducting buybacks and paying dividends, as companies can borrow almost for free. In fact, over the past forty years, the share of corporate investment and R&D spending as a percentage of GDP has increased, as have dividend payments, and profits have surged. While a significant amount of surplus cash has been returned to investors through buybacks, the continued investment in R&D by tech giants like Apple, Microsoft, and Google is clearly sufficient to maintain their status as global leaders.

In addition to lamenting Wall Street's short-termist privileges, many Marxists also argue that "financialization" is rooted in a deeper—indeed, fundamental—crisis of the capitalist mode of production. For Robert Brenner, Cédric Durand, and David Harvey, the decline in profit rates in the industrial sector since the late 1960s has led to a shift in corporate investment from manufacturing to the relatively profitable and rapidly growing financial services sector. They argue that this has created the illusion of economic growth through a series of speculative bubbles, which merely mask the underlying inadequacies of industrial profitability. French economist François Chesnais links the political and economic centrality of finance to its role in international economic integration, but he also views financialization as an aspect of a long-term economic crisis characterized by overproduction and declining profit rates. For Chesnais, this forty-year "global downturn" signifies the decline of the capitalist world system.

These views are based on a certain interpretation of Marx's theory of "fictitious capital," according to which many forms of financial capital are "fictitious" and separate from "real" industrial capital. In this view, finance is largely seen as a passive recipient of surplus value generated by industry through the payment of various forms of interest (including loan interest as well as dividends and service fees). Everything from corporate stocks to derivatives is viewed as fictitious capital, which at best can only downplay the role of these financial instruments in the integrity of industrial capital; at worst, it sees finance as a cancer on the "real" economy, suggesting that the economy would be better off without it. This opens the door to social democratic theories of "hollowing out"—though these theorists often aim to prove that capitalism is doomed rather than to save capitalism by suppressing finance.

Finance and industry are not opposed. As we will demonstrate in the following chapters, it has historically been deeply intertwined with capitalist production. Finance—whether within or outside non-financial companies—regulates the extraction of surplus value, promotes competitiveness, and facilitates the international circulation and valorization of capital. Multinational corporations' ability to freely transfer investments around the world in the blink of an eye is a key condition for their construction and reorganization of flexible, dynamic, and globalized production networks. Derivatives are far from merely a speculative "casino," especially crucial for managing the risks of globalized production. Finance is also vital for corporate mergers and for sustaining consumption in the face of stagnant wages in recent decades.

Radical economist Costas Lapavitsas avoids defining finance as independent from or opposed to industry, emphasizing its structural role in capitalism. However, when he claims that finance "exploits us all," he tends to minimize the important and very positive role of finance in value production. Finance is not only a rentier and extractive force in the economy but is also crucial for enhancing the competitiveness and vitality of productive capital. Furthermore, he primarily understands the financialization of non-financial companies in terms of changing asset portfolios, i.e., industrial companies investing more in financial services. The deeper transformation of companies, in which monetary capital becomes more prominent in their organizational structures, has yet to be explored. Lapavitsas also does not adequately question the changing relationship between companies and financial institutions, missing the decisive feature of neoliberal shareholder capitalism: the concentration of stocks in the hands of powerful institutional investors, which strengthens investor discipline over non-financial companies, and the restructuring of corporate governance reflects the empowerment of finance.

Perhaps most critically, Lapavitsas, like many Marxist and non-Marxist economists, largely overlooks the central role of the American imperial state in organizing economic structures and financial political hegemony. This omission paves the way for explanations by Robert Brenner, Dylan Riley, and Cédric Durand, who argue that the state has now been instrumented or "captured" by corrosive financial sector tools. A key argument of this book is that, conversely, the state's role in managing and constructing the financial system reflects what Nikos Poulantzas referred to as the state's "relative autonomy" in relation to the specific capitalist companies and fractions in overseeing the overall, long-term systemic interests of capitalism. As we emphasize, capitalism is not only an economic system but also a political one that requires the state to manage the trade-offs and power conflicts between different fractions of capital—albeit always against a backdrop of deeper economic contradictions and pressures.

As Leo Panitch and Sam Gindin have long argued, finance is neither a challenge to production nor a challenge to American hegemony. Rather, it is a fundamental component of the American imperial order that makes globalization possible. For them, global financial integration represents the culmination of the U.S. government's project of "building global capitalism" since World War II. The unique imperial responsibility of the American state in regulating the world system is primarily committed to ensuring the free flow of capital across borders, regardless of its nationality, thereby creating a truly global capitalism rather than a unique regional or national capitalism. As they demonstrate, a key foundation for this is the integration of global finance. While this means that finance will become more powerful in the global economy, industrial firms are able to accept this precisely because they also benefit from it.

Panitch and Gindin point out the interconnections between the unique imperial role of the American state, the development of state institutions, and the rise of finance. By doing so, they show that globalization is not an automatic result of economic "laws" but requires the development of specific state capacities. This has led to the concentration of state power in the Federal Reserve and the Treasury, insulating them from democratic pressures. This independence allows these institutions to flexibly intervene in managing the contradictions of globalized capitalism without the arbitrariness of democratic accountability or direct "capture" by capitalists. Thus, a relatively autonomous state can act on behalf of capital, if not in accordance with its demands. Financialization, globalization, and the development of more authoritarian states are all part of "manufacturing global capitalism."

Finance has always been closely tied to the state, forming what David Harvey calls the "state-finance relation," which is a "direct integration" of finance with state institutions. Without considering the central role of state power in supporting and protecting finance, one cannot understand finance; and without considering the fusion of state power with the economy, one cannot understand the structure of state power. However, to date, few have seriously attempted to trace the historical development of American state economic institutions. As we will demonstrate, the evolution of the financial system in the 20th century depended on the continuous expansion of state economic functions, leading to the emergence of authoritarian power structures in democratic capitalist states, which form the fundamental basis of today's new financial capital.

Sociologists and political scientists have also cited some significant transformations in corporate capitalism in the 20th century, including financialization. However, they often fail to connect institutional changes with capitalism as a system, thus failing to understand how this transformation achieved a competitive reorganization of accumulation, and how this reorganization was produced—even suggesting that economic concentration would suppress competitiveness rather than exacerbate it. Moreover, the focus on institutions in these accounts, rather than on the production and circulation of value, supports the view that financialization suddenly emerged with the rise of neoliberal shareholder capitalism, thus overlooking the deeper, more complex interconnections that have always existed between finance and production in a fundamentally monetary economy. The dynamics of class struggle are similarly crucial for understanding history but have largely disappeared from view.

Sociologist John Scott demonstrates how the concentration of institutional investors since the 1970s has produced a historic shift from management companies primarily controlled by insiders to neoliberal companies that are subject to greater investor discipline in the form of "multi-financial hegemony." Unlike the direct control of corporate networks by individual investment banks in traditional finance capital, competing financial institutions established temporary alliances on corporate boards to exert broad influence and discipline over corporate "insiders." Gerald Davis goes further, claiming that the concentration of assets in mutual funds (especially Fidelity) has constituted a "new finance capital." However, he argues that this concentrated ownership has not translated into control due to regulatory constraints, conflicts of interest, and the short-term nature of active mutual funds, as well as the fact that simple stock trading is easier than direct action.

Thus, Davis defines new finance capital as "a historically unique combination of concentration and liquidity," equivalent to "ownership without control." However, Davis did not anticipate how the truly astonishing concentration of equity in passive investment funds (such as those managed by BlackRock, Vanguard, and State Street) would change these dynamics. Davis argues that Fidelity's $1 trillion fund "struggles to maintain flexibility in investments," leading it to shift to other business areas. However, BlackRock alone currently manages $10 trillion in assets. Moreover, as Davis observes, Fidelity is a relatively short-term investor, while these passive funds are extremely long-term. Therefore, they exercise power not through trading but through direct control. New finance capital, like the old, is built on concentration and long-termism, thus primarily defined by the fusion of ownership and control.