naked capitalism

By Tom Adams, an attorney and former monoline executive

I’m usually cynical about these “genius of Wall Street” articles, but the Vanity Fair article “Larry Fink’s $12 Trillion Shadow” by Suzanna Andrews, about the head of the world’s largest money manager, BlackRock, raises the cliche to another level. My skepticism results both from the disconnect between the glowing tone of the article versus some of the information presented, as well as how the depiction of BlackRock is at odds with my own observations of the firm.

Let’s go past the puffery and do some quick computations:

I count losses on over $12 billion dollars of CDOs and CMBS plus losses on other large investments during the crisis in this article, which i suspect misses several billion of dollars of other losses elsewhere in the portfolio.

I count dozens of highly questionable conflicts of interest combined with a seriously problematic Fed (and Geithner, once again) refusing to disclose critical information about such for conflicts. David Patterson is in hot water over $6000 in yankee tickets and about $20,000 in conflicted horse racing fees, but Blackrock can receive hundreds of millions of dollars on two sides of a deal while getting paid for dozens of other highly conflicted, government related companies. On what planet does this make sense?

I count repeated examples of an egomaniac consolidating a dangerous level of power and doubling down on its level of too big to fail with a total disregard for the any sort of systemic risk this might present.

The article also makes much of the Aladdin model, which has proven a very effective marketing tool for the firm:

But while its size was impressive, what would distinguish BlackRock was its state- of-the-art system for evaluating and managing risk. With 5,000 computers running 24 hours a day, overseen by a team of engineers, mathematicians, analysts, and programmers, BlackRock’s “computer farm” could monitor millions of daily trades and scrutinize every single security in its clients’ investment portfolios to see how they would be affected by even the most minor changes in the economy. Churning through 200 million calculations each week, its computers could simulate every imaginable shift in interest rates, every conceivable change in the financial markets, and stress-test the performance of hundreds of thousands of securities in numerous global-crisis scenarios.

Let’s start with a simple observation: did the use of Aladdin model save any of BlackRock’s clients during the upheaval of 2007 and 2008? Exactly how well did those models anticipate the market perturbations that we saw? Pretty much every quant based model performed poorly during this period. But the article is silent on this point, which is telling. If Aladdin miraculously outdid the other strictly math-based risk models, one would expect Fink would have made sure to stress this point. There’s every reason to suspect that Aladdin is yet another example of what Nassim Nicholas Taleb calls statistically-based risk models: “non-performing airbags”. They do a great job of measuring day to day risk, and a poor one of preparing users for the sort of price movements that will kill investors using leverage. And now this model and this analysis is effectively the new monopolistic rating agency for government controlled investment portfolios while displaying even less transparency than Moody’s and S&P did when their opinions dominated the market.

The article similarly has a very curious discussion of how Fink was on a short list to head of Merrill, and lost out to John Thain. The most obvious reason is massive conflicts of interest, since as the piece notes, Merrill owned 40% of BlackRock, but the story features this tidbit first:

Fink would tell people that Merrill’s board had virtually assured him that the job was his, but that the offer evaporated after he demanded he first be allowed to perform a full analysis of

the bank’s mammoth subprime portfolio to gauge the extent of its problems.

How would BlackRock not know how much crap was in Merrill’s portfolio? Even if he wasn’t sure on the ownership of the many crappy CDO deals that Merrill had originated, wouldn’t his knowledge of AIG’s portfolio (which indicated who each counterparty was) have given him a pretty good clue to Merrill’s distribution strategy? i mean, if a lowly guy like me had heard back in March of 2007 that Merrill was stuck with over $20 billion of MBS and CDO bonds, how is it this supposed genius of Wall Street seemed so unaware that he would want to be head of an insolvent company?

Similarly, how the heck did Blackrock sign up for billions of dollars of Stuyvesant Town exposure at the absolute top of the market, based on the assumption that the investors could kick out rent regulated tenants, raise rents and bring in new higher paying tenants in an environment where real estate prices (including apartment rents) were very likely soon to be plummeting? How many bad (and obvious) assumptions went into that deal that Aladdin seemed to miss? Had anyone at Blackrock ever actually picked up a local paper in the last twenty five years, which might have given them some sense of the relationship that rent regulated tenants had with their landlords? On top of which – a multibillion dollar deal entirely within one zip code? Do you really need 600 people, running 5000 computers, 24 hours a day to come up with that analysis?

So why is Larry Fink and his company the subject of such a glowing article? I had actually thought he was a pretty good businessman before I read this but he comes off looking like a bad analyst, a vengeful ratfink and a parasite who made most of his and his company’s money through government connections, blatant breaches of conflict and rule bending (oh, but he does fly commercial, so he must be a real down to earth guy). Seriously, from the time of the S&L crisis, has he ever not had a big government contract to keep the lights on, while submitting million dollar a day contracts which the government then fights to keep secret in flagrant violation of all established practices?

Where would Blackrock be without the FDIC, the RTC, LTMC, Fannie Mae, Freddie Mac, AIG, dozens of desperate state pension funds? When will someone audit their fees and assess what exactly it is they get paid for and why it is Palooka Bank in Iowa couldn’t do a better job? At least Palooka Bank would probably know better than to bet billions of dollars of its own and other people’s money on a New York City landlords being able to magically toss tenants out on the street.

Perhaps articles like these, which are so wildly out of tune with the current popular attitudes towards Wall Street genius, are finally reaching a saturation point with journalists and publications. Even as they try to celebrate one of the great bankers, they seem to run short of noteworthy accomplishments beyond cozying up to the great government fee paying machine.