“The solution is to go straight at the concentration problem by limiting their market share,” Graham Steele, who wrote the American Economic Liberties Project paper, told CNN Business.
The paper calls for effectively breaking up the Big Three by revamping Dodd-Frank, the 2010 Wall Street reform law.
Steele, a former staffer at the San Francisco Federal Reserve Bank who is now director of the Corporations and Society Initiative at Stanford Graduate School of Business, said he’s hopeful the Biden administration will study potential solutions. But he acknowledged the Big Three will fight back, adding: “They won’t take it lying down.”
Yet it’s not clear there is appetite in Washington to tackle this issue, especially after the Obama administration’s efforts to limit the power of fund managers were blunted by lobbyists. The new administration is expected to focus on fighting the pandemic, rebuilding the economy and tackling the climate crisis. And if there are antitrust efforts in the Biden era, it’s likely to focus on Big Tech, not Big BlackRock.
Not surprisingly, BlackRock, State Street and Vanguard took issue with the paper.
“We fundamentally disagree with the conclusions in this paper and its recommendations, which we believe would do harm to investors,” State Street said in a statement.
BlackRock’s ‘web of connections and influence’
There is little doubt that the Big Three, and BlackRock in particular, have become very influential.
BlackRock, the world’s largest asset manager, has a stake of at least 5% in a stunning 97.5% of the companies in the S&P 500, the paper said. That gives BlackRock an outsized role in how companies respond to the climate crisis.
BlackRock manages more than $87 billion worth of shares in fossil fuel companies and has opposed or abstained from 80% of climate-related shareholder motions at those companies between 2015 and 2019, the paper said.
The asset manager also employs both a former Federal Reserve vice chairman and a former head of the Swiss National Bank.
“This web of connections and influence means that it is likely that BlackRock has touched the lives of most Americans in one way or another — whether or not people know this fact is another matter,” Steele wrote in his paper.
In a statement, BlackRock said the report “contains multiple factual inaccuracies and misconceptions” about the company and the industry.
“BlackRock welcomes constructive debate about the role of asset managers and the benefits we bring to financial markets and society more broadly,” the company said.
“However, we are concerned about the paper’s call for proposals that would harm investors and companies by upending the value proposition of low-cost investment solutions that benefit millions of people saving for retirement and other financial goals,” it added.
The rise of exchange-traded funds
The Big Three are heavyweights in the ETF industry.
The Big Three are responsible for between 73% and 80% of the global ETF market and sponsor 45 of the 50 largest funds, according to the paper.
“The industry has become an ‘oligopoly’ controlled by the Big Three,” Steele wrote.
Of course, there’s no doubt mom-and-pop investors have benefited from the rise of ETFs, which charge much lower fees than actively managed funds. That’s why they’ve become so popular.
“Vanguard has grown responsibly by focusing on lowering costs for investors, being prudent in our product development, offering only funds that meet an enduring long-term need and promoting responsible investing,” Vanguard said in a statement. “We take our responsibility as stewards of our clients’ investments seriously and are grateful that investors continue to entrust their savings to Vanguard.”
Forcing BlackRock to shrink?
Still, the paper lays out steps Washington can take to limit the power of the fund industry.
“The outsized footprint of a few large financial companies poses new issues for the governance of corporate America, the competitiveness of our economy, the concentration of political power, and the stability of financial markets,” Steele wrote in the paper.
Steele said Congress should institute common ownership limits that prevent large ownership stakes in concentrated industries.
Steele said FSOC should designate the platform and custody services of the Big Three as systemically important market utilities. That designation would open them up to greater oversight from regulators. And Steele said Dodd-Frank should be amended to require a separation of systemically important infrastructure activities from other lines of business.
“This would help address the risks of conflicts of interest, self-dealing and other market power issues that arise from the concentrated nature of those businesses,” Steele wrote.
“The Obama administration’s FSOC left its battle against the asset management industry with little more than a token statement on risks and a bloody nose,” said Isaac Boltansky, director of policy research at Compass Point Research and Trading. “I doubt that a Biden Treasury Department would take another direct swing at asset managers.”