How vast asset managers impact “our increasingly cartelized economy.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The world’s biggest asset manager, BlackRock, was splashed across the front pages of the Spanish financial news yesterday. The firm had just raised raised its stake in Spain’s telecoms giant Telefónica to 336 million shares — the equivalent of 6.7% of Telefónica’s total capital, with a market value of just under €3 billion.
In the short space of five months BlackRock has almost doubled its holdings and is now the largest owner of Telefónica stock, ahead of Spain’s second biggest bank, BBVA, which holds 6% of the shares. The asset manager has also expanded its participation in Telefónica’s international subsidiaries, raising its holdings in Telefónica Deutschland to 0.76% and Telefónica Brasil to almost 2%, making it the firm’s biggest institutional shareholder.
BlackRock is the largest institutional shareholder of Telefónica’s two main market rivals in Spain, holding 7.3% of Vodafone and 1.96% of part state-owned Orange. It’s also the second largest investor in British Telecom, after Deutsche Telekom, with a 7.84% stake. In the U.S. market BlackRock has the third largest position in Verizon, with 6.17% of the capital, and the second largest position in AT&T, with 5.84%.
A Vast, Sprawling Empire
The US fund manager has built up such a vast, sprawling financial empire since its creation 29 years ago that it has even begun to draw unwanted attention from the academic world. Two blockbuster studies – one by Einer Elhauge of Harvard Law School and the other by Martin C. Schmalz of Stephen M. Ross School of Business and José Azar and Isabel Tecu of Charles River Associates – have confirmed that BlackRock and some other big funds have acquired such large shareholdings throughout the U.S. and global economy that they cause the companies they jointly own to compete less vigorously with one another.
Elhauge’s study, “Horizontal Shareholding as an Antitrust Violation”:
In the banking industry, the top four shareholders of JP Morgan-Chase (BlackRock, Vanguard, Fidelity, and State Street) are also the top four shareholders of Bank of America and four of the top six shareholders of Citigroup, collectively holding 19.2% of JP Morgan-Chase, 16.9% of Bank of America, and 21.9% of Citigroup.
These same shareholders are also the top four shareholders of Apple (BlackRock, Vanguard, Fidelity and State Street) and four of the top five shareholders of Apple’s main rival, Microsoft.
The exact same ownership patterns occur across almost all industries — and not just in the US. Granted, most of the time it’s other people’s money that firms like Vanguard, Fidelity, and BlackRock are investing, but that’s not to say that they are impartial and disinterested.
As Vanguard puts it, they may be passive investors, but they are not passive owners. “We are an active voice,” BlackRock’s chairman and CEO, Laurence D. Fink, is fond of saying — a voice that is now heard in just about every boardroom of just about every major company on this planet.
It is also heard far beyond the boardroom. In August 2014 the European Central Bank hired BlackRock’s consultancy unit, BlackRock Solutions, to provide advice on the design and implementation of the central bank’s upcoming purchase of asset-backed securities. In other words, just before the ECB embarked on one of the biggest asset buying programs in world history, it sought the advice of the world’s largest asset manager – i.e. the company most invested in the assets it intended to buy.
A New Gilded Age
Recent years have seen an increasing focus on the gaping disparity in wealth distribution. As Oxfam reported last month, the situation has reached such bewildering extremes that eight men are now estimated to own more than the poorest half of the world population.
Much less attention, however, is paid to the growing concentration of financial ownership and its impact on financial markets and the distribution of wealth, income and influence. In 1950, institutional investors owned about 7% of the US stock market; today they own almost 70%. If you count them as a single investor, BlackRock, Vanguard and State Street are the largest owner of 88% of the companies in the Standard & Poor’s 500.
As Eric Posner, Fiona Scott Morton and Glen Weyl point out in the New York Times, control of the economy has not been this concentrated since the Gilded Age:
The problem is not just the size of the institutional investors, but the way they invest. Institutional investors often own stakes in all the competitors in concentrated industries. Vanguard alone, with more than $3.5 trillion in assets under management, owns the biggest or second-biggest stake in JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, U.S. Bancorp and PNC Bank. BlackRock, with more than $5 trillion in assets under management, also owns one of the three largest stakes in all these banks.
It’s already been shown that common ownership within the banking and airline industries in the US has resulted in large increases in bank fees and reductions in interest rates to savers as well as rising airline fares. As Posner, Scott Morton and Weyl contend, large institutional investors like BlackRock and Vanguard should be allowed to continue to offer retail investors the possibility of diversifying their assets across industries but prohibited from taking near-monopolistic positions within industries:
A fund owning United Airlines can diversify with holdings in Walgreens; it does not need to own Delta as well. Small institutional investors can diversify in any way they like. Our proposal would restore competition to our increasingly cartelized economy with a minimum of disruption for existing business practices.
Whether Trump’s team – filled with billionaires, Goldman Sachs alumni, and financiers – or other national governments will be inclined (or even able) to take such action is debatable. If they don’t, the concentration of ownership within national and global industries is set to grow, setting the stage for a new gilded age that promises to be even more insidious than the last one, since it will be global in scope and will almost certainly be facilitated by the international network of central banks. By Don Quijones.
And now they’ve come up with a new way to protect citizens from threats, as defined by these apparatchiks. Read… Things Just Got Serious in Europe’s War on Cash
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