Addressing the Blackrock/Vanguard Situation

ladies and gentlemen welcome to the plain bagel I'm your host Richard coffin the video is online or to be believed the beautiful pre-capitalist system that is the stock market which allows individuals to buy and own shares of companies has a pretty nefarious secret about it that might shock you the largest corporations in the US and possibly the world are actually being controlled by two secret Puppet Masters BlackRock and Vanguard and State Street to a smaller extent you see if you take any given stock and you look up the top shareholder for that company you're likely to see one of three names BlackRock Vanguard or State Street now this isn't just anecdotal because according to a 2017 Cambridge University report these three companies are actually the top shareholder in 88 of the S P 500 which might sound impossible but BlackRock and Vanguard together the larger of the three collectively manage 17 trillion dollars in assets which represents roughly a third of the entire U. S stock market market capitalization now that money is invested in other assets as well as stocks so they don't actually own a third of the U. S stock market but it just goes to highlight it's a lot of money and naturally this is like a lot of people online to start warning the masses uh one lady sought to spread the message through the medium of dance warning that these two companies had gobbled up much of corporate America Vivek ramaswamy the presidential candidate has called this group quote arguably the most powerful cartel in human history but more important than a tick talker or presidential candidate raising the alarm is the fact that it showed up on the Joe Rogan podcast the guy running BlackRock is really the president of the United States if we look at the kind of influence he's got in every industry Joe now large corporations running in America not really shocking news but what people are particularly concerned about is the fact that Larry fink a CEO of BlackRock specifically appears to have some Sinister intentions behind the place of power he finds himself in which is that recently he's been using this authority to push ESG environmental social and governance factors that aim to incorporate sustainability into investing I know terrifying development but stay with me we can get through this joking aside though ESG has become a pretty controversial topic not necessarily because people are inherently against screener operations or sustainability but more so about how it's implemented with some people raising concerns about greenwashing which is pretending that you have Greener operations than you actually do and what standards are actually used to rate a company based on its ESG variables since there's no uniform standard here an ESG to one company can be defined differently than ESG at another but BlackRock has more or less taken up the mantle in the space and the CEO Larry Fink has pretty openly discussed his intent to explicitly pressure companies to report and adopt different ESG initiatives if you don't achieve these levels of impact your compensation could be impacted okay you have to force behaviors and regardless of whether you support ESG or not you could see why a lot of people find this shocking that a single Corporation would have this much influence and why it's caused a lot of people to really rally against these companies but some believe in BlackRock explicitly uses its size and influence over ESG to manage competition pull the strings of politicians and ultimately control everything from the news that we consume to the food that we eat with Larry Fink being involved with a number of international institutions such as the world economic forum and BlackRock having been tapped by the government during past crises you can see how easy it is to form world domination theories around these groups but I want to talk about these companies today and the relationships they have with publicly traded stocks not really to defend them or even defend their size but rather to highlight that most of the claims you see circulating online about BlackRock and Vanguard and their unfettered influence over the stock market are at best exaggerated and at worst complete misunderstandings of how these companies function and even how share ownership works that's not to say they don't have influence a lot of people highlight how ExxonMobil saw three new ESG focused directors elected to their board in part thanks to Blackrock support but in this video I'll try to lay out all the details and the Nuance of the situation so you understand the power that they have but also the power that that they don't have that a lot of people claim they do and you might know that I recently put out a short on this exact topic but it really wasn't up to par with the Nuance that I try to strike with my videos so I'll be taking my time on this one to provide a more neutral hopefully perspective on things let's start with the easiest claim to tackle here which is at BlackRock and Vanguard basically own everything obviously as the largest shareholder in all these companies that might lead you to believe that somehow these companies have managed to gobble up a colossal chunk of the stock market for their own benefit and this is indeed a popular claim that circulates on social media largely by people who are outside the finance industry but the belief that these two institutions own everything really just stems from a misunderstanding of what these companies are because at 17 trillion dollars in assets under management isn't their money these companies are asset managers meaning they take client money and help invest it taking care of all the research and administration that comes with that BlackRock for example manages 10 trillion dollars in what's called assets under management uh the assets they manage but they themselves only own in blackrock's case 123 billion dollars in total assets which is the amount you'll find on their financial statements the 10 trillion dollars is actually client money from the millions of investors including other companies pensions yellow Wars on the Robinhood app who have put their funds into one of blackrock's mutual or exchange traded funds or other Solutions but all that money is invested through a BlackRock fund it is not blackrock's money they just facilitate the investment and indeed do hold the shares in custody which is why they show up as a top shareholder but they aren't the ultimate owners of those shares you could compare it to how bank takes deposits from clients but even there Banks actually do treat client deposits as money of their own and so long as they keep certain metrics and check they can treat it as their own funds for funding operations and making loans whereas these asset managers actually face stricter requirements in terms of what this money can and cannot be used for with the investors again ultimately being the owners so right away hopefully that address is a more uninformed claims about the situation these companies haven't managed to gobble up a bunch of the world's assets the shares effectively belong to their millions of clients but to be fair that's not what everyone who's critical of these companies is claiming uh people like Patrick Beth David aren't claiming that these companies own everything but rather that they control them as asset managers Vanguard and BlackRock determined how client money is invested and you might expect that gives them a lot of power for example Larry Fink has talked about having private meetings with directors for companies and a lot of people assume that in walking into a board room he will tell directors what he wants them to do and if they refuse he can threaten to offload their position which in many cases would be a massive hit to the company's stock but the idea that these companies can threaten institutions with the offloading of their giant positions to get what they want is again really unfounded for one key reason which is that the majority of money managed by BlackRock and Vanguard is indexed meaning they don't really control where it gets invested of blackrock's 9.

4 trillion dollars in assets under management 6. 2 trillion or 66 percent is passively managed via index funds and ETFs with the vast majority of equity AUM being indexed meanwhile a Vanguard 7. 2 trillion dollars 79.

1 percent is indexed what this means is that the vast majority of this money is simply copying an index so BlackRock can't really on a discretionary basis sell and buy stocks uh if Larry Fink doesn't like what apple is doing too bad their biggest fun is the S P 500 fund and apple is the largest constituent of that index at around seven percent so they have to hold a sizeable apple position that fund is legally obligated to stick to its mandate and maintain an investment in the index now you might say but Richard if these asset managers control the index then they still get that Leverage sure but the vast majority of their funds track external indices that they don't have any control over so you can see that for the vast majority of this money there's really no threat of them offloading the shares because again they don't really control where the money gets invested in fact indexing is really the only reason these companies have gotten so big in the first place people have bought BlackRock and Vanguard funds because they passively track external broad-based indices Don Vogel the guy who created Vanguard more or less invented the index fund which has been a huge benefit to investors providing Market exposure with very minimal fees so yes BlackRock and Vanguard could threaten companies with their active footprint but again at least on the equity side that's a very small share of their overall AUM it doesn't put them in a position to really hold that above the director's heads that being said even with BlackRock and Vanguard not technically owning these shares even with them not technically being able to determine where a lot of this money gets invested they do still have a lot of influence and this is really the part that I want to expand on given that I wasn't able to do so with the short and that all comes down to the voting rights of the shares as you probably know by now shareholders are the effective owners of a company but because public and trade stocks can have millions of individual investors the way that the shareholders control the company and what it should do is typically by voting on key corporate events things like whether a company should accept a merger or acquisition and even things like management compensation shareholders also vote to elect the board of directors which is a body that looks to keep management under check and represent shareholders at the corporate governance level however when you invest into a fund your voting rights are typically forfeited to the fund manager so even though those assets under management isn't their money they do get to vote with the rights of those shares as if it were and as mentioned this does give the company's influence again with ExxonMobil we saw three directors from an activist hedge fund engine number one elected in 2021 thanks largely to Blackrock support which was able to swing the vote and with Larry Fink being very open to company CEOs in his letters demanding that they increase climate reporting and consider other stakeholders with their operations you could see how this raises concerns for an abuse of power having this level of centralization can be a problem and you might think Richard Checkmate here's our irrefutable proof that these companies do in fact control the world that Larry Fink is in fact going to boardrooms telling them what to do and they're going to listen to whatever he wants well no again really not trying to downplay the real issues that could exist here uh but there are again some very key caveats that no one really covers when describing these institutions as being these sort of Puppet Masters behind the scenes the biggest one being that it's still a minority vote even if these companies wanted to have complete control over what these shares and what these companies did they simply don't have that level of Power with ExxonMobil for example BlackRock only owned 6. 7 percent of the share flow and the only reason those directors which at the end of the day only made up three of the 12 seats on the board of directors the only reason they got elected is because they also had other shareholder support which makes sense because over a 10-year period the stock actually had a negative price return of 30 percent so it's not shocking that investors brought in external directors in hopes of shaking things up and for most of these positions the companies have less than a 10 stake especially when it comes to the larger companies which is still influential but does leave another 90 plus percent of voting rights out there for other investors not to mention that while these asset managers might be active on the voting side they really don't want to be activist investors where you go and try to say revolutionize how companies run it's quite a labor-intensive operation and really for their size and business model it wouldn't really be all that feasible and perhaps the easiest demonstration of the power that these companies don't have in terms of being Master puppeteers is the number of times that they didn't get what they want but they voted against something and still saw the resolution go through that's of course not to say that their vote doesn't matter but to be a stickler it's a very different picture than what a lot of people describe in terms of BlackRock really pulling the strings it's one thing to say these companies have influence which is something I would agree with it's another to say that they're so ingrained in operations and controlling what management does that they have this Mastermind level controlled over 88 of the s p 500.