Mar 15, 2023
BlackRock’s Fink Says SVB Failure Shows Cracks in Finance System
(Bloomberg) -- BlackRock Inc. Chief Executive Officer Larry Fink said the banking crisis could worsen beyond the failure of Silicon Valley Bank, worrying aloud about cracks in the financial system that formed during more than a decade of easy money and low interest rates.
“Are the dominoes starting to fall?” said Fink, chairman of the world’s largest asset manager, in a letter on Wednesday. “It’s too early to know how widespread the damage is.”
Fink, 70, said that while regulators’ actions have contained the problem for the moment, the past week’s collapse of Silicon Valley Bank and Signature Bank recalls past “spectacular financial flameouts,” including the savings and loan crisis in the 1980s and early 1990s and the bankruptcy of Orange County, California, in 1994.
“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S&L crisis) with more seizures and shutdowns coming,” Fink said. “It ultimately lasted about a decade and more than a thousand thrifts went under.”
Fink said that some banks will probably need to pull back on lending to shore up their balance sheets and that regulators are likely to impose stricter capital standards.
The economy and financial system is entering a new period, Fink said, with inflation elevated and the Federal Reserve continuing to raise rates. Fink said inflation is likely to stay close to 3.5% or 4% in the next few years.
In the decade since Fink began writing an annual letter to corporate executives, BlackRock’s client assets under management have surged to $8.6 trillion, with significant stakes in companies around the world. The firm’s growth has lent prominence to Fink’s letters, typically published at the start of each year, which have given the company a powerful say on social and political issues — and have drawn increasing criticism from all corners.
This year’s version of Fink’s letter represents a change of tack after the company and Fink himself faced intense criticism for advocating investing with environmental, social and governance, or ESG, goals.
On the left, progressives complain that BlackRock isn’t pushing harder to combat climate change. Meanwhile, conservatives and many Republican lawmakers lambaste the company for promoting “woke” capitalism. Republican officials in Louisiana and Florida, among other states, have pulled more than $3 billion from the firm over its stances.
Fink typically writes two letters: one as CEO on behalf of the company’s clients to corporate executives about ways to improve performance, and a second letter as chairman of BlackRock to the money manager’s shareholders. Fink combined the two this year for both audiences.
“Part of supporting our clients includes speaking out on issues important to their investments,” Fink said. “I’ve long believed that it’s critical for CEOs to use their voice in the world – and there’s never been a more crucial moment for me to use mine.”
Fink’s tone on sustainable investing also has changed.
In his letter to CEOs last year, Fink hit back at critics of ESG investing, saying the decarbonizing economy would create the “greatest investment opportunity of our lifetime” and would leave behind companies that don’t adapt, regardless of which industry they are in.
“Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led?” Fink wrote in 2022.
This year, Fink took a more measured tone, saying the company still views climate risk as an investment risk and that BlackRock has clients who want to speed up the transition to a low-carbon economy — and some who don’t.
“It is not the role of an asset manager like BlackRock to engineer a particular outcome in the economy, and we don’t know the ultimate path and timing of the transition,” he said. Money managers should not be “the environmental police,” he said.
“Some of the most attractive investment opportunities in the years ahead will be in the transition finance space,” he said. “For clients who choose, we’re connecting them with these investment opportunities.”
Fink underlined the main business priorities of the firm, from investing money on behalf of retirees and other clients, to managing risk through technology, to touting the roughly $400 billion in net new money flowing into its long-term investment funds in 2022 and emphasizing the performance of its share price.
BlackRock’s shares have delivered a total return of about 7,000% since the company went public in 1999. They’re down about 10% so far this year.
More from Fink’s letter:
- Fink said his 70th birthday last year was a moment to reflect on his own leadership role, saying that “my most important responsibility now is growing and mentoring leaders across the firm.”
- The company is continuing to explore digital assets even after the collapse of FTX, and Fink thinks block-chain technology can be used for stocks and bonds.
- Exchange-traded funds linked to bonds had a record $123 billion of net inflows last year. Fink said he expected the ETF industry to reach $15 trillion in the new few years.
- The company raised $35 billion in client capital for its alternatives business, led by private credit and infrastructure.
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