Is BlackRock stealing Goldman's shine?
It seems Goldman Sachs is no longer the mecca for high finance whizzes. Rather, the more staid portfolio focus at BlackRock is snatching the asset manager's 'it' factor.
Six years ago, Wall Street and the City of London were consumed with "Goldman envy”.
Never mind the fact Goldman was producing eye-popping profits, with returns on equity of 40 per cent at the peak. What fuelled that envy was that Goldman had the banking equivalent of the 'it' factor (to use the phrase beloved by celebrity magazines).
The smartest graduates wanted to work at Goldman, the savviest clients used its services and when senior public figures left office, they often jumped aboard, not just because its desks were paved with bonus gold but because the company was at the centre of so much cutting-edge financial and policy innovation.
But is the 'it' factor now stealthily passing from Goldman to companies such as BlackRock? That is one intriguing question running through my mind following this week’s news that Philipp Hildebrand, the former chairman of the Swiss National Bank, is becoming vice-chairman for BlackRock, based in Europe.
Quite why Hildebrand decided on this move is not something he has discussed at length in public; it probably reflected personal, as much as strategic, reasons.
But if an anthropologist were to look at this move, in terms of what it reveals about the modern financial tribe, it looks symbolic on at least two counts.
For one thing, it points to the extraordinary position of BlackRock itself. When Larry Fink, the sharp-eyed former bond trader, first joined BlackRock more than two decades ago, asset management was a very unglamorous field and fixed income assets had none of the glitz of, say, equity trades.
But in the intervening years, Fink has stealthily created a behemoth, through organic growth and mergers, with some $3700 billion of assets under management. That is some way bigger than the entire British economy.
Arguably more striking, though, is its information and infrastructure edge. As its assets have swelled, the company has built a vast database to track and measure the value of assets, particularly in the fixed-income and distressed-asset fields.
As a result, during the 2008 crisis, both private financial firms and branches of the US government alike repeatedly drew on its consultancy, valuation and risk-management skills.
And European governments and companies are following suit: BlackRock is currently playing a crucial advisory role in places ranging from Ireland to Greece. Indeed, the total sum of assets that it is monitoring is worth $12,000 billion. That is almost the size of the US economy.
This puts BlackRock in an extraordinarily influential position. But it also creates challenges. Managing a company this big is tough. So is creating fresh sources of revenue and profit (though BlackRock’s profits have been reasonable recently, margins are not spectacular).
And as it dances ever closer with governments, the reputational challenges are rising. BlackRock, like Google, benefits from the fact that it dominates an infrastructure niche – but that creates political risks. Little wonder it likes hiring people with senior policy knowledge.
But aside from the company itself, the wider structural symbolism of Hildebrand’s move is fascinating too. Back in the old days – or before 2007 – one of the biggest reasons why Goldman had the 'it' factor was that there was real intellectual excitement and profit potential to be found from trading securities, devising funky derivative instruments and concluding corporate deals. That was cutting edge.
These days, however, profit and innovation in those fields is being undercut by financial reform and overcapacity, particularly at regulated banks. A sense of stigma is afoot.
Life outside regulated banks, in fields such as asset management, still offers the potential for thrills, particularly when conducted in non-banks. It currently requires a lot of brainpower, for example, to work out how to generate reasonable investor returns in a zero-interest rate world.
So too does devising solutions for the looming pensions crunch (which is going to be as big, if not bigger, a headache for the next decade as the eurozone crisis is today). True, this may not sound as sexy or as lucrative as, say, prop trading, but the potential for creativity is there.
Now it remains to be seen, of course, whether BlackRock (or anyone else) can produce such innovation. It is also unclear whether BlackRock will be able to sidestep all the political challenges.
Some rumblings of discontent about conflicts of interest have already surfaced in places such as Spain. These may spread unless BlackRock is extraordinarily savvy in the coming years (memo to Fink: just look at Goldman’s own story to see how sentiment can turn). But, if nothing else, his ascent shows that the financial crisis is not just producing big losers, but some significant winners too.
"BlackRock envy” is not a phrase that trips off the tongue, but it may point to the way finance is evolving today.
Copyright The Financial Times Limited 2012.