Larry Fink: From Trading Loss to Building BlackRock

This transcript covers the rise of Larry Fink, founder of BlackRock, from his early days as a bond trader to his success in creating mortgage-backed securities and eventually building one of the largest asset management companies in the world.

Early Days in Finance

• In the early 70s, bonds began to be actively traded and Larry Fink excelled at this job.

• By 1983, after rebounding from a recession, Reagan worked to boost the economy by cutting taxes and deregulating Wall Street. One financial innovation was mortgage-backed securities which bundled millions of mortgages into securities that could be traded by any investor.

• Larry Fink was one of the architects behind this financial innovation which generated tens of millions of fees for First Boston where he worked at the time.

Trading Losses and Unemployment

• In 1986, Larry Fink lost $100 million in just one quarter before the infamous Black Monday crash. He was sidelined but not fired.

• With a tarnished reputation, no investment bank would hire him. At age 36, he became unemployed.

Rise of BlackRock

• After leaving First Boston due to trading losses, Larry Fink founded BlackRock with seven other partners.

• Today, BlackRock handles over $7 trillion dollars in direct management and another $20 trillion through their proprietary software making it one of the largest asset management companies in the world.

Steve Schwarzman and Larry Fink: The Early Days

In this section, we learn about the early days of Steve Schwarzman and Larry Fink's careers, how they met, and their first joint venture.

Schwarzman's Rise to Power

• Steve Schwarzman was a rising star at Lehman Brothers on his way to becoming CEO but was forced to leave due to a power struggle.

• He left with his partner who had been thrown out the year before by the management that ultimately blew up the company.

• In 1988, Blackstone started as a private equity business and barely completed its first deal.

Eye for Talent

• Schwarzman is considering expanding Blackstone into wealth management and wants to hire someone who is a "10 on a scale of 10" to run it.

• After meeting Larry Fink, Schwarzman starts a joint venture called Blackstone Financial Management by investing $5 million with Fink.

• They start making money within two weeks.

Investment Principles

• Within five years, Fink builds his fund to have $8 billion under management.

• One of Fink's investment principles is that he will not put down any money until the risk can be understood and calculated.

• He relies heavily on statistics and algorithms to make investment decisions.

Clash of Titans

• Fink demands that Schwarzman give up some of Blackstone's ownership to offer more stock options for talented people. However, Schwartzman rejects his plan.

• Two alphas are always doomed to clash from the get-go.

• Fink is determined to completely sever ties with Blackstone by finding a buyer to purchase Blackstone's ownership.

PNC Bank and Larry Fink

In this section, we learn about PNC Bank and how it became the perfect buyer for Larry Fink to get rid of Blackstone's control.

PNC Bank

• PNC Bank stands for Pittsburgh National Corporation, a finance group that was on a buying spree in 1991, acquiring dozens of smaller firms.

• It offers hundreds of millions of dollars to buy out Blackstone's stake.

BlackRock's Early Days

In the early 1990s, BlackRock was a small company with $8 billion in assets under management. However, Larry Fink saw an opportunity to use financial engineering to repackage toxic assets and turn them into profitable investments. This strategy helped BlackRock gain a reputation as a "ghostbuster" for companies with problematic assets.

Separation from Blackstone

• In 1994, BlackRock separated from Blackstone.

• After the separation, the company had $8 billion in assets under management.

Financial Engineering

• Larry Fink used financial engineering to repackage toxic assets and turn them into profitable investments.

• This strategy helped BlackRock gain a reputation as a "ghostbuster" for companies with problematic assets.

Breakout Moment

• By helping GE evaluate its toxic bond portfolio, BlackRock made a huge profit and gained recognition on Wall Street.

• Within three years of separating from Blackstone, BlackRock's asset under management grew to $46 billion.

Investing in Art through Masterworks.io

Larry Fink believes that art is one of the two greatest stores of wealth in the world (alongside real estate). However, investing in art has traditionally been limited to those with millions of dollars. Masterworks.io allows anyone to invest in multi-million dollar paintings by famous artists like Basquiat and Banksy.

Benefits of Investing in Art

• Larry Fink believes that art is one of the two greatest stores of wealth in the world (alongside real estate).

• According to data from City, contemporary art prices appreciated by 23.2% versus 3.8% for the S&P 500 during periods of 3% inflation or higher.

Masterworks.io

• Masterworks.io acquires multi-million dollar paintings by famous artists like Basquiat and Banksy.

• They allow anyone to invest in these paintings through an innovative platform that recently raised $110 million in Series A funding at a valuation over $1 billion.

• Investors can either hold their shares until Masterworks sells the painting or sell them to other Masterworks members on their platform.

Larry Fink and the Rise of BlackRock

This section covers the rise of Larry Fink and BlackRock, as well as the financial crisis of 2008 and its impact on the finance sector.

The Early Years

• Larry Fink was raised during the turbulent 60s and economic recession.

• He joined Wall Street after creating his job at First Boston.

• Fink started BlackRock a decade later, which became the most formidable force on Wall Street with hundreds of billions of dollars under management.

The Crisis Brewing

• Financial derivatives that Fink helped develop in the 80s have now transformed into a ticking time bomb.

• In December 2000, Congress passed the Commodity Futures Modernization Act, banning any regulation of derivatives.

• Bear Stearn was one of the first banks to fail during the crisis. The US government asked JPMorgan Chase to bail it out.

The Remarkable Rescue

• Jamie Dimon contacted Larry Fink for advice on acquiring Bear Stearn.

• BlackRock helped rescue AIG and was practically behind every major deal during 2008.

• From the wreckage of the 08 disaster, one business would explode - ETF's.

ETF's Take Over

• Social media enables virtually frictionless mass communication and fast flow of information; this change will fundamentally alter finance.

• ETF's became the best way to build wealth for investors, and BlackRock was already acquiring them in 2009.

• Burton Malkiel proposes that a market is essentially random and therefore unbeatable. The only rational thing to do is putting money in everything.

Conclusion

• After starting with just $11 million dollars, John Bogle launched the first public index mutual fund in 1975, which tracked the movement of S&P 500.

• In 1993, the first ETF SPDR came to life.

BlackRock's Power and Influence

In this section, the speaker discusses how BlackRock controls nearly half of the ETFs in America and has become the major shareholder in almost every public company out there.

BlackRock's Success

• BlackRock raised $103 billion dollars in 2014 alone.

• The firm has $50 billion invested in Lockheed Martin and Northrop Grumman each.

• BlackRock is not a bank but an investment company that has become the most successful in the world.

Larry Fink's Power

• Larry Fink, CEO of BlackRock, now has more potential power to influence the US economy than anyone else.

• He is referred to as "the J.P. Morgan of the 21st century."

• BlackRock is also the largest pension manager in Japan and Mexico where they recently acquired a company.

Corporate Stewardship Team

• Over the last five years, BlackRock has built up their corporate stewardship team.

• They believe there is less accountability at boards than there should be in global companies.

• They have been asking companies to describe their long-term plan and review it with their board.

Exercising Power

• With its immense power provided by controlling ETFs, BlackRock can start exercising its influence on companies' boards.

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