How BlackRock Profits Off of Every Piece of Your Life

The Big Three asset managers eroded shareholder democracy and enriched themselves while doing so.

by Yaseen al-Sheikh, More Perfect Union

Whenever you’re spending or making money — working, driving your car, or even buying groceries — you are likely interacting with money managed by BlackRock.

BlackRock and other major asset managers have worked their tentacles into every corner of the U.S. economy. By using index funds, investors can put money into a stock portfolio that is tied to various stocks at once instead of one stock at a time. These index funds serve as a form of mutual funds, which in turn are managed by companies like BlackRock, Vanguard, and State Street — the Big Three of asset management.

These asset managers may soon finally see increased scrutiny from federal banking regulators — but first, let’s explain how they work.

In essence, asset managers buy a piece of every company and therefore “passively invest” by holding onto those shares for an indefinite amount of time. By owning significant parts of so many of these various companies, and doing so with the money of regular people sourced from pension funds, 401ks, and plans for health insurance, these companies wield immense power. 

For example, the Big Three (BlackRock, Vanguard, and State Street) collectively own 16 percent of Amazon, whereas founder and executive chairman Jeff Bezos only owns around 9 percent of the company’s shares. BlackRock alone owns stock in 95 percent of Fortune 500 companies. 

This gives the asset managers significant voting power, and they use that power to maximize corporate profits to benefit an increasingly narrow set of company shareholders. In the past, shareholders who could make decisions about board elections, acquisitions, mergers, or even wages were more diverse in terms of class, but today, the top 10 percent of earners own more than 80 percent of shares. The bottom 50 percent of Americans by income own virtually no shares at all. 

As a result, decision-making is taken away from those who play a pivotal role in the success of any given company. These shareholders can choose to squeeze workers by slowing and decreasing wages and benefits for the purpose of increasing corporate profits at the top of the line. This kind of consolidation can also lead to an anti-competitive marketplace and increased prices for consumers; for example, when major airlines and clothing companies are all owned by the same asset managers and thus all the different profits return to the same few investors.

The depth and scale of capital are so significant that BlackRock and other asset firms have their own federal overseer, the Financial Stability Oversight Council, that ostensibly monitors their activity and relationships to the economy. BlackRock uses its “passivity” as a workaround to avoid meaningful oversight, however, effectively allowing the companies to audit their own activities. 

Despite each of the Big Three having ownership shares in the other two companies, and despite all of them having significant amounts of shares in virtually every major American company, they are not accountable to the public. 

Finally, there are some efforts underway to change this dynamic so that asset managers begin being regulated in the same ways as banks. The Federal Deposit Insurance Corporation (FDIC), which ensures Americans don’t lose their money when big banks fail, voted in July to advance a proposal to apply stricter regulations to asset managers that own 10 percent or more of banks. 

Under this proposal, companies that opt to continue identifying as passive investors would no longer enjoy the ability just to assure the FDIC that it really is passive — even as the Big Three use their voting power to influence the organization and direction of these banks’ boards of directors.

“There’s no question that our economy and society rely on banks just like we rely on our power grid and our transportation network,” Rohit Chopra, an FDIC board member and the director of the Consumer Financial Protection Bureau, said in July. “Congress put in place guardrails to ensure the ownership and control of this critical infrastructure promotes resiliency and is free of conflicts of interest.” 

To learn more about the erosion of shareholder democracy and the growing oligarchy of asset managers, watch The Class Room’s newest deep-dive into BlackRock below.