Mumbai: Laurence D. Fink, chairman and CEO of BlackRock Inc., the world’s largest listed asset management company, managing in excess of $1.3 trillion (Rs63.5 trillion), was in India on Thursday visiting the Indian mutual fund house his company partly owns.
As part of a September 2006 deal that merged Merrill Lynch and Co. Inc.’s asset management company with BlackRock, Mumbai-based DSP Merrill Lynch Fund Managers Ltd became DSP BlackRock Investment Managers Ltd.
Incidentally, Fink was in the running to take over as chairman and CEO of Merrill Lynch in late 2007, following the investment banking entity’s struggles with bad assets and the sacking of then CEO Stanley O’ Neal. It was a job that ultimately went to John A. Thain, former CEO of New York Stock Exchange. In hindsight, it was probably good for Fink.
The embattled Merrill Lynch eventually had to be taken over by Bank of America Corporation, and Thain was asked to resign. “I said that as a condition for me to consider the job, I need to go inside and have myself and my risk team to evaluate the Merrill Lynch balance sheet. I was never allowed. Mr Thain took the job and did not ask to see what’s inside,” said Fink in an interview with Mint.
He shares his thoughts on the new US treasury secretary Timothy Geithner’s lifeline for Wall Street. As for DSP BlackRock, Fink hopes to expand in India this year while others are contracting.
Most people seem to be unhappy with Treasury Secretary Timothy Geithner’s $2 trillion rescue plan for Wall Street being low on detail. What about you?
I don’t agree with them. I think what he said was right. There’s no magic wand. The Secretary told the world that this is going to take a long time. This is going to take months, and a longer period of low interest rates. He said there will be failures and that some home owners are not going to be protected. In the last one-and-a-half years, I think one of the reasons why the markets have continued to fall is because the (former) government had said, ‘We’re going to draw the line here and fix it’. And (former treasury) secretary (Henry) Paulson said, ‘We’ve got a Bazooka here’. I think what secretary Geithner has said is that this is a big giant problem, it’s going to take a long time and a lot of discipline to fix it, and there are going to be failures. People don’t like it, but they were not going to like it anyway.
The markets have reacted badly. How do you see things unfolding?
The markets are trading badly, but overall, stability is closer at hand.
Relatively speaking, you’re one of the better placed asset managers today. In hindsight, is there something you think you did right that helped you during this period of crisis?
It’s the business model. The whole founding of the fund (BlackRock) 21 years ago was predicated on risk management, which was not fashionable then. We have great risk management tools that can help navigate our portfolios. So the Federal Reserve, when it needed assistance, they approached us.
We have $30 billion of (hard-to-sell) Bear Stearns assets and $80 billion of AIG assets. And there are others which I can’t talk about. And it’s not just the US government. We’re working with other governments as well. The reason for our success is that we’re an independent investment firm. We are not attached to a bank, an insurance company or corporations and we don’t have any proprietary business. So 100% of our business is fiduciary business.
While much of our success has got to do with our risk culture, it’s also that we do not do business in competition with our clients. And in many ways, Wall Street forgot that. Wall Street, 25 years ago, was much more of a consultant relationship. But over the last 15 years, they started using their own balance sheet and their own capital to trade. And many times, they were trading against their clients. For the last 21 years, 100% of our business has only been advice.
So your own balance sheet mark-downs are not on account of exposures to collateralised debt obligations (CDOs) or credit default swaps (CDS)?
We lost $380 million in 2008. But those were not CDOs. We did not lose any money on CDOs. Much of our mark-downs were balance sheet mark-downs, not real impairments. So if the markets re-stabilise, we can get much of that back. Some of that was in private equity, some in mortgages (not CDOs), and some in real estate. But these are investments where we invested with our clients. And we will continue to do that. We will not invest in these things if our clients didn’t invest. It’s a show of confidence. In the alternatives space, every one of your clients, when you show them an alternative product, ask you how much you are investing. And if you don’t invest anything, they won’t either. And when we create new mutual funds, we have to put our own capital.
A client allows us to use CDS only for hedging, protection and insurance, and not for speculation. We may have used them, but a majority of our clients will not allow that. CDS by nature are good. They minimize risk. However, they became a speculative instrument.
Your assets under management have come down to $1.3 trillion as opposed to a peak value of around $1.4 trillion in the middle of of 2008. How do you explain that?
Our assets (own balance sheet) from December 2007 to December 2008 are down 3%. We (clients’ money) lost almost $200 billion in market value in equities. When we started the year, we had $500 billion in equities. How much are global equities now? They’re down 40%. So just on market, we lost $200 billion. But we made back a lot of that through organic growth. That’s where BlackRock is differentiated. We’ve grown organically with new assignments and new clients.
What are your plans for DSP BlackRock?
We want to be much larger in mutual funds here in India. We expect to expand this year at a time when so many firms are contracting. We’re going to add more distribution offices, we’re going to be building some of our products, and hopefully we will grow our presence in the institutional business. We added a few mutual fund products last year. We expect to add three or four products this year. Some in fixed income, others may be in equity.
But with sentiment so low, do you think these products will do well?
The fallacy with so many firms is that they grow when everyone’s bullish. That’s the wrong time to grow. It takes years to establish yourself. You have to invest. If you’re not willing to invest, you’re not going to get any returns. The firms that are contracting now are the same firms that added offices in 2006 and 2007 right at the height of the market. The markets are now down 55%. Can it go down another 10-20%? Maybe. Can it go back up another 50%? Yes. I look at this as a great time to start building our platform when the markets begin its ascendancy again.
Does that mean you’re open to growing inorganically?
Not in India. At BlackRock Inc. we have many opportunities for mergers right now. Many banks and insurance companies who have capital problems are looking to sell their asset management business. But for India, we are very happy with our organic growth opportunities with DSP BlackRock.
What about investing in private equity in India, since you have an existing platform overseas?
I’m not a big believer in private equity right now. I think private equity is going to take years to be fixed. I think there’d be many better opportunities than private equity.