Saturday, December 05, 2020

An Analysis Of TheAnalysis On Democrats And Their Money Masters

nakedcapitalism |  I hate to have to make a couple of qualifying remarks about an otherwise excellent discussion of how the Democrats have made promises to too many constituencies, particularly Big Finance and top professionals, and will soon go through elaborate exercises to try to pretend that they aren’t betraying some interests to deliver to others.

I’ve mentioned before that Paul Jay has developed a misguided obsession with BlackRock, when it is far from the most powerful financial firm. Goldman, with its astonishing alumni penetration of top level government positions in the US and abroad (Mario Draghi, Mark Carney, William Dudley and Neel Kashkari as as central bankers; Bob Rubin, Hank Paulson, and Steven Mnuchin as Treasury Secretaries; Gary Gensler, admittedly a bit of a turncoat, as head of the CFTC; John Corzine and Phil Muphy as New Jersey governors; I’m sure I missed plenty). The idea that a former BlackRock official Brian Deese becoming head of the National Economic Council confers some sort of outsized influence is quite a stretch…particularly since former Goldman President and Chief Operating Officer Gary Cheld the same post in Trump’s administration.

Similarly, any of the top private equity firms has vastly more power than BlackRock. Even though BlackRock manages more money, it has an arms-length, virtually nil influence relationship with the companies whose shares are in its funds.

By contrast KKR stated in one of its annual reports in the mid-2000 that it would be the fifth biggest employer in the US through its portfolio companies. Given that private equity has only grown as a share of global equity since then, it’s extremely likely that Blackstone, Carlyle and KKR each through their portfolio companies are among the top ten employers in the US.

All of these private equity firms hire and fire the executives of their portfolio companies and dictate which law and accounting firms they use; they could reach in and fire any employee if they chose to (say they found offensive remarks on Facebook or Twitter). Private equity collectively is the biggest source of fees to Wall Street (their rich merger and acquisition and financing fees dwarf the skimpy stock and bond trading fees a BlackRock pays1), the biggest source of fees to white shoe law firms, and I am told, since the early 2000s, also pay more than half the fees of top consultants McKinsey, Bain, and BCG

By contrast, Larry Fink, the CEO of BlackRock, has extremely little direct influence over any of the public or late-stage VC companies in which BlackRock invests. Nearly all shares are held in index funds, which means BlackRock’s overriding concern is index replication at the lowest possible cost. It can’t buy or sell shares to make a point. BlackRock does not hold large enough stakes to appoint directors, let alone hire and fire executives or employees.

And BlackRock’s promotion of ESG, as in environmental, social and governance investing? BlackRock is very late to that party. CalPERS and CalSTRS were true believers long ago; CalPERS famously dumped tobacco stocks at the worst possible time, right before the Federal-state settlement. CalSTRS pressured Cerberus to dump its holdings in gun maker Remington in 2015. A party with inside knowledge of BlackRock told me that the big reason BlackRock suddenly became a vocal advocate was that it hoped to win the mandate to take over CalPERS private equity portfolio. Recall that Bloomberg publicized in late 2017 that that was CalPERS’ plan, despite BlackRock’s lack of meaningful private equity experience. BlackRock was indeed on a short list of firms invited to propose over that Christmas/New Years holiday. BlackRock staring making a full throated defense of ESG investing, which is near and dear to the board’s heart, in early 2018, with CalPERS Chief Investment Officer Ted Eliopoulos at Larry Fink’s side during the press conference. The effort to hand off CalPERS’ portfolio to an outside party and have less control and pay even more fees fell apart under press scrutiny, led by this website.

Another smaller sour note was Mark Blyth depicting Republicans as representing extractive, old economy industries. Top expert on political money in America, Tom Ferguson, says that’s simplistic. While oil and fracking company donations are strongly Republican, of the four biggest private equity firms, the heads of three (KKR, Blackstone, and Carlyle) are established heavyweight Republican donors. Industry insiders report that private equity firms press portfolio company executives to donate in line with parent company preferences. Apollo, as more of a real estate firm, gives to both parties, as do most developers, since they always need friends in office. The arms industry skews Republican. The health care industry gives heavily to both parties.