Larry Fink - The Most Powerful Man in Finance | A Documentary

It was the year before the Black Monday crash. Wall Street darling Larry Fink suffered a $100 million trading loss. I was so angry at myself. I was just mortified at myself. Humiliated, Fink now is forced to leave the company. But upon his failure, he will build the mightiest company in the world, BlackRock. Another too-big-to-fail asset manager which handles over $7 trillion in direct management and another $20 trillion through their proprietary software. I mean Larry Fink with those numbers he can say whatever he wants. BlackRock was fantastic. California is on the rise to become the most populated state in America. Like the rest of the country, the 60s was a turbulent time for California. A decade of a drastic political change. It was such an exciting heady time to find out that under the official reality there was this seething turmoil of young people learning new music, new thoughts, new ideas, new literature, new poetry, new ways of being. Larry Fink is one of those young people. He enrolled in UCLA to pursue a political science degree, hoping one day to make impact as a politician. After getting an MBA degree from UCLA, Fink takes a job at a leading investment bank, First Boston, as a bond trader. It was a perfect time to get into the bond business. In the early 70s, bonds only began to be actively traded. Larry Fink excels at this job. He rapidly rises through the ranks, becoming the youngest manager at his department. We started First Boston in 1976. I was the first Freddie Mac bond trader. And so the mortgage market was just in its infancy. And then in 1982, we had the ability to put a PC on our trading desk. Before that, you had no ability to put a computer on a trading desk. And it was very clear to me that if we could have computing power on the trading desk, we were going to have the ability to dissect cash flows of mortgages. And we were the most profitable component of First Boston in 83 and 84 and 85. By 1983, the American economy had rebound from a decade-long recession. The highest order of business before the nation is to restore our economic prosperity. After taking over the presidency, Reagan worked to boost the economy. He starts cutting taxes and deregulating Wall Street, creating a perfect environment for financial innovations. One of such is the mortgage-backed securities. Simply put, they bundle millions of mortgages and turn them into securities that can be traded by any investor. Larry Fink was one of the architects behind this financial innovation, which 20 years later morphed into an economic bomb. But in the meantime, Larry sells these newly minted securities to large investors like pension funds and endowments, generating tens of millions of fees for First Boston. At the time, First Boston was at the top of the investment banking industry, specializing in mergers and acquisitions. After creating $1 billion profit for the firm, Larry Fink becomes the most profitable man at First Boston. When you're at that level and you've had all of that success and you have all of this money, there's a mindset that you're almost invincible. But then he loses $100 million in just one quarter of 1986. So you could work a lifetime trading wealth under certain assumptions that something can't happen. And then, bang, you've lost everything for your whole lifetime because you thought it couldn't happen. That is a year before the infamous Black Monday crash. And the market was still in a euphoric state because everyone was making money. Unless you're hedged for events like Black Monday, whatever alpha you think you're going to get, you're not going to get it. When you started having those types of successes, the firm gave you more capital. We were taking bigger and bigger risks without the attended risk technology to navigate that risk. And in the second quarter of 1986, we lost $100 million. On Wall Street, one big loser can erase all your winners. The same is true for reputation. Although he wasn't fired, but he was sidelined. All of a sudden, people don't want to be seen with him anymore. He becomes the untouchable. The message is clear. It is time to quit. The trouble is, with Tarner's reputation, no investment bank will want to hire him. At age 36, Larry Fink is unemployed. I said to myself 30 days after we lost money in that quarter, even though we made $130 in the first quarter and lost $100 of it in the second quarter, I said I'm leaving. But it took me a year and a half because I never ever thought I was going to leave. But it took me a year and a half to try to determine what I wanted to do next. Always a competitive man, Fink refuses to surrender and is determined to regain his past glory by any means necessary. This time, he will start his own business. And to do that, he will need investors. But with his reputation, it is nearly impossible to raise money. Until he meets the legendary Steve Schwarzman. Steve Schwarzman, the founder of Blackstone, is one of the most powerful figures on Wall Street. In his 30 years reign, he turned Blackstone into the biggest private equity company in the world. But by 1988, Blackstone was still a lesser-known consulting firm. And like Fink, Steve Schwarzman was a castaway. He was a rising star in Lehman Brothers on his way to become the CEO. But due to a nasty power struggle, he was forced to leave the company. I saw a lot of behavior that I didn't like. And so I decided to go out and do something with my partner who'd been thrown out the year before by the management that went in and ultimately blew up the company. In 1988, Blackstone just started as a private equity business and barely completed its first deal. But Steve Schwarzman is already thinking big by expanding the company to more areas. And he's considering a wealth management business. One of the reasons why Schwarzman was so successful is that he has an eye for talent. He knows how to hire the best people. Wanted to attract somebody to run it who was a 10 on a scale of 10. Because you'll find in your careers, if you're a 10, God bless you, you'll be wildly successful. If you attract 10s, they always make it rain if you need rain. And they just have an ability to sense problems, design solutions, do new things. And that's what a 10 does. And Larry Fink is a 10. After meeting Fink, Schwarzman decided to start a joint venture called Blackstone Financial Management by investing $5 million with Fink. Took me a year and a half to assemble my thoughts. And I told the story to Steve Schwarzman and Pete Peterson. And they loved it. And they had more confidence in me than I had myself. They wanted to go right ahead. And we did that. We actually started making money within two weeks. We talk about an investment company and a fund, it's easy to get confused. In this case, Steve Schwarzman gave $5 million to start a management company. But then they have to raise money for their fund. Within five years, Fink built his fund to have $8 billion under management. Fink has learned a lesson that one should always be risk conscious. One of his investment principles is that he would not put down a dime until the risk can be understood and calculated. There were so many other companies that really didn't understand the risk. And most importantly, the buy side, the investors had no idea the risk they were taking. And there was a great need for a company that starts off with a high concentration in risk analytics and principally in the fixed income area. There was a lot of analytics and equities back then, but nothing in bonds. He was one of the first in the industry to rely heavily on statistics and algorithms to make investment decisions. Fink is now back on the top. He recognizes that in order to grow bigger, his company needs to offer more stock options to attract talented people. He demands Schwarzman to give up some of Blackstone's ownership. To his great disappointment, Steve Schwarzman rejected his plan. Both Steve Schwarzman and Larry Fink are highly competitive type A people. But Steve Schwarzman is an investment banker, while Fink is more of a trader. Steve Schwarzman, he's unusually conservative, actually unusually risk averse for a successful entrepreneur and investor. This was a visceral thing, like a primal impulse not to lose money. Two alphas are always doomed to clash from the get-go. After being rejected by Steve Schwarzman for his proposal, Fink is determined to completely sever ties with the firm by finding a buyer to purchase Blackstone's ownership. As Schwarzman is going through a divorce in his personal life, the news that Fink wants to leave Blackstone sent him into a frenzy. Ego is a great thing in business, an ego. You show me a titan of industry and I'll show you somebody with a big ego. But on Wall Street, everything has a price, including ego. PNC Bank stands for Pittsburgh National Corporation, a finance group with a long history and lineage. In 1991, PNC was on a buying spree, acquiring dozens of smaller firms. It is a perfect buyer for Fink to get rid of Blackstone's control. They offer hundreds of millions of dollars to buy out Blackstone's stake. Think about this. Steve Schwarzman and Fink started this business with just about $5 million. That is a huge return in just five years. Although Steve Schwarzman is still hesitant, the money, it just took good to ignore. He agrees to sell the asset management business to PNC. This is the biggest mistake in Schwarzman's career. At the time, even he couldn't foresee that this side business of Blackstone would someday become a financial giant that dwarfs even Blackstone itself. 1994 was a fateful year for Blackrock. After separating from Blackstone, the company was still small. By Wall Street standard, $8 billion of fixed income portfolio is not considered to be big because bonds tend to make less returns and a little bit less risky. Now afraid to build Blackrock any way he likes, Fink is holding nothing back. But to win, he must find an edge that others don't have. And it will come from an unexpected place. Under the leadership of Jack Welch, GE started an explosive growth. Fueled by easy money in the mid-80s, General Electric ventured into new industries, including news and finance. The company bought Kidder Peabody, a once respected investment bank, but was later found guilty of insider trading and accounting fraud. Once Welch realizes how deeply in trouble his new firm is, he decides to sell it to virtually anyone willing to buy. Pineweber, another investment bank, is willing to acquire Peabody from GE, but not its toxic bond portfolio, which consists of $10 billion worth of CMOs. These derivatives are notorious for their complexity. Welch was a brilliant manager, but he was no finance expert. He frantically tried to get rid of the toxic assets left by Peabody. But due to the complexity of the portfolio, no Wall Street firm wants to touch it. Except Blackrock. As the pioneer of CMOs, Fink realizes if Blackrock can help GE properly evaluate the assets, that he is set to make a huge profit, and it will also be a breakout moment. Fink's team of quantitative analysts worked tirelessly for weeks to re-evaluate the portfolio and to repackage them into a new set of derivative assets. Blackrock helped GE gradually unload the assets and recover their value with minimal loss. If you're confused about what he did and how he did it, you're not alone. It's called financial engineering. It's about packaging, restructuring existing securities into new ones. While some of these securities are indeed valuable, they're only available to big players in finance. But in the early 1990s, the financial engineering becomes Larry Fink's number one competitive edge. From then on, Blackrock's developed a reputation as a ghostbuster. For companies with problematic assets, Larry Fink becomes the guy to call. The success with GE solidifies Blackrock's reputation on Wall Street. Just three years after separating from Blackstone, Blackrock's asset under management grew to $46 billion. Its parent company, PNC, decided to merge its wealth management division with Blackrock, with a combined $154 billion total assets. After becoming a billionaire, Larry Fink does what all billionaires do, collecting arts. He believes that arts and real estates are the two greatest stores of wealth in the world. And investors with a greater than $100K portfolio should use arts as a better inflation hedge than gold. Art has benefited immensely from soaring costs, according to data from Citi. In fact, they reported that contemporary art prices appreciated by 23.2% versus 3.8% for the S&P 500 during periods of 3% inflation or higher, like right now. But unless you have $100 million in the bank, you could never take a proper stake in this asset class. Until now. Masterworks.io acquires multi-million dollar paintings by famous artists like Basquiat and Banksy and allows anyone to invest in them, just like picking stocks online. And they built an innovative platform that they recently raised $110 million in Sears A funding at a valuation over $1 billion. They securitize each painting filed with the SEC and issue shares representing an investment in an art piece on their platform that investors can either hold until Masterworks sell the painting or sell to other Masterworks members on their platform. Investors already saw a 32% annualized price appreciation from the sale of their Banksy painting, Metaphys. Now thanks to Masterworks, I'm an investor in Basquiat and I invite you to do the same. Through the link in the description, you will skip the wait list and get priority access to invest like me and Larry. By the time it went public in 1999, BlackRock became the fifth largest publicly traded asset manager in America. But Fink wants to be number one. Over the next five years, BlackRock continues to grow, accumulating $400 billion assets. In a little over 10 years, Fink's BlackRock has grown to be a monster. And this monster only wants one thing. To get bigger. In the mid-90s, the United States saw a strong economic recovery like never before. During Clinton's second term, unemployment fell, the stock market surged, and America once again became the epicenter of the technological revolution. Raised during the turbulent 60s and the economic recession, Fink joined Wall Street. After quitting his job at First Boston, Fink started BlackRock. A decade later, BlackRock became the most formidable force on Wall Street, with hundreds of billions of dollars under management. But underneath the prosperity, a crisis is brewing. The 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. It banned any regulation of derivatives. Investment banks make billions through the business of securitization. This business links investment banks, insurance companies, and rating agencies together, connecting trillions of dollars in mortgages and other loans with investors all over the world. The essence of it all is about shifting risks, or rather, socializing risks and privatizing profits. But the risk is still there. Since anyone could get a mortgage, real estate prices skyrocketed. Real estate is real. They can see their asset. They can live in their asset. They can rent out their asset. There's gripped markets overnight with Asian stocks slammed by... Stocks fell off a cliff, the largest single point drop in history. Share prices continued to tumble. In a matter of days, one of the pillars of... One of the first banks to fail is Bear Stearns. The U.S. government asks the biggest commercial bank, JPMorgan Chase, to bail out Bear Stearns. We bought Bear Stearns. And it wasn't bailed out by the government. The government did a little bit of financing. We only did it because we were asked to by Hank Paulson. And we thought if it went down, that could be a huge crisis for the globe. Jamie Dimon is the shrewdest banker on Wall Street. He's not going to acquire Bear Stearns at a loss. So he dials up Larry Fink for advice. Incidentally, Tim Geithner, who was orchestrating the deal, was already contacting Larry Fink about Bear Stearns. In normal times, this is a conflict of interest. But Fink was just too good at his job. So everyone just ignored it. Then BlackRock is hired again to help rescue AIG. Practically behind every major deal during 2008, BlackRock was part of it. And as an expert on mortgage-backed securities, he was called in to help and to clean up. With people like Hank Paulson and Jamie Dimon and Tim Geithner on speed dial, Larry Fink helped engineer a remarkable rescue for the financial industry. The financial crisis provided the perfect opportunity for Fink to strengthen his position as the new king of Wall Street. After the housing crisis of 2008, issuing and trading fixed income derivatives are no longer the most desirable business to get into. Since the early 2000s, the internet has become widely available, enabling the growth of social networks like Facebook and YouTube. And now we're at 100,000 people. So who knows where we're going next? We're hoping to have many more universities by the fall. Social media enables virtually frictionless mass communication and a fast flow of information. Fink realizes this change will fundamentally alter the finance sector. From the wreckage of the 08 disaster, one business would explode, the ETFs. The best single thing you could have done was just buy an index fund. Statistically, this is the simplest way to build wealth for probably 99% of investors. The markets will grow over the long term. And so because of that, we can invest into some of these different funds that are available to us. Every year, it turns out that probably two thirds of the active managers are outperformed by the index. And the third that outperform in one year are not the same as the ones who do it the next year. In his classic book, Running Walk Down Wall Street, Burton Malkiel proposes that a market is essentially random and therefore unbeatable. The only rational thing to do is putting money in everything. Influenced by Malkiel, mutual fund legend John Bogle launched the first public index mutual fund in 1975. Starting with just $11 million, this fund tracked the movement of S&P 500. After that, many follow suit. But these mutual funds did not become publicly traded until 1993, when the first ETF, SPDR, came to life. In the aftermath of the housing crisis in 2009, BlackRock has already begun acquiring ETFs, starting with the iShares from Burton's Barclays Bank. Through just three funds, you can get exposure to 1500 stocks with minimal fees. Just like the fishing industry, very few people get wealthy by hunting whales. Most of the revenue comes from smaller fish with large volumes. I guess to Feng, he realized that the future of investing is about tapping into the pockets of smaller investors. Volume over profits. BlackRock soon controls nearly half of the ETFs in America. In 2014 alone, BlackRock raised $103 billion. Shortly, the firm becomes the major shareholder in almost every public company out there. They have $50 billion in Lockheed Martin and Northrop Grumman each. And it's been the most successful. It's not a bank, it's just an investment company. And it's been the most successful in the world. So it's huge, it's massive. Larry Fink now has more potential power to influence the US economy than anyone else. He is the JP Morgan of the 21st century. And we're the largest pension manager in Japan. Mexico, where we are now becoming, we just did an acquisition, we're going to be the largest asset manager in Mexico. We have one technology pipe worldwide that connects everything we do at the firm. Used to remain passive, Fink now has become more involved in every company's board. So over the last five years, we've built up our corporate stewardship team. And I actually believe there was less accountability at boards than there should have been in global companies. And so we've now been asking companies, please describe your long-term plan. You tell us what long-term is. But most importantly, please just tell us that you reviewed your long-term strategy with your board. It means he starts exercising his immense power provided by all the ETFs he controls.