Good Conspiracy: ESG, Assemblies, HPS

Summary

Money Stuff Podcast - Episode Summary: "Good Conspiracy: ESG, Assemblies, HPS"

Release Date: December 6, 2024
Hosts: Matt Levine and Katie Greifeld
Source: Bloomberg

---

1. Introduction to the Episode

In this episode of Money Stuff: The Podcast, hosts Matt Levine and Katie Greifeld delve into the contentious intersection of Environmental, Social, and Governance (ESG) principles, antitrust concerns surrounding major index fund managers, and BlackRock's strategic acquisition of HPS. The conversation navigates through complex financial regulations, corporate governance, and the evolving landscape of private credit markets.

---

2. ESG and Antitrust Concerns

[02:30] Katie Greifeld:
"We're going to talk about ESG and whether index funds are illegal."

The episode opens with a discussion on a groundbreaking lawsuit initiated by Texas and several other states against the "big three" asset managers—Vanguard, BlackRock, and State Street. These firms are accused of engaging in an antitrust conspiracy by collectively pressuring coal companies to reduce coal production, thereby inflating coal prices and securing higher profits.

Matt Levine:
"There’s a long-running theory that these big diversified asset managers like BlackRock and Vanguard own every company, and they might have a desire for companies in an industry to get together, cut production, not compete too hard, and raise prices."
[02:56]

Levine elaborates on the controversial nature of the lawsuit, highlighting the lack of concrete evidence that these asset managers are explicitly coordinating with companies to manipulate production and pricing. The conversation underscores the uniqueness of ESG commitments in this context.

Matt Levine:
"The huge exception to that is ESG. The big asset managers really did sign on to statements saying we want companies to achieve net zero emissions."
[06:07]

This alignment with ESG goals, particularly in the coal industry, blurs the lines between environmental objectives and potential antitrust violations. By advocating for reduced coal production under the guise of environmental responsibility, the big asset managers find themselves at the center of legal scrutiny.

Katie Greifeld:
"If I were BlackRock or Vanguard or State Street, could I defend myself on the emissions point saying, we didn't mean for you to lower production?"
[06:24]

Levine responds by questioning the viability of such defenses, pointing out the ambiguous nature of ESG commitments and their unintended economic consequences.

Matt Levine:
"The fact that you were doing it for some outside benefit is not a really good antitrust defense."
[07:45]

The discussion further explores the complexities of intent in antitrust cases, emphasizing that even altruistic motives may not shield these companies from legal repercussions if their actions result in anti-competitive outcomes.

---

3. Shareholder Voting and Proposed Solutions

Katie Greifeld:
"States are asking the court to bar the three largest US Investment firms from using their stock in coal companies to vote on shareholder resolutions."
[13:21]

The hosts transition to the topic of shareholder voting power held by the big asset managers. Texas is seeking to limit their influence over shareholder resolutions, raising concerns about the concentration of voting power and its implications for corporate governance.

Matt Levine:
"It's weird that so much of the voting power of stocks is controlled by literally Larry Fink."
[13:49]

Levine critiques the disproportionate influence wielded by key figures in these firms, suggesting that it fuels conspiracy theories and undermines fair governance practices.

Katie Greifeld:
"We have a novel solution that's been proposed to sort of solve some of these issues. Do you think we should talk about it?"
[18:05]

The hosts introduce a proposal by Oliver Hart, Helene Landemore, and Luigi Zingales, which suggests implementing shareholder assemblies to democratize voting processes within mutual funds.

Matt Levine:
"The idea is to give each shareholder a lottery ticket for each share they own and randomly select a representative sample to form an assembly."
[18:25]

This innovative approach aims to create a more representative and participatory decision-making body, reducing the singular control exerted by large asset managers. However, Levine raises concerns about the practicality and effectiveness of such assemblies in influencing corporate policies.

Katie Greifeld:
"Participation would be voluntary, and participants should be adequately paid and provided with childcare, etc."
[23:15]

Despite its merits, the proposal faces significant logistical challenges, including participant recruitment and potential self-selection biases, which Levine acknowledges may limit its impact.

---

4. BlackRock's Acquisition of HPS and Private Credit Markets

Katie Greifeld:
"BlackRock finally bought HPS. But let's start with ESG turns out, at least according to Texas, that's an antitrust violation."
[02:30]

The conversation shifts to BlackRock's strategic moves within the private credit sector, particularly its recent acquisition of HPS for $12 billion.

Matt Levine:
"We're in a really white hot time for private credit and a golden age for private credit."
[31:03]

Levine characterizes the current private credit market as vibrant but cautions that what feels like a "golden age" may precede significant changes. He praises HPS's execution in positioning itself as a valuable acquisition target for BlackRock.

Katie Greifeld:
"BlackRock is trying to get a lot bigger, specifically in private markets, and they're spending a lot of money to get there."
[30:20]

Levine and Greifeld explore the implications of BlackRock's expansion into private credit, drawing parallels to its growth strategy in the Exchange-Traded Funds (ETF) market.

Matt Levine:
"BlackRock is like synonymous with being a giant ETF provider. But private credit feels different because it doesn't feel especially winner-take-all."
[36:31]

They discuss how BlackRock's foray into private credit mirrors its aggressive expansion in ETFs, highlighting the firm's pattern of inorganic growth through strategic acquisitions.

Katie Greifeld:
"I can't wait to talk about this in 15 years."
[37:10]

Reflecting on BlackRock's history, Greifeld emphasizes the transformative impact of ETFs and anticipates similar shifts in the private credit landscape driven by BlackRock's influence.

---

5. Closing Remarks and Future Thoughts

As the episode concludes, Levine and Greifeld touch upon the broader implications of concentrated voting power and asset management strategies on the financial markets. They ponder the future of private credit and the potential for new governance models to emerge in response to regulatory and market pressures.

Matt Levine:
"The stock price is the main disciplining mechanism. Shareholder votes are a secondary disciplining mechanism."
[26:15]

Levine underscores the paramount importance of stock prices in governing corporate behavior, suggesting that while shareholder votes are significant, they operate within a larger framework driven by market valuations.

Katie Greifeld:
"Ultimately, I feel like if you're a public company, your stock price is going to be the ultimate sounding board."
[25:58]

Greifeld echoes this sentiment, reinforcing the idea that financial performance and investor sentiment remain the primary drivers of corporate accountability.

---

Notable Quotes

• Matt Levine:
  "There’s a long-running theory that these big diversified asset managers like BlackRock and Vanguard own every company, and they might have a desire for companies in an industry to get together, cut production, not compete too hard, and raise prices."
  [02:56]

• Katie Greifeld:
  "If I were BlackRock or Vanguard or State Street, could I defend myself on the emissions point saying, we didn't mean for you to lower production?"
  [06:24]

• Matt Levine:
  "It's weird that so much of the voting power of stocks is controlled by literally Larry Fink."
  [13:49]

• Katie Greifeld:
  "I can't wait to talk about this in 15 years."
  [37:10]

---

Conclusion

In "Good Conspiracy: ESG, Assemblies, HPS," Matt Levine and Katie Greifeld provide a nuanced exploration of ESG-related antitrust issues, the concentration of shareholder voting power, and strategic acquisitions in the private credit market. Their insightful dialogue sheds light on the intricate dynamics between large asset managers, corporate governance, and market regulations, offering listeners a comprehensive understanding of these pivotal financial topics.

---

For more insights and detailed analysis, subscribe to the Money Stuff podcast on your preferred platform and stay updated with Bloomberg's latest financial reporting.

Transcript

[Narrator]

GiveWell, a non profit that researches and recommends giving opportunities, takes the impact of donations seriously to ensure their recommendations withstand tough scrutiny. GiveWell had their own researchers spend months trying to identify flaws in their past work. They then publish their findings, mistakes and all for any donors to use for their giving. It's this kind of rigor that can help your donation make a big impact on the world. GiveWell has now spent over 17 years researching charitable organizations and only directs funding to a few of the highest impact opportunities they've found. Over 125,000 donors have used GiveWell to donate more than $2 billion. Rigorous evidence suggests that these donations will save over 200,000 lives. If you've never used GiveWell to donate, you can have your donations matched up to $100 before the end of the year or as long as matching funds last. To claim your match, go to givewell.org and pick podcast and specify where you heard this ad. Make sure they know that you heard about GiveWell from this podcast. Open source AI is available to all, not just the few Meta's open source is free to use, enabling startups like XAON to innovate. Here's CEO and co founder Dr. Cal Clark.

[Matt Levine]

We've built a tool with Llama Meta's open source AI model to help radiologists.

[Narrator]

Double check their diagnoses.

[Matt Levine]

We're able to collaborate with universities to further radiology education and catch more errors.

[Narrator]

Learn how others are building with Meta's free open source AI at AI.meta.com Open in 15th century Florence, the great inventor Leonardo da Vinci dreamt of creating a flying machine. But something kept getting in his way. Admin Piles of it.

[Matt Levine]

Luckily, Leo used the smart buying tools.

[Katie Greifeld]

On Amazon Business so he could work.

[Matt Levine]

More efficiently with the extra time. He not only invented the flying machine.

[Narrator]

But actually built it.

[Matt Levine]

Magnifico.

[Narrator]

Incredible.

[Matt Levine]

Whoa, easy there Leo. Amazon Business your partner for Smart Business Buying.

[Narrator]

Bloomberg Audio Studios Podcasts, Radio News.

[Katie Greifeld]

Here we go.

[Matt Levine]

Hello and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff. Com for Bloomberg Opinion.

[Katie Greifeld]

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

[Matt Levine]

What are we talking about today, Katie?

[Katie Greifeld]

We're going to talk about ESG and whether index funds are illegal. We're going to talk about maybe an answer to shareholder voting. And then we're going to talk about BlackRock. HPS. It finally happened. BlackRock finally bought HPS. But let's start with ESG turns out, at least according to Texas, that's an antitrust violation.

[Matt Levine]

So I've been writing for almost 10 years, are index funds illegal? And I didn't invent that idea, but I feel like I've done a lot to popularize it. And within the next few years it might become the case that index funds are illegal. So Texas and some other states, but some states led by Texas sued what we in the business call the big three asset managers, so Vanguard, BlackRock and State street for an alleged antitrust conspiracy where, where they allegedly all got together and pressured coal companies to cut the production of coal to raise the price of coal. And that is the antitrust conspiracy. Now there's a long running theory that these big diversified asset managers like BlackRock and Vanguard and State street, but also like some of the smaller, less indexy managers, because they kind of own every company, every in an industry, they have a desire for the companies in that industry to get together, cut production, not compete with each other too hard, raise prices and earn outsized margins because they are not competing the way they would if they were all owned by separate owners. This is like a long running theory. It's very controversial. And one reason it's controversial is that no one really thinks that those meetings happen. So the classic example is airlines. No one really thinks that BlackRock sends people to the CEOs of airlines and says, you need to stop competing with other airlines on your routes because we want you to raise ticket prices and earn more profits and we want everyone else to raise ticket prices there, earn more profits too. And no one really thinks that the airline executives would listen to those conversations. So there's just not like a lot of evidence based that these index fund companies, these big investors get together and actually explicitly tell companies to cut production and raise prices. So that's like the problem with a lot of these antitrusty theories that like, oh, look, these index funds own every company. So isn't that a weird antitrust problem? The huge exception to that is esg. The huge exception to that is that the big asset managers really did sign on to statements saying we want companies to, to achieve net zero emissions. And that is all well and good when you're talking about consulting companies trying to fly less or whatever, but when you talk about coal companies, talking about a coal company lowering its emissions is very similar to talking about a coal company lowering its production of coal. And so if all of the big shareholders of all the big coal companies get together and say to the coal companies, you should lower your production of Coal. And the coal companies go out and say, we have lowered our production of coal in order to meet ESG goals, then like, I don't know, that kind of looks like the owners of all the companies getting together and saying we're going to lower production to raise prices. And so you have this lawsuit saying not only that BlackRock and Vanguard signed on to net zero pledges and then urged companies to lower their emissions, but also that these coal companies cut production of coal into rising demand for coal and the price of coal soared and these coal companies made, quote, cartel like profits. So I don't know, it's kind of a cool lawsuit.

[Katie Greifeld]

If I were BlackRock or Vanguard or State street, could I defend myself on the emissions point saying, we didn't mean for you to lower production. We didn't mean for you to stop mining coal. Just do it in a more green way. Does that hold any water?

[Matt Levine]

I don't know. That's kind of hard. I think there are a lot of defenses here and this is like a creative lawsuit more than it is like a slam dunk lawsuit. Even if the story was we just wanted them to mine in a, in a greener way and that raised the cost of mining or like, you know, delayed mining, like that would still be sort of a production cut. But it's also like, obviously the case that if you are generically an ESG investor, thermal coal is kind of your least favorite thing. And so there is some amount of pressure on companies to shift away from thermal coal mining. And like the lawsuit, you don't see like explicit statements from like BlackRock saying coal companies shouldn't mind coal anymore. It's more like statements like, we're going to engage with companies about their climate goals and try to really understand how they see the future of the market for thermal coal. It's all vague statements, but it is all suggestive of the idea that the people writing those statements are not big believers in increasing the production of thermal coal.

[Katie Greifeld]

Something that I feel like I've asked you before, but I'll ask you again, is whether or not intent matters when it comes to antitrust. Like, surely when, you know, Putting together these ESG flavored proposals for these coal companies, BlackRock wasn't trying to like, boost their margins and line the pockets of these coal companies.

[Matt Levine]

So a couple of points of that. One, the lawsuit says it doesn't matter that they think they were doing this for the good of the world. If you have a conspiracy to restrain trade, if you have a conspiracy to lower production, that has the effect of raising prices. The fact that you were doing it for some outside benefit is not a really good antitrust defense. On the other hand, it's a very weird claim because like these lawsuits, they are antitrust lawsuits. And so they are arguing that BlackRock and Vanguard were ganging up to have cartel like profits in the coal industry. Which is a strange claim for a couple reasons. One is like most of the time when politicians complain about ESG, what they say is BlackRock is usually the punching bag. BlackRock is not being a fiduciary for its investors. It's not trying to get the highest returns for investors. It's not putting profits first. Instead, it's putting its own moral interest in climate change or whatever ahead of the financial interests of its investors. But this lawsuit says no, no, no. Actually BlackRock's ESG stuff is making cartel like profits. Right? Like, the ESG stuff is incredibly lucrative for these big asset managers, which is just a strange claim. It's not really a claim that blackrock would make. Right. I mean, I think a lot of ESG investors would say this is actually in the long term financial interest of our investors. But they're not saying, oh, we're making cartel like profits by cutting down the mining of coal. But it's also not something that like the Attorney General of Texas would say in any context outside of this lawsuit. Right. Like the Attorney General of Texas is saying, oh, BlackRock is not putting its investors interest first. Except here it is, here it's making a lot of money for investors. So that's like a funny little claim. The other thing that's weird is that the coal companies are not defendants, right? Yeah. If you're worried about antitrust conspiracy in which the coal companies are earning cartel like profits by all agreeing to cut back on production, like, why aren't you suing the coal companies? And again, the answer is political. Right? The answer is like, it would be weird for the Attorney General of Texas to sue all the big coal companies, but to sue blackrock is fine.

[Katie Greifeld]

Yeah, that is so funny. I mean, you mentioned that BlackRock is often the punching bag here. I thought that.

[Matt Levine]

Much more so than State street and Vanyard, mostly because they've put out more public statements one way or the other.

[Katie Greifeld]

That's true. And I mean Vanguard is just a passive beast, just a passive animal.

[Matt Levine]

But I saw entirely true. They're much less like public about it and they are much more like their heritage is much more index funds versus BlackRock, like owns a lot of index funds, but is also like you know, has more of a heritage as an active bond manager.

[Katie Greifeld]

But yeah, you're right.

[Matt Levine]

You know, sign up to the conversation.

[Katie Greifeld]

I've had with Vanguard as well that they're also in on the active game.

[Matt Levine]

Which not active, I don't mean active investing. I mean like intentional stewardship of even their passive holdings. Right. If you are a massive index fund manager, you have to think about how you vote your shares and you have to think about, you know, whether and how you engage with companies. And I think Vanguard does not say we do none of that. Right? I mean, I think they have some sort of, some of the same sorts of stewardship thoughts that like BlackRock has.

[Katie Greifeld]

I do think it's interesting that something that's brought up in this lawsuit is the fact that the Big three are part of these like various climate groups, some of them that are named are the climate action 100 plus. There's also the Net Zero Asset Managers Initiative. I mean that's pointed to as proof that they formed a syndicate and agreed to use their collective holdings of publicly traded coal companies to introduce industry wide output reductions for several of these groups. I mean, State street, for example, quit CA100 plus in February. Vanguard left. The Net Zero Asset managers initiative in 2022 was never a part of the previous group as well. And that's also acknowledged in the lawsuit that at least for several of these collectives, they're not even part of these anymore. But I don't know, it's a weird thing to point to as proof of something. And also I just don't know how much teeth is involved.

[Matt Levine]

I agree with that. I mean, I think the lawsuit has to mention this because one antitrust claim you could make is that BlackRock itself or you know, one of these three managers just by itself because it owns big stakes in all of these public companies and it has some incentive and some power to make those companies glue together. So like BlackRock itself could go to meetings at all the coal companies, say cut coal to like boost the price of the other coal companies and maybe that's an antitrust violation, but that is less compelling because BlackRock is a, you know, passive minority shareholder. And all these, it's less compelling than saying, well between them the big three own 30% of all these coal companies and so they have enormous power. And the fact is that for a while the Big three asset managers all sort of made similar statements about being interested in ESG and being concerned about climate disclosure and talking to portfolio companies about how they think about climate change. And it's possible that those statements were all independent. Right. It's possible that if you're a coal company, you have a lot of shareholders who are separate, unrelated shareholders who are all interested in climate change and who are all worried about ESG issues. And so as a coal company CEO, you have to respond to your various shareholders who all care about esg, or many of them care about esg. But that's not an antitrust problem. Right. Like, if all of your shareholders independently worry about climate change because it's like a fact in the world, then that's not an antitrust problem. The antitrust problem is if they all get together in a group. Right. And so that's why the lawsuits mention these groups. I agree with you. These groups do not seem like they have a ton of teeth. Right. These are not literally like backroom meetings of the heads of BlackRock and Vanguard and State street saying, oh, let's cut coal production. But they are a group that you can point to where they all sort of got together and signed onto the same statement.

[Katie Greifeld]

Let's also talk about what they're trying to achieve, because this line caught my eye and I think it leads in nicely to what we're going to be talking about next. So the states are asking the court to bar the three largest US Investment firms from using their stock in coal companies to vote on shareholder resolutions, which I don't know. That doesn't seem very healthy and good just to remove the voting power of specifically these three altogether.

[Matt Levine]

I think a lot of people, not just anti ESG people, find it weird that so much of the voting power of stocks is controlled by literally, Larry Fink. Right. By the people in charge of stewardship at these three companies. And this is not the first suggestion I've seen that, oh, actually just index funds shouldn't be able to vote. That would solve all the problems. I agree with you. It's a weird solution. I don't know that it solves all the problems, but saying these big firms shouldn't be allowed to vote their shares is not an uncommon proposed solution. Actually, it sort of crudely gets at the issue of like, hey, it's weird that they control so many votes and they have sort of different motivations from other shareholders because they do own every company and they do sort of represent a lot of passive investors who maybe don't supervise their voting choices that closely.

[Katie Greifeld]

Yeah. I mean, you Tweet anything about BlackRock or if you spend even five minutes on Twitter, at least the circles that I run in, and you'll find a lot of conspiracy theories immediately. But when it comes to, I mean.

[Matt Levine]

They really, they truly lend themselves to conspiracy theories, right? I mean, they're like a multi trillion dollar company that controls every company. If you're like, oh, there's a company that like, is the biggest shareholder of every company in the world, like, ooh, that's a good conspir. That's a good starting sentence for a conspiracy. And so they do attract a lot of conspiracy theories.

[Narrator]

GiveWell, a nonprofit that researches and recommends giving opportunities, takes the impact of donations seriously. To ensure their recommendations withstand tough scrutiny, GiveWell had their own researchers spend months trying to identify flaws in their past work. They then publish their findings, mistakes and all for any donors to use for their giving. It's this kind of rigor that can help your donation make a big impact on the world. GiveWell has now spent over 17 years researching charitable organizations and only directs funding to a few of the highest impact opportunities they've found. Over 125,000 donors have used GiveWell to donate more than $2 billion. Rigorous evidence suggests that these donations will save over 200,000 lives. If you've never used GiveWell to donate, you can have your donations matched up to $100 before the end of the year or as long as funds last. To claim your match, go to givewell.org and pick podcast and specify where you heard this ad. Make sure they know that you heard about GiveWell from this podcast. This show is sponsored by Better Help. BetterHelp has been revolutionary in connecting people to mental health services.

[Katie Greifeld]

Using better help can be as easy.

[Narrator]

As opening your laptop or your phone.

[Katie Greifeld]

And clicking a button and the session begins.

[Matt Levine]

Clients are able to choose in what.

[Narrator]

Way they would like to communicate with me.

[Matt Levine]

Whether video or on the phone or.

[Narrator]

Chat texting, BetterHelp is there when you need it. And that's what makes all the difference. Visit betterhelp.com podbusiness to get 10% off your first month. Therapists were compensated. Success. It's discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. It's the best in each of us, made better by the best in all of us. Whatever success looks like to you, Stifel is invested in yours. That's why Stifel is one of the fastest growing global wealth management firms in the country. So when you're ready to chase success, our financial advisors are ready for you. At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct Access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row. If you're an advisor or an investor, choose Stifel. Where success meets success. Stifel, Nicholas & Co. Inc. Member SIPC and NYSE for J.D. power 2024 award information, visit jdpower.comawards compensation provided for using not obtaining the AW.

[Katie Greifeld]

We have a novel solution that's been proposed to sort of solve some of these issues. Do you think we should talk about it?

[Matt Levine]

We should talk about it.

[Katie Greifeld]

Okay.

[Matt Levine]

It's a proposal from Oliver Hart, Helene Landemore and Luigi Zingales in Bloomberg Weekend about how to implement shareholder democracy using shareholder assemblies.

[Katie Greifeld]

Yeah, so this is interesting. They kind of compare it to basically a. A jury where you select a sample of the shareholders. It's sort of like a sampling sort of technique in a bond index fund.

[Matt Levine]

Well, it's more like a lottery, but sure, a lottery.

[Katie Greifeld]

Well, I mean, it reminds me of a sampling technique just because you're not going to get all of the bonds in your index. So the hope is to pick a sample that sort of accurately represents the demographics or whatever. But you're right, they are picking randomly.

[Matt Levine]

Right. The idea is like there's like a million shareholders in a mutual fund or whatever, and you give them each one lottery ticket for each share of the fund that they own. And then you choose 150 lottery tickets. And so you collect 150 people who are in some sense representative investors in the fund. And then you get them together in a big room and they talk about what the fund's voting policies should be. So that instead of Larry Fink deciding how BlackRock will vote its shares in coal companies, you have, you know, some people in a room who are like ultimately the direct investors like the BlackRock Index Fund. And they get together and they decide how blackrock should vote its shares. And then their decision, you know, after deliberation and consultation, is the new policy for BlackRock.

[Katie Greifeld]

And this is specific to mutual funds. And they do propose that, you know, if you have a larger investment, you would have a higher chance of being drawn, but everyone would have an equal voice once actually in the assembly, which I also, I don't know how to think about that. Obviously with a jury that makes sense. But if you own a ton of shares in a mutual fund, shouldn't you have a bigger vote?

[Matt Levine]

Well, but most of the people who own the shares in the Mutual fund have zero vote in this proposal. Right. It's not like a direct democracy. It's a random sample to get some people who seem vaguely representative and they hash out something that seems like it might be workable for everyone. My impression is that there is a lot of overstatement of the importance of shareholder voting. I don't think that like BlackRock is influential or that ESG is important because of how BlackRock votes on shareholder proposals at coal companies. I don't think that's the thing that is driving anything. These shareholder proposals are frequently sort of symbolic, non binding proposals. And so it's nice for a company to win the votes against the shareholder proposal. It doesn't like, it's an annoying embarrassment to fight over these things, but it's not like the driving force behind how the CEO lives her life or is paid or anything like that. Right. The thing that matters is voting in contested proxy fights and mergers. But it's also like the soft power of Vanguard coming in or blackrock coming in and having a meeting and saying, hey, we'd really like you to dig up less coal or whatever. And I think that what that means is that the sort of explicit voting policies are less important than the informal meetings and engagement that these firms can have. And you can only really have these assemblies to set the explicit voting policies. Right. You have these meetings to say we will vote in favor of shareholder proposals to disclose more about climate change or whatever or against them or the people will get together and decide. But you can't have the assemblies show up at the meetings with the companies. That's going to be the blackrock stewardship team and those people are going to continue to be those people and they're going to have the sort of professional biases that those people have. And the voting policy will be a sort of marginal change rather than a real change in how BlackRock operates itself. Now people really care about the voting stuff, right? And there's a lot of focus on blackrock is a number of these big fund firms are experimenting with pass through voting where the shareholders, the ultimate beneficiaries of the fund, can vote their shares or they can choose from a menu of policies that will drive the votes so they can be a little bit more responsive to the ultimate beneficiary's interests. And so this is another way to do that. I just don't know how much any of this matters. The voting stuff is the sort of showy, visible stuff, but I'm not sure how much it matters and I'm sure.

[Katie Greifeld]

There's people that would disagree, but the pass through voting doesn't seem like a, a terrible solution, especially when you consider sort of the logistical problems that would come with these shareholder or investor assemblies.

[Matt Levine]

Like, well, pass through voting is very logistically problematic. It's like, because like you have to vote. I think the way they actually implement it is like you choose from a menu of like three different voting policies and then they do the voting for you. It's not actually pass through voting in the sense that like, you know, BlackRock gets like a thousand proxy statements and you get to choose how you vote your little shares on each one of them.

[Katie Greifeld]

Yeah. In terms of though, what, what is being proposed by these three professors? They talk about, you know, gathering 150 people in a room and it sounds like a pretty intense process. And they say, you know, since participation would be voluntary, participants should be adequately paid, provided with childcare, et cetera, like that seems like quite, quite an uphill battle.

[Matt Levine]

I don't know. And that's a drop in the bucket compared to running trillions and trillions of dollars of, of money and also like a drop in the bucket compared to running trillions of dollars of money and getting in trouble with politicians because you're voting in a way that's different from if you have like a good way to sort of point at like we.

[Katie Greifeld]

Have a good process but just in terms of like who would actually agree to do that? Like, who would take time of their life to participate. Yeah, exactly. They propose that to cranks are the.

[Matt Levine]

People who participate in shareholder voting anyway.

[Katie Greifeld]

So it's like, fine, that's true, that's true. But self selection obviously would still be a big problem here.

[Matt Levine]

I will say it reminds me of a paper by John Coats, the Harvard law professor. It's called the problem of 12, which is a great title. It's about the idea that he says 12. Many people now say 3, but there's some small number of asset managers who will end up controlling most of the votes at most of the companies in America. And one thing he writes about is they've gotten to that position sort of like by accident. And there's no thought given to how they exercise that power. And we now increasingly see people thinking about how they exercise that power. And one thing he proposed is like, there's all these rules of administrative law for how U.S. federal agencies should have to make decisions, how they should make new rules or they should make enforcement decisions. There's just a lot of process around how federal agencies make decisions. And like Obviously the big asset managers have some process around how they make decisions, but like, it's all internal, it's all voluntary. It's like, you know, they're companies and they make decisions however they want to make decisions. There's this idea that they shouldn't be completely free to make decisions on their own. They're like now like a sort of quasi public function. And so there should be some public process. There should be some like, way for citizens or like investors to like come in and give them some feedback and tell them how to make decisions so that they're not just making unconstrained decisions. It reminds me of the Facebook oversight board where Facebook is like, we don't know how to moderate our content, so we're going to have some official Supreme Court of moderation. This is one more proposal of how to do that, of how to get some sort of process and public input into how these asset managers make decisions. And I think it's not quite right for how they actually influence companies, but it's a gesture in that direction.

[Katie Greifeld]

Yeah, I mean, ultimately I feel like if you're a public company, your stock price is going to be the ultimate sounding board. If you make a bad decision, your stock price will probably go down eventually. Like if you make enough bad decisions that they outweigh the good decisions, et cetera. But obviously that's more indirect.

[Matt Levine]

Yeah, I mostly agree with that. And I think the stock price is the main disciplining mechanism. Shareholder votes is a secondary disciplining mechanism. Right. Like you could imagine a company performing perfectly well financially, but annoying enough of its locked up index investors that someone raises a proxy fight and gets management kicked out. That's a little bit what happened with Exxon and engine number one management didn't get kicked out, but they did lose a proxy fight. Not because investors were particularly disgruntled with the financial performance, but because a small activist fund was able to kind of get support from big indexy investors to change some policies. So I agree with you. It's mostly stock price is what matters. And so all this stuff is a second tier thing, but there's a little bit of this stuff can affect how companies actually operate.

[Narrator]

GiveWell, a nonprofit that researches and recommends giving opportunities, takes the impact of donations seriously. To ensure their recommendations withstand tough scrutiny, GiveWell had their own researchers spend months trying to identify flaws in their past work. They then publish their findings, mistakes and all for any donors to use for their giving. It's this kind of rigor that can help your donation make a big impact on the world. GiveWell has now spent over 17 years researching charitable organizations and only directs funding to a few of the highest impact opportunities they've found. Over 125,000 donors have used GiveWell to donate more than $2 billion. Rigorous evidence suggests that these donations will save over 200,000 lives. If you've never used GiveWell to donate, you can have your donations matched up to $100 before the end of the year or as long as matching funds last. To claim your match, go to givewell.org and pick podcast and specify where you heard this ad. Make sure they know that you heard about GiveWell from this podcast.

[Katie Greifeld]

I'm Alpine skier Mikaela Shifrin.

[Narrator]

I've won the most World cup ski races in history. But what does success mean? To me, success means discipline. It's teamwork. It's the drive and passion inside of.

[Katie Greifeld]

Us that comes before all recognition. And it's why Stifel is one of.

[Narrator]

The fastest growing global wealth management firms in the country.

[Katie Greifeld]

If you're looking for success, surround yourself.

[Narrator]

With the people who will get you there. At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest, largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row. If you're an advisor or investor, choose Stifel. Where success meets success. Stifel Nicholas & Co. Inc. Member SIPC and NYSE for J.D. power 2024 award information, visit jdpower.com Awards compensation provided for using not obtaining the award Attention small business owners struggling to stay compliant with 1099 reporting or keep up with changing tax regulations. Discover E File My Forms, your fast, cost effective solution for hassle free tax compliance. Our platform supports over 25 IRS compliant federal and state tax forms from W2s and 1099s to ACA forms allowing you to file securely in minutes, not hours. With built in tin validation and one click electronic filing, we ensure accuracy every step of the way. Need to print and mail recipient statements? We've got that covered too. Track your filing status easily within the platform for peace of mind throughout the process. The best part? You can start using E File My Forms today for free. No credit card required. Don't let tax season overwhelm your business. Visit efilemyforms.com and see how easy year end reporting can be. E File My Forms Simplifying compliance for small businesses Everywhere.

[Katie Greifeld]

Matt, I think we should keep talking about blackrock. Oh yeah, it's the world's biggest asset manager and they're trying to get a lot bigger. Specifically when a little bit. Well, they'd like to get a lot bigger and they'd like to be a leader in private markets and boy, are they spending a lot of money to get there.

[Matt Levine]

Are they? I guess they are.

[Katie Greifeld]

Well, they spent another 12 billion on HPS. They spent like 12 and a half billion right on GIP about a year ago. And I forget how much they spent on Prequen, but that was mostly about data. But hps, I mean we've been, this has been written about and speculated on for a while now and they finally came out and announced that they're buying hps.

[Matt Levine]

Yeah, it feels like we're in a really white hot time for private credit and a golden age, a golden age for private credit. And golden ages always feel like golden ages, like until like the last moment. And HPS seems very smart. Like they did a very smart job here where they made a lot of noises about it and like went pretty far down the road of going public and talking about a very high valuation for their ipo. And they made a lot of noise about it and went far down the road of raising big minority stakes from Middle east sovereign wealth funds. So there's a lot of talk about we're going to have some mark where the thing is worth 10 or 12 billion dollars. And then they were able to use that kind of public pressure to get BlackRock, which was pretty obviously pretty desperate to buy a big private credit fund. And HBS was kind of like the biggest target. They were able to use that like all those marks to get BlackRock to pay $12 billion for HPS's business. And you know, like you get the sense they think that's kind of a rich valuation and are very happy with their deal.

[Katie Greifeld]

Yeah, I imagine so. But as you write about recently in money stuff, they're not sailing into the sunset. They are going to continue to work. And I mean that's important because you think about all.

[Matt Levine]

But like there's like a bunch of articles in Bloomberg about how like there's a huge incentive compensation package to keep all the HBS people and like they're getting all these big retention bonuses and they are taking all their money in BlackRock stock and they're keeping billions of dollars of like their PAs in like HPS funds. You're saying all of that because. Because it's surprising. You're saying all of that because you need to say all of that, right? Like, like yes, they are not just cashing out and selling off into the sunset, but it's like it feels like such a good and rich and timely exit that you have to be like, no, it's not an exit. We're fine, we're still here.

[Katie Greifeld]

Yeah, yeah. Well, I mean you think about all the sell side notes that have been written about this deal, talking about concerns about culture, et cetera and you highlighted the best one, which got at it pretty directly from Evercore, talking about how this does come with execution risk. This is a people led business and assets go up and down the elevator every single day. So they need to come out with these sort of noises.

[Matt Levine]

Yeah. I'll also say like you can obviously see the appeal to HBS, right? Besides the $12 billion, they are a big private credit fund, but this is a business that has gone from being like a kind of like weird niche business to being a huge institutional business. And like if you want to get really big as a private credit fund, you kind of need a really big platform at this point and like a platform to go out and market to big institutions. And you know, HBS is like largely a high yield direct lending firm and plausibly the next wave of private credit is more like investment grade private credit. And to build that out, it just seems like it would obviously be helpful to have like BlackRock's enormous size and client base.

[Katie Greifeld]

I mean, I don't know what to say to that other than God, I wish I was being bought by BlackRock in some way. It is interesting. I don't know, it's just, it's so, it's so blackrock. The way that they've approached this for, I don't know, a couple months, it's like, oh, blackrock's trying to catch up in the, the private markets and now it's like when this closes, what they're going to be managing like 600 billion in alternatives and now they're, you know, close to the top of the leaderboard.

[Matt Levine]

Yeah, I mean it's funny to me, like you think about like the giant asset managers. BlackRock comes from a place of being a bond manager, eventually being an index fund manager and Blackstone, Apollo, KKR come from places of being LBO shops and the convergence is in this private credit world where it sort of is like being a public credit investor because yeah, it's like credit stuff and it's increasingly like investment grade credit stuff and it's sort of like being a LBO investor because it's like a lot of it is financing LBOs but so like you can come to it from either direction. And it is like that sort of vast middle ground where like, you know, if you are running a giant private credit strategy now you're talking about like, oh, we talked to investment grade companies. We're like, you kind of look like a bond manager when you say BlackRock has $600 billion of alternatives. Like they're not doing LBOs. Right. Like alternative. Like there's a range of what alternatives can mean and it's like it's fixed income credit stuff now.

[Katie Greifeld]

Yeah. Another point I wanted to make just about like this being so BlackRock. I love ETFs, as everyone knows. And you think about how BlackRock became BlackRock in ETFs. They bought Barclays Global Investors for 13 and a half billion. I think that was announced in June 2009 and now you look like 15 years later and they manage close to 4 trillion globally. They are the biggest in ETFs and that was also inorganic growth. They just bought a business and then built and built and built. So I don't know, it's a similar playbook to what they always do.

[Matt Levine]

Yeah. It's funny, like blackrock is like the, you know, it's like synonymous with being a giant ETF provider. But it's, you know. Yeah, like I come from a place of thinking of them as a like, you know, active fixed income manager because that's like ultimately their heritage. Right. But like private credit feels a little different because it doesn't feel especially winner take. All Right. This is the sort of thing where everyone's going to have to have a private credit business and because they're a big company, they had to have a big one and so they went out and got a big one. But like, I don't know, they're not going to be like the provider of private credit. They're going to be one of a dozen.

[Katie Greifeld]

I can't wait to talk about this in 15 years.

[Matt Levine]

I don't want to just flatter you because you're an ETF person, but ETFs revolutionized areas of finance.

[Katie Greifeld]

You're so right. Say more.

[Matt Levine]

I think in five years private credit is going to be like bank lens. It's going to be like, yeah, thing in the pitchbook. It's going to be like another way of financing deals. I think that ultimately people are not going to talk about private credit as distinct from public credit in the way that they do now. Because it still feels kind of new and interesting now. Whereas ETFs really are different from the mutual funds that came before.

[Katie Greifeld]

Yeah, I agree with you there. I also was not paying attention to ETFs in 2009 and like, I would love to just go back in time and see how that moment felt. You know, like when BlackRock made that splashy 13 and a half billion dollar purchase for iShares. Like, what did that feel like? I wonder how that was greeted. And I don't know, maybe I'll do that in my spare time because I don't know, I talked to a lot of like people who've been in the ETF industry for like two decades and like you hear them talk and they're like, yeah, we used to be like toiling away in the dark. You know, we were just like obscure and no one really cared about us. And now we're, you know, at the center of the world.

[Matt Levine]

So I love that this episode about Blackrock's private credit pushes turned into just encomium to ETFs.

[Katie Greifeld]

Just like, how could it not Everything.

[Matt Levine]

Comes back to etf, especially on the it does.

[Katie Greifeld]

When you're a hammer, everything's a nail.

[Matt Levine]

We're considering doing another Mailbag episode, so if you have good questions for the Money Stuff podcast, please send them to moneypodlumberg.net and if they're good, we'll answer them in another mailbag episode.

[Katie Greifeld]

We look forward to hearing from you.

[Matt Levine]

And that was the Money Stuff Podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the Money stuff newsletter on Bloomberg.com.

[Katie Greifeld]

And you can find me on Bloomberg TV every day on Open Interest between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodloomberg.net, ask us a question and we might answer it on the air.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

[Katie Greifeld]

Our theme music was composed by Blake Maples.

[Matt Levine]

Brendan Francis Newnham is our executive producer.

[Katie Greifeld]

And Sage Bauman is Bloomberg's head of Fox Podcasts.

[Matt Levine]

Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.

[Katie Greifeld]

Thanks for listening to the Money Stuff Podcast. If you never want to miss a story, become a Bloomberg.com subscriber today. Check out our special intro offer right [e-mail] podcast offer or click the link in our show notes. You'll also unlock deep reporting data and analysis from reporters around the world.