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.

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