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Today let us understand the mechanism of a company whose name may not be on everyone's lips but whose influence is present in every corner of the world. An asset manager who works behind the scenes to make the world's biggest economic decisions. In today's analysis, we will take a closer look at the workings of this huge financial empire and its impact.
So let's start this interesting journey. $5 trillion. Just feel the weight of this number. This is not a small amount. To understand the magnitude of this figure, just imagine that even if the entire GDP of India, Japan and France is added together, this amount would still be much more than that. This is such immense financial power that it is beyond the imagination of an ordinary person.
Now here comes a very big and strange secret. A company that has not made a single smartphone till date. How can a country that has not manufactured any microchip, does not have its own factory and does not sell any physical product, have a share in every big business in the world? Becoming the owner of everything in the world without creating anything seems no less than magic.
Let us look at these figures to see how big the level of this ownership actually is. BlackRock holds significant stakes in the world's largest tech companies. Nvidia has over 8% , Microsoft has over 8%, and Apple has almost 8%. The most surprising thing is that the founders who built these companies from zero, like Steve Jobs or Bill Gates, their share in their companies remained around 1 or 2%.
But the ownership of this company goes far beyond that. This is a completely different level of market control. But the interesting thing is that the story of this huge empire did not start with success but with a huge failure. In the 1980s, a banker named Larry Fink was considered the uncrowned king of Wall Street.
But in the mid-80s, a major calculation error led to a massive loss of 100 million and resulted in his dismissal from his job. From the ashes of this massive failure, BlackRock was born in 1988. Behind Larry Finn's early success was a very special financial tool that changed the map of Wall Street. This is called a Collateralized Mortgage Obligation, or CMO for short.
It so happened that at that time the banks were facing a big headache. When they used to give loan for house, it used to take 30 years to get the money back. To eliminate this long wait, Fick invented this tool. To be honest, it was a money-making machine out of thin air. Let's simplify this math a bit.
Suppose a lot of home loans worth 100 million were combined together. Then they were divided into bonds A, B and C according to risk. Bond A was the safest, so its interest rate was the lowest. Bond C had higher risk. Therefore its interest was also the highest. The beauty of this entire structure was that without creating anything new, bankers were making profits worth millions of dollars overnight simply by this mathematical manipulation.
But it is said that real life has its own script. Funk estimated that the biggest risk was that people would not pay their EMIs. But the exact opposite happened. People repaid their loans and that too much before time. When the interest rates in the market fell from 9% to 7%, people took new loans at cheaper rates and cleared their old loans in one go.
Due to this, the interest income that was going to last for 30 years suddenly became zero and this was the reason for that huge loss of Rs 100 million. But this failure did not end everything but laid the foundation for a new beginning. After losing his job, Fing understood why even the brightest minds on Wall Street fail to accurately assess risk.
Aladdin emerged as the solution to this. This is not the genie from the proverbial lamp but a very powerful computerized risk management system. It was designed as a predictive engine for the entire world economy. This is not just any software. Just understand its level of data processing. Be it the crash in oil prices, ongoing wars in the world or natural disasters like tsunami.
This system tracks everything. Even people's credit history and changing interest rates are on its radar. What if this happens to large investment portfolios ? It gives accurate answers to difficult scenarios. This is truly beyond human capability. Now a system had been created. But he was looking for a big opportunity to prove his true strength.
And that opportunity came in the form of the devastating financial crisis of 2008. What a great irony. The mortgage-backed bonds that Fick had pioneered were now sinking the world economy. And amidst this massive devastation, how did this private risk machine become the biggest need and lifesaver for the American government?
let's watch. When the uproar broke out in 2008, the government was unable to understand which of the millions of bundled home loans were actually going to be defaulted and which were safe. The banks themselves were not aware of their toxic assets. In such a situation, the government had to take the help of Aladdin because it had the data and complete context of the last 20 years.
Aladdin played a key role in resolving this crisis and within no time the firm's assets doubled to over $3 trillion. After winning the trust of the government, what completely changed the fortunes of this company was another new innovation called ETF. Earlier, people used to give money to fund managers who used their own intelligence to select shares.
But ETFs are completely different. This is a passive fund. It does not rely on any human brain but simply blindly mimics a fixed market index such as the SNP500. It is very easy to understand the difference between the two. On one side are active fund managers who charge a hefty 1.5% fee. But data shows that over a 15-year period, 90% of them fail to even beat the market's general performance.
And on the other end are index ETFs that charge a nominal fee of just 0.03% and deliver the same returns as the overall market. This is a completely automatic and very cheap method. If we come straight to mathematics, the picture becomes very clear. Let's say someone wants to invest $1 million. A traditional fund manager would charge a hefty fee of $15,000.
Whereas through ETF this expense will be only $300. Seeing such huge savings, it was inevitable that investors would turn towards ETFs and this is the reason why gradually $6 trillion came into this automatic system. What was the result? When something is so good and so cheap, the market tends to skew towards one side, and this phenomenal success has concentrated the market in a few hands.
Today, just three companies dominate the US equity ETF market. BlackRock, Vanguard and State State. These are called the Big Three and together they control 72% of the entire market. This is a very large and concentrated form of financial power. The data from a Cambridge research is even more surprising.
The influence of these three firms is so great that they are the largest shareholders in 438 of the 500 largest companies in America. This simply means that in almost every major sector of the economy, these few select institutions have the most influence in terms of ownership. Now it is obvious that where such a huge power is gathered at one place, questions will definitely arise.
Recently, American politicians and officials have begun to express serious concerns about this passive investment strategy. Critics allege that it is no longer just a passive investment but is being used to influence the market. Let us try to understand the facts behind these controversies objectively.
For example, consider a recent lawsuit filed in Texas. It explains how these Big Three control the entire supply chain at the same time. That means they also have a huge stake in coal extracting companies. Both in the power companies that generate electricity from it and in the big tech companies that buy that electricity.
When a single group has such a large control over every part of the market, according to critics, conflicts of interest are natural. How does this work according to the allegations of the Attorney General of Texas? Let us understand its steps. The allegation is that first of all these firms become part of climate clubs.
Then, using their massive voting power, they pressure coal companies to reduce production by more than 50%. As a result, coal supply falls by 19%. And obviously, the reduced supply increases the prices by 25%. Ultimately electricity becomes expensive for the common people. But these investment firms reportedly make huge profits.
These issues are not limited to just one industry but are raising huge concerns. Critics argue that if financial power continues to be concentrated in such a few hands, the impact will not be limited to energy. What if essential sectors like healthcare or education are similarly transformed for profit?
If this happens, everyday things may become out of reach of the common man. Which would be a very serious situation. A very interesting but slightly strange contrast emerges from the source material between this whole analysis and these economic mechanisms. Just think about this. According to this financial model, a perfectly healthy person who rides a bicycle is bad for the economy.
Why? Because he is neither buying petrol , nor taking expensive medicines, nor taking any loan for treatment. On the contrary, a sick person who buys a lot of medicines and takes huge loans for treatment is considered a great consumer for the economy. And this is where the biggest and deepest question of today's analysis arises.
How are we actually measuring the success of modern capitalism? Are we creating an economy that grows only on paper, where people must always be in some trouble or in debt to keep this financial machinery running? Is it necessary to have sick people for a healthy economy? Please consider this question. Patience to join in this analysis
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