Bloomberg Audio Studios, Podcasts, radio News. Here we go, Hello, and welcome to The Money Stuff Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levigne and I write the Moneys Doff column for Bloomberg Opinion.
And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
What are you talking about today, Katie?
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 anti trust violation.
It's been writing for almost ten years. Our index fund's illegal, and I didn't invent that idea, but I feel like I've done a lot to popular has 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 do we in the business called the Big three asset managers, so Vanguard Blackrock, and State Street for an alleged anti trust conspiracy 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 anti trust conspiracy. Now, there's a long running theory that these big diversified asset managers like Blackrock and Vanguarden, State Street, but also like some of the smaller less INDEXI managers, because they kind of own every company 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 like 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, you know, so the classic examples airlines, no one really thinks that like Blackrock sends people to the CEOs of airlines and says you need to stop competing with other airlines on your roots because we want you to raise ticket prices and earn more profits, and we want everyone else to raise
ticket prices are and 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 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 anti trustee theories that like, oh, look, these index funds own every company, so isn't that a weird anti trust 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 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 Black Rock 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 sort, and these coal companies made quote cartel like profits. So I don't know, it's kind of a cool lawsuit.
If I were Black Rock 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?
I don't know. That's like kind of hard, Like 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 mind 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 yeah, 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.
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.
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 or some outside
benefit is not a really good anti trust defense. On the other hand, it's a very weird claim because like the lawsuits, they are anti trust 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 of 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 cartelig 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 minor 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 texts say, oh, Blackrock is not putting its investors' interests 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 anti trust conspiracy in which the coal companies are earning cartel like profits by all agreeing to cut back on production, like why aren't you seeing 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 finn Yeah, that is so funny. I mean you mentioned that Blackrock is often the punching bag here. I thought that.
Much more so than State Street and found here mostly because they've put out more cablic statements. One way or the other.
That's true. And I mean Vanguard is just a passive beast, just passive animal.
But that's not entirely. They're much less like public about it, and they are much more Their heritage is much more index funds versus Blackrock, like owns a lot of index funds, but it is also like you know, has more of a heritage an active bond manager.
But yeah, you're right. You know, the conversation I've had with Vanguard as well that they're also in on the active game.
Active I don't mean active investment. 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 blackrockers.
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 or the Climate Action one hundred plus. There's also the Net Zero Asset Managers and NICHE. 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 a CAA one hundred plus in February. Vanguard left the Net Zero Asset Manager's Initiative in twenty twenty two. 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.
I agree with that. I mean, I think the lawsuit has to mention this because one anti trust 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, it has some incentive and some power to make those companies colude together.
So like Blackrock itself could go to meetings at all the coal companies say cut to like boost the price of the other coal companies, and maybe that's an anti trust 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 owned thirty percent 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're all worried about ESG issues, and so as a coal company CEO, you have to respond to your various shareholders who all care about ESGA or
many of whom care about escha. But that's not an anti trust 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 antrust problem. The a interrust problem is if they all get together in a group, right, And so that's why the lawsuits mentioned these groups. I agree with you, these groups don't seem like they have a ton of teeth, right, Like these are not literally like backroom meetings of the heads of
Black Rock and Vanguard and States. She's saying, oh, that's got coal production, right, But like they are a group that you can point to where they all sort of got together and signed on to the same statement.
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, I.
Think a lot of people, not just that idea ischi people find it weird that so much of the voting power of stocks is controlled by literally Larry think right by, like 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 ones shouldn't be able to vote. That would solve all the problems. I agree that 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.
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 they truly lend themselves to conspiracy theories, right. I mean, they're like a multi trillion dollar company that controls every company. Like if you're like, oh, there's a company that like is the biggest shareholder for every company in the world, Like, ooh, that's a good conspiracy. That's a good starting sentence for a conspiracy. And so they do attract a lot of conspiracy.
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?
We should talk about it.
Okay.
It's a proposal from Oliver Hart, Helene Landimore and Luigi's and Galas in Bloomberg Weekend about how to implement shareholder democracy using shareholder assemblies.
Yeah, so this is interesting. We kind of compare it to basically a jury where you select a sample of the shareholders. It's like a sampling sort of technique and a bond index fund. Well, it's more like a lottery, but sure a lottery. Well, I mean it reminds you 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.
Right. The idea is like there's like a million you know, shareholders and 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 you know, one hundred and fifty lottery tickets, and so you collect one hundred and fifty 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 funds voting policies should be, so that instead of
like Larry think, deciding how Blackrock will vote its shares in coal companies, you have like, you know, some people in a room who are like ultimately the direct investors in like the Blackrock index fund, and they get together and they decide have Black Action vote its shares and then their decision, you know, after deliberation and consultation, is the new policy for Blackrock.
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 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 funds, shouldn't you have a bigger vote?
Well, but most of the people who own the shares the mutual fund of zero voted in this propessal Right, it's not like a direct democracy. It's it's a random temple to get some people who seem vaguely representative and they hash out something that seems like it might be workable for everyone. Like, my impression is that there's like a
lot of overstatement of the importance of shareholder voting. Like I don't think that like Blackrock is influential or that ESG is important because of how black Rock votes on shareholder proposals at coal companies, Like I don't think that's the thing that is driving anything, right, Like 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 sheralfter's proposal. That doesn't Like it's an annoying embarrassment to fight over these things, But it's not like the driving force behind Like you know, how the CEO lives her life or is paid or anything like that. Right, Like the thing that matters is, you know, voting in contested proxy fights and mergers. But it's also like the soft power of Vanguard coming in or of black Rock 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 like 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, Like you have these meetings to say we will vote in favor of shareholder proposals to like disclose more about climate change or whatever, or
against them or whatever. You know, like the people will get together into alot, but you can't have the assemblies
show up at the meetings with the companies. Right. Like that's going to be the Blackrock Stewardship team, right, And like those people are going to continue to be those people, and they're going to be 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 like a real change in like how Blackrock operates itself.
Now people really care about the voting stuff, right, and like there's a lot of like focus on you know, Blackrock is like a number of these funds, these big fund firms are like experimenting with pass through voting, where like 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 like a little bit more responsive to like the
ultimate beneficiary's interests, And this is another way to do that. I just I just don't know how much any of this matters. Like the voting stuff is the sort of like showy, visible stuff, but I'm not sure how much it matters.
And I'm sure there's people that would disagree. But the pass through voting doesn't seem like a terrible solution, especially when you consider sort of the logistical problems that would come with these shareholder or investor assemblies, Like.
Well, the pastor voting is very logistically problematic. It's like because yeah, you have to vote, Like I think the way I 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, yeah, black guy gets like a thousand proxy statements and you get to choose how you vote your little shares on each one of them.
Yeah. In terms of though, what is being proposed by these three professors, they talk about, you know, gathering one hundred and fifty 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 child care, et cetera. Like that seems like quite quite an uphill battle.
I don't know, man, that's a drop in the bucket compared to running trillions and trillions of dollars of money, and also like dropping 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 have a good process.
But just in terms of like who would actually agree to do that, Like who would take time because their life could participate? Yeah, exactly. They propose that to make people who.
Participate in CHERYLD they're ready anyway, So it's like.
Fun, that's true, that's true, but self selection obviously would still be a big problem here.
I will say it reminds me of a paper by John Coates, the Harvard law professor. It's called the Problem of twelve, which is a great title. It's about the idea that like, like he says twelve, many people now say three. 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 like 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're now increasingly see people thinking about how they exercise that power. And one thing he proposed is like there's like all these rules of administrative law for how like US federal agencies should have to like make decisions, how they should like make new rules or they should make enforcement decisions. There's just a lot of like 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, their 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 like making unconstrained decisions. It reminds you of like the Facebook oversight board, where Facebook is like we don't know how to moderate our contents, so we're going to have like some you know, official supreme
court of moderation. This is like one more proposal of like how to do that, of how to get like some sort of process and public input into how these asset managers make decisions. And I think it's like not quite right for like how they actually influence companies, but it's a gesture in that direction.
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.
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 like annoying enough if it's like locked up index investors, that someone raises a proxy fight and gets management kicked out. Like that's a little bit what happened with Exxon and engine number one.
They didn't 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 like a small activist fund was able to kind of get support from big indexy investors to change some policies. So like like it's mostly stock prices what matters, and so like all this stuff is like a second tier thing, but like there's a little bit of this stuff can affect how companies actually operate.
Matt, I think we should keep talking about black Rock. Oh yeah, it's the world's biggest asset manager, and they're trying to get a lot bigger, specifically in the months. Well, they'd like to get a lot bigger, and they'd like to be leader in private markets. And boy are they spending a lot of money to get there, are they?
I guess they are.
Well, they spent another twelve billion on HPS. They spent like twelve and a half billion right on a GIP about a year ago, and I forget how much they spent on prequein 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.
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 age is like until like for 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 IPI and they made a lot of noise about it. Like went far down the road of like raising big
minority stakes from like Middle East sovereign wealth funds. So there's a lot of like talk about we're gonna have some mark where the thing is worth ten or twelve 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 like HPS was kind of like the biggest target.
They were able to use that, like all those marks to get Blackrock to pay twelve billion dollars for hps's business. And you know, like you get the sense they think that's kind of a rich valuation. Mm hmmm, and a're very happy what they're doing.
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 can, like there's.
Like a bunch of articles in Bloomberg about how like there's a huge incentive compensation package to keep all the HPS people and like they're getting all these big retention bonuses and they are take 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, right, You're saying all of that, because you need to say all of that, right, Like, yes, they are not just cashing at and selling off into the sunset, but it's like it feels like such a good and rich and timely exit that you know you have to be like, no, it's not an excent. We're fine, We're still here.
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.
Yeah. As I say, like, you can obviously see the appeal to HPS, right besides the twelve dollars, 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 ahead
and market to big institutions. And you know, HPS is like largely a high yieldy direct lending e firm, and plausibly the next wave of private credit is more like investment credit private credit, and to build that out. It's just seems like it would obviously be helpful to have like Blackrocks enormous size and client base.
M I mean, I don't know what to say to that, other than God, I wish I was being bought by Blackrock,
and so I'm like, 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 of months, it's like, oh, Blackrocks 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 six hundred billion in alternatives and now they're you know, close to the top of the leader board.
Yeah. I mean it's funny to me, like you think
about like the giant gasset managers. Black Rock comes from a place of you know, being a bond manager eventually being an excepent manager, and like Blackstone, Apollo, KKR come from places of like being LBO shops, and the convergence is in this like 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 an LBO
investor because it's like a lot of it as financing LBS.
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're running a giant private credit strateg 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 six hundred billion dollars of alternatives, like they're not doing LBS, Like yeah, alternative, Like there's a range of what alternatives
can mean, and it's like it's fixed income credit stuff now.
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 Barkley's Global Investors for thirteen and a half billion. I think that was announced in June two thousand and nine, and now you look like fifteen years later and they manage close to four trillion globally. They are the biggest
in ETFs and that was also in organic 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.
Yeah, it's funny, like Blackrock is like the you know, it's like synonymous with being a giant ATF provider, but it's you know, yeah, But 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 kind of feels a little different because
like it doesn't feel especially winner or take all. Right, this is the sort of thing where everyone's gonna 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 gonna be like the provider of private credit. They're gonna be one of you know, a dozen.
I can't wait to talk about this in fifteen years.
I don't want to just flatter you because you're an ETF person, but like ETFs like revolutionized areas.
Of finance, you're so right say more.
I think in five years, private credit is gonna be like bank wut. It's gonna be like yeah, think in the pitch bock. It's gonna be like another way of financing deals. I think that like, ultimately, people are not going to talk about private credit as this thing from public credit in the way that they do now, because it like still feels kind of new and interesting now, whereas ETFs like, really are you know, different from like the mutual fans that came before.
Yeah, I agree with you there. I also was not paying attention to ETFs in two thousand and nine, and like, I would love to just go back in time and see how that moment felt, you know, like when Blackrock made that splash, a thirteen and a half billion dollars purchase for ey shares, 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.
So I thought of this episode about BlackRock's private creditfiicials turn into just combi to ETFs. It's just like that.
How could it not?
Everything comes back to ETFs, especially.
It does when you're a hammer. Everything's a nail.
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I'm Matt Levian and I'm Katie Greifeld.
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