Tuesday, December 01, 2020

The first in a long thread, with the rest copied below. 

Lots of left-wing people are rightfully suspicious of what seems to be yet another Obama guy who cashed out in the private sector and is now returning to government. And that he cashed out at Blackrock, one of the biggest single shareholders in big fossil fuel companies.

What I think is missing in this picture is just what a strange and new invention of capitalism a company like Blackrock is, particularly in how it represents a new relationship of shareholders to capital. 

A major idea in neoliberal thought is that corporations have no social responsibility but to maximize profits for their shareholders. It's often assumed by Marxists that shareholders are ruthless creatures interested in class domination. This misses a lot -- some new, some old. 

One old thing it misses is that capitalists do compete. Not always as much you'd think if you internalized the freshman econ fairy tale, but they do. Hence Henry Ford, who famously paid his employees well so they could afford to buy his products, and to dominate the labor market. 

A more recent thing it misses is that capitalists want to diversify their investments and also want to not have to think about them. They would rather be on their yacht. Enter Blackrock, Vanguard, the idea of index funds. 

An index fund is a fairly recent innovation of capitalism. The idea originated at the University of Chicago with a bunch of financial economists asking one of life's big questions: if I have a big fucking pile of money, what is the best way to invest it? 

To address this question, they made some weird assumptions, like that the market should be efficient so that arbitrage should not be possible. You might ask why one would assume that arbitrage is not possible, and then go looking for arbitrage opportunities. It's a good question. 

Anyway, they took their burning desire to know how to earn the best risk-adjusted returns on a big portfolio of money, and they took their efficient market assumption, and discovered something that kind of embarrassed them. 

What they discovered is that the best portfolio, basically, would be constructed by going to the stock market and saying "i'll take one of everything, please". 

By doing this, you would, by definition, get returns equal to the average returns of the market. This was really upsetting to a lot of people in finance, because it suggested that all of the work they did was pointless and could be replaced by a guy ordering one of everything. 

In fact there are reports (see the fantastic book by Mackenzie, An Engine, Not A Camera) of banking guys having posters on their doors saying that index funds were *worse* than socialism. 

Interestingly, it took a little while for them to catch on. The 1980s were characterized by the rise of activist investors like Carl Icahn, who would buy up big stakes in companies, and then convince them to run them differently so they could pay their shareholders more. 

Activist investment, of course, grew out of the notion that the only social responsibility of the company was to its shareholders. Therefore, please route all future pension payouts to my account. 

It took some time, but index funds eventually dominated. It wasn't just the theory that said they were good. (In fact, the theory wasn't *exactly* correct.) But over the last several decades, index funds have handily outperformed the active stockpickers who get paid lots of money 

(It's almost always enlightening to ask people who manage money why their clients don't just index.) 

Now, who runs the index funds? The biggest two are Blackrock and Vanguard. They're the biggest shareholders in *basically everything* now.

The next obvious question is what they do with their enormous power as shareholders. This has been a matter of debate, but generally the answer has been: not much.

Vanguard, iirc, takes the view that as its fiduciary duty to shareholders is to give them the market average, they should abstain from doing much activism. In other words, give them the market average, if Vanguard wasn't there.

Another question: is it actually possible to do this? Does the idea of "give my clients the market average, if my index fund wasn't there" even make logical sense when your index fund owns more of the stock than anyone else? 

Moreover, when you own massive stakes in *every* company, what *would* activist investment even look like? 

Obvious example, written about by Matt Levine.
If you're a Pfizer shareholder, what do you want Pfizer to charge for the coronavirus vaccine? 

Now if you're Carl Icahn in 1980, the answer is obvious: the amount that allows you to pay me the most. Therefore, route everyone's retirement savings to my account in the Cayman's (once they've raided it to pay for the vaccine).

The answer gets *weird*, though, when you see the world as Blackrock, which owns everything. Because your fund owns The Economy, the answer could be that every company is gonna bleed until everyone gets vaccinated, therefore Pfizer should go bankrupt providing vaccine for free 

Or maybe that's not! the point is the answer becomes murky, but that it's far from obviously "route everyone's future pensions to my account" 

Now, we've come a long way, but this is more or less why Blackrock would want someone like Brian Deese who had worked on economic and climate policy to go to work for them and make some decisions about sustainable investing. 

Blackrock, in constructing its indices, has a legal duty to its shareholders to own, e.g. Exxon-Mobil in proportion to their market cap. But they also have a duty to own, e.g., Aetna in proportion to *its* market cap. And if Exxon-Mobil gives people cancer, that's bad for Aetna. 

But in a broader sense, if the oceans boil because of Exxon-Mobil, well, that's bad for the whole portfolio. And bad for the shareholders, because some of them want to be on their yachts, and because some of them are just regular people with retirement accounts. 

The major development here is that through essentially capitalist machinations, Blackrock and other index funds find themselves seeing the world less like a company and seeing more like a government.

They’ve been somewhat slow to wake up to this power, but it’s been a quiet major development in the last few years that Blackrock CEO Larry Fink has started making more demands of portfolio companies. And some of them are kind of resentful. 

Interestingly, he’s nowhere near as rich as Jeff Bezos. But as the representative of an overwhelming amount of shareholder money, Larry Fink is, in some sense, every CEO’s boss. He can call them on the phone and make them do things. And probably get them fired.

This Larry Fink letter to shareholders is an interesting read. It’s almost completely divorced from any moral notions of justice and basically tells investors that if companies don’t clean up their act the party is definitely going to be over soon.  Larry Fink CEO Letter | BlackRock https://www.blackrock.com/uk/individual/larry-fink-ceo-letter

Now, my opinion here is that government is completely out to lunch on doing anything about this. But as Blackrock sees like a state, and as it can force companies to do things, someone who sets sustainability standards at Blackrock is doing something similar to making new laws. 

In other words, it’s a fairly natural places for a climate-minded policy person to end up, that doesn’t — in my opinion — really have the same political conflicts of interest with Obama’s stated political goals as working for Uber — which I do see as unforgivable. 

To reiterate, the difference as I see it is Uber’s internet is in actively undermining labor law, whereas Blackrock’s is in the abstract idea of shareholder returns. Which is capitalist, sure, but that commitment hardly makes someone a standout in any presidential admin. 

In other words, there will be many nominees, and many will be more corrupt, and he just doesn’t seem all that worth the energy to me. And frankly, among the alternatives for where an Obama guy can go work during a GOP presidency, it’s probably less corrupt than Brookings or CAP. 

I haven’t gone into it, but there’s a *lot* of fascinating places you go when you start thinking about what index funds mean for capitalism and government. Matt Bruenig for example has used them to argue for sovereign wealth funds. 

But the basic nature of the questions that they lead you to ask as soon as you know about how effective they are and how much money is in them are basically 1. what the fuck are capitalists even *for*? 2. what does it mean that a guy who manages an index fund is every CEOs boss? 

I’ll end with some recommended reading:
1. An Engine, Not A Camera, by Don McKenzie
2. Matt Levine’s newsletter, all of it
3. Wall Street: How It Works And For Whom, by Doug Henwood
4. A Random Walk Down Wall Street, by Burton Malkiel

Oh, and one last note: there were some accusations that Jill Stein was a phony in 2016 because they looked at her retirement portfolio and it had lots of oil companies. But they were all owned through index funds, like pretty much any well-to-do 70 year old’s portfolio. 

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