27 Mar PUBLIC PENSION CORNER, #37: Larry Fink’s Idea of “Reform”
NEWS:
I. Bipartisan Group of Senators Question Chinese Access to American Markets
The leaders of the Senate Banking Committee, Chairman Tim Scott and Ranking Member Elizabeth Warren, penned a letter, signed by 13 Republican committee members and four Democratic members, asking SEC Chairman Paul Atkins to take a long, hard look at the access to American markets granted to Chinese companies. Unsurprisingly, one of the primary concerns was the use of Variable Interest Entities (VIEs) to dilute the ownership rights of American shareholders:
In a rare display of bipartisanship, Republican Senate banking committee chair Tim Scott and Elizabeth Warren, his Democratic counterpart, on Thursday sent a letter to Paul Atkins, who has served as SEC chair since April 2025 after being nominated by President Donald Trump to run the financial regulator….
It is the latest effort to urge the SEC to take a closer look at how allowing Chinese companies to list on US stock exchanges can undermine national security and threaten the data privacy of US citizens. Concern has been rising that US capital is being funnelled into Chinese groups that enable the modernisation of Beijing’s military.
The lawmakers cited as an example opaque corporate structures called variable interest entities, which allow Chinese companies to circumvent rules on foreign ownership of certain industries and assets to list on US exchanges.
II. Why Vanguard Settled
Allen Mendenhall and yours truly argued in a recent op-ed that the reason Vanguard settled its portion of the ESG suit brought by several Republican states is that it can’t afford the potential risks associated with letting the case go to trial:
Vanguard is not the same as the other two members of the Big Three and is profoundly different from BlackRock in particular. BlackRock may be the biggest asset manager in the world, with more than $14 trillion in assets under management, but Vanguard is, by far, the biggest manager of passive assets. Of its total of $12 trillion in AUM, almost all is passively managed. By comparison, only 35%-40% ($5-$6 trillion) of BlackRock’s assets are passively managed….
About a year ago, Denise Hearn and Cynthia Hanawalt, two climate investment researchers at Columbia University, published a paper noting that a trial in this case would provide the first legal test of the “common ownership theory,” which posits that index investing—in which managers hold multiple companies in the same sector—creates incentives to reduce or eliminate competition between the companies, resulting in a slowdown or stoppage in innovation, artificially inflated prices, reduced output, etc. Hearn and Hanawalt argued that the case against the Big Three was flawed but could, at trial, produce unexpected results that would profoundly disrupt the asset management business.
Historically, the common ownership theory has been dismissed as ideologically tinged and is refuted specifically by an appeal to “passivity.” Managers take no advantage of the competition-deadening incentives; they are mere inert observers. But that defense may be weaker than it appears, and this is where the story gets genuinely interesting.
We would argue that passivity actually has the opposite effect. Because it dulls the price-discovery mechanism, which traditionally enforces competitive behavior on corporations, passive investing creates the circumstances in which the structural incentives of common ownership—the dampening of competition in the interest of industry-wide profitability—can function without check or intent.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Larry Fink’s Idea of ‘Reform’”
Earlier this week, Larry Fink – the CEO of BlackRock, the largest asset manager in the world – published his annual letter to investors. For years, Fink’s annual letters have provided guidance about his thinking, about his expectations, and, in turn, about the state of the asset management business in general. In many cases, Fink’s letters have also been quite controversial, signaling the rise of “sustainability”-based investing, defending stakeholder capitalism as “real” capitalism, and indicating a willingness to use his firm’s size and influence to alter the way companies interact with their shareholders. Sometimes, though – most notably the past couple of years – Fink’s letters have served as attempts to change the subject away from his controversial recent past and to other, less provocative, more consensus topics. This year’s letter is, inarguably, one of the latter type, an attempt to appear high-minded, apolitical, and concerned exclusively with the well-being of the American investor and the American people. It is ironic, therefore, that what this well-respected, empire-building asset manager does instead is expose a hard truth about himself, his firm, and the giants that dominate the business today.
Fink’s focus this year, as in a handful of past years, is the rather paltry retirement savings most Americans have accumulated. As in past years, he focuses specifically on government intervention in this matter, addressing the massive shortcomings (and shortfalls) of the Social Security system. This year, however, he supports a reform plan (rather than merely arguing that Americans augment their government benefits with private savings). He writes:
Senator Bill Cassidy (R-LA) and Senator Tim Kaine (D-VA), for example, have proposed creating a new investment fund—parallel to the existing trust fund, not replacing it—that would be invested in a diversified mix of stocks and bonds to generate higher returns over time. The fund would require an initial investment of roughly $1.5 trillion and would be given 75 years to grow. During that period, the Treasury would continue covering benefits. Once the fund matures, it would pay the Treasury back and supplement payroll taxes going forward, helping close the gap between what the system takes in and what it pays out. No one currently on Social Security, or nearing retirement, would see any change to their benefits….
I understand why any talk of changing Social Security makes people uneasy. Social Security is a core promise, and people rightly believe it should be honored. But under the current system, doing nothing could very well break that promise.
On the one hand, you have to give Fink credit for diving into a difficult, contentious, and long-overdue discussion. Forever, Social Security reform has been the third rail of public policy (i.e., “you touch it, and you die”). Social Security reform derailed George W. Bush’s second term, and even today, hard-core conservatives/libertarians are still rewarded with jeers and called “communists,” simply for pointing out that the system as it exists is hopelessly broken.
On the other hand, Fink could, at the very least, be a little less transparent in his motives.
While he goes out of his way to pick a reform plan that is “bipartisan” and is always referred to as such in the press, Fink also manages to pick a plan that is also rejected on a bipartisan basis. Indeed, with the exceptions of the handful of Senators who put their names to this reform proposal, everyone in Washington – on both sides of the aisle – seems to think that it’s the dumbest idea in the history of ever. Honestly, who in his right mind believes that adding $1.5 trillion in federal debt right now, in the midst of record deficits, war-induced inflationary pressure, and warnings of a dollar collapse, is a good idea, especially given that this debt will yield no results, no tangible benefits for (almost) anyone for 75 years, long after the impending Social Security crisis will have made the system insolvent? Almost no one, it turns out:
[P]olicy experts are broadly unsupportive of the Cassidy-Kaine idea. “The idea is bonkers,” said Alicia Munnell, founder and senior adviser at the Center for Retirement Research at Boston College. “It’s just really a stupid idea.”
Put another way, “There is no ideological divide on this; it’s just not seen as a very good idea,” said Andrew Biggs, senior fellow at the American Enterprise Institute, a conservative think tank, and former principal deputy commissioner at the Social Security Administration during the George W. Bush administration….
“Free money for Social Security is good; free money for everything is better,” he added. “Why don’t we do that? Because at some point it becomes obvious this is just ridiculous. How come BlackRock is not doing this at scale for themselves: borrow massive amounts of money, invest in the stock market? Why are they not doing this? Why is everybody not doing it?”
Given that this idea is nearly universally mocked and loathed, one might wonder what, exactly, Larry Fink is thinking, putting his name and his firm’s weight behind it.
While I can’t read minds and, therefore, can’t say for certain, it seems likely that what Fink is thinking is that such a massive investment scheme – $1.5 trillion – would require the use of a massive asset manager. By way of comparison, the roughly $1 trillion in the Thrift Savings Plan (the retirement plan for federal workers and members of the military) is managed by two private firms, which just happen to be the biggest and third-biggest asset managers in the world. All of which is to say that while almost no one in the country would see any benefit from this Social Security “reform” proposal for three-quarters of a decade, one of the select few who would see immediate benefit is the founder and CEO of the biggest asset manager in the world, a guy named Larry Fink.
Nice work if you can get it, I suppose.
All of this, then, brings us back to one of the basic themes of this newsletter: while most public entities have little choice in their use of banks, with only a handful having significant enough reserves to handle large-scale infrastructure and other needs, public entities DO have a choice in asset managers. Moreover, by exercising that choice, and not taking the easy route by choosing from among only a handful of massive firms, they have the opportunity to do themselves, their constituents (or retirees), and the investment world at large a huge favor by depriving the giants of control over more and more public monies. The ever-increasing concentration of investment capital in so few hands is a threat to our financial system, not just in the macro, long-term sense, but in the micro-sense as well.
Giving Larry Fink control over an even greater chunk of public funds will serve no one’s interests, save Larry Fink’s. This is not reform. It’s something far less noble. Make your own choices wisely and with all of this in mind.
