U.S. Report on Asset Management and Financial StabilityIn 2013, the U.S. Treasury Department's Office of Financial Research conducted a brief overview and analysis of the asset management industry with respect to how giant firms like BlackRock, Vanguard and others, through their activities, could introduce "vulnerabilities" that might pose threats to the financial stability of the economic system.[1] The study, titled "Asset management and financial stability," was done on behalf of the U.S. Government's Financial Stability Oversight Council to better inform its analysis as to whether such firms should be put under "enhanced prudential standards and supervision" as designated by the Dodd-Frank Wall Street Reform and Consumer Protection Act which came into being in the wake of the 2008 financial crisis. Financial regulations are one of the tools which the large corporations and banks that dominate the economy use to sort out contradictions within their ranks, but they are also used as weapons by one faction, sector or cartel of business against others. In that regard, an ongoing controversy in the U.S. has been that the giant asset management corporations are not as restricted by regulation as other sectors of the financial industry, which gives them a competitive advantage. To remain in that position, BlackRock, the world's largest asset management company, has successfully opposed the imposition of regulation to the point that it has even refused to be designated a "systemically important financial institution" and thus be subject to more regulation, despite its gigantic size and influence. Indeed, asset management companies remain largely unregulated despite the efforts of the Office of Financial Research and other sections of the financial oligarchy. Nonetheless, in its report the Office of Financial Research reveals some of the risks and dangers to the larger economy posed by the rise of these asset management companies. The report points out that in 2013 the U.S. asset management industry oversaw the allocation of approximately $53 trillion in financial assets. In 2020, these assets now amount to approximately $90 trillion, matching the GDP of all the countries of the world combined. The report notes that the industry is central to the allocation of financial assets on behalf of investors and is marked by a high degree of innovation and diverse financial activity. Asset management firms and the funds they manage "transact with other financial institutions to transfer risks, achieve price discovery, and invest capital globally through a variety of activities." However, their activity differs in key ways from that of banking and insurance companies (although these latter may also have asset management divisions within them). For example, "asset managers act primarily as agents, managing assets on behalf of clients as opposed to investing on the managers' behalf. Losses are borne by -- and gains accrue to -- clients rather than asset management firms." In contrast, although some asset management activities may be similar, "commercial banks and insurance companies typically act as principals: accepting deposits with a liability of redemption at par and on demand, or assuming specified liabilities with respect to policy holders." According to the report, asset management firms could possibly engage in a certain combination of fund- and firm-level activities within a large, complex firm, or have a significant number of asset managers engage in riskier activities, all of which could end up posing, amplifying or transmitting a threat to the monopoly capitalist system. The report identifies four key factors that make the asset management industry vulnerable to threats and shocks: 1. "reaching for yield" -- (i.e. seeking ever higher returns on investment by purchasing riskier assets, as well as "herding" behaviours, which include stampeding in and out of markets and investments especially at times of market stress); 2. "redemption risk" -- (i.e. early or heightened withdrawal of funds from a financial institution or instrument, etc. in a stressed or illiquid market causing a cascading crisis and even insolvencies); 3. "leverage" -- (i.e. the use of borrowed funds which can amplify asset price movements and increase the potential for fire sales' of assets, which can then spread to the larger market); 4. "firms as sources of risk" -- (i.e. given their size, the failure of one of the big asset manager corporations could pose a risk to the financial stability of the entire economy, as happened with several of the large Wall Street financial institutions in 2008). In other words, the bigger they are, the harder they fall. The problem is that they not only hit the ground hard, but also pull down the entire economy with them, plunging millions of workers, small and medium-sized businesses, pensioners and the population as a whole into crisis and ruin. In that regard, the asset management industry is highly concentrated. Although the report does not mention the word cartel at all, some of the activities it describes hint at cartel type activity. For example, the report states that "interconnectedness and complexity can transmit or amplify threats to financial stability" and that "large financial companies tend to have multiple business lines that are interconnected in complex ways." Further, "these threats may be particularly acute when a small number of firms dominate a particular activity or fund offering." This, of course, contradicts the mantra of asset management firms like BlackRock that "exchange traded funds" (ETFs) and other financial instruments, that it dominates in both the U.S. and Canadian markets, are a safe investment. What the report exposes is the high degree of potential instability and chaos that lies at the heart of the financial system and how much it has descended into a "law of the jungle" situation where even minimal regulations are cast off by the most powerful. The financial oligarchy has created huge, highly complex, financial institutions and structures to enrich itself to an unprecedented degree. At the same time, it is like the sorcerer's apprentice conjuring up demons it can't control, even if it wanted to. Despite this risk, the U.S. and Canadian governments have allowed asset management companies to swell and dominate the economy. And, more than that, have handed over key advisory and decision-making power to BlackRock in regards to the COVID-19 bailout. The consequences remain to be seen. Note1. "Asset management and financial stability." U.S. Office of Financial Research, September
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