U.S. Report on Asset Management and Financial Stability
In 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.
Note
1. "Asset
management
and financial stability." U.S. Office of
Financial
Research, September
This article was published in
Volume 50 Number 21 - June 13, 2020
Article Link:
U.S. Report on Asset Management and Financial Stability
Website: www.cpcml.ca
Email: editor@cpcml.ca
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