Asset managers are the new bankers, and they are feeling quite uneasy.
Bankers were unquestionably kings of the financial hill prior to the 2008 financial crisis, creating markets, taking calculated risks, and creating complex financial products like CDOs, CLOs, and MBSs (collateralized debt obligations, loan obligations, and mortgage-backed securities, in case you forgot).
Then, once Lehman Brothers failed, the industry fell off a cliff, prompting the US and European governments to use taxpayer money to fund rescue efforts.
The survivors had to deal with legislative hearings, media attacks calling them “vampire squids” (for Goldman Sachs), enormous fines, and much stricter regulation that limited their ability to innovate financially and their position in the economy.
The largest investment managers were only too eager to fill the gap that was left in the market as a result, which greatly increased the sector’s wealth and prominence.
Together, BlackRock, State Street, and Vanguard, three US index fund providers, control 15% to 20% of the majority of US businesses.
Additionally, money that was once virtually entirely provided by banks has been replaced by asset managers and private equity firms. They employ “alternatives,” which are products and services that deal with private finance, infrastructure, and real estate.
Asset managers are currently under investigation on two continents due to their influence and significance as well as issues with the products they offer. The emphasis is once more on a jumble of abbreviations, particularly ESG and LDI.
While some funds have long used environmental, social, and governance concerns to direct their investments, this year’s criticism of the practice from US lawmakers and European and American financial watchdogs has focused on how asset managers handle the problem of climate change.
Due to its scale ($8.5 trillion in assets under management) and chief executive Larry Fink’s well-known letters asking corporate leaders to work toward net zero carbon emissions, BlackRock has come under fire.
ESG funds have also come under fire across the Atlantic, but liability-driven investment strategies, or LDI, is the most recent unsavory term.
Before last week, when it played a role in pushing the prices of UK gilts into such a downward spiral that the Bank of England had to intervene with emergency purchases. The majority of people had never even heard of this £1.5tn market.
BlackRock, Legal & General, and Schroders, among others, are now being questioned since they were significant suppliers of these highly leveraged instruments.
Asset managers emphasize that they do not lend out government-insured deposits or trade on their own accounts more generally.
Therefore, if they sell items that turn out to be riskier than anticipated, they are significantly less likely to need a bailout than a bank. Losses are typically borne by the clients rather than the fund manager.
