Have you heard about Blackrock?
Of course. This is one of the largest funds in the world. They have somewhere around $10 trillion in assets under management. Their influence is enormous. Not only do they have financial clout but also political.
Larry Fink is a well known Wall Street CEO who commands a lot of attention. One of the problems is when these institutions get too large.
Many feel Blackrock is untouchable. After all, they went on a buying spree the last few years, taking over a portion of the residential housing market.
How could something that is so large end up failing?
We might get the answer to that in the first quarter of this year.
Blackrock recently started to limit withdrawals. This is a bad sign. It is good to remember the fate of those cryptocurrency institutions that did the same thing. While nowhere near as large, it all stems from the same issue:
Liquidity
When a financial institution (or bank) freezes money, it is because it lacks the liquidity to meet the demand. This is something that the system tries hard to regulate. Naturally, banks have more stringent regulation as compared to Wall Street hedge funds.
The basic problem is long and medium term investing. This is contrast with demand deposits. When an individual (or company) can withdraw money, there has to be enough liquidity (cash on hand). This is difficult to do when the assets being purchased are invested on a long term basis.
For example, a bank can have a run if depositors want their money. They typically have their money tied up on loans, often real estate. These are non-liquid assets which cannot be turned easily into cash.
This is Blackrock's problem but on a larger scale. They purchased hunreds of millions in residential real estate, money that cannot be easily accessed. As entities are heading to Blackrock to pull their funds out, this is causing a major issue.
It got so bad that withdrawals are now limited to $125 million. This might sound like a lot of money yet the State of Florida withdrew $2 billion from Blackrock.
This should come as common sense but there is nobody there to make a $100 billion market. The liquidity required simply is not going to be there.
When running such a fund with numbers nearing $10 trillion, there is no liquidity to keep everyone happy. Simply following the idea of demand deposits (short term/immediate demand) with medium-long term investments shows how things will not work. It does not take too many clients who want out to create a run.
Obviously, this does not happen when things are going up. As markets are increasing in value, money managers are content with how things are going. Enter the bear and a different sentiment occurs. Suddenly, pension funds and other entities are suddenly reducing their exposure.
It is what Blackrock is facing.
We also can see how panic could also make the situation worse. While money managers are more patient and understanding than individual customers, there is a limit to what they are willing to put up with. Any sniff of insolvency is going to make them jumpy.
Blackrock is doing its part by trying to unload its real estate portfolio. Unfortunately for them, they are doing so in a market that is weakening. With interest rates going up, the strain is falling squarely on the shoulders of these Wall Street entities.
How much can they withstand? This is going to be a question to keep asking over the next few months. If the housing market dried up along with a stock market pullback, this could really put a dent in the value of Blackrock's holdings. This will only further upset the money managers, likely increasing the calls for redemption.
Fink is playing with fire here. The company lost $1.7 trillion in the first half of 2022. But then again, for him this is nothing new. As head of First Boston, he lost $100 million.
So losses are something Larry is accustomed to.
Nice to play with other people's money.
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