Asset managers, who usually take care of their client company’s assets and maximize the latter’s investment returns, have emerged as new-age bankers now.
Earlier, traditional bankers used to create markets, financial products, and services such as Collateralized Debt Obligation (entity backed by loans, other assets and sold to institutional investors), Collateralized Loan Obligation (single security backed by a debt pool), and Mortgage-backed securities (bonds secured by home and other real estate loans), but things changed in 2008 when the United States-based financial services firm Lehman Brothers went bankrupt.
Apart from stricter banking regulations across Europe and the United States, investment managers and private equity companies emerged as the new market players. For example, BlackRock, State Street and Vanguard control 15% to 20% of American corporate assets and market funding. But another crisis is looming large as these firms are now under the scanner of market watchdogs.
BlackRock’s CEO Larry Fink’s letters ‘urging’ company heads to commit to net zero carbon emissions have come under criticism. In the United States, lawmakers have accused the firm of being hostile to fossil fuels, and failing to match rhetoric with concrete actions. In Europe, the company’s ESG (Environmental, Social, and Governance) and LDI (Liability Driven Investment) funds have drawn criticisms too.
In the United Kingdom, the LDI scheme sent the gilt prices (government liability in sterling) down, forcing the Bank of England to intervene.
While these companies have stated that they don’t trade from their own business accounts or lend out state-insured deposits, they don’t rescue banks either after selling highly riskier financial products, and it’s the clients who suffer the losses only. For ESG funds, it’s the client’s money, which gets invested.
As per a Financial Times report, BlackRock has taken corrective measures such as expanding the Voting Choice Programme for their client companies. But, recently, the IMF has warned about these “funds with hard-to-sell assets” potentially putting the market under more stress.