Good Conspiracy: ESG, Assemblies, HPS

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Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuffcom for Bloomberg Opinion.

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

What are we talking talking about today, Katie?

We're going to talk about ESG and whether index funds are illegal.

We're going to talk about maybe an answer to shareholder voting.

And then we're going to talk about BlackRock, HPS.

It finally happened.

BlackRock finally bought HPS.

But let's start with ESG.

Turns out, at least according to Texas, that's an antitrust violation.

So I've been writing for almost 10 years, are index funds

And I didn't invent that idea, but I feel like I've done a lot to popularize it.

And within the next few years, it might become the case that index funds are illegal.

So, Texas and some other states, but some states led by Texas, sued what we in the business call the big three asset managers, so Vanguard, Blacklock, and State Street, for an alleged antitrust conspiracy where they allegedly all got together and

pressured coal companies to cut the production of coal to raise the price of coal.

And that is the antitrust conspiracy.

Now, there's a long-running theory that these big diversified asset managers like BlackRock and Vanguard and State Street, but also like some of the smaller, less indexy managers, because they kind of own every company in an industry, they have a desire for the companies in that industry to get together, cut production, not compete with each other too hard, raise prices, and like earn outsized margins because they are not competing the way they would if they were all owned by separate owners.

This is like a long-running theory.

It's very controversial.

And one reason it's controversial is that no one really thinks that those meetings happen.

You know, so the classic example is airlines.

No one really thinks that like BlackRock sends people to the CEOs of airlines and says, you need to stop competing with other airlines on your routes because we want you to raise ticket prices and earn more profits.

and we want everyone else to raise ticket prices and more profits too.

And no one really thinks that the airline executives would listen to those conversations.

So there's just not like a lot of evidence that these index fund companies, these big investors get together and actually explicitly tell companies to cut production and raise prices.

So that's like the problem with a lot of these antitrusty theories that like, oh, look, these index funds own every company.

So isn't that a weird antitrust problem?

The huge exception to that is ESG.

The huge exception to that is that the big asset managers really did sign on to statements saying, we want companies to achieve net zero emissions.

And

that is all well and good when you're talking about consulting companies trying to fly less or whatever.

But when you talk about coal companies, talking about a coal company lowering its emissions is very similar to talking about a coal company lowering its production of coal.

And so if all of the big shareholders of all the big coal companies get together and say to the coal companies, you should lower your production of coal, and the coal companies go out and say, we have lowered our production of coal in order to meet ESG goals, then like, I don't know, that kind of looks like the owners of all the companies getting together and saying, we're going to lower production to raise prices.

And so you have this lawsuit saying

not only that BlackRock and Vanguard signed on to net zero pledges and then urged companies to lower their emissions, but also that these coal companies cut production of coal into rising demand for coal and the price of coal soared, and these coal companies made, quote, cartel-like profits.

So I don't know.

It's kind of a cool lawsuit.

If I were BlackRock or Vanguard or State Street, could I defend myself on the emissions point saying,

We didn't mean for you to lower production.

We didn't mean for you to stop mining coal.

Just do it in a more green way.

Does that hold any water?

I don't know.

That's kind of hard.

Like, I think there are a lot of defenses here, and this is like a creative lawsuit more than it is like a Slam slam dunk lawsuit.

Even if the story was we just wanted them to mine in a, in a greener way, and that raised the cost of mining or like, you know, delayed mining, like that would still be sort of a production cut.

But it's also like obviously the case that if you are generically an ESG investor, thermal coal is kind of your least favorite thing.

And so there is some amount of pressure.

on companies to shift away from thermal coal mining.

And like the lawsuit, you don't see like explicit statements from like BlackRock saying coal companies shouldn't mine coal anymore.

It's more like statements like, we're going to engage with companies about their climate goals and try to really understand how they see the future of the market for thermal coal.

It's all vague statements, but it is all suggestive of the idea that the people writing those statements are not big believers in increasing the production of thermal coal.

Something that I feel like I've asked you before, but I'll ask you again, is whether or not intent matters when it comes to antitrust.

Like, surely when, you know, putting together these ESG-flavored proposals for these coal companies, BlackRock wasn't trying to like

boost their margins and line the pockets of these coal companies.

So a couple of points on that.

One, the lawsuit says it doesn't matter that they think they were doing this for the good of the world.

If you have a conspiracy to restrain trade, if you have a conspiracy to lower production that has the effect of raising prices, the fact that you were doing it for some outside benefit is not a really good antitrust offense.

On the other hand, it's a very weird claim because like these lawsuits, they are antitrust lawsuits.

And so they are arguing that BlackRock and Vanguard were ganging up to have cartel-like profits in the coal industry, which is a strange claim for a couple of reasons.

One is like most of the time when politicians complain about ESG, what they say is BlackRock is usually the punching bag.

BlackRock is not being a fiduciary for its investors.

It's not trying to get the highest returns for investors.

It's not putting profits first.

Instead, it's putting its own moral interest in climate change or whatever ahead of the financial interests of its investors.

But this lawsuit says, no, no, no, actually, BlackRock's ESG stuff is making cartel-like profits, right?

Like the ESG stuff is incredibly lucrative for these big asset managers, which is just a strange claim.

It's not really a claim that BlackRock would make, right?

I mean, I think a lot of ESG investors would say this is actually in the long-term financial interest of our investors, but they're not saying, oh, we're making cartel-like profits by cutting down the money of coal.

But it's also not something that, like, the Attorney General of Texas would say in any context outside of this lawsuit, right?

Like, the Attorney General of Texas is saying, oh, BlackRock is not putting its investors' interest first, except here it is.

Here it's making a lot of money for investors.

So that's like a funny little claim.

The other thing that's weird is that the coal companies are not defendants, right?

Yeah.

If you're worried about an antitrust conspiracy in which the coal companies are earning cartel-like profits by all agreeing to cut back on production, like why aren't you suing the coal companies?

And again, the answer is political, right?

The answer is like, it would be weird for the Attorney General of Texas to sue all the big coal companies, but to sue BlackRock is fine.

Yeah.

That is so funny.

I mean, you mentioned that BlackRock is often the punching bag here.

I thought that much more so than State Street and Vanguard, mostly because they've put out more public statements one way or the other.

That's true.

And I mean, Vanguard is just a passive beast, just a passive animal.

But that's entirely true.

They're much less like public about it.

And they're much more,

their heritage is much more index funds versus BlackRock owns a lot of index funds, but is also like, you know, has more of a heritage as an active bond manager.

But

yeah, you're right.

And this is a conversation I've had with Vanguard as well, that they're also in on the active game.

I don't mean active investing.

I mean like intentional stewardship of even their passive holdings, right?

If you are a massive index fund manager, you have to think about how you vote your shares and you have to think about whether and how you engage with companies.

And I think Vanguard does not say we do none of that, right?

I mean, I think they have some sort of some of the same sorts of stewardship thoughts that like BlackRock has.

I do think it's interesting that something that's brought up in this lawsuit is the fact that the big three are part of these like various climate groups.

Some of them that are named are the Climate Action 100 Plus.

There's also the Net Zero Asset Managers Initiative.

I mean, that's pointed to as proof that they formed a syndicate and agreed to use their collective holdings of publicly traded coal companies to introduce industry-wide output reductions for several of these groups.

I mean, State Street, for example, quit CA 100 Plus in February.

Vanguard left the Net Zero Asset Managers Initiative in 2022, was never a part of the previous group as well.

And that's also acknowledged in the lawsuit that at least for several of these collectives, they're not even part of these anymore.

But I don't know, it's a weird thing to point to as proof of something.

Also, I just don't know how much teeth is involved.

I agree with that.

I mean, I think the lawsuit has to mention this because one antitrust claim you could make is that BlackRock itself, or you know, one of these three managers, just by itself, because it owns big stakes in all of these public companies, it has some incentive and some power to make those companies glue together.

So like BlackRock itself could go to meetings at all the coal companies, say, cut coal to like boost the price of the other coal companies, and maybe that's an antitrust violation.

But that is less compelling, because BlackRock is a passive minority shareholder in all these.

It's less compelling than saying, well, between them, the big three own 30% of all these coal companies, and so they have enormous power.

And the fact is that for a while, the big three asset managers all sort of made similar statements about being interested in ESG and being concerned about climate disclosure and talking to portfolio companies about how they think about climate change.

And it's possible that those statements were all independent, right?

It's possible that if you're a coal company, you have a lot of shareholders who are separate, unrelated shareholders who are all interested in climate change and who are all worried about ESG issues.

And so as a coal company CEO, you have to respond to your various shareholders who all care about ESG, or many of whom care about ESG.

But that's not an antitrust problem, right?

Like if all of your shareholders independently worry about climate change because it's like a fact in the world, then that's not an antitrust problem.

The antitrust problem is if they all get together in a group, right?

And so that's why the lawsuits mention these groups.

I agree with you.

These groups do not seem like they have a ton of teeth.

These are not literally like backroom meetings of the heads of BlackRock and Vanguard and State Street saying, oh, that's cut coal production.

Right.

But like they are a group that you can point to where they all sort of got together and signed on to the same statement.

Let's also talk about what they're trying to achieve because this line caught my eye and I think it bleeds in nicely to what we're going to be talking about next.

So, the states are asking the court to bar the three largest U.S.

investment firms from using their stock in coal companies to vote on shareholder resolutions, which I don't know, that doesn't seem very healthy and good just to remove the voting power of specifically these three altogether.

I think a lot of people,

not just anti-ESG people,

find it weird that

so much of the voting power of stocks is controlled by literally Larry Fink, right?

By like the people in charge of stewardship at these three companies.

And this is not the first suggestion I've seen that, oh, actually just index ones shouldn't be able to vote.

That would solve all the problems.

I agree with you.

It's a weird solution.

I don't know that it solves all the problems, but saying these big firms shouldn't be allowed to vote their shares is not an uncommon proposed solution, actually.

It sort of crudely gets at the issue of like, hey, it's weird that they control so many votes.

And

they have sort of different motivations from other shareholders because they do own every company and they do sort of represent a lot of passive investors who maybe don't supervise their voting choices that closely.

Yeah.

I mean, you tweet anything about BlackRock or if you spend even five minutes on Twitter, at least the circles that I run in, and you'll find a lot of conspiracy theories immediately.

But when it comes to the same thing,

they truly lend themselves to conspiracy theories, right?

I mean, they're like a multi-trillion dollar company that

controls every company.

If you're like, oh, there's a company that is the biggest shareholder of every company in the world, like, ooh, that's a good conspiracy.

That's a good starting sentence for a conspiracy.

And so they do attract a lot of conspiracy theories.

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We have a novel solution that's been proposed to sort of solve some of these issues.

Do you think we should talk about it?

We should talk about it.

Okay.

It's a proposal from Oliver Hart, Helene Landemore, and Luigi Zangalis in Bloomberg Weekend about how to implement shareholder democracy using shareholder assemblies.

Yeah, so this is interesting.

They kind of compare it to basically a jury where you select a sample of the shareholders.

It's sort of like a sampling sort of technique in a bond index fund.

Well, it's more like a lottery, but sure.

A lottery.

Well, I mean, it reminds me of a sampling technique just because you're not going to get all of the bonds in your index.

So the hope is to pick a sample that sort of accurately represents the demographics or whatever.

But you're right.

They are picking randomly.

Right.

The idea is like there's like a million shareholders in a mutual fund or whatever.

And you give them each one lottery ticket for each share of the fund that they own.

And then you choose 150 lottery tickets.

And so you collect 150 people who are, in some sense, representative investors in the fund.

And then you get them together in a big room and they talk about what the fund's voting policies should be.

So that instead of like Larry Fink deciding how BlackRock will vote its shares in coal companies, you have like, you know, some people in a room who are like ultimately the direct investors in like the BlackRock Index Fund.

And they get together and they decide how BlackRock should vote its shares.

And then their decision, you know, after deliberation and consultation is the new policy for BlackRock.

And this is specific to mutual funds.

And they do propose that, you know, if you have a larger investment, you would have a higher chance of being drawn, but everyone would have an equal voice once actually in the assembly, which I also

don't know how to think about that.

Obviously, with a jury, that makes sense.

But if you own a ton of shares in a mutual fund, shouldn't you have a bigger vote?

Well, but most of the people who own the shares in the mutual fund have zero vote in this proposal, right?

It's not like a direct democracy.

It's a random sample to get some people who seem vaguely representative and they hash out something that seems like it might be workable for everyone.

Like my impression is that there is like a lot of overstatement of the importance of shareholder voting.

Like, I don't think that like...

BlackRock is influential or that ESG is important because of how BlackRock votes on shareholder proposals at coal companies.

Like, I don't think that's the thing that is driving anything, right?

Like, these shareholder proposals are frequently sort of symbolic, non-binding proposals.

And so it's nice for a company to win the votes against the shareholder proposals it doesn't like.

It's an annoying embarrassment to fight over these things, but it's not like the driving force behind like, you know, how the CEO lives her life or is paid or anything like that, right?

Like the thing that matters is, you know, voting in contested proxy fights and mergers, but it's also like the soft power of Vanguard coming in.

or BlackRock coming in and having a meeting and saying, hey, we'd really like you to dig up less coal or whatever.

And I think think that like

what that means is that the sort of explicit voting policies are less important than the informal meetings and engagement that these firms can have.

And you can only really have these assemblies to set the explicit voting policies, right?

Like you have these meetings to say, we will vote in favor of shareholder proposals to like disclose more about climate change or whatever, or against them, or what, you know, like the people will get together and decide.

But you can't have the assemblies show up at the meetings with the companies, right?

Like, that's going to be the BlackRock stewardship team, right?

And like, those people are going to continue to be those people.

And

they're going to have the sort of professional biases that those people have.

And the voting policy will be a sort of marginal change rather than a real change in how BlackRock operates itself.

Now, people really care about the voting stuff, right?

And there's a lot of focus on, you know, BlackRock is

like a number of these funds, these big fund firms are like experimenting with pass-through voting where like the shareholders, the ultimate beneficiaries of the fund can vote their shares or they can choose from a menu of policies that will drive the votes so they can be like a little bit more

responsive to like the ultimate beneficiary's interests.

And so this is another way to do that.

I just don't know how much any of this matters.

Like the voting stuff is the sort of like showy visible stuff, but I'm not sure how much it matters.

And I'm sure there's people that would disagree, but the pass-through voting doesn't seem like a terrible solution, especially when you consider sort of the logistical problems that would come with these shareholder or investor assemblies.

Well, the pass-through voting is very logistically problematic.

It's like because like

you have to vote.

I think the way they actually implement it is like you choose from a menu of like three different voting policies and then they do the voting for you.

It's not actually pass-through voting in the sense that like, you know, Blackboard gets like a thousand proxy statements and you get to choose how you vote your little shares on each one of of them.

Yeah.

In terms of though, what is being proposed by these three professors, they talk about, you know, gathering 150 people in a room.

And it sounds like a pretty intense process.

And they say, you know, since participation would be voluntary, participants should be adequately paid, provided with childcare, etc.

Like that seems...

like quite quite an uphill battle.

I don't know, man.

That's a drop in the bucket compared to running trillions and trillions of dollars of money.

And also like a drop in the bucket compared to running trillions of dollars of money and getting in trouble with politicians because you're voting in a way that's different from how

if you have like a good way to sort of point at like we have a good process.

But just in terms of like who would actually agree to do that, like who would take time out of their life to participate?

Yeah, exactly.

They propose that to

cranks are the people who participate in Cheryl are voting anyway.

So it's like fun.

That's true.

That's true.

But self-selection obviously would still be a big problem here.

I will say, it reminds me of a paper by John Coates, the Harvard law professor.

It's called The Problem of 12, which is a great title.

It's about the idea that he says 12.

Many people now say three, but there's some

small number of asset managers who will end up controlling most of the votes at most of the companies in America.

And one thing he writes about is like they've gotten to that position sort of like by accident.

And there's no thought given to how they exercise that power.

And

we now increasingly see people thinking about how they exercise that power.

And one thing he proposed is like, there's like all these rules of administrative law for how like U.S.

federal agencies should have to make decisions, how they should make new rules or they should make enforcement decisions.

There's just a lot of process around how federal agencies make decisions.

And obviously...

the big asset managers have some process around how they make decisions, but like it's all internal.

It's all voluntary.

It's like, you know, they're companies and they make decisions however they want to make decisions.

There's this idea that they shouldn't be completely free to make decisions on their own.

They're like now like a sort of quasi-public function.

And so there should be some public process.

There should be some like way for citizens or like investors to like come in and give them some feedback and tell them how to make decisions so that they're not just like making unconstrained decisions.

It reminds me of like the Facebook Oversight Board where Facebook is like, we don't know how to moderate our content, so we're going to have like some, you know, official Supreme Court of moderation.

This is like one more proposal of like how to do that, of how to get like some sort of process and public input into how these asset managers make decisions.

And I think it's like not quite right for like how they actually influence companies, but it's a gesture in that direction.

Yeah.

I mean, ultimately, I feel like if you're a public company, your stock price is going to be the ultimate sounding board.

If you make a bad decision, your stock price will probably go down eventually.

Like if you make enough bad decisions that they outweigh the good decisions, et cetera.

But obviously that's more indirect.

Yeah, I mostly agree with that.

And I think the stock price is the main disciplining mechanism.

Shareholder votes is a secondary disciplining mechanism, right?

Like you could imagine a company

performing perfectly well financially, but like annoying enough of its like locked up index investors that someone rages a proxy fight and gets management kicked out.

Like that's a little bit what happened with Exxon and engine number one.

Management didn't get kicked out, but they did lose a proxy fight, not because investors were particularly disgruntled with the financial performance, but because like a small activist fund was able to kind of get support from big index-y investors to change some policies.

So, like,

it's mostly stock prices what matters, and so like all this stuff is like a second-tier thing, but like there's a little bit of this stuff that can affect how companies actually operate.

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Matt, I think we should keep talking about BlackRock.

Oh, yeah.

It's the world's biggest asset manager.

And they're trying to get a lot bigger, specifically when it comes.

Well, they'd like to get a lot bigger, and they'd like to be a leader in private markets.

And boy, are they spending a lot of money to get there.

Are they?

I guess they are.

Well, they spent another 12 billion on HPS.

They spent like 12.5 billion, right, on GIP about a year ago.

And I forget how much they spent on prequen, but that was mostly about data.

But HPS, I mean, we've been

this has been written about and speculated on for a while now and they finally came out and announced that they're buying hps yeah it feels like we're in a really white hot time for private credit and

a golden age a golden age for private credit and golden ages always feel like golden ages like until like the last moment and hps seems very smart.

Like they did a very smart job here where they made a lot of noises noises about and like went pretty far down the road of going public and talking about a very high valuation for their IPO.

And they made a lot of noise about and like went far down the road of like raising big minority stakes from like Middle East sovereign wealth funds.

So there's a lot of like talk about we're going to have some mark where the thing is worth $10 or $12 billion.

And then they were able to use that kind of public pressure to get BlackRock, which was pretty obviously pretty desperate to buy a big private credit fund and like HPS was kind of like the biggest target, they were able to use that, like all those marks to get FlackRock to pay $12 billion

for HPS's business.

And, you know, like you get the sense they think that's kind of a rich valuation

and are very happy with their deal.

Yeah, I imagine so.

But as you write about recently in money stuff, they're not selling into the sunset.

They are going to continue to work.

And I mean, that's important because you think about all of that.

But like, there's like a bunch of articles in Bloomberg about how like there's a huge incentive compensation package to keep all the HPS people.

And like, they're getting all these big retention bonuses and they are taking all their money in BlackRock stock and they're keeping billions of dollars of like their PAs in like HPS funds.

You're saying all of that because

it's surprising, right?

You're saying all of that because you need to say all of that, right?

Like, like, yes, they are not just cashing out and selling off into the sunset, but it's like, it feels like such a

good and rich and timely exit that you have to be like, no, it's not an exit.

We're fine.

We're still here.

Yeah.

Well, I mean, you think about all the sell-side notes that have been written about this deal, talking about concerns about culture, etc.

And you highlighted the best one, which got at it pretty directly from Evercore talking about how this does come with execution risk.

This is a people-led business, and assets go up and down the elevator every single day.

So they need to come out with these sort of noises.

Yeah.

I was going to say, like, you can obviously see the appeal to HPS, right?

Besides the $12 billion, they are a big private credit fund, but this is a business that has gone from being like a kind of like weird niche business to being a huge institutional business.

And like, if you want to get really big as a private credit fund, you kind of need a really big platform at this point, like a platform to go out and market to big institutions.

And, you know, HPS is like largely a high-yieldy direct lending firm.

And plausibly the next wave of private credit is more like investment-grade private credit.

And to build that out, it's just seems like it would obviously be helpful to have like BlackRock's enormous size and client base.

I mean, I don't know what to say to that other than, God, I wish I was being bought by BlackRock in some way.

It is

interesting.

I don't know.

It's just, it's so, it's so so BlackRock the way that they've approached this for, I don't know, a couple months.

It's like, oh, BlackRock's trying to catch up in the private markets.

And now it's like, when this closes, what, they're going to be managing like 600 billion in alternatives.

And now they're, you know, close to the top of the leaderboard.

Yeah.

I mean,

it's funny to me, like, you think about like the giant asset managers.

BlackRock comes from a place of, you know, being a bond manager, eventually being an index fund manager.

and like

blackstone apollo kkr come from places of like

being

lbo shops and

the convergence is in this like private credit world where it sort of is like being a public credit investor because you know it's like credit stuff and it's increasingly like investment grade credit stuff

And it's sort of like being a LBO investor because it's like a lot of it is financing LBOs.

But so like you can come to it from either direction.

And it is like that sort of vast middle ground where, like, you know, if you're running a giant private credit strategy now, you're talking about like, oh, we talked to investment in great companies.

We're like,

you kind of look like a bond manager.

When you say BlackRock has $600 billion of alternatives, like

they're not doing LBOs, right?

Like,

alternative, like, there's a range of what alternatives can mean.

And it's like, it's fixed income credit stuff now.

Yeah.

Another point I wanted to make just about like this being so BlackRock.

I love ETFs as everyone knows.

And you think about how BlackRock became BlackRock in ETFs.

They bought Barclays Global Investors for 13.5 billion.

I think that was announced in June 2009.

And now you look like 15 years later and they manage close to 4 trillion globally.

They are the biggest in ETFs.

And that was also inorganic growth.

They just bought a business and then built and built and built.

So I don't know.

It's a similar playbook to what they always do.

Yeah, it's funny.

Like, FlackRock is like the, you know,

it's like synonymous with being a giant ATF provider, but it's, you know,

like, I come from a place of thinking of them as a, like, you know, active fixed income manager because that's like ultimately their heritage, right?

But like,

it kind of feels a little different because like it doesn't.

feel especially winner take all, right?

This is the sort of thing where everyone's going to to have to have a private credit business.

And because they're a big company, they had to have a big one.

And so they went out and got a big one.

But like,

I don't know.

They're not going to be like the provider of private credit.

They're going to be one of, you know, a dozen.

I can't wait to talk about this in 15 years.

I don't want to just flatter you because you're an ETF person, but like ETFs like revolutionized areas of finance.

You're so right.

Say more.

I think in five years, private credit is going to be like bank lands.

It's going to be like, yeah, a thing in the pitch book.

It's going to be like another way of financing deals.

I think that like ultimately people are not going to talk about private credit as distinct from public credit in the way that they do now because it like still feels kind of new and interesting now.

Whereas ETFs like really are

different from like the mutual funds that came before.

Yeah.

I agree with you there.

I also was not paying attention to ETFs in 2009.

And like, I would love to just go back in time and see how that moment felt.

You know, like when BlackRock made that splashy $13.5 billion purchase for eyeshares, like, what did that feel like?

I wonder how that was greeted.

And I don't know, maybe I'll do that in my spare time.

Cause I don't know.

I talk to a lot of like people who've been in the ETF industry for like two decades and like you hear them talk and they're like, yeah, we used to be like toiling away in the dark.

You know, we were just like obscure and no one really cared about us.

And now we're, you know, at the center of the world.

So I love that this episode about BlackRock's private credit officials turned into just an encomium to ETFs.

It's Just like, oh.

How could it not?

Everything comes back to ETFs.

It does.

When you're a hammer, everything's a nail.

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