Welcome to our Friday mailbag edition!
Every week, we receive some great questions and comments from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
I’ve been in Washington, D.C. this week. The two-day Federal Open Market Committee (FOMC) meeting took place on Tuesday and Wednesday. And I wanted to report to you from the thick of the action.
I’ve met with various Congressional members and senior staffers about topics ranging from infrastructure to private equity.
I hope you managed to catch my update from Washington yesterday. In it, I discussed why the Fed’s latest policy adjustment doesn’t change our outlook regarding the distortion between the markets and the real economy.
The fact the Fed raised rates by just 25 basis points came as no surprise to me, as I reported to you on Monday.
Now, if you’re a regular reader, you’ll know spending time in the corridors of power in Washington is a regular occurrence for me.
And that brings us to this week’s questions…
I recently presented to the U.S. Senate Budget Committee on the growing influence of Wall Street asset management and private equity firms.
I sent you the script of my testimony shortly afterwards.
And I concluded with a controversial proposal – one that would give the power back to everyday people and retail investors.
I proposed a shareholder pass-through structure. This would give people invested in an ETF shareholder rights in the companies included in that ETF.
Currently, these rights are retained by the asset management companies themselves.
My testimony sparked some interesting notes in the mailbag. First up, Kevin B. voices his support for my proposal…
I also support the idea that the beneficial owners of ETFs and mutual funds should have the voting rights on corporate issues, instead of the asset managers.
This is especially troubling because of BlackRock’s Larry Fink being a director of the World Economic Forum, which is attempting to do away with shareholder capitalism and transform it to stakeholder capitalism, which seems like a different moniker for socialism.
Not to say that is the only thing wrong with Larry Fink. But this note isn’t intended to just be about him.
I am 100% in agreement with the statement you made.
– Kevin B.
Hi Kevin, thanks so much for your email and kind support.
I totally understand your point. This issue is wider than BlackRock and its CEO Larry Fink. (Though they do represent the pinnacle of asset managers voting the corporate shares that their customers paid for.)
For me, it’s a no-brainer. Shareholders should keep their voting rights. It is, after all, their money being invested in these companies.
It should be no different if those shareholders own company shares outright or through an exchange-traded fund (ETF).
BlackRock shouldn’t have more of a right to corporate votes than shareholders, just because it can aggregate its customers’ money into votes.
And that’s why this issue is so important to me. It’s about being fair.
Moving on, William O. agrees with my suggestion to reduce the size and influence of asset management and private equity firms…
Emphasizing shareholder rights would do very little.
But setting up a size maximum, like the trust-busting days of Standard Oil, is a great idea.
– William O.
Hi William, thank you for your thoughts. The concept of maximum concentration sizes for companies and their market share is important.
For banks, there’s a deposit maximum of 10% of the total amount of consumer deposits. For asset managers, it’s supposed to be no more than 5% of any company’s stock.
But this isn’t enforced. The large asset managers can spread the stock concentration across various funds.
That way, they can keep just below the limit in any one fund. For example, BlackRock owns 6.5% of JPMorgan stock.
I’ve been advocating breaking up the megabanks for a decade and a half now, along the lines of Standard Oil.
(As you likely know, Standard Oil was the world’s first and largest multinational corporation. John D. Rockefeller, the American business magnate, founded it and owned it. But in 1911, the U.S. Supreme Court ruled that Standard Oil was an illegal monopoly. So it was broken into 34 smaller companies.)
But instead, the big banks just keep getting bigger. That’s even after the government bailed them out in 2008 at a cost of as much as $498 billion.
It’s now the same thing with the big asset managers.
Rest assured, I’m not giving up the quest to hold them accountable!
Meanwhile, Steven C. feels I didn’t go far enough… And he has a great idea to create more transparency…
Banking committee is THE place to be heard. I was amazed at how reserved your comments were. I guess the turtle will beat the hare in the race to open Congress’ eyes.
Somehow, the issue of campaign contributions from these asset management companies needs to be added quietly with Senators Toomey, Sanders, and yes, Warren.
To reduce the banks and Wall Street’s excessive influence, ultimately, the U.S. public will need to know that “Politicians should wear jackets like NASCAR drivers, so we know who owns them.”
– Steven C.
Hi Steven, I appreciate your observation about the tone I took for those comments before the Senate Budget Committee.
I adopted a more measured approach because I felt that words mattered here.
And I believed that providing a flow of information, rather than emotion, was the best way for my words to be given the most consideration.
That brought Senators from both sides of the aisle into the topic.
That’s an excellent idea about bringing in campaign contributions.
Not to mention all the multi-thousand-dollar-per-plate dinners that some of these corporations and their executives throw to raise campaign money.
Your idea of NASCAR driver-like advertisements is terrific – funny, yet not funny. If I was a New Yorker cartoonist, I’d totally scribble that up.
Next up, Karen W. writes…
Thank you for taking a stand with your experience and testifying to the Senate Budget Committee! Bravo! I have heard of BlackRock being at the root of a lot that is going wrong in the world today. I am so glad you could offer your expertise to the Senate.
– Karen W.
Hi Karen, thank you for your support and kind words. Speaking before the Senate Budget Committee was an interesting experience.
My testimony had to be five minutes in length. But the entire session was two hours long.
So, I got to explore some of the themes in my testimony in more detail through the Q&A component.
For example, there were questions about private equity companies taking over nursing and other care companies, which turned out to be damaging for elderly patients.
That’s not okay.
By the way, if you’d like to watch that full session, you can do so here. My testimony begins around the 1 hour 32 minutes mark.
Finally, Jim S. worries the Fed has no way out…
In my view, the only lesson learned from the 2008 Global Financial Crisis, when Bear Stearns and Lehman Brothers went down and everything was on the precipice of disaster, was that the free market was dead and could no longer tolerate market corrections, even at the corporate level.
I blame the entire derivatives market – a huge, top-heavy house of cards, supposedly based on other “real” assets, but so intertwined with rehypothecation – pools of owners with claims on pools of assets – that it cannot be untangled.
So, the short-term solution is to prevent corporate bankruptcy, which is causing a growing list of “zombie” corporations. This can’t end well.
The Fed is backed into a corner. It can’t fight worsening inflation or even stop QE/bond-buying for fear of an entire market crash. As Bill Bonner has written, it’s now Inflate AND Die.
Am I being too pessimistic?
– Jim S.
Hi Jim, thank you for your email. The short answer is no, you’re not being too pessimistic.
Since the financial crisis of 2008, and more so since the pandemic, central banks have manufactured epic amounts of money in their quantitative easing (QE) programs.
This has created a distortion between how the market values companies relative to what their value would be without central bank money.
Companies have taken on huge amounts of debt because interest rates have been so low.
As a result, the Fed and other central banks are in a Catch-22 of their own making.
They cannot pull the rug of money from underneath the markets without causing a massive crash.
So they won’t. As we’ve seen this week, they will tweak interest rate levels… but not increase them dramatically. They will let securities roll off their books when they mature… but not sell too many, or any at all.
This will keep the money-market merry-go-round spinning.
Finally, before I go, a quick note on the Inside Wall Street schedule…
Starting this week, we will publish six days a week instead of seven.
Your weekly roundup email, which brings you all the content we published for the week in one convenient place, will be with you a day earlier than usual.
Look out for that in your inbox at 8 a.m. ET on Saturdays, instead of Sundays, starting this week.
You’ll still receive guest essays from my network around and outside Rogue Economics… with their insights into the big topics on their radars.
Going forward, look for those on weekdays instead.
And that’s all for this week. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition. I do my best to respond to as many of your questions and comments as I can.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins
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