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jerryking : systemic_risks   10

BlackRock’s black box: the technology hub of modern finance
FEBRUARY 24 2020 | Financial Times | by Richard Henderson in New York and Owen Walker in London.

In the depths of the 2008 financial crisis, the US government turned to Larry Fink, founder of BlackRock, for help.

As the crisis deepened, Mr Fink spoke to Hank Paulson, US Treasury secretary, in brief, urgent calls. He offered the Treasury and Federal Reserve a powerful tool to gauge risk in the assets at the centre of the havoc. The arrangement would net BlackRock tens of millions of dollars in government contracts, awarded largely without a tender process, put it at the forefront of the fintech revolution and cement Mr Fink’s standing at the intersection of politics and finance.

At the heart of this exchange was Aladdin, BlackRock’s vast technology platform. The system links investors to the markets, ensures portfolios hold the right assets and measures risk in the world’s stocks, bonds and derivatives, currencies and private equity.

Aladdin’s influence has surged since the financial crisis. Today, it acts as the central nervous system for many of the largest players in the investment management industry — and, for several huge non-financial companies........Vanguard State Street Global Advisors, the top half the top 10 insurers by assets, as well as Japan’s $1.5tn government pension fund, the world’s largest. Apple, Microsoft and Google’s parent firm, Alphabet — the three biggest US public companies — all rely on Aladdin to steward hundreds of billions of dollars in their corporate treasury investment portfolios.....Yet the true reach of Aladdin is unknown outside of BlackRock......Aladdin has fuelled BlackRock’s all-conquering rise by tightening its links with customers and diversifying its revenues. But the platform’s success has opened up new challenges. Competitors are fast developing rival platforms that are taking some of its business. The system’s scale — unparalleled for technology offered by a fund manager — has also created possible conflicts of interest. Most of all, its importance as a fintech hub has raised the prospect of a regulatory backlash.

The world’s most powerful risk management system threatens to become a liability for its owner.....Platforms like Aladdin are not covered by regulations, but as markets and investing become more reliant on technology the functions of these systems could play a role in future decisions whether or not to regulate...Aladdin’s sprawling influence has prompted fears that it, or BlackRock, could act as a chokepoint if either faced a shock — a cyber attack, a rogue line of code or a sudden crisis for the company — destabilising the financial system.....Although Aladdin does not tell asset managers what to buy or sell, the worry is that if a large enough portion of global assets respond to the warnings that Aladdin gives off, trillions of dollars will react to events — such as the outbreak of a pandemic or war in the Middle East — in the same way, causing dangerous *herding behaviour*......Aladdin creates the potential for “groupthink” .......Aladdin’s critical role within high-profile companies also makes it a prime target for cyber crime. .....Aladdin’s risk tools are designed to support, rather than replace, portfolio managers.....The scale of BlackRock’s dominance in both the investment industry and in providing its plumbing has led to potential conflicts of interest. As the world’s biggest asset manager, BlackRock is among the top shareholders of most listed companies globally, including many Aladdin clients.........Aladdin — which stands for asset, liability, debt and derivative investment network — began as a simple ledger for bond portfolios shortly after BlackRock was founded in 1988. As it grew, BlackRock extended its use for certain clients. The first was General Electric, which in 1994 was selling Kidder Peabody, the beleaguered brokerage, but was unsure how to price the assets on its balance sheet. A series of similar one-off arrangements eventually led BlackRock to offer Aladdin as a product in 2000.....Powerful trends have buffeted Aladdin’s rise. Investing has become more electronic and reliant on big data. As the tools that process the information have become more complex, investors, fund managers and insurers have turned to larger platforms such as Aladdin to replace multiple specialised systems.
Aladdin  analytics  asset_management  BlackRock  conflicts_of_interest  crisis  cyber_security  economic_downturn  financial_system  government_contracts  hackers  Hank_Paulson  herd_behaviour  institutional_investors  Laurence_Fink  one-time_events  origin_story  packaging  platforms  portfolio_management  regulators  risk-managment  rivalries  Second_Acts  systemic_risks  tools  trends  U.S._Federal_Reserve  U.S.Treasury_Department  Wall_Street 
4 weeks ago by jerryking
BlackRock bets on Aladdin as genie of growth
MAY 18, 2017 | FT | Attracta Mooney.

Aladdin, a technology system developed by BlackRock, the world’s largest asset manager, is also clever. It analyses the risks of investing in particular stocks, figures out where to sell bonds to get the best prices, and tracks those trades. And it is wily too, combing through huge data sets to find vital pieces of information for investors.....Launched in in 1988, when it was developed as an internal risk tool for BlackRock employees, Aladdin has become bigger, better and far more influential. It is now one of the best-known pieces of technology in the fund industry and is widely used by BlackRock’s rivals, including Deutsche Asset Management, the $733bn investment house, and Schroders, the UK’s largest listed fund manager.

But as Aladdin — which stands for Asset Liability and Debt and Derivatives Investment Network — has grown, concerns have mounted about its influence on markets. There are also questions about whether Aladdin can maintain or increase its hold on the asset management industry as rival technologies emerge.....with more and more investors using Aladdin, there are concerns about its impact on markets. The argument is that if trillions of dollars are being managed by people using the same risk system, those individuals may be more likely to make the same mistakes. i.e. Aladdin may increase systemic risk!!...Aladdin has a 9 per cent share of the 250 largest asset managers and a 15 per cent share of the insurance market, according to Credit Suisse, the Swiss bank. .......Many asset managers have recently begun the slow process of overhauling their technology systems after years of neglect. Previously, fund houses often had hundreds of different systems, but Aladdin and similar enterprise platforms allow businesses to cut out huge chunks of IT, reducing costs and jobs in the process.

At the same time, running money has become more complex and there is more regulatory scrutiny of investment decisions. This has meant that fund houses have been forced to assess how technology can help their investment processes.

“Money management is very tricky these days. Any tool that can help you with decisions is going to be highly in demand,”
........Under plans by Larry Fink, BlackRock’s chief executive, Aladdin will become an even more important source of cash for the fund giant. Mr Fink recently said that his goal is for Aladdin and the wider BlackRock solutions business to account for about 30 per cent of revenues in five years, compared with 7 per cent currently.......Even if there is a stumble in demand, BlackRock is already eyeing up other avenues for Aladdin.

In the past two years, it began promoting Aladdin, which comprises 25m lines of code, in the retail investment space, targeting wealth managers and brokers.

Last week, UBS Wealth Management Americas became the first wealth manager to say it will use Aladdin for risk management and portfolio construction......“Technology has always been a key differentiator for BlackRock. It is more essential to our business than ever before. We believe technology can transform our industry,” he said.

.......
Aladdin  asset_management  BlackRock  institutional_investors  Laurence_Fink  wealth_management  systemic_risks  order_management_system  algorithms  platforms 
january 2018 by jerryking
Keeping America's Edge
Winter 2010 | National Affairs | Jim Manzi.

.....One of the most painful things about markets is that they often make fools of our fathers: Sharp operators with an eye for trends often outperform those who carefully learn a trade and continue a tradition. ...First, To begin with, we must unwind some recent errors that fail to take account of these circumstances. Most obviously, government ownership of industrial assets is almost a guarantee that the painful decisions required for international competitiveness will not be made. When it comes to the auto industry, for instance, we need to take the loss and move on. As soon as possible, the government should announce a structured program to sell off the equity it holds in GM. ....Second, the financial crisis has demonstrated obvious systemic problems of poor regulation and under-regulation of some aspects of the financial sector that must be addressed — though for at least a decade prior to the crisis, over-regulation, lawsuits, and aggressive government prosecution seriously damaged the competitiveness of other parts of America's financial system ........Regulation to avoid systemic risk must therefore proceed from a clear understanding of its causes. In the recent crisis, the reason the government has been forced to prop up financial institutions isn't that they are too big to fail, but rather that they are too interconnected to fail......we should therefore adopt a modernized version of a New Deal-era ­innovation: focus on creating walls that contain busts, rather than on applying brakes that hold back the entire system.....Third, over the coming decades, we should seek to deregulate public schools. .....We should pursue the creation of a real marketplace among ever more deregulated publicly financed schools — a market in which funding follows students, and far broader discretion is permitted to those who actually teach and manage in our schools. There are real-world examples of such systems that work well today — both Sweden and the Netherlands, for instance, have implemented this kind of plan at the national level......Fourth, we should reconceptualize immigration as recruiting. Assimilating immigrants is a demonstrated core capability of America's political economy — and it is one we should take advantage of. ....think of immigration as an opportunity to improve our stock of human capital. Once we have re-established control of our southern border, and as we preserve our commitment to political asylum, we should also set up recruiting offices looking for the best possible talent everywhere: from Mexico City to Beijing to Helsinki to Calcutta. Australia and Canada have demonstrated the practicality of skills-based immigration policies for many years. We should improve upon their example by using testing and other methods to apply a basic tenet of all human capital-intensive organizations managing for the long term: Always pick talent over skill. It would be great for America as a whole to have, say, 500,000 smart, motivated people move here each year with the intention of becoming citizens.
social_cohesion  innovation  human_capital  Jim_Manzi  immigration  immigration_policies  recruiting  interconnections  too_big_to_fail  economic_downturn  outperformance  capitalization  human_potential  financial_system  regulation  under-regulation  too_interconnected_to_fail  systemic_risks  talent  skills  innovation_policies 
august 2017 by jerryking
One Firm Getting What It Wants in Washington: BlackRock - WSJ
By RYAN TRACY and SARAH KROUSE
Updated April 20, 2016

The Problem: BlackRock believed that the U.S. Federal Reserve was leaning towards designating it as a source of financial system risk, like other big banks, and as such, be “too big to fail”.

What Was At Stake: the designation “systemically important” would draw BlackRock in for greater oversight by the Federal Reserve which would mean tougher rules and potentially higher capital requirements from U.S. regulators.

The Solution: BlackRock didn't take any chances. The company began spending heavily on lobbying and engaging policymakers. Executives at the firm began preparing for greater federal scrutiny of their business in the months following the 2008 financial crisis. BlackRock aggressively prepared a counter-narrative upon discovered a Treasury Department’s Office of Financial Research report that asset-management firms and the funds they run were “vulnerable to shocks” and may engage in “herding” behavior that could amplify a shock to the financial system. The response took the form of a 40-plus-page paper rebutting the report. The firm suggested that instead of focusing on the size of a manager or fund, regulators should look at what specific practices, such as the use of leverage, might be the source of risks. While other money managers such as Fidelity and Vanguard sought to evade being labeled systemically important, BlackRock’s strategy stood out.
BlackRock  crony_capitalism  Washington_D.C.  risks  lobbying  too_big_to_fail  asset_management  advocacy  government_relations  influence  political_advocacy  policy  U.S._Federal_Reserve  systemic_risks  Communicating_&_Connecting  U.S.Treasury_Department  counternarratives  oversight  financial_system  leverage  debt  creating_valuable_content  think_differently  policymakers  policymaking 
april 2016 by jerryking
The Dangers and Opportunities in a Crisis
October 7, 2012 | NYTimes.com | By HUGO DIXON, Hugo Dixon is the founder and editor of Reuters Breakingviews.

Wherever one turns — politics, business, medicine, ecology, psychology, virtually every field of human activity — people talk about crises. But what are they, how do they develop and what can people do to change their course?

The first thing to say is that a crisis is not just a bad situation. When the word is used that way, it is devalued. The etymology is from the ancient Greek: krisis, or judgment. The Greek Orthodox Church uses the term when it talks about the Final Judgment — when sinners go to hell, but the virtuous end up in heaven. The Chinese have a similar concept: The characters for crisis combine parts of those for danger and opportunity.

A crisis is a point when people have to make rapid choices under extreme pressure, normally after something unhealthy has been exposed in a system. To use two other Greek words, one path can lead to chaos; another to catharsis or purification.

A crisis is certainly a test of character. It can be scary. Think of wars; environmental collapses that destroy civilizations of the sort charted in Jared Diamond’s book “Collapse: How Societies Choose to Fail or Succeed”; mass unemployment; or individual depression that leads to suicide.

But the outcome can also be beneficial. This applies whether one is managing the aftermath of the Lehman Brothers bankruptcy, the current euro crisis, the destruction of an oil rig in the Gulf of Mexico or an individual’s midlife crisis. Much depends on how the protagonists act.

Students of crises are fond of dividing them into phases. For example, Charles Kindleberger’s “Manias, Panics, and Crashes: A History of Financial Crises” identifies five phases of a financial crisis: an exogenous, normally positive, shock to the system; a bubble in which people exaggerate the benefits of that shock; distress when some investors realize that the game cannot last; the crash; and finally a depression.

Although there is much to commend in Mr. Kindleberger’s system, it is too rigid to account for all crises in all fields. It also downplays the possibility that decision makers can change the course of a crisis. A more flexible scheme that leaves space for human agency to affect how events turn out has just two phases: the bubble and the crash......The bubble is typically characterized by mania and denial. Things are going well — or, at least, appear to be. Feedback loops end up magnifying confidence...............Manic individuals do not know their limitations and end up taking excessive risks — whether on a personal level or in managing an organization or an entire economy. As the ancient Greeks said, hubris comes before nemesis........But before that, there is denial. People do not wish to recognize that there is a fundamental sickness in a system, especially when they are doing so well........The ethical imperative in this phase is to *burst the bubble before it gets too big*. That, in turn, means both being able to spot a bubble and having the courage to stop the party before it gets out of hand [JCK: courage = "political will"] . Neither is easy. It is hard to recognize a sickness, given that there is usually some ideology that explains away the mania as a new normal. The few naysayers can be ridiculed by those who benefit from the continuation of the status quo.

What is more, politicians, business leaders and investors rarely have long-term horizons. So even if they have an inkling that things are not sustainable, they may still have an incentive to prolong the bubble.......The crash, by contrast, is characterized by panic and scapegoating. People fear that the system could collapse. Negative feedback loops are in operation: The loss of confidence breeds further losses in confidence. This is apparent on an individual level as much as on a macro one.

..Events move extremely fast, and decisions have to be made rapidly........The key challenge is to make effective decisions that avoid vicious spirals while not embracing short-term fixes that fail to address the fundamental issues. With the euro crisis, for example, it is important to improve competitiveness with structural reforms and not just rely on liquidity injections from the European Central Bank.[JCK: "structural change"]

In this phase, no one denies that there is a problem. But there is often no agreement over what has gone wrong. Protagonists are reluctant to accept their share of the responsibility but instead seek to blame others. Such scapegoating, though, prevents people from reforming a system fundamentally so that similar crises do not recur.[JCK: "systemic change"].....Crises will always be a feature of life. The best that humanity can do is to make sure it does not repeat the same ones. And the main way to evolve — both during a bubble and after a crash — is to strive to be honest about what is sick in a system. That way, crises will not go to waste.
blaming_fingerpointing  books  bubbles  catharsis  chaos  character_tests  clarity  crisis  dangers  decision_making  denials  economic_downturn  feedback_loops  Hugo_Dixon  individual_agency  Jared_Diamond  manias  market_crash  new_normal  opportunities  overconfidence  political_will  risks  scapegoating  short-sightedness  societal_choices  speed  structural_change  systemic_change  systemic_risks 
february 2015 by jerryking
BlackRock’s Aladdin: genie not included - FT.com
July 11, 2014 | FT |By Tracy Alloway.
(Risk management technology is no substitute for investor instinct)
Aladdin is BlackRock's current, state of the art risk and order management system. Aladdin has been described as BlackRock’s “central nervous system” but what is less well-known is that the operating platform also acts as the brains at some 60 other financial firms which altogether handle a whopping $14tn worth of assets.

At banks, investment managers and trading outfits around the world, Aladdin’s genie is hard at work analysing portfolios, running stress test scenarios and generally employing BlackRock’s “collective intelligence” to perform a whole host of financial functions....the increasingly significant role that Aladdin and its 25m lines of code plays in the wider financial markets has, with notable exceptions, largely been overlooked....The role of these formulas or programs tends to go unnoticed but they often play two key roles in the build-ups to financial crises. Firstly they give investors and traders a potentially dangerous sense of control over risk. Second, as their use proliferates, they also encourage a build-up of “one-way” bets as investors increasingly come to rely on similar data and analysis.
BlackRock  Laurence_Fink  asset_management  pretense_of_knowledge  long-term  risk-management  Wall_Street  collective_intelligence  systemic_risks  order_management_system  algorithms  platforms  Aladdin  stress-tests  overconfidence  overlooked  false_confidence  scenario-planning  financial_crises 
july 2014 by jerryking
Letters to the Editor: Spotting Bubbles in the Economy Isn’t Hard, but Deflating Them Is - WSJ.com
AUGUST 2, 2009 | Wall Street Journal..."More important than
appointing and paying someone to identify risks which are already being
identified is the need to have the political will to do something about
them when they are identified and, more importantly, to have the wisdom
to know which ones are going to become problems and which ones aren’t.
Systemic risks that cause major disruptions are only identified in
hindsight."..."Systemic risk is not created by assets increasing in
value—that’s good news. The risk is that asset values increase because
of excessive debt growth. Bubble watching is then simply a matter of
defining a speed limit for debt growth."
Alan_Greenspan  assets  asset_values  backward_looking  bubbles  debt  hindsight  letters_to_the_editor  political_will  systemic_risks  wisdom 
august 2010 by jerryking
Off the Shelf - ‘Fault Lines’ Concludes Global Economy Remains Vulnerable - NYTimes.com
July 31, 2010 | NYT | By NANCY F. KOEHN reviews “Fault Lines:
How Hidden Fractures Still Threaten the World Economy” by Raghuram G.
Rajan who concludes that the financial crisis erupted “because in an
integrated economy and in an integrated world, what is best for the
individual actor or institution is not always best for the system.” Like
geological fault lines, the fissures in the world economic sys. are
more hidden and widespread than many realize. And they are potentially
more destructive than other culprits, e.g greedy bankers, sleepy
regulators and irresponsible borrowers. Rajan, a finance prof at the U.
of Chicago and former chief economist at the IMF argues that the
actions of these players (and others) unfolded on a larger worldwide
stage, that is subject to the imperatives of political economies. He
cites 3 fault lines: domestic political stresses; trade imbalances among
countries; and the tensions produced when financial sys. with very
different structures interact.
book_reviews  economic_downturn  financial_crises  crisis  threats  interconnections  interdependence  books  systemic_risks  vulnerabilities  fault_lines  hidden  latent  regulators  uChicago  global_economy  imbalances 
august 2010 by jerryking
Easy Credit and the Depression - WSJ.com
MAY 5, 2009 | Wall Street Journal | by L. GORDON CROVITZ.
Judge Richard Posner's "A Failure of Capitalism: The Crisis of '08 and
the Descent into Depression". Explains behavior that looks irrational in
retrospect shows that it was logical, based on incentives at the time.
Prevention requires regulators with access to public and private
information to track systemic risk and clear, predictable rules for how
the Federal Reserve and other regulators would respond to various risk
situations.
L._Gordon_Crovtiz  economic_downturn  Richard_A._Posner  risks  book_reviews  credit  predictability  failure  U.S._Federal_Reserve  regulators  incentives  information  information_flows  irrationality  systemic_risks  causality  public_information  private_information  hindsight  rules-based 
may 2009 by jerryking
What, me worry? (1)
September 30, 2005 | Globe & Mail | by Doug Steiner.
Tsunamis, asteroids, central bankers - how do you protect one portfolio
against all those risks? Systemic versus personal risk.

"Unfortunately, risk is rarely that clear cut. It comes in many forms, and we all think of it in different ways. Many of us have trouble putting risks into appropriate categories. We often mash all of them together or worry too much about spectacular calamities. To get a handle on things, you need to create a proper hierarchy of anxieties and then deal with them in an orderly fashion.

Many academics split risks into two buckets. Systemic risk is general risk--risk that affects large groups of people, such as the stock market crashing or a hurricane wiping out a city. Personal risk relates to individuals making choices, such as trying to balance on a balcony railing after downing three or four martinis."
Doug_Steiner  category_errors  risk-assessment  systemic_risks  personal_risk  insurance  panics  natural_calamities  risk-mitigation  risks  disasters 
march 2009 by jerryking

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