With over $4.5 trillion in assets under its control, BlackRock's Aladdin® system is responsible for more capital than the Obama administration has ever dared to request from Congress—in any annual Federal budget proposal—by hundreds of billions of dollars. Actually, it's even bigger than that.
Because Alladin is made available, at various price-points and levels of access, to financial managers responsible for another $11 trillion in assets, BlackRock's proprietary technology, humming away at a server farm up in Washington state, is ultimately responsible for 7 percent of all the financial wealth on the planet. Even that faceless caste of business reporters at the Economist is voicing concern.
"If that much money is being managed by people who all think with the same tools," they posited, "it may be managed by people all predisposed to the same mistakes."
Is Aladdin Too Big to Fail? Or just the right size to fail? Good question. In fact, the Treasury Department's Financial Stability Oversight Council is currently investigating whether or not BlackRock qualifies as a non-bank "systemically important financial institution" (SIFI): a decision which could place it under the strict supervision of the Federal Reserve, as per its newly expanded authorities under Dodd-Frank. How BlackRock's employees are expected to pursue management's desire for a steady 5 percent-annual increase in "net new business" with all this added government scrutiny is anyone's guess.
There are— without question—more flattering photos of Larry Fink than the one at left, but none of them, I think, really captures what's great about him or why his existence may have eluded you up until this point: he's a risk-averse, wealth management dweeb, in the best sense; clip art of a tax preparer made flesh; a doyen amongst his business peers, to be sure, but an affable anonymous goober to almost anyone else.
Larry Fink, BlackRock, and Aladdin's origin stories all begin at the investment bank First Boston in the mid-1980s. After a very promising start, Fink's career took a small stumble when—in a precursor to the Great Recession of 2008—his pioneering work transforming debt income streams, like mortgages and car payments, into bonds unexpectedly collapsed. From the wreckage of this devastating professional failure, Fink began working on a powerful and important idea: Owners and buyers of these complicated securitized assets, collateralized mortgage obligations, and other debt-based investments, would need sophisticated software both to track these holdings and to effectively model their future stability or risk. In his image, BlackRock has become a company that is, according to one of Aladdin's architects, "perpetually neurotic" about risk.
BlackRock has also become bizarrely, and quietly, and awesomely powerful. Following the collapse of the housing bubble, the Federal government turned to BlackRock and its Aladdin software to properly evaluate the value of the great mass of toxic assets poisoning the economy—with both Britain and Greece requesting similar assistance as the crisis metastasized internationally. For a time, Fink was widely rumored to be a potential successor to Treasury Secretary Tim Geithner, a role many in the business press jokingly described as a demotion.
All of this power and prestige is, to be clear, due to Aladdin. Aladdin is the central nervous system at the core of BlackRock's business.
As briefly and non-technically as possible, then, here is how BlackRock's Aladdin works: At a large data center in East Wenatchee, Washington, an ever-growing number of historical events are recorded and stored, ranging from the rise and fall of financial products, to freak weather disasters, to political scandals, and more. Aladdin compares these past events to current events, and their potential impact on BlackRock's assests under management (AUM), or the AUM of subscribers with access to Aladdin, many, many times, very rapidly, creating a probability distribution of potential future outcomes via a computational technique known as the Monte Carlo method. The name evokes sexy gambling stuff, because it's meant to evoke sexy gambling stuff; Aladdin is metaphorically rolling the dice, again and again, and then tabulating the results—with the obvious goal being to locate assets with troubled futures and shift wealth out of them.
BBC documentary filmmaker Adam Curtis (a man, like Errol Morris, that you may know for his unique stature as a kind of multimedia public intellectual), has expressed some pretty heavy ethical, ontological, and doxastic issues with what Aladdin's autonomy and influence might mean for a democratic society. He's also expressed a funny petty issue:
I can't over-emphasise how powerful Blackrock's system is in shaping the world—it's more powerful in some respects than traditional politics.
And it raises really important questions. Because its aim is to not change the world - but to keep it stable. Preventing any development that's too risky. And when you are moving $11 trillion around to do that—it is a really important new force.
But it's boring. And there is no story. Just patterns.
As an example of how boring it is, here is some footage Curtis shot outside the Sabey Data Center where Aladdin is stored:
"It is the modern world of power," Curtis says, "and it's incredibly boring. Nothing to film, run by a cautious man who is in no way a wolf of Wall Street. It's how power works today. It hides in plain sight—through sheer boringness and dullness."
Aladdin has no standing armies, true. It passes no legislation, nor rules from any court bench. However, just as taxpayers entrust the Congress and the rest of the Federal government to allocate roughly $3 trillion in taxes every year for their collective benefit, investors have given Aladdin even more money to do just the same. Aladdin's human managers may exert some kind of check, but it was built to tell them what to do. Aladdin is in charge.
Relatively recently, and presumably in accordance with Aladdin's wishes, BlackRock dumped a bunch of money into Uber—that annoying, lame, and much discussed taxi-disrupting, app-based enterprise, a poster child for "the Sharing Economy." Uber's value to its owners and investors, though it's rarely been expressed in quite this way, stems from its radical change to what economists might call the externalities of the taxicab industry. The overhead on one piece of software—even a really fucking great piece of software with a sizable team maintaining it—is just considerably less than maintaining fleets of taxis, their unionized drivers, the real estate to hold the taxis, and all the other corporeal things involved in that industry; things that depreciate in value, age, get broken. Uber reduces the middleman to microscopic size, and the middleman's contribution to mere electrons. Best of all for investors, it limits their exposure to the smallest, most secure part of the business, externalizing the rest of the enterprise to the desperate, low-class yahoos (like you or me) who need to turn their access to a car and their idle free time into cash.
But, and I am only half-kidding, just like a human, it's almost like Aladdin is recommending that BlackRock's investors put their money in his friend's business. It's like nepotism between computer programs.
Though it may not be very intuitive, Uber and Aladdin are alike in the critical sense that their utility to their owners comes from their radical ability to externalize the most costly, corporeal portions of their business. This is particularly true as Aladdin grows, with its knowledge increasingly derived from what BlackRock calls its "collective intelligence" approach—a touchy-feelie Utopian gloss on the reality that Aladdin is increasingly becoming augmented by user-generated content, absorbing historical case studies and information from the paying clients who use Aladdin for their own asset management businesses. Here is how BlackRock wants you to feel about this:
"Please feel empowered while we absorb what is unique to you within our proprietary software designed to profit off of your unique knowledge. You will get some money too, probably not a fair amount, but certainly enough to shut up." Irony lovers will certainly appreciate this; Aladdin is very much the "Sharing Economy" coming home to roost, as the human Masters of the Financial Universe are asked to share their unique information and insights with BlackRock's powerful software asset, partially for their own collective benefit, but most assuredly more for BlackRock's personal enrichment.
In its drive to acquire more of this kind of information, BlackRock got into some trouble earlier this year by exerting the soft power of its stature to encourage financial analysts into filling out questionaires on their own future predictions and as-yet-uncollected intelligence. From Fortune:
BlackRock has also run into some legal and regulatory constraints when it has tried to be innovative, in ways that also flash some of its power. Through last year, one of the company's investment arms was regularly surveying securities analysts about their view of the near future. The analysts were asked, for example, what surprises they thought could undo their forecasted earnings or what mergers they visualized happening. Perhaps because they didn't want to say no to a company of BlackRock's clout, many analysts answered. New York Attorney General Eric Schneiderman, however, concluded in January that these surveys sought too much nonpublic information and extracted $400,000 from BlackRock to cover the cost of his investigation. The company agreed to stop the surveys.
(In yet another example of the culture of leniency Schneiderman's office has cultivated around punning and other word crimes, the initiative that included this BlackRock investigation has been dubbed "Insider Trading 2.0". Not cool.) A fairly rational interpretation of this episode is that, as BlackRock and Aladdin gain financial power and accumulate data, like a black hole, they begin to achieve the critical mass wherein information and capital begins flowing into them faster, and cheaper, and more often against the own best interests of its previous owners.
So: Ought we to be fearful, uncertain, and dubious of Aladdin and the potentially technocratic totalitarian potential of its awesome rise to power?
"I can assure you that BlackRock is among the biggest control freaks and we're proud of it."