In the wake of the financial crisis, BlackRock has emerged as one of the most valued and influential advisers to the U.S. government. Not only is it the world's largest money manager, with $2.7 trillion in assets under management stemming from its acquisition of Barclays Global Investors (due to close in the fourth quarter), BlackRock also has become a key contractor to the U.S. Treasury department because of the quantitative asset manager's expertise in valuing complex debt instruments.
At the heart of BlackRock's rise to prominence has been its analytics, which are housed in the firm's BlackRock Solutions technology division. The technology organization develops BlackRock's analytics and maintains extensive databases. "Fundamentally, these products are incredibly complicated," says Rob Goldstein, managing director and head of BlackRock Solutions. "We fortunately have the modeling capabilities to look at them from the bottom up."
Even before Bear Stearns' hedge funds imploded in spring 2007 and the credit crisis crippled the industry, BlackRock was called on for its risk analytics expertise. "We started to get inquiries to look at portfolios and to provide a risk assessment," relates Goldstein, who declines to name clients but acknowledges that the firm became involved with some of the "headline" names following the market implosion.
Known for its expertise in fixed income, BlackRock reportedly was hired by the federal government to help value and unwind the complex holdings of Bear Stearns, American International Group and Citigroup. In addition the government engaged BlackRock to evaluate Fannie Mae and Freddie Mac, the mortgage finance giants, and to perform risk assessments of banks and insurance companies both in the U.S. and internationally. "It all goes back to the core modeling capabilities," emphasizes Goldstein, who compares the ability of the firm's analytics to provide transparency into complicated instruments to the capabilities of an MRI machine.
The Birth of Aladdin
These capabilities are delivered through Aladdin, BlackRock's enterprise investment management, operations and risk management system. "The roots of Aladdin started with the founding members of the firm," relates Tom Fortin, CIO at BlackRock's headquarters in New York. He explains that with the fast run-up in complex mortgage assets, BlackRock founder and CEO Larry Fink, who previously was head of the mortgage department at First Boston, realized the lack of capabilities on the buy side to understand these products.
"The sell side was leveraging technology in the mortgage space, and the buy side didn't have comparable products to understand these things," adds Goldstein.
So in 1988 BlackRock cofounders Charlie Hallec, currently co-COO, and Ben Golub, the firm's chief risk officer, began building collateralized mortgage obligation (CMO) valuation models, relates Fortin. "That has been one of the guiding principles of the firm -- to understand the risks you are taking, to know where you are, to be able to manage them, and to know the limitations of the products and the models," he says.
"Complete portfolio transparency was and is the theme," observes Goldstein, who says that BlackRock began to get inquiries from other institutional asset managers regarding its analytic capabilities when the U.S. mortgage market went through an earlier implosion in 1994: "Can you take a look at our portfolio?" he recalls being asked.
Over time BlackRock started to make the analytics available to its institutional clients as a risk and analytics platform, expanding it to include various advisory services and eventually the entire Aladdin platform. The company officially launched BlackRock Solutions in 2000.
Today BlackRock Solutions employs 1,000 people and has evolved into a global business with clients that span the Americas, Europe, the Middle East, Asia and Australia. It maintains local client service sites in major cities overseas and across the United States. With about $7 trillion in client assets, BlackRock Solutions is the largest securities and portfolio analytics company in the world, according to Goldstein.
"BlackRock recognized very quickly that the problems its clients were facing were exactly the problems we are facing," explains Fortin. "It was a natural position to create these models, use them ourselves and use the models to help others."
Although it's the largest user of the Aladdin platform, BlackRock collaborates with more than 100 large organizations that use the analytics and risk tools, which ensures that the platform stays best in class, according to Goldstein.