Legends Live @Citi with Larry Fink, Chairman and CEO of BlackRock

Guest: Larry Fink, Co-founder, Chairman and CEO of BlackRock

Moderator: Leon Kalvaria, Chairman of Citigroup Global Bank

Compiled and edited by LenaXin and ChainCatcher

ChainCatcher Editor's Summary

This article is compiled from the latest episode of Legends Conversation @Citi, in which Leon Kalvaria, Chairman of Citi Global Bank, speaks with Larry Fink, co-founder, chairman, and CEO of BlackRock. As of the video's release, BlackRock's assets under management have reached $12.5 trillion. How did Larry achieve this?

In this episode, Larry will share his unique insights on leadership, themes from his career, and his experiences in creating a brilliant journey.

ChainCatcher did the collation and compilation.

Summary of highlights:

• What really changed Wall Street was the personal computer.
• The profound lessons learned were: First, we thought we had a top-notch team and market knowledge, but our thinking did not evolve with the market; second, when competing with Salomon Brothers, we were blinded by the ambition to gain market share.
• The foundation of the firm is the development of risk tools, and BlackRock’s culture is deeply rooted in risk technology.
• Artificial intelligence and financial asset tokenization will reshape future investment and asset management
• The essence of the asset management industry is results-oriented
• Investors need to seek out information that is not fully understood by the market; old news is no longer able to generate excess returns.
• If active investing were effective, ETFs would never have taken off.
• If the US economic growth rate cannot sustainably reach 3%, the deficit problem will overwhelm the country.
• As long as assets and liabilities are matched and deleveraged, losses will not spread into a systemic crisis.
• Bitcoin is a hedge against an uncertain future
• Only by fully committing to the whole process can we continue to have the qualifications for dialogue and the right to speak in the industry

(1) How did Larry’s upbringing shape his leadership?

Leon Kalvaria: How did your family background shape your unique worldview and risk-taking ability, ultimately leading to excellence with a global perspective?

Larry Fink: My parents were truly remarkable. They were socialists, open-minded, and they valued two things above all else: academic achievement and personal responsibility. They often told me, " If you're not happy as an adult , don't blame your parents; blame yourself. "

This indoctrination taught me the importance of independence from a young age. Starting at age 10, I worked in a shoe store, an experience that taught me how to connect with customers and build relationships. While it's uncommon for children to work so young these days, that time helped me mature early and teach me to take responsibility. It wasn't until I was 15 that I truly began to plan a more purposeful life.

Leon Kalvaria: How did your West Coast academic background help you transition into a leader within an established company?

Larry Fink: I first saw snow in January 1976 during a job interview in New York. I was a typical West Coast teenager, wearing turquoise jewelry, long hair, and a brown suit. Of all the firms, First Boston was the most appealing to me. They offered a personalized training program, and the trading leaders felt very approachable. They even assigned me directly to the trading desk, which was unusual at the time.

Wall Street back then was completely different from what it is today. In 1976, First Boston hired only 14 people. The combined capital of all Wall Street investment banks at the time, including Goldman Sachs, Loblolly, Kuhn Loeb, Lehman Brothers, Whitewell, Merrill Lynch, and others (excluding commercial banks), was only about $200 million.

At the time, investment banks operated like cottage industries, taking almost no risk. Balance sheet expansion only began after 1976.

Within my first month on the trading floor, I was convinced I was qualified for the job. After my training, I was assigned to the Mortgage and Guarantee Department, which consisted of only three people, which was very exciting.

(2) Larry's entrepreneurial journey

Leon Kalvaria: What fundamental new understandings of finance and risk did your early experience in securitization give you?

Larry Fink: What really changed Wall Street was the personal computer. Before that, there were tools like the Monroe calculator or the HP-12C. In 1983, the mortgage department was equipped with a few computers. Although they were primitive by today's standards, they allowed us to completely rethink how we assembled mortgage pools and calculated their cash flow characteristics.

The ability to restructure cash flows by processing real-time data launched the securitization process. While many calculations were still done manually, the application of trading-level technology gave rise to derivatives like interest rate swaps. Wall Street was forever transformed.

An important factor in the establishment of BlackRock was that the sell-side technology was always ahead of the buy-side technology.

Leon Kalvaria: What was the most unexpected lesson you learned, and what insights did you gain that may have shaped your subsequent leadership at BlackRock?

Larry Fink: Let me tell you about my career trajectory. I became the youngest managing director at the age of 27, joined the company's executive committee at the age of 31, and became insufferable at the age of 34 because of my arrogance.

Back then, the team-first philosophy only worked when we were profitable. In 1984-1985, we were the company's most profitable division, even setting a quarterly record. But then we suddenly suffered a $100 million loss in the second quarter of 1986. This exposed the root of the problem: We were hailed as heroes when we were profitable, but when we lost money, 80% of our employees stopped supporting us . The so-called team spirit completely collapsed.

I learned two hard lessons: first, I thought I had a top-notch team and market knowledge, but my thinking didn't evolve with the market; second, when competing with Salomon Brothers, I was blinded by my ambition to gain market share. Lou was fired a year before me for the same mistake, but I didn't learn from it.

I've never been able to forgive myself for not speaking out forcefully when the company was blindly adding capital. We lacked risk management tools, yet we took on risks no one knew about. This experience of failure ultimately became the soil that nurtured BlackRock's growth.

Leon Kalvaria: What keeps you convinced that entrepreneurship can succeed despite widespread skepticism and personal setbacks?

Larry Fink: That experience definitely eroded my confidence. Although I spent a year and a half rebuilding my career, and received several partner offers from Wall Street firms during that time, I felt it wasn't right to repeat my old path. So I began exploring the possibility of transitioning to a buy-side market.

Two key clients were willing to fund my startup, but I wasn't confident enough to start on my own, so I reached out to Steve Schwarzman. First Boston had helped raise some of Blackstone's first fund (approximately $545 million), and I had helped fund it, leveraging our relationships with thrift institutions.

Bruce Wasserstein introduced me to Steve and Pete. They were very interested in the idea I proposed, and in fact, Steve believed in me more than I did, and I eventually became the fourth partner of Blackstone.

The weekend after I resigned, I held an open house at my home. About 60 to 70 people showed up to discuss my new plans. I told some of them directly, "You'll thrive after I leave." The company was going through a period of disintegration, with some leaving and some staying, but this candor helped all parties find a more suitable path forward.

(3) The Development and Importance of Aladdin Technology

Leon Kalvaria: What were the key factors in BlackRock's selection to provide key advisory services to the US government during the financial crisis? Did Aladdin's early deployment of technology provide a decisive advantage?

Larry Fink: When we started the company, we had two technologists out of eight people. We invested $25,000 in a SunSpark workstation, which had just been released in 1988. This allowed us to develop our own risk tools at BlackRock.

From day one, the foundation of the firm has been developing risk tools, and BlackRock’s culture is deeply rooted in risk technology.

When Kidder Peabody, a subsidiary of General Electric (GE), went bankrupt in 1994, we leveraged our long-standing partnership with GE to proactively offer assistance to CEO Jack Welch and CFO Dennis Damerman. While Goldman Sachs was widely expected to be hired, we, leveraging our Aladdin system, were entrusted with liquidating its troubled assets.

I stated that I didn't need consulting fees and would pay after success. After nine months of operation, the asset portfolio finally became profitable, and GE ultimately paid the highest consulting fee in its history.

I wanted my investment team to be able to establish themselves based on their own success and capabilities, and I wanted Aladdin to be able to compete and win against anyone. We decided to open the Aladdin system to all our customers and competitors.

In 2003, we encountered the financial crisis. Leveraging our trusted relationship with the U.S. government and regulators, we shared a common philosophy in multiple rescue efforts. Bear Stearns was hired by JPMorgan Chase (JP) to analyze its asset portfolio over the weekend. While urgently assisting JP with risk assessments on Friday and Saturday, I was allowed to communicate simultaneously with Hack from the Treasury Department and Tim from the Federal Reserve.

At 6 a.m. on Sunday morning, Tim called and asked for support. I responded that we needed to get permission from JPMorgan Chase CEO Jamie before we could transition to government service. To expedite the process, we were directly hired by the U.S. government.

The Treasury Secretary asked, "Will American taxpayers lose money from taking over the assets?" I suggested that principal and interest be included in the calculation, because the assets had been significantly written down and the interest rate was extremely high, so taxpayers would most likely get their money back.

Since then, we have been hired to handle the restructuring of AIG and the crisis responses of the governments of the UK, the Netherlands, Germany, Switzerland and Canada.

(Note: American International Group is referred to as AIG.)

(4) What is the purpose of the annual letter to shareholders?

Leon Kalvaria: What's the core rationale behind the annual shareholder letter you've written since 2012? Is it to document key milestones, provide insights to investors, or perhaps make a strategic statement?

Larry Fink: Beyond a few core themes, I never intended these letters to be manifestos. I wouldn't have written them if we hadn't acquired BGI in 2009 to become the world's largest index provider. At the time, we assumed significant equity management responsibilities, but only had voting rights, not disposal rights .

This is consistent with the concept discussed by Warren. The core of the first few letters was to promote "long-termism" and think about long-term trends for long-term investors . This was the whole original intention.

(Note: Leon Kalvaria jokingly called Larry Fink's shareholder letter a companion piece to Warren Buffett's letter.)

(V) Major trends in reshaping asset management in the future

Leon Kalvaria: From your perspective, what are the major trends that you see that will reshape your investments and asset management in the future?

Larry Fink: Artificial Intelligence and the Tokenization of Financial Assets. During lunch today with a former Treasury Secretary and central bank governor, he privately admitted that the banking industry has been left behind by technology in many areas .

Brazil's New Bank's innovative practices are spreading to Mexico, and digital platforms like Germany's Trade Republic are also disrupting traditional practices. These cases demonstrate the power of technology to transform. The disruptive nature of AI can be better understood by considering how it is transforming big data analytics . For example, BlackRock established an AI lab at Stanford in 2017, employing a team of professors to develop optimization algorithms. We manage $12.5 trillion in assets and process a massive volume of transactions, but technological innovation is driving us back to our roots of responsibility.

Leon Kalvaria: These tools will be made available to the public. How can we ensure transparency and accountability while maintaining BlackRock's advantages?

Larry Fink: Early-stage scale operators will have an advantage, which makes me worried about society as a whole. Large institutions that can afford the cost of AI technology will become the dominant ones.

However, as second-generation AI becomes ubiquitous, our competitive advantage will be challenged. BlackRock's current advantage is far greater than it was a year ago or five years ago. Our investment in technology has reached a massive scale, with all of our operations underpinned by a technology architecture, including transaction processing, process optimization, M&A integration, and a unified technology platform. The scale of our investment far exceeds public perception.

Leon Kalvaria: How do the three major acquisitions in the private equity sector (Prequin, HBS, and Bio) reshape investors' asset allocation landscape in the private equity market?

Larry Fink: Today's earnings call reaffirmed the importance of ongoing transformation. While the 2009 acquisition of BGI (including iShares) sparked market skepticism, the strategy of "passive and active integration with full portfolio focus" has proven successful—iShares' size has leapt from $340 billion to nearly $5 trillion.

By 2023, BlackRock's private equity business will have grown significantly, with infrastructure investment increasing from zero to $50 billion and private credit expanding rapidly. This unexpected surge in client demand has driven innovation, accelerating the integration of public and private equity. Technological advances will facilitate the free allocation of public and private assets, a trend that will extend to all institutional investors and even 401(k) plans.

The acquisition of Prequin cost only one-third of that of its peers, but it is a key strategy: by integrating the E-Front private equity analysis platform and the Aladdin public equity system, it has established full-chain risk control capabilities for public and private assets, facilitating investment portfolio integration and deepening customer dialogue.

Leon Kalvaria: What is the current state of retirement funding?

Larry Fink: If you can earn 50 basis points over 30 years, your returns in the private equity market will exceed that over the long term, otherwise the liquidity risk is not worth taking. In total, your portfolio can increase by 18%.

Four months ago, BlackRock hosted a retirement summit in Washington, D.C., with 50 members of Congress and the Speaker of the House of Representatives among the guests. As administrator of the federal government's retirement plans, we manage 50% of the $12.5 trillion in retirement assets.

(VI) Relationships with Global Leaders and Strategic Influence

Leon Kalvaria: When global leaders seek your personal advice on financial and geopolitical issues, how do you combine your investment expertise with your geopolitical risk assessment?

Larry Fink: Building trust is fundamental. Since 2008, central bank governors and finance ministers have made it a practice to have in-depth conversations with me, all held behind closed doors. While there are no formal confidentiality agreements, the trust is similar to my interactions with CEOs, where the core of the conversation is confidentiality. These conversations always focus on substantive issues . I'm not always right, but my views are always grounded in history and facts.

Leon Kalvaria: You have been a mentor to so many leaders for a long time, and this unique communication channel is rare.

Larry Fink: The asset management industry is inherently results-oriented . We don't profit by capital turnover or trading volume, but rather by concrete results. We are deeply involved in retirement systems around the world (we are the third-largest retirement management company in Mexico, the largest foreign-invested retirement management company in Japan, and the largest pension fund manager in the UK), so we maintain a focus on long-term issues.

This kind of influence cannot be replicated; it's built on years of trust . I proactively meet with new leaders (such as Claudia in Mexico and Kiel in Germany) before they take office to ensure a smooth flow of information, which is a reflection of our unique value.

Leon Kalvaria: When you look back at your recent career, who have been your mentors and influences?

Larry Fink: When we went public in 1999, BlackRock's market capitalization was only $700 million. We immediately attracted senior directors like Merrill Lynch CEO Dave Kamansky and General Electric's Dennis Damerman. Our board of directors has always been a core pillar of our organization. When we acquired Merrill Lynch Investment Management, we transitioned from a US-based fixed income firm to a global operation in 40 countries. During this time, I repeatedly discussed our management model with the board.

Today, the board remains crucial, with Cisco CEO Chuck Robbins providing technical insights and former Estée Lauder CEO Fabrizio Freda contributing marketing wisdom. These multidisciplinary experts allow me to continue to rely on the board to drive progress.

(VII) Audience Question Session

Q: How will AI reshape the future investment paradigm? How do you think different investment strategies (for both individual investors and institutions) will evolve? Where will this trend head in the future?

Larry Fink: Every investor needs to seek out information that the market doesn't fully understand. Traditional information (old news) no longer generates excess returns. Artificial intelligence generates unique insights by analyzing differentiated data sets. Our systematic equity team has consistently outperformed the market for 12 years. Its thematic investment strategy, based on AI algorithms and big data, has outperformed 95% of fundamental stock pickers over the past decade.

But like baseball, maintaining a 30% batting average is incredibly difficult, and achieving it for five consecutive years is even rarer. Only a select few investors consistently outperform. Most fundamental investors experience dismal returns after fees, which is the core of the decline in the active management industry. If active investing truly worked, ETFs would never have taken off.

Traditional asset management companies face depressed market capitalizations. Many of our peers listed in 2004 have market capitalizations of only $5 billion to $20 billion, while BlackRock's is $170 billion. This is due to our inability to invest in technological upgrades. The gap between us and traditional agencies will continue to widen.

Leon Kalvaria: What is the most underestimated black swan risk in the current market? If the US economic growth rate cannot be maintained at 3% (even if inflation is controlled), what systemic crises may be triggered?

Larry Fink: If the US economic growth rate cannot continue to reach 3%, the deficit problem will overwhelm the country .

The deficit was $8 trillion in 2000, soared to $36 trillion 25 years later, and continues to worsen. Only by maintaining 3% growth can the debt/GDP ratio be controlled. However, the market is skeptical. The deeper risks lie in:

1. 20% of US debt is held by foreign countries. If tariff policies lead to isolationism, dollar holdings may decrease;

2. The development of domestic capital markets in many countries (e.g., BlackRock raising $2 billion in India and Saudi Arabia launching MBS business) has resulted in domestic savings being retained in the country, weakening the appeal of US Treasuries;

3. Stablecoins and currency digitization may reduce the global role of the US dollar.

The solution lies in releasing private capital and simplifying the approval process . Countries such as Japan and Italy are also facing deficit crises caused by low growth.

While black swan events are possible in the private credit sector, higher matching ratios mean that systemic risk in the current capital market is lower than in previous years. As long as assets and liabilities are matched and deleveraging is achieved, losses will not escalate into a systemic crisis.

(8) Why did Larry’s attitude towards digital assets change?

Leon Kalvaria: What were the key factors behind your evolving stance on digital assets, particularly stablecoins? Has your perspective changed due to the unexpected speed at which other institutions have embraced the space?

Larry Fink: I harshly criticized Bitcoin in a discussion with Jamie Dimon, calling it a "currency for money laundering and theft." That was my view in 2017.

But my reflections and research during the pandemic changed my perspective: an Afghan woman used Bitcoin to pay the salaries of female workers banned by the Taliban. With the banking system under control, cryptocurrency became a solution.

I gradually realized the irreplaceable value of the blockchain technology behind Bitcoin. It's not a currency, but a "fear asset" designed to mitigate systemic risk. People hold Bitcoin out of concern for national security and currency devaluation. Even though 20% of Bitcoin is held illegally in China, it's still held by Chinese citizens.

If you don’t believe that your assets will appreciate in value over the next 20-30 years, why invest?

Bitcoin is a hedge against an uncertain future. The high-risk and rapidly changing environment requires us to continue learning.

9. Larry’s Leadership Principles

Q: What are your core leadership principles? How do you maintain leadership consistency, especially when facing dramatic industry changes and needing to flexibly adjust strategies?

Larry Fink: Daily learning is essential. Stagnation means falling behind. There's no pause button when leading a large enterprise; you have to give it your all. To be the best, you must constantly challenge yourself and hold your team to the same standard. I've been in the industry for 50 years, and I still strive to be at my best every day.

Ultimately, only by fully committing to the process can one maintain a position of authority and a voice in the industry . This right must be earned daily and should never be taken for granted.