Are there any readers out there old enough to remember the story of the original Too Smart and Too Big to Fail money manager, Nobel-prizewinner-packed Long Term Capital Management? It didn’t last in the long term at all, ironically. The long version of that story is available in many books; we like When Genius Failed: The Rise and Fall of Long-Term Capital Management. The short version is, they relied on a flawed computer program with a fatal response to unusual hedging conditions, those conditions arose, and it failed. It failed so fast and so hard that it lost approximately the net worth of Asia before they could shut it down, ending the Asian Tiger financial boom and enabling yours truly to take a quite shockingly inexpensive vacation in Indonesia, where things which had been X expensive in the morning were X-n expensive by late afternoon.
Now the smartest guys on Wall Street are back, this time with a piece of LTCM-proof software that combines crowdsourced financial intelligence with dominance of the market so pervasive that, although you’d be a fool to give them what they want, you can’t help it because you have to be in the game, and on their team. Of course, it’s all based on a computer program that they claim is IN NO WAY as vulnerable as LTCM’s, or vulnerable at all, thanks to the willingness of all its clients to keep it constantly updated at all times. They call it “Aladdin.”
According to the FT, Aladdin and BlackRock control the controllers of wealth, to the tune of “some 60 other financial firms which altogether handle a whopping $14tn worth of assets.” It’s this concentration of control that analysts find worrying.
Blackbag’s Matthew Phelan has the scoop, in an article titled This Asset Software Has More Power Than the U.S. Government Right Now:
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.
“We’re just an asset manager,” BlackRock’s co-founder and CEO Larry Fink told Fortunerecently, “not a systemic threat in any way.”
This is the point where we break in to remind you of the LTCM-related fall of the Asian Tiger and the subsequent destabilization of several key governments in the region.
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 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.
“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.
Which brings me to one of my favorite pieces of poetry, the evocatively-titled No More Stalins, No More Hitlers, by American poet William S. Burroughs.
We have a new type of rule now. Not one man rule or rule of aristocracy or plutocracy, but of small groups elevated to positions of absolute power by random pressures and subject to political and economic factors that leave little room for decisions. They are representatives of abstract forces who have reached power through surrender of self. The iron-willed dictator is a thing of the past.
There will be no more Stalins, no more Hitlers. The rulers of this most insecure of all worlds are rulers by accident; inept, frightened pilots at the controls of a vast machine that they cannot understand, calling in experts to tell them which button to push.
Image via Lamnatos on Flickr