Silicon Valley Bank collapse: Billionaire Larry Fink raises spectre of ‘slow rolling crisis’

Larry Fink of BlackRock said rapidly rising interest rates were “the first domino to drop” and the SVB collapse was an example of the second. Photo / Mike Cohen, The New York Times

BlackRock chief executive Larry Fink has raised the spectre of a “slow rolling crisis” in the US financial system following the failure of Silicon Valley Bank, “with more seizures and shutdowns coming”.

In his closely watched letter to investors and chief executives, the founder of the US$8.6 trillion (NZ$13.9t) money manager said SVB’s collapse was an example of the “price we’re paying for decades of easy money”.

Rapidly rising interest rates were “the first domino to drop” while SVB was an instance of the second, Fink wrote as he warned that other regional banks and investors who rely on leverage could also follow suit.

Fink said swift regulatory action had helped stabilise markets after the biggest bank failure since 2008. But he nonetheless compared recent events to the 1980s savings and loan crisis, when more than 1000 lenders collapsed.

“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming,” he wrote.

Banks will inevitably pull back on lending, which will prompt more companies to turn to the capital markets — creating opportunities for investors and asset managers, Fink predicted.

But funds invested in illiquid investments, such as private equity, real estate and private credit, “could yet be a third domino to fall”, particularly if they have used borrowed money to increase returns, he wrote.

As the world’s largest money manager, BlackRock has large shareholdings in most US companies and Fink’s annual letter has become required reading for corporate executives.

However, his outspoken support for tackling climate change via investment has made the New York fund manager a target of conservatives.

Republican state officials have pulled more than US$4 billion (NZ$6.46b) of government pension and treasury funds from the firm on the grounds it is “boycotting” fossil fuel companies or putting social concerns ahead of its fiduciary duty to maximise returns for customers. BlackRock denies the claims.

Fink used the letter to hit back at critics, who have criticised him for taking a public stand.

“Part of supporting our clients includes speaking out on issues important to their investments,” he wrote. “There are many people with opinions about how we should manage our clients’ money. But the money doesn’t belong to these people. It’s not ours either. It belongs to our clients, and our responsibility and our duty is to them.”

Fink identified several other risks to the financial system in the 20-page letter, including geopolitical tensions and global fragmentation that would result in persistent inflation and lower returns for investors.

“Leaders in public and private sectors are essentially trading off efficiency and lower costs for resilience and national security,” he wrote. “Inflation will persist and be more difficult for bankers to tame. As a result, I believe inflation is more likely to stay closer to 3.5 per cent or 4 per cent in the next few years.”

That is well above the 2 per cent targeted by most central banks.

In previous years Fink has issued two letters, one to the chief executives of the companies that BlackRock clients are invested in and one to his own shareholders.

This year he opted to combine the two because “all of our stakeholders ... are facing so many of the same issues”.

Fink also boasted that BlackRock is the highest-performing financial services stock in the S&P 500 since its 1999 float, delivering total returns of 7700 per cent. Its share price is down 10 per cent so far this year.

Written by: Brooke Masters in New York

© Financial Times