With more than $23 trillion in assets under their collective management, the Big Three investment managers – BlackRock, Vanguard and State Street – are undisputed financial heavyweights. State Street has more assets under management than the entire annual gross domestic product of Germany. And together, they’ve become known for imposing a woke political agenda on corporate America.
The Big Three have heavily invested in America’s banks. At some of them, BlackRock and Vanguard hold more than 10% of the voting stock. State Street also holds substantial amounts of shares of many banks. That’s important because, under the Change in Bank Control Act, companies are prohibited from acquiring “control” of a bank unless certain federal regulators approve beforehand. Federal regulators long ago adopted regulations that rebuttably presume “control” when a firm holds more than 10% of the voting stock of a publicly held company.
Jonathan McKernan, a Republican on the FDIC’s board of directors, recently called for enhanced monitoring of the Big Three, and for temporarily prohibiting further investments by the investment manager behemoths in FDIC-regulated banks in excess of 10%. Democrat board member Rohit Chopra appears to be on board as well.
The bipartisan duo has it right. These investment managers have used voting power that they should have never been permitted to wield. Instead of using it solely for the benefit of their customers, they anointed themselves rogue, unaccountable emperors whose woke whims at banks could include choking off credit and denying banking services to businesses they politically disfavor, including oil companies, firearms manufacturers, payday lenders and other businesses not to their personal liking. The corrupting influence of their undeserved power should and can at long last be curbed in the case of banks.
The FDIC was weaponized during the Obama administration’s “Operation Choke Point” to actively discourage banks from serving clients with business classifications at ideological odds with the White House. After the operation’s discovery, it collapsed under the weight of legal action. But today, the acquisition of controlling blocks of bank stock by proudly woke investment managers raises the specter of a return to Operation Choke Point by different means.
Despite the prohibition on controlling interests above 10%, the giant managers do indeed own shares in excess of the 10% threshold. They’re being allowed to skate by regulators who give them a free pass on the condition that the companies signal their intent to retain a “passive” posture. In other words, it’s alright for them to hold a stake greater than 10% if they refrain from using that controlling interest to push an agenda. But, considering that they are exceptionally well-known for “forcing behaviors” like their arbitrary ESG standards, their assertion that they have been acting with passivity is completely self-serving.
Regulators seldom, if ever, enforce or even look into such flaunting of the rules. Among other things, government bank examiners should critically interrogate senior bank executives as to whether they’ve had any communication from shareholders BlackRock, Vanguard or State Street.
At a minimum, in the case of publicly held companies, share acquisitions above the 10% threshold should trigger the regulatory approval process, and investment managers would be expressly prohibited from pursuing such an acquisition in the event that the regulator denies the application.
Not only should the reform be implemented by the FDIC (which generally regulates smaller, often rural, community banks); but it should be adopted by other bank regulators, such as the Office of the Comptroller of the Currency (the primary regulator of all national banks) and the Federal Reserve Board (the primary regulator of companies that control banks).
For all practical purposes, the Big Three have a controlling influence over the American economy and are not held to account for their potentially despotic control. For its part, BlackRock has reportedly and self-servingly been asserting that existing arrangements with the FDIC are working and no changes regarding oversight are necessary. It would be hard to point to more compelling evidence that “business as usual” is not working and that a drastic shake-up is urgently needed.
Jerry Loeser is a retired bank regulatory lawyer who, over a 50-year career, counseled the Federal Reserve Board, major banks, and prominent law firms.
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