Bill Rubin, a senior investment analyst at BlackRock Inc. (BLK:US) who picks financial-company stocks, didn’t mince words a year ago when he e-mailed JPMorgan Chase & Co. (JPM:US) right after the bank disclosed a trading loss that ultimately cost more than $6.2 billion.
“We are very disappointed by this turn in events, not so much by the size of the loss, but more by the bad stumble in risk management/controls,” Rubin wrote, according to notes relayed to JPMorgan’s management by Sarah Youngwood in the bank’s investor-relations department. “Major reputation and sentiment hit, damaging.”
BlackRock, JPMorgan’s biggest shareholder with a 6.5 percent stake, will cast a key vote this month on whether Jamie Dimon should be allowed to retain both his roles as chairman and chief executive officer even after last year’s stumble. The vote pits Dimon, who runs the world’s largest trading business, against BlackRock Chairman and CEO Larry Fink, who runs the world’s biggest asset-management company.
The vote could represent “a clash of Too Big to Fails,” said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, invoking the phrase used to describe companies whose collapse is deemed too damaging to the economy to be allowed. “They’re both strong personalities.”
The two men are at the top of their respective Wall Street domains. Los Angeles native Fink, 60, runs the largest “buy side” business with $3.94 trillion of client assets, while New York City-born Dimon, 57, oversees the biggest “sell side” company, with a $2.39 trillion balance sheet (JPM:US).
“Fink is probably emblematic of the new power that the buy side has because of their sheer size,” said Geisst, who has written about the history of Wall Street. If BlackRock influences Dimon’s role, “people on Wall Street would all genuflect to BlackRock.”
Brian Beades, a BlackRock spokesman in New York, said “no single vote fully captures our philosophy on corporate governance.”
BlackRock is one of JPMorgan’s biggest clients and counterparties as well as a shareholder. JPMorgan’s own asset-management business, meanwhile, competes with BlackRock and owns more than 1 percent of BlackRock stock, data (BLK:US) compiled by Bloomberg show. BlackRock has risen 29 percent in the past five years, outstripping JPMorgan’s 8 percent gain.
“BlackRock is voting shares that could be the swing vote for JPMorgan,” said Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor. “The power has shifted, not just from JPMorgan to BlackRock, but from the sell side to the buy side.”
BlackRock has moved to encroach on JPMorgan’s territory. It announced plans last year to start a bond-trading system, called the Aladdin Trading Network. The effort failed because it couldn’t attract enough customers, and BlackRock said last month that it would route trades instead through MarketAxess (MKTX:US) Holdings Inc.’s electronic system. MarketAxess, now a publicly traded company, was founded in 2000 by two executives from JPMorgan.
BlackRock started a capital-markets unit in 2010 to give money-management clients direct access to bond sales, also a business JPMorgan has dominated.
As the biggest manager of exchange-traded funds, investments that generally track indexes, BlackRock has gained stakes exceeding 5 percent in some 2,400 companies worldwide. Early last year, BlackRock decided it was time to leverage this position and assert more power in how corporations are managed.
Fink wrote a letter in January 2012 to 600 companies in which BlackRock had the biggest holdings, saying that the firm wanted to have a direct dialogue with company managements about issues before they come up in proxies or shareholder meetings.
In the letter, Fink said that BlackRock reaches its voting decisions independently of proxy-advisory firms and that they are designed to “protect the economic interests” of investors.
Institutional Shareholder Services and Glass Lewis & Co., the two most influential proxy-advisory firms, have recommended that JPMorgan shareholders vote to split the chairman and CEO roles held by Dimon. At last year’s meeting, 40 percent of the shares were voted in support of the same proposal.
Even as Fink’s company seeks to take a larger role in proxy matters, it’s leaving the JPMorgan question to others. BlackRock will outsource decisions on the JPMorgan proxy to a London-based firm called Governance for Owners, according to a person familiar with the company’s decision.
PNC Financial Services Group Inc., the Pittsburgh-based lender, owns about 21 percent of BlackRock. That makes BlackRock subject to restrictions under the Bank Holding Company Act on voting directly on certain shareholdings, according to the person, who asked not to be identified because he’s not authorized to speak on the matter publicly.
BlackRock used Governance for Owners for the JPMorgan vote last year, opting to allow Dimon to keep both roles, the person said. While Governance for Owners is aware of BlackRock’s corporate-governance philosophy, it doesn’t have to follow it, the person said.
In a May 7 television interview on CNBC, Fink said BlackRock’s corporate-governance guidelines published on its website make clear that “we believe there is a role for a combination of chairman and CEO,” adding, “I’m a chairman and CEO.” He said BlackRock has invested “millions of dollars” on its corporate-governance team to make decisions.
“I don’t even know what is happening on this one issue and it would not be proper for me to know for the independence of this team,” Fink said. Asked if he’s talked to Dimon about the topic, he said “I’ve had conversations with Jamie.”
BlackRock, which has been publicly traded since 1999, hasn’t faced any shareholder proposals, let alone one that would separate Fink’s chairman and CEO roles, according to data compiled by FactSet Research Systems Inc.
The JPMorgan vote, coming more than a year after the trading loss that led to congressional hearings and the departure or demotion of about a dozen executives, is a referendum on Dimon, whom President Barack Obama called “one of the smartest bankers we’ve got.”
Fink and Dimon are both Democrats and have been named in the past as potential Treasury Secretary candidates. Each played a role in helping the government during the financial crisis, with JPMorgan buying Bear Stearns Cos. and Washington Mutual Inc. and BlackRock managing portfolios of assets acquired by the Federal Reserve from Bear Stearns and American International Group Inc.
Dimon has a higher public profile. He’s a regular at the World Economic Forum in Davos, Switzerland, an event that Fink eschews. And while Dimon took a politician-style bus tour last year to meet with employees and clients, Fink has said he’s a reluctant promoter of himself and his business.
“I don’t like being that visible in the industry -- I much preferred the first 12 years when no one knew who BlackRock was,” he said in an interview last year. “But I don’t think I could stand there and say our voice could be silent anymore. Our scale, our visibility, our business model has given us a platform in which we need to have a voice on behalf of our clients.”
BlackRock began a five-year branding campaign last year as it seeks to get investors back into higher-yielding assets such as stocks and expand its retail business. Fink has said clients need to diversify and can be harmed by staying in cash-like products. Earlier this week, he spoke at New York University’s Stern School of Business about the need for retirement-savings reform and creating a mandatory savings system.
Last year’s e-mail on the trading loss from Rubin, who selects stocks for some of the firm’s large-cap value mutual funds, demonstrated how assertive the asset manager can be. Youngwood’s notes, e-mailed to Dimon and seven other JPMorgan executives, called for “an aggressive response on four fronts,” including a look at cost reductions and a stock buyback.
The notes were made public earlier this year by the U.S. Senate Permanent Subcommittee on Investigations, whose report said Dimon misled investors and dodged regulators in an effort to hide escalating losses at the bank’s chief investment office. JPMorgan has said that senior management acted in “good faith” and never intended to mislead anyone.
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