Owning Our Future: Enterprise as Living SystemMarjorie KellyAugust 10, 2012, San Francisco

Redesigning Finance: Pathways to a Resilient Future

A hidden ownership story

“You could trace the biggest financial crisis in the history of

the world back to a decision” made by John Gutfreund, when,

“in 1981 ,he’d turned Salomon Brothers from a private

partnership into Wall Street’s first public corporation….

* Michael Lewis, The Big Short

Investment banks going public:

• Salomon Brothers – 1984 • Lehman Brothers – 1984 • Goldman Sachs – 1999

Consequences of this shift:

• Greater internal conflict at firms.• More greed. • Shorter tenure among employees.

o Source: Richard Freedman, Jill Vohr, NYU Stern School of Business

Ownership design has consequences

“Combing through the rubble of the avalanche, the decision

to turn the Wall Street partnership into a public corporation

looked a lot like the first pebble kicked off the top of the hill.”

* Michael Lewis, The Big Short

Among banking alternatives: Cooperative banks

• Rabobank – a cooperative bank --

holds 43% of Netherland

deposits.

• Cooperative banks hold 21% of

deposits in Europe.

• The “submerged part of the

banking world.”

• In statistics kept by IMF, no

headings dedicated to

cooperative banks.

Other banking alternatives:State-owned banks

• Bank of North Dakota – only

state-owned bank in U.S. –

remained resilient in crisis.

• 17 states today considering

creation of similar state banks.

• State Bank of India – mission

of uplifting the people of India

– also resilient in crisis.

Other banking alternatives: Building societies in UK

• Member-owned like credit unions.

• Many de-mutualized, went public.

• After the crisis, not one of these

converted institutions remained

standing as independent bank.

• Spectacular example: Northern

Rock – had to be nationalized by

UK, bailout of billions.

               

Two archetypes of ownership design

Extractive Generative

1.Financial Purpose 1. Living Purpose

2.Absentee Membership 2. Rooted Membership

3.Governance by Markets 3. Mission-Controlled

Governance

4.Casino Finance 4. Stakeholder Finance

5.Commodity Networks 5. Ethical Networks

Enterprise as living system:The lessons of systems thinking

1. Behavior comes from structure.

2. The real structure is found in the rules of the

game.

3. System rules are created by feedback loops:

* Reinforcing feedback loop:

more requires more.

* Stabilizing feedback loop:

sufficiency is possible.

Reinforcing feedbackvs. Balancing feedback

• Reinforcing feedback loops amplify

behavior. They tend toward

overshoot and collapse.

• Stabilizing feedback loops

moderate behavior. They

maintain the equilibrium living

systems

require.

Systems do what they are designed to do. • LIBOR rate-fixing scandal.

• Toxic mortgage derivatives.

• Burdensome student loan debt.

• Municipalities saddled with $100s of millions in interest rate

swaps.

These are the logical consequence of financial firms seeking

maximum profits. Instead of chasing each as a singular problem

requiring unique legislation, systems thinking suggests the

approach of design:

Locate responsibility within the system.

Extractive design of finance, when deregulated, leads naturally to financial overshoot.

Financial overshoot: when financial claims exceed the load-

bearing capacity of the real economy.

Impetus for derivatives: “desperate search for profits”

“Beneath all the financial wizardry,

beneath all the financial engineering,

here there has been an increasingly

desperate search for new sources

of profit.”

-- Ron Chernow, author, The House

Of Morgan, speaking just days after

Lehman Brothers collapsed.

Implications for investors

1. In an era of financial overshoot, is publicly traded ownership fundamentally unsuited to banking and financial firms?

2. How can alternative designs be more systematically promoted – particularly when the next financial crisis hits?

3. In addition to Move Your Money and community investing, how can investors work for more fundamental shifts?

The banking alternative

• What is the project about?

• Define the goal of this project

• Define the scope of this project

Other banking alternatives:Community Development Financial Institutions•One example: Coastal Enterprises

Inc., loan fund in Maine, $791

million under management.

•1,000 CDFIs in U S.

•CDFIs include banks, loan funds,

credit unions with purpose of

serving community.

•No investor in 180 OFN member

institutions has ever lost a dime.

Issues and Resolutions

• Description of the issue

• How was it resolved?

• What and how did it impact the project?o Time

o Cost

o Other

Timeline

Today 90% of trading done by banks is generated by 6 big publicly held banking giants

• JP Morgan Chase Morgan Stanley

• Goldman Sachs Wells Fargo

• Bank of America Citigroup

Source: Bloomberg 6/13/12

These banks specialize not in lending but in trading –

Trading mortgages, equities, derivatives.

This trading was at the epicenter of the mortgage

crisis.

A similar ownership shift across the banking industry has been going on for decades.

• In 1929, 250 banks controlled

roughly half the nation’s banking

resources.

• Today, 6 banks control nearly 74%

of banking resources.

Timeline

Dependencies and Resources

Appendix

Appendix

• Budget

• Design documents

• Marketing plan

• Supplemental documents

• Contact information