owning our future-enterprise_as_living_system_8-9-12

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Economy & Finance

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1. Owning Our Future: Enterprise as Living SystemMarjorie KellyAugust 10, 2012, San FranciscoRedesigning Finance: Pathways to a Resilient Future 2. A hidden ownership storyYou could trace the biggest financial crisis in the history of the worldback to a decision made by John Gutfreund, when, in 1981 ,hedturned Salomon Brothers from a private partnership into Wall Streetsfirst public corporation.* Michael Lewis, The Big Short 3. Investment banks going public: Salomon Brothers 1984 Lehman Brothers 1984 Goldman Sachs 1999Consequences of this shift: Greater internal conflict at firms. More greed. Shorter tenure among employees.o Source: Richard Freedman, Jill Vohr, NYU SternSchool of Business 4. Ownership design has consequencesCombing through the rubble of the avalanche, the decision to turn theWall Street partnership into a public corporation looked a lot like thefirst pebble kicked off the top of the hill.* Michael Lewis, The Big Short 5. Among banking alternatives:Cooperative banks Rabobank a cooperative bank --holds 43% of Netherland deposits. Cooperative banks hold 21% ofdeposits in Europe. The submerged part of thebanking world. In statistics kept by IMF, noheadings dedicated tocooperative banks. 6. Other banking alternatives:State-owned banks Bank of North Dakota onlystate-owned bank in U.S. remained resilient in crisis. 17 states today consideringcreation of similar state banks. State Bank of India mission ofuplifting the people of India alsoresilient in crisis. 7. Other banking alternatives:Building societies in UK Member-owned like credit unions. Many de-mutualized, went public. After the crisis, not one of theseconverted institutionsremained standing asindependent bank. Spectacular example: NorthernRock had to be nationalized byUK, bailout of billions. 8. Two archetypes of ownership designExtractive Generative1.Financial Purpose 1. Living Purpose2.Absentee Membership 2. Rooted Membership3.Governance by Markets 3. Mission-Controlled Governance4.Casino Finance4. Stakeholder Finance5.Commodity Networks5. Ethical Networks 9. Enterprise as living system:The lessons of systems thinking1. 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. 10. Reinforcing feedback vs. Balancing feedback Reinforcing feedback loops amplifybehavior. They tend toward overshootand collapse. Stabilizing feedback loops moderatebehavior. They maintain theequilibrium living systemsrequire. 11. 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 maximumprofits. Instead of chasing each as a singular problem requiringunique legislation, systems thinking suggests the approach ofdesign:Locate responsibility within the system. 12. 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. 13. Impetus for derivatives: desperate search for profitsBeneath all the financial wizardry,beneath all the financial engineering, herethere has been an increasinglydesperate search for new sourcesof profit.-- Ron Chernow, author, The HouseOf Morgan, speaking just days afterLehman Brothers collapsed. 14. Implications for investors1. 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? 15. The banking alternative What is the project about? Define the goal of this project Define the scope of this project 16. Other banking alternatives:Community DevelopmentFinancial InstitutionsOne example: Coastal Enterprises Inc.,loan fund in Maine, $791 million undermanagement.1,000 CDFIs in U S.CDFIs include banks, loan funds, creditunions with purpose of servingcommunity.No investor in 180 OFN memberinstitutions has ever lost a dime. 17. Issues and Resolutions Description of the issue How was it resolved? What and how did it impact the project?o Timeo Costo Other 18. Timeline 19. Today 90% of trading done by banks is generated by 6big publicly held banking giants JP Morgan Chase Morgan Stanley Goldman Sachs Wells Fargo Bank of America CitigroupSource: Bloomberg 6/13/12These banks specialize not in lending but in trading Trading mortgages, equities, derivatives.This trading was at the epicenter of the mortgage crisis. 20. A similar ownership shift across thebanking industry has been going onfor decades. In 1929, 250 banks controlled roughlyhalf the nations banking resources. Today, 6 banks control nearly 74% ofbanking resources. 21. Timeline 22. Dependencies and Resources 23. Appendix 24. Appendix Budget Design documents Marketing plan Supplemental documents Contact information