More Related Content Similar to Equity Shares - A Solution to the Credit Crash Similar to Equity Shares - A Solution to the Credit Crash (16) More from ChrisJCook (20) Equity Shares - A Solution to the Credit Crash1. Equity Shares A Debt Free Solution to the Property Crash Chris Cook FEASTA Annual Lecture 2008 5 November 2008 3. … .some say, “the end of the financial system as we know it” 06/06/09 5. … .but last year we reached the point of Peak Credit.... 06/06/09 10. To find out, we need to understand what banks actually do.... 06/06/09 11. A Bank is a Credit Institution which creates credit as interest-bearing loans.... 06/06/09 12. ... a Pyramid of Credit, on a base of “Regulatory Capital”... Bank Credit Bank Equity 06/06/09 14. ..but a Bank does not lend pre-existing money…. 06/06/09 15. … .it creates new money as interest–bearing credit…. 06/06/09 16. … .which is then deposited back into the system 06/06/09 18. ...is as a Credit intermediary or middleman... Lender £ 06/06/09 Borrower 20. … and guaranteeing that the borrowers’ credit is good… 06/06/09 24. ..and a profit to Investors normally results Bank Interest Borrowers Depositors Interest Costs Investors 06/06/09 26. … .that Banks began to “outsource” their guarantee to rid themselves of risk. 06/06/09 27. … and thus allow Equity to support more credit creation 06/06/09 29. … temporarily – with “Credit Derivatives” (a time-limited guarantee)…. 06/06/09 30. … and partially – using credit insurance from insurers such as AIG 06/06/09 31. The Result is a bigger Credit Pyramid than Banks alone could sustain… Investor Equity Credit Bank Equity 06/06/09 32. … and a “shadow banking system” of Investors with “sliced and diced” risk… Investor Equity Credit Bank Equity 06/06/09 34. … and servicing this credit finally exceeded the financial capacity of the US population... 06/06/09 35. … to the point of Peak Credit .... 06/06/09 36. In August 2007, the Bubble started to deflate and attention turned at last to defaults … 06/06/09 37. ..but by now no-one knew where the Risk lay… Investor Equity Credit Bank Equity 06/06/09 38. Banks started to think, “if this is what our balance sheet looks like…..” 06/06/09 41. The problem is not shortage of money - liquidity – Central Banks can handle that 06/06/09 42. … ..it is shortage of Equity - Solvency – which Central Banks cannot handle….. 06/06/09 44. … and Investors will not recapitalise the shadow banking system... 06/06/09 48. … and further defaults in the shadow banking system….. 06/06/09 49. … .continue to drain money out of the system in a “deflationary spiral”.... 06/06/09 53. So why not take a new approach to “Equity” investment instead? 06/06/09 55. Ownership by a Corporation is what makes the “Private Sector” Private 06/06/09 60. Income Trust Income Trust Corporation Gross Revenues Unit Investors % % Units Costs Dividends? 06/06/09 61. Units are sold to risk averse investors such as pension funds… 06/06/09 62. … who consider investment less risky if they access corporate revenues… 06/06/09 64. We are also seeing new asset classes such as Exchange Traded Funds (“ETF’s”)…. 06/06/09 68. In 2001 the UK introduced the Limited Liability Partnership (“LLP”)...... 06/06/09 70. … but a corporate entity with a legal personality independent of its members..... 06/06/09 71. … and limited liability, so members cannot lose more than they put in..... 06/06/09 73. … which is why I call it an “Open” Corporate.. 06/06/09 74. … and it is being put to some very interesting uses... 06/06/09 75. Capital Partnership - Hilton Deal 2002 Capital Partnership LLP 10 UK Hotels Gross Revenues Hilton Group Capital User Consortium LLP Capital Provider Bank Property Developer Hotel Specialist % % % % % 06/06/09 76. The Hilton Deal was the first example I have seen of a “Capital Partnership”... 06/06/09 78. Firstly, ownership of productive assets is transferred to a “Custodian”.... Assets Custodian Ownership 06/06/09 79. … then Investors put in Financial Capital in money, or “money’s worth”… 06/06/09 Assets Investors Custodian Ownership Financial Capital 80. … Managers put in Human Capital of time, expertise and experience.... Assets Investors Managers Custodian Ownership Human Capital Financial Capital 06/06/09 81. … and Users pay for the use of this Capital… Assets Investors Users Payment Managers % % Custodian Use 06/06/09 82. … resulting in a “Capital Partnership” Assets Investors Users Managers Custodian 06/06/09 84. (a) Equity Shares - proportional (%age) ”n’ths” such as billionths..... 06/06/09 85. … ..which may be bought and sold, but never redeemed, because there must always be 100% 06/06/09 87. ...with a value in exchange, but with no continuing rights to production 06/06/09 88. Units hold their value because they are asset-based on value provided by the issuer … 06/06/09 89. … .rather than being deficit-based upon a claim over value issued by a Bank 06/06/09 91. ..today we are looking at the potential of Land Partnerships.... 06/06/09 97. Then we rent the houses affordably but at an index-linked rental.... Houses Occupiers Custodian Rental 06/06/09 99. Then we appoint a Manager and give him a proportional share in the rentals.... Houses Occupiers Custodian % Rental 06/06/09 Manager 100. ....so that with a stake in the outcome he has an interest in doing a good job... 06/06/09 101. ....and the Investors complete the picture Houses Investors Occupiers Custodian % % Rental 06/06/09 Managers 102. Occupiers may “Rent to Buy” - simply by paying rent early, they become Investors... 06/06/09 103. ...and end mortgage slavery as rental may then be paid in Equity Shares, not cash... 06/06/09 108. ...who will buy from distressed developers their Equity Shares in the Rental Pool.... 06/06/09 118. ...and the Land Owner becomes an Investor Land Land Owner Custodian Land Value 06/06/09 119. ...as does the Council, in return for planning permission... Land Council Custodian Value of Planning permission 06/06/09 120. ...and so do the Contractors at least for their profit margin... Land Contractors Custodian Profit Margin 06/06/09 122. ....while the Developer invests “Intellectual Capital” of concept and services... Land Investors Land-owner, Council, Contractors, Risk Takers Developer Custodian Value Value 06/06/09 123. When the development is occupied... Houses Investors Occupiers Custodian % % Rental 06/06/09 Managers 130. So we go from a transaction model... Developer Property Buyer £ £ Property Buyer £ 06/06/09 Land Owner 131. ...to a service provider model where property is never sold again... 06/06/09 135. ...it does not own anything, do anything, employ anyone, or contract with anyone... 06/06/09 136. ...it is simply a framework within which the stakeholders self organise ... 06/06/09 138. So let’s replace conventional secured debt with a new form of Community Equity... 06/06/09 140. … and turn the Risk Pyramid the right way up! Management Equity Investor Units Community Equity 06/06/09