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Getting  There  from  Here A Flight to Simplicity  Chris Cook, Institute for Security & Resilience Studies 6 June 2011
“ 21 st  Century problems cannot be solved with 20th Century solutions” .  Dr Narsi Ghorban
Market 1.0 –  decentralised  &  disconnected
Market 1.0 – physical market presence
Here : Market 2.0 -  centralised  &  connected
Market 2.0 - presence via intermediaries
There : Market 3.0 -  decentralised  &  connected
Market 3.0 - network presence
Here  - at Twin Peaks
Peak Credit  - financial demand on people
Peak Oil  - demand on a finite resource
Peak Credit  – intermediary Banks create credit pyramids on their bases of Capital Credit Capital
Banks  outsourced  credit risk
Freeing Capital to support more credit creation
Totally   – securitisation and sale of debt to 'shadow bank' investors
Temporarily   – Credit Derivatives  (CDS - a time-limited guarantee)
Partially  – using credit insurance from insurers such as AIG
Radioactive cocktails of all three, like CDOs, structured finance and so on
The Result was a  bigger   Credit Pyramid than Banks alone could sustain… Investor Capital Credit Bank Capital
… and an opaque 'shadow banking system' of Investors holding sliced and diced risk Investor Capital Credit Bank Capital
This pyramid of Credit funded the Mother of all Bubbles in US property prices….
… and servicing this credit finally exceeded the financial capacity of the US population
Maybe the end of cheap oil spiked the bubble?
Peak Credit  – was the point when the Property Bubble began to deflate
But by now no-one knew where the Risk was Investor Capital Credit Bank Capital
Banks started to think, “if this is what  our  balance sheet looks like…..”
“… what does everyone else’s look like?”
The problem is not shortage of money -  liquidity
It is shortage of Capital -  solvency
Solvency of Banks is one aspect Capital Credit
The other aspect is the solvency of populations
And a secular decline of purchasing power
Loans which cannot be paid, will not be paid
Non-performing loans drain money out of the system...
...threatening a deflationary spiral...
....which requires periodic transfusions
...to avoid Depression
Quantitative Easing  – increases quantity of money and prevents deflation
This dilutes the value of money, and causes inflation of financial asset prices
Money will only inflate retail prices if lent or spent into circulation
But at the  Zero Bound  of 0% dollar interest rates strange things happen
Investors buy  anything but dollars  whether it carries a return or not
Investors buy Structured Products from Banks and Units in Exchange Traded Funds
The motive is Fear: investors aim to avoid loss, not to make speculative transaction profit
Financial demand – not consumption – has caused correlated commodity bubbles
Many markets have become financialised and have lost touch with reality  Totally financialised Brent/WTI 2011 Semi - finan...
So Investors have actually created the very inflation they seek to avoid
Getting from  Here  to  There
Unitisation : a Flight to Simplicity
Financing  - short term investment in creation of new assets
Funding  – long term investment in productive assets
There are conventionally two types of ownership - Public or Private 03/04/10
There are two conventional types of investment: Equity and Debt 03/04/10
Equity: shares in a Joint Stock Limited Company 03/04/10
The 19 th  Century legal dinosaur...  03/04/10
...which makes the Private Sector  Private 03/04/10
Debt: is typically created by banks as credit and secured eg by mortgages 03/04/10
...giving two conflicting claims over the same productive asset 03/04/10
But there are new creatures out there  03/04/10
Equity vehicles: Trusts, ETFs, ETCs, ETPs, REITs, Master Limited Partnerships (MLPs)  03/04/10
Introducing the 21 st  Century UK Limited Liability Partnership (LLP) 03/04/10
A UK LLP is a corporate entity with limited liability 03/04/10
...and...errrr...that’s it!...an  Open  Corporate 03/04/10
As far as the UK Tax Man is concerned it  is  a Partnership 03/04/10
Over 68,000 UK LLPs are now in pervasive use for purposes never intended... 03/04/10
...even in the Public Sector, where Glasgow has five municipal LLPs 03/04/10
Capital Partnership  – direct investment in productive assets 03/04/10
Embryonic Capital Partnership 2002 ( > £1bn) Capital Partnership LLP 10 UK Hotels Gross  Revenues  Hilton Group Capital Us...
Generic Capital Partnership Custodian Investors Payment % % Use Managers Users
Productive assets are held by a  Custodian Assets Custodian Ownership
...who safeguards the asset and accounts Assets Custodian Ownership
Investors provide Financial Capital in money, or  money’s worth … Custodian Investors Financial Capital
Managers provide Human Capital of time, expertise and experience.... Custodian Investors Human Capital Financial Capital M...
Users pay for the use of Capital Custodian Investors Payment % % Use Managers Users
Result: Capital Partnership Custodian Investors Payment % % Use Managers Users
Capital Partnership reinvents Equity
Equity Shares  - % age shares in flows of revenue or production 03/04/10
Units   – redeemable in payment for use value eg rentals, Kilowatt Hours
Example: “The Art of Flirting” – a film incorporated as an LLP 31/05/10
The actors received  nth’s  of  gross   revenues 31/05/10
I got 5%...and the producer the rest 31/05/10
But we needed lights, cameras, pizza, coffee 31/05/10
Capital Partners invested £ for 20% of the revenues.... 31/05/10
...if there are any 31/05/10
Art of Flirting Partnership Custodian Financial Capital (Investors) Viewers % % £ 31/05/10 Human Capital (Actors, Producer...
Albion Trust - a charity providing affordable office space   31/05/10
Due to demand for affordable space they bought the adjacent disused church... 31/05/10
...and planned a £4m development 31/05/10
But if they borrow, rentals will be  unaffordable 31/05/10
Solution?  An Albion Partnership Custodian Investors Tenants % % £ 31/05/10 Managers
Unitisation Custodian Investors Users %  Units % Rental 16/06/10 Managers
Unitisation  – the creation of ownership claims which are  value-based   16/06/10
Securitisation  – the creation of debt claims against third parties which are  value-backed 16/06/10
Unitisation - changes the quality rather than the quantity of credit:  Qualitative Easing  16/06/10
Resolution  – through Unitisation of rentals  16/06/10
Rental   Units  – undated credits redeemable in payment for occupation  16/06/10
Custodian  is appointed or incorporated  Custodian Houses
Affordable (index-linked) rental is set Rental Custodian Occupiers
Proportional Share allocated to Manager % Rental Custodian Occupiers Manager
Balance available for unitisation and sale % % Rental Custodian Investors Occupiers Managers
Units  are sold to Investors at a discount to the rental value 16/06/10
The discount determines the return 16/06/10
Debt : £300k pa will fund <£4m debt over 20 years at 5% compound interest 16/06/10
Units  - £300k (initially) funds £5m @ 6% £10m at 3%; £20m @ 1.5% (index-linked) 16/06/10
Investors lend direct to the land – not to the owner 16/06/10
Surprise! No compound interest + no principal repayment = drastic cut in funding costs  16/06/10
Occupiers - may invest simply by paying rent in advance 16/06/10
Receive 'Sweat Equity' Units if they maintain the property themselves 16/06/10
Investors – Units are a secure and liquid new asset class 16/06/10
Secure – credit default risk in respect of capital becomes liquidity risk 16/06/10
Secure - affordability of rental means income is  by definition  more certain to be paid 16/06/10
Liquid – Units in pools are not fragmented by date, rate of return or even issuer 16/06/10
Liquid – even if Investors do not buy Units, Occupiers will buy for redemption 16/06/10
Intermediaries (eg Banks) – transform from a transaction model to service provision 16/06/10
...and need Capital only for operating costs 16/06/10
So Back to the Future? A reversion from investment banking to merchant banking? 16/06/10
Resolution  - exchange of dated land-backed debt for undated land-based credit  Units   16/06/10
Transition  -  through Unitisation   of energy  16/06/10
Energy Pool Custodian Investor User Energy Energy Energy Manager
Units  - redeemable in payment for energy 05/04/10
Mega Watts : renewables funded by unitising Energy Pool of production. 05/04/10
Nega Watt  energy savings - the cheapest energy - funded by an Energy Loan in Units 09/03/10
Energy Loans  in KwH made to properties & repaid via utility bills out of energy saved 09/03/10
Funded by investors who invest through buying Units in  Energy Pools   09/03/10
Energy Loan of £5,000 50 Units of 1 Megawatt Hour @ £100 per Unit 09/03/10
5,000 Units of 10 Kilowatt Hours @ £1.00 per Unit...and so on 09/03/10
Reduced energy bill paid to power supplier for energy consumed 09/03/10
Energy loan repaid through buying Units from the Pool at the market price 09/03/10
The Coalition's Green Deal faces Jevon's Paradox: how to change behaviour? 09/03/10
Unitisation: saving energy  is  saving money 09/03/10
But how do we transition from a carbon economy? 09/03/10
Transition through Gas 09/03/10
Carbon Levy  -  initially on gas - funds Energy Pool investment in renewable  Mega Watts 09/03/10
… and Green Deal investment in  Nega Watts 09/03/10
An  Energy Dividend  is paid in Units 09/03/10
The outcome is that those with above average carbon fuel use ...
… .make a net transfer to those with below average use of carbon fuel
“ If you want to keep a cow healthy, you don’t regulate what comes out of it……”
“…… you regulate what goes in….”
Energy Pools enable Carbon currency based upon the  intrinsic  value of energy…
..rather than a market in  value-less  Units of CO2 emissions, imposed by governments
Capital Partnerships are not  Organisations 03/04/10
They do not  own  anything,  do  anything,  employ  anyone, or  contract   with anyone... 03/04/10
They are simply framework agreements with cross border application
They transcend borders through associative  consensual  agreements... 03/04/10
...rather than  adversarial  contracts imposed by national statutes or courts 03/04/10
Associative agreements require no legislation Custodians (National) Financial Capital (Money, IP etc) Users % % Payment 03...
No national or international organisations or hierarchies
Associative agreements enable  complementary  – not alternative - solutions
So, to get  There  from  Here
Anyone with Air Miles or Storecard Loyalty Points will understand Units
Units  – simply direct investment in value created by productive assets
Market 3.0  - networked; decentralised; disintermediated; adaptive....and  Resilient
Getting Started: the low-hanging fruit
Micro - optimal Equity Release
Macro - re-financing existing public assets
Micro - Community Energy
Macro – Global Market in Gas
Thank You 03/04/10
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Flight to Simplicity

  1. 1. Getting There from Here A Flight to Simplicity Chris Cook, Institute for Security & Resilience Studies 6 June 2011
  2. 2. “ 21 st Century problems cannot be solved with 20th Century solutions” . Dr Narsi Ghorban
  3. 3. Market 1.0 – decentralised & disconnected
  4. 4. Market 1.0 – physical market presence
  5. 5. Here : Market 2.0 - centralised & connected
  6. 6. Market 2.0 - presence via intermediaries
  7. 7. There : Market 3.0 - decentralised & connected
  8. 8. Market 3.0 - network presence
  9. 9. Here - at Twin Peaks
  10. 10. Peak Credit - financial demand on people
  11. 11. Peak Oil - demand on a finite resource
  12. 12. Peak Credit – intermediary Banks create credit pyramids on their bases of Capital Credit Capital
  13. 13. Banks outsourced credit risk
  14. 14. Freeing Capital to support more credit creation
  15. 15. Totally – securitisation and sale of debt to 'shadow bank' investors
  16. 16. Temporarily – Credit Derivatives (CDS - a time-limited guarantee)
  17. 17. Partially – using credit insurance from insurers such as AIG
  18. 18. Radioactive cocktails of all three, like CDOs, structured finance and so on
  19. 19. The Result was a bigger Credit Pyramid than Banks alone could sustain… Investor Capital Credit Bank Capital
  20. 20. … and an opaque 'shadow banking system' of Investors holding sliced and diced risk Investor Capital Credit Bank Capital
  21. 21. This pyramid of Credit funded the Mother of all Bubbles in US property prices….
  22. 22. … and servicing this credit finally exceeded the financial capacity of the US population
  23. 23. Maybe the end of cheap oil spiked the bubble?
  24. 24. Peak Credit – was the point when the Property Bubble began to deflate
  25. 25. But by now no-one knew where the Risk was Investor Capital Credit Bank Capital
  26. 26. Banks started to think, “if this is what our balance sheet looks like…..”
  27. 27. “… what does everyone else’s look like?”
  28. 28. The problem is not shortage of money - liquidity
  29. 29. It is shortage of Capital - solvency
  30. 30. Solvency of Banks is one aspect Capital Credit
  31. 31. The other aspect is the solvency of populations
  32. 32. And a secular decline of purchasing power
  33. 33. Loans which cannot be paid, will not be paid
  34. 34. Non-performing loans drain money out of the system...
  35. 35. ...threatening a deflationary spiral...
  36. 36. ....which requires periodic transfusions
  37. 37. ...to avoid Depression
  38. 38. Quantitative Easing – increases quantity of money and prevents deflation
  39. 39. This dilutes the value of money, and causes inflation of financial asset prices
  40. 40. Money will only inflate retail prices if lent or spent into circulation
  41. 41. But at the Zero Bound of 0% dollar interest rates strange things happen
  42. 42. Investors buy anything but dollars whether it carries a return or not
  43. 43. Investors buy Structured Products from Banks and Units in Exchange Traded Funds
  44. 44. The motive is Fear: investors aim to avoid loss, not to make speculative transaction profit
  45. 45. Financial demand – not consumption – has caused correlated commodity bubbles
  46. 46. Many markets have become financialised and have lost touch with reality Totally financialised Brent/WTI 2011 Semi - financialised Brent/WTI 2009
  47. 47. So Investors have actually created the very inflation they seek to avoid
  48. 48. Getting from Here to There
  49. 49. Unitisation : a Flight to Simplicity
  50. 50. Financing - short term investment in creation of new assets
  51. 51. Funding – long term investment in productive assets
  52. 52. There are conventionally two types of ownership - Public or Private 03/04/10
  53. 53. There are two conventional types of investment: Equity and Debt 03/04/10
  54. 54. Equity: shares in a Joint Stock Limited Company 03/04/10
  55. 55. The 19 th Century legal dinosaur... 03/04/10
  56. 56. ...which makes the Private Sector Private 03/04/10
  57. 57. Debt: is typically created by banks as credit and secured eg by mortgages 03/04/10
  58. 58. ...giving two conflicting claims over the same productive asset 03/04/10
  59. 59. But there are new creatures out there 03/04/10
  60. 60. Equity vehicles: Trusts, ETFs, ETCs, ETPs, REITs, Master Limited Partnerships (MLPs) 03/04/10
  61. 61. Introducing the 21 st Century UK Limited Liability Partnership (LLP) 03/04/10
  62. 62. A UK LLP is a corporate entity with limited liability 03/04/10
  63. 63. ...and...errrr...that’s it!...an Open Corporate 03/04/10
  64. 64. As far as the UK Tax Man is concerned it is a Partnership 03/04/10
  65. 65. Over 68,000 UK LLPs are now in pervasive use for purposes never intended... 03/04/10
  66. 66. ...even in the Public Sector, where Glasgow has five municipal LLPs 03/04/10
  67. 67. Capital Partnership – direct investment in productive assets 03/04/10
  68. 68. Embryonic Capital Partnership 2002 ( > £1bn) Capital Partnership LLP 10 UK Hotels Gross Revenues Hilton Group Capital User Consortium LLP Capital Provider Bank Property Developer Hotel Specialist % % % % %
  69. 69. Generic Capital Partnership Custodian Investors Payment % % Use Managers Users
  70. 70. Productive assets are held by a Custodian Assets Custodian Ownership
  71. 71. ...who safeguards the asset and accounts Assets Custodian Ownership
  72. 72. Investors provide Financial Capital in money, or money’s worth … Custodian Investors Financial Capital
  73. 73. Managers provide Human Capital of time, expertise and experience.... Custodian Investors Human Capital Financial Capital Managers
  74. 74. Users pay for the use of Capital Custodian Investors Payment % % Use Managers Users
  75. 75. Result: Capital Partnership Custodian Investors Payment % % Use Managers Users
  76. 76. Capital Partnership reinvents Equity
  77. 77. Equity Shares - % age shares in flows of revenue or production 03/04/10
  78. 78. Units – redeemable in payment for use value eg rentals, Kilowatt Hours
  79. 79. Example: “The Art of Flirting” – a film incorporated as an LLP 31/05/10
  80. 80. The actors received nth’s of gross revenues 31/05/10
  81. 81. I got 5%...and the producer the rest 31/05/10
  82. 82. But we needed lights, cameras, pizza, coffee 31/05/10
  83. 83. Capital Partners invested £ for 20% of the revenues.... 31/05/10
  84. 84. ...if there are any 31/05/10
  85. 85. Art of Flirting Partnership Custodian Financial Capital (Investors) Viewers % % £ 31/05/10 Human Capital (Actors, Producer, Me)
  86. 86. Albion Trust - a charity providing affordable office space 31/05/10
  87. 87. Due to demand for affordable space they bought the adjacent disused church... 31/05/10
  88. 88. ...and planned a £4m development 31/05/10
  89. 89. But if they borrow, rentals will be unaffordable 31/05/10
  90. 90. Solution? An Albion Partnership Custodian Investors Tenants % % £ 31/05/10 Managers
  91. 91. Unitisation Custodian Investors Users % Units % Rental 16/06/10 Managers
  92. 92. Unitisation – the creation of ownership claims which are value-based 16/06/10
  93. 93. Securitisation – the creation of debt claims against third parties which are value-backed 16/06/10
  94. 94. Unitisation - changes the quality rather than the quantity of credit: Qualitative Easing 16/06/10
  95. 95. Resolution – through Unitisation of rentals 16/06/10
  96. 96. Rental Units – undated credits redeemable in payment for occupation 16/06/10
  97. 97. Custodian is appointed or incorporated Custodian Houses
  98. 98. Affordable (index-linked) rental is set Rental Custodian Occupiers
  99. 99. Proportional Share allocated to Manager % Rental Custodian Occupiers Manager
  100. 100. Balance available for unitisation and sale % % Rental Custodian Investors Occupiers Managers
  101. 101. Units are sold to Investors at a discount to the rental value 16/06/10
  102. 102. The discount determines the return 16/06/10
  103. 103. Debt : £300k pa will fund <£4m debt over 20 years at 5% compound interest 16/06/10
  104. 104. Units - £300k (initially) funds £5m @ 6% £10m at 3%; £20m @ 1.5% (index-linked) 16/06/10
  105. 105. Investors lend direct to the land – not to the owner 16/06/10
  106. 106. Surprise! No compound interest + no principal repayment = drastic cut in funding costs 16/06/10
  107. 107. Occupiers - may invest simply by paying rent in advance 16/06/10
  108. 108. Receive 'Sweat Equity' Units if they maintain the property themselves 16/06/10
  109. 109. Investors – Units are a secure and liquid new asset class 16/06/10
  110. 110. Secure – credit default risk in respect of capital becomes liquidity risk 16/06/10
  111. 111. Secure - affordability of rental means income is by definition more certain to be paid 16/06/10
  112. 112. Liquid – Units in pools are not fragmented by date, rate of return or even issuer 16/06/10
  113. 113. Liquid – even if Investors do not buy Units, Occupiers will buy for redemption 16/06/10
  114. 114. Intermediaries (eg Banks) – transform from a transaction model to service provision 16/06/10
  115. 115. ...and need Capital only for operating costs 16/06/10
  116. 116. So Back to the Future? A reversion from investment banking to merchant banking? 16/06/10
  117. 117. Resolution - exchange of dated land-backed debt for undated land-based credit Units 16/06/10
  118. 118. Transition - through Unitisation of energy 16/06/10
  119. 119. Energy Pool Custodian Investor User Energy Energy Energy Manager
  120. 120. Units - redeemable in payment for energy 05/04/10
  121. 121. Mega Watts : renewables funded by unitising Energy Pool of production. 05/04/10
  122. 122. Nega Watt energy savings - the cheapest energy - funded by an Energy Loan in Units 09/03/10
  123. 123. Energy Loans in KwH made to properties & repaid via utility bills out of energy saved 09/03/10
  124. 124. Funded by investors who invest through buying Units in Energy Pools 09/03/10
  125. 125. Energy Loan of £5,000 50 Units of 1 Megawatt Hour @ £100 per Unit 09/03/10
  126. 126. 5,000 Units of 10 Kilowatt Hours @ £1.00 per Unit...and so on 09/03/10
  127. 127. Reduced energy bill paid to power supplier for energy consumed 09/03/10
  128. 128. Energy loan repaid through buying Units from the Pool at the market price 09/03/10
  129. 129. The Coalition's Green Deal faces Jevon's Paradox: how to change behaviour? 09/03/10
  130. 130. Unitisation: saving energy is saving money 09/03/10
  131. 131. But how do we transition from a carbon economy? 09/03/10
  132. 132. Transition through Gas 09/03/10
  133. 133. Carbon Levy - initially on gas - funds Energy Pool investment in renewable Mega Watts 09/03/10
  134. 134. … and Green Deal investment in Nega Watts 09/03/10
  135. 135. An Energy Dividend is paid in Units 09/03/10
  136. 136. The outcome is that those with above average carbon fuel use ...
  137. 137. … .make a net transfer to those with below average use of carbon fuel
  138. 138. “ If you want to keep a cow healthy, you don’t regulate what comes out of it……”
  139. 139. “…… you regulate what goes in….”
  140. 140. Energy Pools enable Carbon currency based upon the intrinsic value of energy…
  141. 141. ..rather than a market in value-less Units of CO2 emissions, imposed by governments
  142. 142. Capital Partnerships are not Organisations 03/04/10
  143. 143. They do not own anything, do anything, employ anyone, or contract with anyone... 03/04/10
  144. 144. They are simply framework agreements with cross border application
  145. 145. They transcend borders through associative consensual agreements... 03/04/10
  146. 146. ...rather than adversarial contracts imposed by national statutes or courts 03/04/10
  147. 147. Associative agreements require no legislation Custodians (National) Financial Capital (Money, IP etc) Users % % Payment 03/04/10 Human Capital ( Developers, Operators)
  148. 148. No national or international organisations or hierarchies
  149. 149. Associative agreements enable complementary – not alternative - solutions
  150. 150. So, to get There from Here
  151. 151. Anyone with Air Miles or Storecard Loyalty Points will understand Units
  152. 152. Units – simply direct investment in value created by productive assets
  153. 153. Market 3.0 - networked; decentralised; disintermediated; adaptive....and Resilient
  154. 154. Getting Started: the low-hanging fruit
  155. 155. Micro - optimal Equity Release
  156. 156. Macro - re-financing existing public assets
  157. 157. Micro - Community Energy
  158. 158. Macro – Global Market in Gas
  159. 159. Thank You 03/04/10

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