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Owning Our Future: Enterprise as Living SystemMarjorie KellyAugust 10, 2012, San FranciscoRedesigning Finance: Pathways to...
A hidden ownership story“You could trace the biggest financial crisis in the history of the worldback to a decision” made ...
Investment banks going public:•   Salomon Brothers – 1984•   Lehman Brothers – 1984•   Goldman Sachs – 1999Consequences of...
Ownership design has consequences“Combing through the rubble of the avalanche, the decision to turn theWall Street partner...
Among banking alternatives:Cooperative banks•   Rabobank – a cooperative bank --    holds 43% of Netherland deposits.•   C...
Other banking alternatives:State-owned banks•   Bank of North Dakota – only    state-owned bank in U.S. –    remained resi...
Other banking alternatives:Building societies in UK•   Member-owned like credit unions.•   Many de-mutualized, went public...
Two archetypes of ownership designExtractive                   Generative1.Financial Purpose         1. Living Purpose2.Ab...
Enterprise as living system:The lessons of systems thinking1.   Behavior comes from structure.2.   The real structure is f...
Reinforcing feedback     vs. Balancing feedback•   Reinforcing feedback loops amplify    behavior. They tend toward oversh...
Systems do what they are designed to do.•   LIBOR rate-fixing scandal.•   Toxic mortgage derivatives.•   Burdensome studen...
Extractive design of finance, when deregulated,leads naturally to financial overshoot.  Financial overshoot: when financia...
Impetus for derivatives: “desperate search for profits”“Beneath all the financial wizardry,beneath all the financial engin...
Implications for investors1.   In an era of financial overshoot, is publicly traded     ownership fundamentally unsuited t...
The banking alternative•   What is the project about?•   Define the goal of this project•   Define the scope of this project
Other banking alternatives:Community DevelopmentFinancial Institutions•One example: Coastal Enterprises Inc.,loan fund in ...
Issues and Resolutions•   Description of the issue•   How was it resolved?•   What and how did it impact the project?    o...
Timeline
Today 90% of trading done by banks is generated by 6big publicly held banking giants•   JP Morgan Chase             Morgan...
A similar ownership shift across thebanking industry has been going onfor decades.•   In 1929, 250 banks controlled roughl...
Timeline
Dependencies and Resources
Appendix
Appendix•   Budget•   Design documents•   Marketing plan•   Supplemental documents•   Contact information
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Owning our future-enterprise_as_living_system_8-9-12

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Owning our future-enterprise_as_living_system_8-9-12

  1. 1. Owning Our Future: Enterprise as Living SystemMarjorie KellyAugust 10, 2012, San FranciscoRedesigning Finance: Pathways to a Resilient Future
  2. 2. A hidden ownership story“You could trace the biggest financial crisis in the history of the worldback to a decision” made by John Gutfreund, when, “in 1981 ,he’dturned Salomon Brothers from a private partnership into Wall Street’sfirst public corporation…. * Michael Lewis, The Big Short
  3. 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 Stern School of Business
  4. 4. Ownership design has consequences“Combing 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. 5. 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.
  6. 6. 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.
  7. 7. 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.
  8. 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 Finance 4. Stakeholder Finance5.Commodity Networks5. Ethical Networks
  9. 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. 10. Reinforcing feedback vs. 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.
  11. 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 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.
  12. 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. 13. Impetus for derivatives: “desperate search for profits”“Beneath 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. 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. 15. The banking alternative• What is the project about?• Define the goal of this project• Define the scope of this project
  16. 16. Other banking alternatives:Community DevelopmentFinancial Institutions•One 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. 17. 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
  18. 18. Timeline
  19. 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 Citigroup Source: 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. 20. A similar ownership shift across thebanking industry has been going onfor decades.• In 1929, 250 banks controlled roughly half the nation’s banking resources.• Today, 6 banks control nearly 74% of banking resources.
  21. 21. Timeline
  22. 22. Dependencies and Resources
  23. 23. Appendix
  24. 24. Appendix• Budget• Design documents• Marketing plan• Supplemental documents• Contact information

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