Owning Our Future: Enterprise as Living System
Marjorie Kelly
August 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 Networks5. 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 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.

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