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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

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Owning our future-enterprise_as_living_system_8-9-12

  • 1. Owning Our Future: Enterprise as Living System Marjorie Kelly August 10, 2012, San Francisco Redesigning Finance: Pathways to a Resilient Future
  • 2. 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
  • 3. 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
  • 4. 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
  • 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. 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. 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. 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
  • 9. 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.
  • 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. 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. 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 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.
  • 14. 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?
  • 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 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.
  • 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
  • 19. 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.
  • 20. 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.
  • 24. Appendix • Budget • Design documents • Marketing plan • Supplemental documents • Contact information

Editor's Notes

  1. This template can be used as a starter file to give updates for project milestones. Sections Right-click on a slide to add sections. Sections can help to organize your slides or facilitate collaboration between multiple authors. Notes Use the Notes section for delivery notes or to provide additional details for the audience. View these notes in Presentation View during your presentation. Keep in mind the font size (important for accessibility, visibility, videotaping, and online production) Coordinated colors Pay particular attention to the graphs, charts, and text boxes. Consider that attendees will print in black and white or grayscale. Run a test print to make sure your colors work when printed in pure black and white and grayscale. Graphics, tables, and graphs Keep it simple: If possible, use consistent, non-distracting styles and colors. Label all graphs and tables.
  2. * If any of these issues caused a schedule delay or need to be discussed further, include details in next slide.
  3. * If any of these issues caused a schedule delay or need to be discussed further, include details in next slide.
  4. What is the project about? Define the goal of this project Is it similar to projects in the past or is it a new effort? Define the scope of this project Is it an independent project or is it related to other projects? * Note that this slide is not necessary for weekly status meetings
  5. What is the project about? Define the goal of this project Is it similar to projects in the past or is it a new effort? Define the scope of this project Is it an independent project or is it related to other projects? * Note that this slide is not necessary for weekly status meetings
  6. What is the project about? Define the goal of this project Is it similar to projects in the past or is it a new effort? Define the scope of this project Is it an independent project or is it related to other projects? * Note that this slide is not necessary for weekly status meetings
  7. Duplicate this slide as necessary if there is more than one issue. This and related slides can be moved to the appendix or hidden if necessary.
  8. Duplicate this slide as necessary if there is more than one issue. This and related slides can be moved to the appendix or hidden if necessary.
  9. What is the project about? Define the goal of this project Is it similar to projects in the past or is it a new effort? Define the scope of this project Is it an independent project or is it related to other projects? * Note that this slide is not necessary for weekly status meetings
  10. Duplicate this slide as necessary if there is more than one issue. This and related slides can be moved to the appendix or hidden if necessary.
  11. Duplicate this slide as necessary if there is more than one issue. This and related slides can be moved to the appendix or hidden if necessary.
  12. What is the project about? Define the goal of this project Is it similar to projects in the past or is it a new effort? Define the scope of this project Is it an independent project or is it related to other projects? * Note that this slide is not necessary for weekly status meetings
  13. Duplicate this slide as necessary if there is more than one issue. This and related slides can be moved to the appendix or hidden if necessary.
  14. What is the project about? Define the goal of this project Is it similar to projects in the past or is it a new effort? Define the scope of this project Is it an independent project or is it related to other projects? * Note that this slide is not necessary for weekly status meetings
  15. What is the project about? Define the goal of this project Is it similar to projects in the past or is it a new effort? Define the scope of this project Is it an independent project or is it related to other projects? * Note that this slide is not necessary for weekly status meetings
  16. Duplicate this slide as necessary if there is more than one issue. This and related slides can be moved to the appendix or hidden if necessary.
  17. Duplicate this slide as necessary if there is more than one issue. This and related slides can be moved to the appendix or hidden if necessary.
  18. What are the dependencies that affect the timeline, cost, and output of this project?
  19. Prepare slides for the appendix in the event that more details or supplemental slides are needed. The appendix is also useful if the presentation is distributed later.