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CURRENT FINANCIAL RISK MANAGEMENT = “JUST SAY NO”
CURRENT FINANCIAL RISK MANAGEMENT = “JUST SAY NO”
I was a customer of Bank of America since age seven when my parents opened a savings account for me. During my mid-20's I asked BofA for a $1200 loan with which to buy a 1956 Chevy two door hard top – a primo car easily worth $2500. In turning me down, the loan officer said the car was too old. – No loan, no risk. I immediately close all of my accounts with BofA and have never done business with it since then.
Today, business failure is often triggered by the refusal of banks to make business loans – in fact they accelerate business failure by cutting down the lines of credit and calling debt due. FreddieMac and FannyMae own hundreds of thousands of homes and other properties, and more foreclosures are in the pipeline. All of the lending is based on “safety” of the loan which means the legal right to take assets away from the borrower. Financial statements are used more for the depth of net available assets a borrower has and credit ratings tell how much other debt is against those assets.
Foreclosures are caused mostly by job loss Lost homes and lost business contribute to foreclosures and a bad credit rating for the home owner and business owner. Banks fail and are taken over by FDIC, then sold to BofA and other financial monsters. It is like the smaller banks help dig their own graves then fall into them by using asset lending followed by foreclosure.
When banks, homeowners and businesses hit a cash flow emergency, that emergency usually triggers the failure. A company at the hinge point near failure, has little chance of selling equity shares or obtaining bridge financing – so they fail and the equity owners lose their investments. Using Chapter 13 is not much of a solutions – it is a long, costly and devastating experience, the result of which is a major hit on the credit rating.
So what can be done to create an economic environment in which investors, banks and other financial institutions can avoid unnecessary risk so they can say “yes”? Two steps need to be taken: (1) at least half of business enterprises need to be or become worker cooperatives with quadruple “bottom lines” (People, Planet, Profits and Principles) and (2) a means of buying, selling, trading and transferring financial instruments in a secure, honest and well-managed manner, such a system must be found and implemented. Let's take each solution, one at a time:
WORKER COOPERATIVES
A worker cooperative is a private capital-based company wherein the investors are the workers who manage themselves in a democratic legal setting. If our current way of financing and managing businesses is “top-down capital”, then a worker cooperative is “bottom-up capital”. The primary worker cooperative candidate for the Social Benefit Investment Exchange (SBIE) is the low profit, limited liability company (L3C), also known as a social benefit entrepreneurial enterprise (SBEE). Here are some of the hallmarks for worker cooperatives:
- Let's bring prudence into the financial services market and use risk management so we can say “yes”.
- By Jim Miller
I was a customer of Bank of America since age seven when my parents opened a savings account for me. During my mid-20's I asked BofA for a $1200 loan with which to buy a 1956 Chevy two door hard top – a primo car easily worth $2500. In turning me down, the loan officer said the car was too old. – No loan, no risk. I immediately close all of my accounts with BofA and have never done business with it since then.
Today, business failure is often triggered by the refusal of banks to make business loans – in fact they accelerate business failure by cutting down the lines of credit and calling debt due. FreddieMac and FannyMae own hundreds of thousands of homes and other properties, and more foreclosures are in the pipeline. All of the lending is based on “safety” of the loan which means the legal right to take assets away from the borrower. Financial statements are used more for the depth of net available assets a borrower has and credit ratings tell how much other debt is against those assets.
Foreclosures are caused mostly by job loss Lost homes and lost business contribute to foreclosures and a bad credit rating for the home owner and business owner. Banks fail and are taken over by FDIC, then sold to BofA and other financial monsters. It is like the smaller banks help dig their own graves then fall into them by using asset lending followed by foreclosure.
When banks, homeowners and businesses hit a cash flow emergency, that emergency usually triggers the failure. A company at the hinge point near failure, has little chance of selling equity shares or obtaining bridge financing – so they fail and the equity owners lose their investments. Using Chapter 13 is not much of a solutions – it is a long, costly and devastating experience, the result of which is a major hit on the credit rating.
So what can be done to create an economic environment in which investors, banks and other financial institutions can avoid unnecessary risk so they can say “yes”? Two steps need to be taken: (1) at least half of business enterprises need to be or become worker cooperatives with quadruple “bottom lines” (People, Planet, Profits and Principles) and (2) a means of buying, selling, trading and transferring financial instruments in a secure, honest and well-managed manner, such a system must be found and implemented. Let's take each solution, one at a time:
WORKER COOPERATIVES
A worker cooperative is a private capital-based company wherein the investors are the workers who manage themselves in a democratic legal setting. If our current way of financing and managing businesses is “top-down capital”, then a worker cooperative is “bottom-up capital”. The primary worker cooperative candidate for the Social Benefit Investment Exchange (SBIE) is the low profit, limited liability company (L3C), also known as a social benefit entrepreneurial enterprise (SBEE). Here are some of the hallmarks for worker cooperatives:
- Worker equity. Workers put in most of the equity capital, usually a great deal of it is sweat capital. Each worker has one vote.
- Failure prevention. The risk of failure is directly upon those who can do the most to prevent failure; hence, less chance of failure
- Reserve account. By transferring some of the profit each quarter to a reserve account, a financial cushion is created which prevents or reduces cash flow emergencies which would otherwise threaten the business.
- Oversight. As a self-managed company, the level of over-sight greatly increases.
- Local profit turning. Profits tend to stay within the community in which the business is located, thus turning several times to the benefit of other businesses and their workers.
- Charitable giving. Typically, ten percent of the profits are directly invested in local charities.
- Equality of voting power. Part of the profits are assigned to each worker each quarter to his/her capital account, which is used by the company as working capital. When the worker quits or retires, his/her capital account must be either paid to the worker or converted to Class C shares which, collectively can vote for only one-third of the governing board (Council of Managers or Board of Directors).
- Wage differentials. No worker can be paid more than three or four times the lowest paid worker. Workers can earn additional shares by advancing suggestions which improve the performance of the company.
- Work and pay equality. Workers who are in supervisory roles earn their normal base pay.
- Transparency. The financial records are available for all workers to examine online and all financial transactions are recorded, without exception.
- Transactional security. Class C shares may be traded on the Social Benefit Investment Exchange directly between seller and buyer in a secure transaction through the business escrow of SBIE. Registration of the instruments of ownership with SBIE provides for a chain of title.
- Critical due diligence. New financial issues by a SBEE are vetted by the Council of Advisors of SBIE and are subject to a due diligence examination by the SBIE Ombudsman.
- Bridge loans. SBIE is a source of emergency lending to bridge unforeseen emergencies of the SBEE. The amount of this fund will grow over time. This reserved will be funded internally by using twenty-five percent of the net profits.
- Credit union. SBIE and the worker cooperatives, will sponsor the formation of a credit union for worker savings and personal lending to members.
- A nation of savers. Our nation has become a population of consumers, riding on an increasingly higher pile of debt. We need to change from consuming to producing (mostly knowledge products and services). We need to become a saving nation like the Japanese. We need to reduce the personal, business and governmental debt. We can accomplish this goal by increasing the middle class and providing incentives for parents and children to save for college. To make this shift, requires family income to rise.
- Educational Savings. Savings are more likely when the out-go is less than the in-come. Poverty wage workers seldom have that choice. By eliminating the high compensation of the top side of top-down capital business and paying the workers with this savings, a SBEE can encourage workers to create educational and personal savings accounts.
- Synergistic effect. The profits allocated to stock dividends and interest payment which accrue to absentee capital owners, typically used by the payees for expenditures in locales other than the one in which the earning were made. In contrast, profits spent in the community in which earned “turn” several times in the community. This shift creates a synergistic effect on business formations and growth in the community when profits are paid to the local workers.
- Matching. The main role of SBIE is to match buyers and sellers, thus increasing the liquidity of investments in L3C or SBEE equity and debt capital. Full disclosure and secure transactions are essential to this process.
- Transparency. SBEEies are required to respond immediately to any concern raised by the SBIE Ombudsman. The financial records of each SBEE are totally transparent to the registered investors. Existing issues are generally traded between principals.
- The Market. A SBEE may elect a private sale to designated buyers of a new issue, or may post the issue for auction. No futures are traded. No broker/dealers are allowed.
- Issue offerings. If the issue can qualify as an exempt private offering, that will reduce the securities compliance costs. If the issue does not qualify for a private offering, it can be offered in a public offering. Most of the issues will be private, intra-state offerings. There is also the use of a business partnership – either an LLP or a Chapter S corporation – where all of the investors are active partners. Depending on the state of domicile, these other types of business entities may not comply with the L3C statutes and tax treatments. Each type will require careful evaluation by a tax attorney.
- Trader Board. Many companies which have invested labor and materials in inventory, sometimes have excess inventory which is no longer salable as the inventory used to be. Factory seconds and over-stock typically are sold through factory outlets or liquidators. SBIE will help remedy this situation by providing a barter board where SBEEies can list their “want to sell” and buyers can list their “want to buy” items for cash or barter. Wood Planet is typical of these boards. Also Craigslist is also an example of a trading board – or more of a classified ad board. The SBIE barter board will also index other trader boards.
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Latest page update: made by jimmiller5417
, May 11 2010, 7:28 PM EDT
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