Saturday, March 6, 2010

Reformed Banking- J-Model

I Love finance. The stock market, the company projections, the concepts, macro economic trends, having to care about Iraqi and Brazilian Oil Fields, I love it all (okay...maybe not so much the number crunching).

But it's an inherently unfair system, the people who get loans are the ones who already have significant money and assets lying around (generally in offshore accounts). What I'd like to see is a bank that'll give a homeless guy off the street a loan to start his own business. A bank that's both profitable and altruistic. I'm a dreamer I realize, and I thank God every day that I never tried LSD, Cocaine, or any other kind of banned substance, otherwise I'd really be for baby mama's maybe?

I think the world needs a new kind of bank, the kind that actually has some social development goals coupled with the profit motive that can actually uplift a country and change peoples lives for the better?

1. Don't give Loans, buy Equity: Make any business loans akin to a partnership for a specified period of time. The bank doesn't earn fees; it earns a share of the profits. This may result in Banks meddling with companies to make them more efficient, but I don't think that's a bad idea.

It sounds a bit like venture capital and private equity, but the key difference here is that the profits will be shared in equal proportion to the DEPOSITORS (Management gets a sweet stake too....If you want the best, you pay for the best). And yes, the depositors will still have access to their accounts as usual, but at the end of the year, they will receive a weighted average portion of profit. If the banks declares a loss, then the depositors lose money. It's that simple. Take it or leave, it's also completely Islamic for all of you people I get to call infidels for not agreeing with me.

2. Standards & Regulations: Require companies that the Bank does business with to meet minimum standards like actually paying a minimum wage, address environmental concerns and spend a portion of their profits on non-for profit charities.

I vote donations to the Charity of Knocked up Play Boy Bunnies....It'll be good for PR...I promise.

3. Private Loans Conundrum; Now individuals often need loans for education, weddings and perhaps a good oven toaster (everyone needs a good over toaster), the question is how do you make loans under my model? Well, as always, I have a solution.

Not only will the loan be based on their credit history, their salary slip, assets etc, but that persons severance package. No loan is to exceed that amount. Period. And a contract will be signed that they will directly debit the amount from their salary on a monthly basis and if they get fired their severance will be...Or we can just take the market value of their disposable organs and monthly blood and sperm donation revenue and factor that in....what? It's a Win.

4. This Greed is Good for an Economy: Businesses will be run more efficiently, entrepreneurs will have actual business partners, Corporations will only be on the hook for amounts that they use, The government will be assured more revenue as there will be greater documentation of taxation.

The government ought to be happy about it, because they'll be more money for them to steal/borrow. I expect imports of 100 year old Scotches, BMW's and space ships to sky rocket....oh and sugar, Pakistani like their sugar.

5. Who would invest in such a Awesome model: I think the IMF, World Bank, Asian Development bank to name a few might be a tad bit interested in this sort of innovative model. Buffet and Soros like minded people might think its a good idea to park their idle cash in a system that promotes innovation and strong returns. Any excess cash can always be parked in other banks and financial institutions using liquid'ish debt instruments.

If you think about it, what the bank will be doing is entering into partnership with businesses and that assures them a share of any profits made, which thanks to efficient measures could be higher interest.

Obviously this would be balanced down by businesses that don't perform well, but that's when the debt revenue comes in handy to cushion losses. So theoretically it works....Must drink more red bull to delve deeper.

6. It Breeds Entrepreneurs: Banks themselves will help build, train and give experience to future entrepreneurs who manage their 'loan' portfolio, the next generation can get into the nuts and bolts of how to set up, run and efficiently manage a business.

The reason why so many people are corrupt is largely because they have no other way to increase their earnings rather than make more at their current jobs through....out sourcing themselves. By having programs that breed entrepreneurs, people who have no other means to make decent money have avenues for future opportunities.

Small Businesses create more jobs that big ones. And Banks can help....because it makes them money....oh and we care...a lot....seriously.

7. Promote Efficiency and Actual Credit Standards in Banks! Banks would become lean efficient machines that would have very low rates of delinquent loans, because their own profits would be directly on the line. No more 'friendly' loans. A business better have a pretty compelling power point and business plan on why it needs money.

Banks earning would go through the roof. Particularly as it's shareholders are literally everywhere. If their are some negligent morons (as there probably will be), firing them will be a public monthly spectacle where shareholders will be invited to bear witness...Sell tickets and popcorn, it'll increase revenue.

8. Banks have a Solid reason to care about their Customers: Currently, banks do what's best for the shareholders first and depositors second. Push comes to shove, they'll tack on higher fees on the depositors to keep the share holders happy. Now by making them both one and the same, it gives the bank access to it's shareholders funds, as well as it's depositors to induce better returns.

This might give the clientele a huge power trip, but there will be a lot less Customers put on hold while folks go on their 3rd tea break of the morning.

9. Give Preferential Loans to Women. They carry men's babies and need something to do during the day, have programs that help them run businesses from their homes, be it web based, sewing, writing etc.

Give some special loans for really cool innovative businesses like a Bungee Jumping facility (I love the idea of bungee jumping).

10. Invest in your Employees, expand EVERYONE'S Horizons: Offer educational programs and opportunities to everyone within the organization. I don't care if it's the maid or the CEO, everyone is entitled to the same opportunities as everyone else. If they want to go to school or gain a degree, the company ought to be obligated to cough that cash up.

It's fair and it's good PR. The costs can be mitigated by educational loan financing or that body part collateral thingy I talked about. If a bank is truly going to succeed, it needs to realize that it's merely the sum of the people that are working there. The truth is that most banks have awful work cultures, and people feel stifled by the lack of freedom.

The more educated a banks employees they are, the more they can contribute to realm of ideas on how to improve that bank. Ivy league grads are going to have a hard time figuring out how to expand their banks presence in depressed areas, but someone from that area who has gained educational opportunities through the bank is likely to be more valuable. It breeds good will in the industry. End of the day, it's good for business to local solution via the natives of the area.

The Big Idea:

The Greatest countries in the world are ones where small innovative businesses have thrived, thanks to the freedom and sources of capital to match their dreams. They have the avenues for their citizens to gain opportunities for a better life. That's meritocracy, and the J-Model of Banking can take us one step closer to opening up that dream for others (and make a butt load of money). Banks are the forefront of change.

Governments are too big, corrupt, unwieldy, inefficient and just plain unaccountable. Banks are the only sector that actually are connected to the rest of the economy and the country.

Getting a loan is hard, as it should be, but let's make it a little bit more fair.


Anonymous said...

So this whole model is based on the initial proposition that banks rather than make a loan should in effect buy equity in the company in which they invest? Everything follows from that one point? But isn't it the case that banks are institutionally conservative, and might not having them as more of a business partner be antithetical to innovative and risk taking business? Just a thought. This isn't at all my comfort zone. As a polemic it's lovely.

Alpha Za said...

Banks are conservative or risk takers, depending on who you ask. One form to maintain a conservative stance and returns would be to invest money in government securities.

Having banks as business partners would expand the realm of expertise, the single most common reason businesses fail is due to inadequate cash flows. Banks have that knowledge to alleviate that, rather than force that firm to liquidate or write off the amount as a loss.

Currently most business owners are already subject to their banks, in forms of their loan terms, over drafts, financing facilities. By making the bank a partner, would increase the scope of the banks profit making.

Anonymous said...

And another thing, would having a bank as a partner in your enterprise, as opposed to just financing the business, be attractive to the entrepreneur? Isn't it more likely that the businessman worth his salt wants to pursue his own vision? Hasn't there got to be the hands off venture capital provider who backs the idea, and the entrepreneur, without needing to interfere? If banks are put in the position of having to back a business because they own part of the equity, doesn't that cloud judgement and make it more likely that banks themselves will get into trouble? Isn't it true that sometimes businesses should fail? Would a bank with a share in the equity be able to make that decision?

Alpha Za said...

Yes, Banks would definitely let a company that deserves to fail to fail, because if its one thing that banks are good at is number crunching. Usually, I'd imagine they'd minimize high risk businesses, but that depends on what sort of credit rating system they have.

Most entrepreneurs know their own expertise, for example an ice cream shop owner, knows how to make good ice cream, but he probably doesn't know how a business runs or the numbers work. A good entrepreneur worth his salt would want to focus on what he/she is good at. Divisibility of labor...

If they want to pursue their own vision, they are under no obligation to enter into the agreement, either way they'll need a bank, and J-Model bank is one where they'll gain extra expertise and particularly for the next generations sake, ensure that it's a going concern.

Banks wouldn't interfere that much, if they didn't have faith in the entrepreneur, they wouldn't have given him money in the first place.

Anonymous said...

I think, and as I say I know next to nothing about finance or banking, that you are talking about ideal models. Do you think, because this is your plan, that you might have too rosy a view of how the banks might work as equity partners? I'm trying to remain dispassionate, but can't help imagining that banks would interfere, in fact might more quickly find an excuse to, in situations where they are more than just the financial backer. I was talking to an executive in a major aid charity recently and she said that the more money a donor had given them the more they wanted to direct how the money should be spent, often with little understanding of where it would be best spent. A good part of her time is spent with executives and auditors arguing the case for the charity's decisions, and occasionally losing the argument with what eventually become demonstrably poor outcomes for the beneficiaries of the aid. Isn't this a parallel with what might happen with banks if they become so closely involved in their clients' business?

Alpha Za said...

haha, of course I'm talking about ideal models. Models are all built for a set of perfect principles. The most perfect model can be corrupted by human behavior. What you do is build a model where there is a lack of incentives for humans to act corruptly. For example, Goldman distributes about half of it's profits amongst employees. So they are all perfectly aligned to making money for all.

In terms of Banks interfering, Banks are lending to businesses they believe will make them money, and they realize they can't do that if they interfere more than they ask. A charity, basically doles out money. You expect no return from it, so if you give alot, you expect a voice on how the money is spent. If you don't agree with it, you should be able to yank it out, after all, the purpose of your charity allocations is to do good. Banks work as an organization to make profits. They want real returns and if owners don't have autonomy they won't be able to create them. Banks wouldn't give money to a companies management if they did'nt believe they knew what they were doing. So no, they wouldn't interfere unless the company was really in the doldrums.

You also have alot of venture cap and private equity firms that do in fact act as silent investors to start ups. Facebook, Twitter, etc.

Anonymous said...

Well banks basically dole out money, and both they and charities expect a return (different in kind maybe, but still a return). All I was trying to illustrate was how difficult it is for a charity to work towards what its judgement says is the best end if the powerful donees decide they want something, let us say, which is a more obvious tribute to themselves. You seem in any case to be so trimming your model that it has got a long way back towards the situation as it exists now, where the bank lends (invests, in your model) money and allows the entrepreneur the freedom to run the business untrammeled by interference. Is that different? You seem to me to be back to square one, leaving investment, as you say, to private capital.

Alpha Za said...

Well actually no, people who give to charities expect some 'good' to be done, and because it's their money, they feel they know more about what the money should be used for. If I gave money to a charity that helps the homeless, I'd rather the money be spent on feeding them versus building them a shelter as the charity feels. We both have valid arguments of what the 'greatest' good is. Which is reasonable, even though charity dollars are mostly used for tax breaks.

Banks don't care about greatest good. They want a tangible return, the difference between that and private capital, is that it's the banks profits belong to the depositors and when the bank invests in a project it will have a stake in the success of the project, and as banks typically don't have the man power to individually manage each investment, they are more likely to give money to those businesses that they feel don't need supervision, but will be there to help at all times in their own realm of expertise. Bank will obviously act, in the interest of it's depositors. Banks have the infrastructure to help businesses trim their costs, either via financial expertise or link ups with other invested clients of the bank.

Private Capital expects majority of the businesses it invests in to fail. As far as they are concerned it's a numbers game. for every face book a firm invests in, there are 20-30 duds.

Anonymous said...

So you would set your inexpert opinion above that of the people who are involved every day with the problems of the homeless or whatever? That's exactly my point about the banks, too generally stated perhaps (but argument forces us, eventually, into exaggeration). The situation you've created may or may not happen as you suppose, but the point is that you as the donee would want the money spent in a particular way, which may or may not accord with what the charity thinks is the best way to spend it. Exactly. And this, I'm suggesting, is how the bank might behave if it is too closely involved with the business. For the sake of argument I accept all you say about what a bank might (and I'm also assuming that the bank is run by clever men of sound judgement [such as yourself!] - which experience teaches us is not necessarily always the case) bring to a business, but I suspect it isn't what businessmen want. I imagine they want the freedom to act as their judgement tells them.

Alpha Za said...

I think when it comes to charity, everyone likes having some influence on how their money is being spent.

In terms of investment, it's not the banks money, it's the depositors money, so there is a lack of emotional attachment. It's more 'professional', banks are aware that even though when they are junior partners, they don't have control over the company.

Banks do currently in essence have some degree of control of how the money they loan out is spent. For example, they ask what the money is for?

Businesses may want complete control, but they also want to grow, be liquid and succeed. So they have to be willing to give it up, or go to a more conventional bank and take on debt. It's the price we pay.

Banks own equity is a lot of companies and usually don't have alot of say in how they are run.

Ali Naqvi said...

ok, you must read Banker to the Poor written by Nobel Prize winner Mohammed Younus and he created Grameen Bank which did you proposed in your J model. Ali Naqvi

Alpha Za said...

Thank you Ali, I've of course heard of Mr. Younus, but I thought his entire model was based on primarily lending to poor people with little collateral and charging them...well, 'attractive' interest rates.

I'll definitely grab that book at the first opportunity, Banking ought to be innovative and as time goes on, it must be.