Another way to address the crisis on Wall Street

Once the $700 million bailout package is sorted out, the federal government will have to roll up its sleeves and figure out what went wrong and how to fix it.  I suspect that whatever they come up with will not fundamentally address the problem.  Here’s why:

1. Wall Street has gotten exponentially more complex in the last decade

2. Most lawmakers really do not understand all of this complexity

3. Regulation and oversight is an unbelievably blunt instrument

4. Things will just get more complex and more global, and if we overregulate we’ll fall behind the Middle East and Asia’s financial centers

So here’s another idea.  What if Wall Street CEOs had real downside risk, and real chance to lose not only what they earn in a given year but also what they earned in previous years?

Right now, the income of your average top-flight Wall Streeter might look like this: $10M; $20M; $25M; $55M; $130M….   They kept on taking on more leverage and paying out more and more until the music stopped.  It’s like being at a casino and playing with the house’s money.

Imagine you have that kind of money coming in.  Then your firm goes bankrupt and you make nothing in a given year (unless you’re the CEO of Morgan Stanley).  Big deal.  Sure it hurts, and your unvested stock loses value.  But you are going to land on your feet because you’re incredibly smart and good at what you do, so you’ll start another firm or get hired by another firm.

So what about putting previous years’ pay at risk too?  Then all of a sudden the equation changes, and you really lose when the firm loses.  It could be as simple as: “Make all the money you want, but if the firm goes bankrupt or there are material restatements in earnings, you owe us everything you made in the last 5 years.”

Of course this will never happen.  But until we realize that CEOs and top management were doing exactly what makes the most sense under the current incentive structure (“go big, because you get all the upside and the downside really isn’t that bad”) we won’t get at the root of the problem.

When will we start to see buyouts in the nonprofit sector?

There are a number of tools that exist in the for-profit sector that lead to greater efficiencies.  Some are about raising capital – for example, the more successful a for-profit business gets, the easier it gets to raise capital.  The opposite can be true in the nonprofit sector – where early donors can feel left behind as an organization starts to grow.

Another missing tool is buyouts.  When you buy a for-profit company, you buy their staff, assets, and revenue stream.  On the nonprofit side, when funders are dedicated to a particular organization or its leader, the revenue stream may disappear as a result of the acquisition.

I’m not sure this is the only reason we don’t see buyouts in the nonprofit sector, but it might be part of the reason.

Do you just do “more than nothing”?

I recently had the chance to look at the corporate responsibility / poverty alleviation project of a major multinational corporation, and it looked very familiar.  As far as I could tell, they took a set of things they already did, named it, studied it, collected a few metrics on it, and claimed thousands of jobs created, millions into the local economy, etc.

These days, it seems that every company has to do something “nice” for the world.  The problem is that, in most companies, a small group with not a lot of power, budget or influence is in charge of the “nice” projects.  Hence the result: going from doing nothing to doing a little bit “more than nothing.”  This might be good enough when your stakeholders aren’t going to dig any deeper – when all you really want is a theme for a section of your annual report, to write a press release, to get a few photo ops, etc.

I guess “more than nothing” is, well, better than nothing.  But it’s also pretty disappointing, and we shouldn’t pat ourselves on the back yet if this is the best we can do.

Blowup on Wall Street: the graphs

If you want a better sense of how big this blowup is on Wall St. (knowing that it’s probably not over yet), play around with this graphic from the NY Times website.  Just click on the boxes on the left-hand side of the page to compare then (market peak on Oct. 9, 2007) and now.

If nothing else, it looks like State Street is one of the big winners in all of this?

(I hope the NYTimes keeps on updating this one…I’d love to see it monthly for the next 6 months)

The latest in embodied cognition: can getting the cold shoulder actually make you feel cold?

Apparently it can, according to a recent article in the journal Psychological Science, as recently reported in the New York Times.  Dr. Zhong and Geoffrey J. Leonardelli, of the University of Toronto, ran two experiments:

In one, they split 65 students into two groups, instructing those in one to recall a time when they felt socially rejected, and those in the other to summon a memory of social acceptance.

Many of the students were recent immigrants and had fresh memories of being isolated in the dorms, left behind while roommates went out, Dr. Zhong said.

The researchers then had each of the participants estimate the temperature in the lab room. The students who had recalled being excluded estimated the temperature to be, on average, 5 degrees Fahrenheit lower than the others.

Pretty strong evidence that how we feel governs our state of mind and action as much as what we think.

If you could get your donation back, would you?

I always read the Kiva blog with interest.  In it, Matt Flannery, the founder and CEO, gives a candid, blow-by-blow account of Kiva’s growth.  Kiva is an innovative organization that allows donors to lend money directly to clients of microfinance organizations in the developing world.  This means that donors have the chance to connect to an low-income individual who needs a loan, lend that person money, and then get the money back.

There is a lot of interest in the idea of using invested capital (meaning funds that eventually will get returned to the investor) to fight poverty.  Which is why I found Matt’s recent post on the Kiva blog so fascinating.  In this latest iteration, Kiva “lenders” (the donors) get their money back as it’s paid back, rather than as one lump sum at the end of the loan cycle.  The effect, as Matt writes, was that people quickly turned around and lent money back to other borrowers:

We had a lot of activity, in the first 10 days since the event, our users have lent about $2.5M on the site.  Before that, we had been lending about $3M every month, so this is a significant jump.  However, instead of new funds being injected into the system, this surge of lending is compromised mostly of dollars that are already in the system.  Instead of sitting in our account, they been liquidated…headed next into the hands of entrepreneurs on the site with the help of our Field Partner MFIs.

This is an incredibly interesting observation, as it speaks to the mentality of the “philanthropic investor” who has the option of getting their money back.  My suspicion has always been that people who have this option would, in general, choose to reinvest the money that comes back to them — that the return of their donation is really more about accountability than about actually getting their money back.

As the social investing world expands, it will be interesting to see how this further develops.  It’s perhaps the first real data set that will help us all to understand how people really think about their giving.

A Revenues Strategy?

Before coming over to the non-profit sector I worked at IBM and GE, two of the biggest businesses around.  In Big Business, the people who hold the reins – the center of energy and talent – are people who bring in money: the sales guys, the CEO, the big account managers.  That’s where everyone’s bread is buttered, so it’s where the action is.

Surprising, then, how in the nonprofit sector everyone wants to be on the money-spending side of the equation (the “Program” side), and raising capital (a.k.a. fundraising) is mostly seen as a necessary evil.  Need proof?  Check out the Chronicle of Philanthropy’s job page today: 354 “fund raising” [sic] jobs; 102 “Administrative” and 80 “Program.”

The sector is doing itself a major disservice.  Raising money is a barometer of how effective you are at convincing the the most powerful, influential people in your orbit (whether you raise big gifts or have a retail strategy) to care about your mission and support it.  It’s taken as a given that the Obama Campaign’s ability to inspire people and raise money from them is a testament to the power of their message.  When was the last time you heard similar talk about a nonprofit that’s good at raising money?  We rarely if ever think about things like “Revenues” in a really strategic way.

As the meltdown continues in the banking sector, the nonprofit sector in New York (let alone city and state government) runs the risk of a major downturn in funds raised. Hopefully we can all roll up our sleeves and start to think differently about Revenues when the music starts again.