From Prime Mover to Freedom: Spirit Matters in Giving

August 17, 2009

By John Bloom

givingIf I could accomplish one change in the field of economics in this lifetime, it would be that gifts and philanthropy are understood as essential to a healthy economy, and even more so as the prime mover of all economic activity.  I think I can make the case for this with two examples.

First, each of us is born into a gift economy; that is, our physical needs for nourishment and care are met through the gifts bestowed by parents without expectation of recompense. So we begin life in gift, which we then develop, through education and other life experience, into capacities to serve others and meet our own needs. This means that what we absorb as gift, we are able to give back to the world through our own intentions and work. Of course, this is a reductivist picture, but pare away all we are conditioned to think about work and vocation — what, why, and how we get paid, the disintegration of experience that results from the division of labor. The result is a mega-bundle of gifts and needs waiting to be orchestrated into economic circulation through capacities and relationships.

The second argument for gift as the prime mover is its necessary role in cultivating all those creative human capacities up to the point where they have value in the world of exchange and transactions. The function of the parental gift so essential to early life is taken up more broadly by a culture (it takes a village) in how it transfers wisdom across generations. Culture would become stultified if there were no research and development, no evolving story, no place for experimentation and failure, and no avenue for new ideas to percolate and find their way into daily life. Since such experimentation is pre-production, it naturally absorbs money rather than producing it. Education, defined through this laboratory function, will never generate profit. Quite the opposite is true. It depends upon gift to fulfill its mission of fostering human capacities and fomenting new ideas and insights.

In the real economy, the one that includes both spiritual and material dimensions, there is circulation of human and material gifts. Clearly both have value in economic terms—if you accept my argument—and they also have an interesting relationship brought into sharp focus in the field of philanthropy. Consider the following from Lewis Hyde’s seminal book The Gift: Imagination and the Erotic Life of Property:

“Gift exchange is connected to faith because both are disinterested. Faith does not look out. No one by himself controls the cycle of gifts he participates in; each, instead, surrenders to the spirit of the gift in order for it to move. Therefore the person who gives is a person willing to abandon control. If this were not so, if the donor calculated his return, the gift would be pulled out of the whole and into the personal ego, where it loses its power. We say that a man gives faithfully when he participates disinterestedly in a circulation he does not control but which nonetheless supports his life.”

Understanding the full dimension of this release of control is vital to the human part of gift circulation. Of course, donors can only take a tax deduction if they have given up control to a qualified charity and have received no goods or services in return. But what about gift intention? Is that something that can really be given up or given over, even if the gift is truly released? Is this something of what Hyde refers to in the element of faith? And, what exactly might he mean by disinterested since most donors are anything but disinterested? Can one be disinterested and interested at the same time? If one looks at the spiritual dimension of gifts as one in which the gift actually carries the giver and receiver into a deeper destiny relationship (this is the interested part), and at the same time is given over for charitable purposes as determined by the receiver (this is the disinterested part), then the answer is clearly yes.

So what arises for the donor by truly giving up control of a gift? When the donor gives up control, he, she, or they are at the same time released from the gift, freed by it. Sometime this is expressed as a kind of relief, a feeling of well being or buoyancy, and sometimes a kind of grief. These are all transformative moments, moments in which new insights and consciousness can happen. The deep inner knowledge and process that led up to the moment of the gift giving, up to the moment of willing release of control, is also a moment of a renewed spiritual freedom.

One transformative aspect of money is that when a financial gift is made to a charitable entity, that gift money very quickly becomes purchase money. That which was “surplus” for the giver is given new life by the receiver in the rapid economic circulation of the day-to-day economy. It supports the development of human capacities and a kind of spiritual freedom that is essential to education, research, the arts, and other cultural endeavors in a free society. What a change it would be for philanthropy if it were to be practiced as an integral part of daily transactions rather than as something one does after accumulating “enough” to give away. In cultures where there is no such wealth accumulation, gift is essential to survival. Without gift, life withers; without gift, culture stagnates; without gift, economy languishes. The analysis is simple. The solution, the release of stored up wisdom and wealth—surrendering to the spirit of gift, is one critical way to recognize and engage what is desperately needed for the future.

John Bloom is the Director of Organizational Culture at RSF Social Finance.  If you enjoyed this post, read more of John’s work here:

Revenue Participation Notes: What are they, and why are they an innovative social finance tool?

August 10, 2009

By Terri Spath

Traditionally, enterprises receive capital in one of two ways: they get a loan, or they sell equity in the enterprise. Sometimes, however, neither of these options provides the right fit for an enterprise’s needs and goals, which is where revenue participation notes can provide an innovative solution. But before diving into what revenue participation means, let’s look at the benefits and drawbacks of traditional loans and equity financing.

Traditional loan

With a loan, an enterprise receives cash, and enters into an agreement to repay that cash with interest. The tradeoffs for a loan:

Less Expensive Financing: It is generally less risky for someone to lend money than to extend equity. With a loan, there is usually a valuable asset (a guarantee, a piece of land, or machinery, etc) that the lender could legally take if the loan isn’t paid back. Since lending is less risky, it usually carries a lower price than equity, thus being a less expensive choice for financing.

Promise to Pay: With a loan, there is a legal obligation to pay the money back with interest. Also, lenders will only provide so much – at some point there aren’t enough assets to secure the loan and/or the ability to pay the interest.

Equity financing

By selling equity, an enterprise can raise cash by offering the investor some ownership of the enterprise. There are tradeoffs with equity financing, too:

No Short Term Cash Flow Constraints: In exchange for a cash investment, the investor owns some of the enterprise and the investor’s return is expected to come through the growth of the enterprise. Generally, there are no cash interest payments, and no legal obligation to ever give the money back.

Ceding Some Control: Since the investor now owns part of the enterprise, they have a right to some amount of control over the investment – and, therefore, a voice and frequently a vote about business decisions. The investor’s point of view may or may not align with the founder’s. This ownership gives the investor control over the enterprise that a lender does not have.

“Exit” Requirement: The new owner will want their money back plus handsome profits. This generally involves selling the enterprise to a new party, who will want to run the show (usually without the original founder).

An alternative – Note (i.e. loan) plus “Revenue Participation”

The traditional options don’t always fit for emerging social enterprises, entities built to grow profitably around an important social vision.

Case study: A Great Beverage Enterprise (GBE) that has created a healthy beverage to sell in the U.S. that supports sustainability in the Amazon rainforest.

GBE could sell more product if they had more money to spend on marketing (sales people to get into more stores, creating more products to put on more trucks for delivery, free products at sporting events, etc). However, the founders’ vision does not include the eventual transfer of ownership to a Big Giant Corporation that may dilute GBE’s mission in a drive for high profits (e.g. by creating cheaper formulations that no longer support the indigenous farmers of the Amazon).

Equity providers don’t have a clear way to recoup their original investment (no “exit strategy”), and are therefore hard to attract. GBE can try to borrow money, but the risk for the loan is high – many lenders are unwilling to lend as much money as GBE needs. What should GBE do?

One great solution is a note (typical loan with a coupon) plus revenue participation. With this structure, GBE gets a loan and is responsible for the interest and repayment of that loan. Revenue participation is attached to the loan, and defined as a percentage of the sales. As the revenues of the enterprise grow, it is in a stronger position and its revenue participation payments increase (the percentage stays the same, but the total dollars grow). The note plus revenue participation structure gets capital to the enterprise without affecting its ownership, goals or mission. At the same time, the lender/investor is properly compensated for the risks involved.

The RSF Mezzanine Fund is using this innovative tool to meet the needs of social enterprises, while earning a solid return for its investors. Ensuring that mission-driven companies can retain ownership and continue to have a high level of social impact while expanding their business was the key consideration for RSF in creating the Mezzanine Fund. We hope to see this type of financing become more common as an alternative for triple-bottom-line social enterprises whose priorities are not just profits, but people and the planet as well.

To learn more about the RSF Mezzanine Fund, click here. To find out how you can apply for financing from the RSF Mezzanine Fund, click here.

Terri Spath is the Managing Director of RSF Capital Management.

It’s Happening Right Now

August 3, 2009

By Don Shaffer

Mortimer Zuckerman, editor in chief of U.S. News & World Report, wrote an opinion piece in The Wall Street Journal three weeks ago (July 14, 2009) entitled “The Economy Is Even Worse Than You Think.”

Mr. Zuckerman outlines 10 reasons why we are “in even more trouble than the 9.5% unemployment rate indicates.”  He states that job losses are now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

We can read accounts like this and crawl into a shell; we can hope for the best.  Or we can apply as much ingenuity as we possibly can to address the root causes of our present crisis.

I’d like to propose a “What if” exercise.

What if we create a groundswell around the country where each of us shifts 50% of our investments to within 50 miles of where we live?  This is a challenge introduced by Woody Tasch in his recent book, Inquiries into the Nature of Slow Money.  It’s a provocative idea.

What would be the effect on job creation?  What long-term financial returns would be generated?  How much risk would be involved?  If all the companies and organizations receiving investments used triple-bottom-line standards to measure their success, what would be the effect on community health and ecological well-being?  Is this just a romantic throwback to a previous era?  Would it crimp our global competitiveness?

Picture a regional economy like the San Francisco Bay Area.  What if we stitched together a set of financial vehicles designed to match investors from the Bay Area with small- and medium-sized, privately held, triple-bottom-line, community-based enterprises in the Bay Area?

What if you believed you could earn a consistent rate of return (e.g. 5%) on your portfolio investments, with relatively low volatility, while keeping a much more significant percentage of your money circulating in the regional economy?  What if you lived in the San Francisco Bay Area and you had access to all of the following options addressing the full range of investing, lending, giving, and day-to-day purchasing?

  • Community banks and credit unions (for checking/savings accounts, CD’s, etc): New Resource Bank, OneCalifornia Bank, and Exchange Bank are a few examples based in the Bay Area
  • Direct lending models (for making direct loans to small companies), such as a regional version of Kiva
  • Community credit and loyalty cards (for supporting local merchants and nonprofits) like the following which have implemented in several regions:  GoLocal Rewards and Locals Care
  • Angel networks (for regionally-based, triple-bottom-line equity investing) that might operate like regional versions of  Investors’ Circle or Golden Seeds
  • Direct philanthropic models (for making gifts to local nonprofits) similar to or Portland’s ChangeXchange
  • Community development venture capital funds (for early-stage equity investing) like Pacific Community Ventures
  • Regional stock exchanges (for investing in mature, community-based businesses), such as a regional version of the Social Stock Exchange being developed in the U.K.
  • Regionally-focused holding companies (for helping mature, community-based businesses with leadership succession and liquidity) like Upstream 21
  • Complementary currencies (for encouraging local purchasing) like Time Banks or the BerkShares system in Massachusetts.

Imagine this is possible, because it’s happening right now.  In sectors like sustainable agriculture, renewable energy, zero-waste manufacturing, independent retail, and green building, there are a growing number of excellent companies in which to invest.  With financial vehicles like those listed above, there are more and more viable ways to keep your money closer to home, supporting your neighbors while they support you.

Instead of having all your money tied up in a financial system that has become increasingly complex, opaque, and anonymous, based on short–term outcomes, you can now help create an alternative that is direct, transparent, and personal, based on long-term relationships.

Here at RSF, we are finding ourselves at the center of these developments.  Please contact me to learn more about what you can do to get involved.

Don Shaffer is President & CEO of RSF Social Finance.

The DNA of Social Finance

July 20, 2009

By John Bloom

DNAThe course of social finance is enlivened by transparency and trust. These essential elements of agreements between people are central to the value of financial transactions—and are in many ways inseparable from each other. What I mean by this is that transparency leads naturally to trust and vice-versa in a constant dance through time. I would add that the healthy circulatory system of money, even on a global scale, is built or carried by the dynamic present in transparency and trust. Consider the opposite where they are not present—circulation stops, economies falter, wealth is extracted, self-interest reigns, poverty results. This may seem a stark contrast, but a poignant one given the current state of the economy in which unemployment and foreclosures are rising while investment houses proclaim huge profits.

Transparency and trust emanate from human experience, and are therefore quite individualized in their practice or find expression in the behavioral patterns of a particular culture. They are also deeply connected to the need for accountability and dependability. Most people want to know that whatever motivated a transaction in the first place will be recognized and respected by the other party to it. For example, if I agree to lend money to you, I need to know that the money will be used as expected and returned as per the understanding. I also need to know that if the scenario does not play out as planned and there is significant change, you would come back to renegotiate the agreement or return the funds. This epitomizes the tandem connection of trust and transparency, and is a measure of a healthy financial transaction—one that frees the lender to focus on other activities and the borrower to progress with the planned project while remaining connected through the lender-borrower partnership. If you cannot find out where the money you loaned went to, or the borrower feels no responsibility to the lender, something is broken in the flow of both money and human relationships. Accountability has both a human aspect in the context of relationship, and a financial one in the context of tracking and measuring the movement of the money itself.

The salient characteristic of social finance is that these two threads, the human and the financial, are recognized and worked with as inextricably linked. Every financial transaction has an effect on human beings, and every human being affects the quality of the world through how he or she works with money. This is a fully rounded concept of interdependence as it includes the perceptual and behavioral dynamic along with the more traditional economic one of interchange and efficiencies in the production and consumption of goods and services.

If trust and transparency are central to the vitality of financial circulation, and serve a bridging function between the social and the financial, then what actually is the deeper motivating force that begins, sustains or augments that circulation? What if we could consider that social finance has the double helical structure of DNA, with the major strand being human actions and needs, and the secondary strand, the creation of money in its many forms. That they come into a dynamic relationship is inevitable in economic life and is epitomized by the tension between self-interest and community-interest. Add to this, movement through time and place. In this imagination, the pulsing dance between transparency and trust bridges the two strands and naturally gives rise to a vortex-like spiraling movement. But what of the motivating force? I would argue that the prime mover is human intention. It is the element that moves with the currency, the flow of money. It represents the energetic investment of people into the circulation, the rhythmic movement of value as it is generated, destroyed, and recreated anew within the whole economic process.  Of course, one can make the case for the shadow side, the adverse effect of bad intentions or unethical practice. But, if we can understand social finance from the perspective of the elegant architecture of DNA with its life-building capacity, we might also see how social finance can serve as a restorative and healing force in economic life.

John Bloom is the Director of Organizational Culture at RSF Social Finance. If you enjoyed this post, read more of John’s work here:

Cold Hard Cash for Social Impact

July 13, 2009

By Kelley Buhles

Ever wondered what your money is doing while it is sitting in your bank account? Currently the world’s largest banks are funding the world’s most destructive industries. What that means is that the average person’s checking account helps to finance dirty coal plants, destructive oil extraction, and unsustainable logging operations.  What are the alternatives to using these large banks, you might ask?

RSF is faced with this same dilemma in deciding where to keep our cash accounts. Currently, RSF primarily banks with Citibank. They have offered us the flexibility and service we have needed to build our organization. In addition, Citi was the first bank in North America to adopt environmental policies addressing biodiversity, indigenous rights, and climate change.  Unfortunately, Citi is also one of the leading funders of the coal industry and coal is the single biggest cause of global warming.

At RSF we are committed to becoming 100% invested in mission-aligned companies and funds. As we work toward this objective (currently, our portfolios are about 60% mission-aligned), we are constantly looking for ways to make our financial transactions more direct, transparent, and personal.  To further these goals, our investment committee recently voted to move roughly half of the cash deposits in our Donor Advised Fund Liquidity Portfolio from Citi and into community development and environmentally oriented banks.  After conducting rigorous due diligence, we have identified eight banks and credit unions around the country that are low risk, offer competitive returns, and are mission-aligned.

We are happy to announce that we recently made investments in four of these institutions. Our accounting team, who facilitated the investments, had their own personally transformative experience while going through this process. They reported at a recent staff meeting that while Citi doesn’t blink an eye at a few million here and there, these four banks expressed joy and gratitude for receiving our investments, making the transactions and new relationships much more meaningful to our staff members.

Below is more information about our four recent investments:

$1 Million CDARS* with Southern Bancorp

Southern Bancorp Mississippi is operating 23 banking centers in Mississippi and Arkansas.  It was formed out of an initiative to end decades of economic decline in rural Arkansas by creating new trends of investment in people, jobs, business and property. The bank launched nonprofits to address affordable housing, grassroots community development and asset creation in order to build resources in the rural communities it serves. The bank currently focuses on the fast growing crop market and offers mostly small business and consumer loans (over 40% of its loans are less than $10,000).

$2 Million CDARS with OneCalifornia Bank

OneCalifornia is a hybrid bank/foundation created with the OneCalifornia Foundation acting as the bank holding company. This innovative structure allows the Bank to pursue programs that benefit the community, such as credit enhanced loans to less-proven borrowers, by having the foundation act as the program sponsor. The Bank engages in programs and grants to eliminate discrimination, encourage affordable housing, alleviate economic distress, stimulate community development, and increase financial literacy.  To date, OneCalifornia Bank has financed the largest private solar installation in the state.

$250,000 account with Latino Community Credit Union

The Latino Community Credit Union was created to address violence against Latinos in North Carolina. Without access to savings or checking accounts, Latinos were essentially “walking banks” and were frequently targeted by robbers. Since its formation in 2000, the Latino Community Credit Union has grown to $65 million in assets with 51,000 members. And since launching its mortgage lending program in 2004, the credit union has had zero delinquencies in its mortgage portfolio and keeps all its loans on its own books. The credit union has also identified new ways to assess risk without utilizing a formal credit rating and offers credit builder products to its users.

$1 Million CDARS with Legacy Bank

Legacy Bank is the only certified community development bank in Wisconsin and the only bank in the country to be founded and led by African-American women. The bank concentrates on distressed neighborhoods in Milwaukee, one of the top cities for subprime and predatory lending. Additionally, Legacy focuses on serving the unbanked, particularly minorities and women in areas of high economic distress, and provides financial education services and workshops. Legacy Bank is one of the fastest growing community development banks in the country!

*CDARS stands for Certificate of Deposit Account Registry Service.  These investments allow organizations to place deposits up to $50 million and still enjoy full FDIC protection of their funds.  For more information, visit:

RSF is proud to have begun moving our cash investments into mission-aligned banks and credit unions such as the ones mentioned above.  We will continue to transfer our funds into similar vehicles until we achieve our goal of having 100% mission-aligned investments.  Reaching that goal is part of RSF’s daily efforts to transform the way the world works with money at every level of our operations, and we are excited to see the impact these and future investments will create.

Click here to learn more about the RSF Donor Advised Funds and click here to learn more about the DAF Investment Portfolios.

Kelley Buhles is the Program Manager of Philanthropic Services at RSF Social Finance.

Resources on Program Related Investing

June 29, 2009

By Elizabeth Ü

Deep RootsI spent most of last week in Greensboro, NC, attending the Sustainable Agriculture & Food Systems Funders Annual Forum: Deep Roots (you can check out the agenda here: This annual event is an excellent forum for foundations and government funders (such as staff from the USDA and Risk Management Agency) to discuss trends, identify collaboration opportunities, and challenge each other to do more to support local and sustainable food systems; the conversations continue throughout the year via the SAFSF listserv, and I highly recommend joining as a member if you are an individual or institutional funder interested in food issues. As is so often the case, the value of the collective consciousness is so much more than the sum of its parts! To learn more about membership, click here.  Readers seeking grants for projects that contribute to sustainable food systems may be interested in the list of funder members here.

In preparation for a presentation that Kathleen Fluegel (HRK Foundation), Jeff Rosen (Solidago Foundation) and I gave on program related investing (PRI) at Deep Roots, I compiled the short list below of resources that I have found most helpful for foundations interested in learning about how they can more effectively activate their assets toward strategic goals with PRI. (See also my previous blog post on the topic:

The PRI Makers Network seeks to strengthen the capacity of grantmakers to affect change across diverse program areas. It is an association of grantmakers that use program-related and other investments to accomplish their philanthropic goals. The organization provides a forum for networking, professional development, collaboration and outreach to funders, including those not currently making PRIs or other social investments. The network’s website ( includes regularly updated links to various resources and articles (including the ones listed below). It also facilitates a variety of workshops and discussions – ranging from one-day briefings to sessions at regional and national affinity group conferences – and maintains a database of PRI activity. Certain features are accessible to members only.

These three articles, from the law offices of Brody, Weiser, and Burns, provide general overviews, definitions, legal information, and key considerations for foundations considering PRI.

1. Should We Consider a PRI? Basic program-related investment criteria for foundations and nonprofit organizations, Christa Velasquez and Francie Brody, 2002;

2. Current Practices in Program-Related Investing,  Francie Brody, Kevin McQueen, Christa Velasquez and John Weiser, 2002;

3. Matching Program Strategy and PRI Cost,  Frances Brody, John Weiser and Scott Miller. Phyllis Joffe, editor.

As you can see from these articles, direct PRI requires staff skilled in:

•         Finding and evaluating eligible PRI projects,
•         Drafting investment term sheets,
•         Administering investments,
•         Monitoring projects, and
•         Providing technical assistance as necessary.

Intermediated PRI models, such as the RSF PRI Funds (, make PRI accessible to a wide range of foundations. Whether your foundation is just getting started with PRI, or does not want to go through the challenge and expense of starting up an in-house program, or wants to leverage the experience and systems of an intermediary, there are many reasons to consider this approach. For more information on PRI intermediaries, visit:

Mission Related Investing (MRI) is another powerful concept foundations can consider to allocate a greater percentage of total assets toward their strategic goals. There is still a lot of confusion around what constitutes MRI compared with PRI, and this article is quite helpful in breaking down the differences:

Capital with a Conscience: Private foundations must distinguish carefully their investments’ purpose, character and strategy, Jane M. Searing,


This is of course only a partial list of the resources available online and otherwise, and I’d be happy to point you in the right direction if you have specific questions. Please also feel free to list your own favorite resources in the comments below!

From Transaction to Transformation: Spirit Matters in Lending

June 22, 2009

personalBy John Bloom

It is one thing to say that money has a spiritual dimension, to speak of it as energy or a force. It is another matter to recognize and understand how important and practical this perspective is as we act within the economy. A brief inquiry into the presence of spirit in our financial transactions is a risky venture. Nonetheless, I am compelled to take the risk because of the upside potential for transforming how we see and work with money.

Consider looking at experience this way: there is what we perceive with our senses, for example, a color or texture, which we could call “matter”; then, there is our interpretation of that sensation, our sympathies and antipathies, which we could call “soul” activity; then, there is recognizing within that experience something of its lasting essence, such that we might recognize another occurrence of it though it may be in a different color or form, which we could call “spiritual” activity. For example, how do we know that a loan is a loan no matter whether it is called credit or investment? Given this architecture of experience, might there be a tripartite view that clarifies and integrates matter, soul, and spirit in the realm of financial transactions? What place does each of the three take in the transactional process?

For this essay, I have chosen to focus on loans and the lending-borrowing transaction, though one could equally apply the approach to purchases and giving. What gives rise to lending is a combination of a lender’s available capital coupled with a need for that capital to realize an economically viable idea. One could say that the lender recognizes a borrower’s entrepreneurial capacity to make good use of the money. The money passes hands, a material matter in auditing terms, as a result of an agreement, with the transaction accounted for in debits and credits, assets and liabilities. However, the process that led up to the agreement, that is, how enough trust was established between the lender and borrower to make the agreement possible, is not such a simple one. The lender and the borrower each have their conditions for trust, their deeper purposes and intentions. Of course, transparency is a critical part of this discovery process, as are intuition, character, and social impact. The reality is that the lender and borrower are bound in relationship over the period of the loan; they have to take and maintain a long-term interest in each other, and support each other’s success. This mutual trust, formalized in the loan agreement, is something of the soul aspect of the loan. Imagine, lenders have made loans because the constellation of people and intentions around the loan project felt right, even if the numbers didn’t quite justify the transaction.

What is the spiritual aspect of a loan? The money makes possible entrepreneurial initiatives that would not have been possible otherwise—this is the essence of a healthy capital economy. The entrepreneurial initiative itself is framed upon ideas, which, though they may be inspired by material circumstances, are not dependent on them. And within the structures of those ideas, the entrepreneur recognizes and serves the presence of others’ economic needs. This capacity for perceiving what is, and what is not yet, (anticipating need) demonstrates creative, imaginative, and in some cases intuitive, capacities, and is also why enterprise so often leads to cultural transformation.

In economic thinking the spiritual world of ideas is made practical through the world of physical matter. How we find value in the world of lending is a matter of the degree to which the lender’s feelings and perceptions are tuned to the intentions and capabilities of the entrepreneur. The loan transaction becomes a vessel for the shared purpose and vision of lender and borrower. Transforming how we work with loan money is catalyzed when we embrace these interpersonal relationships and recognize how the entrepreneur’s work brings spiritual activity into the world.

John Bloom is Director of Organizational Culture at RSF Social Finance.  If you enjoyed this post, read more of John’s work here:

Dialogue on the Banking Crisis Continued

June 15, 2009

By Ted Levinson

Federal Reserve BankIt’s ironic that one contingent of society rails against big government and that another camp curses big business, and few people recognize that each is a threat since with extreme size comes extreme power, and extreme power leads to ruin.

E.F Schumacher warned of the “almost universal idolatry of gigantism” and we are now paying a dear price for our devotion to General Motors, AIG and Chrysler.  There is certainly cruel justice in the fact that our punishment for letting these companies grow so big is to become unwitting taxpayer-owners of these businesses as they shrink.

I’ve read James K. Galbraith’s statement that Don recommends in his recent blog post, but my attention was drawn to different parts of Galbraith’s testimony.  The first was the simple statement that “credit is a contract,” and the second was his view that the world “trusted the transparency, efficiency and accountability of the U.S. financial system…” Both are historically true, but our response to this financial crisis has cast doubt on both claims and this is what worries me the most.

Rudolf Steiner advocated a threefold social order where the economic sphere was separated from the state.  He would have likely rejected the political influence of lobbyists, government subsidies, and tax breaks as vehemently as he would have rejected our response to propping up businesses defined as “too big to fail.”  We have addressed the current financial crisis by forgetting that credit is, indeed, a contract. We have also threatened the transparency, efficiency and accountability of our financial system by abrogating the laws that permit credit to flourish and by creating artificial and perverse incentives for lenders to withhold the very credit that could extricate us from our situation.

Credit is built on trust. Our willingness to trade our money today for a piece of paper promising repayment later is undermined when the rules of the game can change for the most powerful. Without consistent laws regarding private property and bankruptcy, and without confidence in the stability of money, credit cannot exist.  This is why credit cards work in California and farmers in Nigeria are unable to borrow to finance a tractor.

In the past year, we have responded to the outrage of outsized bonuses, inflated ratings on murky credit derivatives, and corporate collapse by altering the rules by which the largest companies play.  We have bailed out big banks by using taxpayer money to buy preferred shares at inflated prices while simultaneously discouraging them from using that capital to make new loans.  We have trampled on secured lenders’ rights in our rush to shepherd Chrysler through bankruptcy with concessions that are not afforded to most.

As the line between big business and big government becomes more blurred, the conflicts of interest and self-dealing multiply.  Shouldn’t AIG become the preferred insurer for HUD homes? Shouldn’t GM become the sole provider of cars to the government? Governments owning businesses is as unwise and unfair as businesses running governments.

Steiner’s countryman, economist Joseph Schumpeter remarked that, “Rational as distinguished from vindictive regulation by authority turns out to be an extremely delicate problem which not every government agency, particularly when in full cry against big business, can be trusted to solve.” How then can we solve the challenge of consolidated power in our largest banks and corporations?  At RSF we aim to do so by working with small businesses and nonprofits that measure their impact in more meaningful ways than sheer size.  We also aim to restore humanity to lending – it’s not an abstract transaction, but a meaningful relationship built on understanding the contributions, needs, and long-term intentions of all parties. By bringing together investors and borrowers in a culture of spirited inquiry and dialogue, RSF is creating a community too invested in one another to fail.

Ted Levinson is Senior Lending Manager at RSF Social Finance.

Employee Ownership as a Tool for Growing Social Enterprise

June 1, 2009


The staff of Namaste Solar, an employee-owned solar power company in Colorado.

By Esther Park

Last month I attended the Beyser Institute & NCEO Employee Ownership conference in Portland, OR, specifically to learn the ins and outs of Employee Stock Ownership Plans (ESOPs).  As a newcomer to the subject, many of the regulatory requirements and the alphabet soup of acronyms flew by me, but I came away with a renewed sense of optimism that employee ownership could have a special place in the development of social enterprises.

By way of background, one of the questions we have been raising and debating at RSF is: how do ownership and the transfer of ownership affect the social mission of a business?  A few recent comments from various meetings and conferences have stuck out and stayed with me:

  • “How do we get ownership into the hands of more people?”
  • “That’s the fundamental problem with [traditional] venture capital” (in response to an assertion that the best and most effective partnerships occur when each partner is taking an equal amount of risk)
  • “How did I get here?” (in reference to a previously profitable company that was driven to unsustainable growth by its investors)

The plain fact is that any enterprise needs capital to grow.  Some will grow slowly with patience and internally generated working capital or bank financing.  But many others, particularly the social enterprises that RSF encounters, have the opportunity to grow quickly and will often take on equity capital, whether it be through friends, family, angel investors, or venture capitalists.  With perhaps the exception of friends and family, investors will want to (or assume to) know how they will exit their investment and make their target return.  The prevailing thought for most investors is to sell the company to a larger company.  (Because of this, companies not well-suited to this type of potential sale often have a more difficult time raising capital.)  Whether selling to a conglomerate is an attractive option for a mission-driven entrepreneur is dependent on his/her theory of change.  Some would argue that such a company can have vastly greater impact by being a part of and influencing its parent company.  Others would argue that a company’s social mission is necessarily diluted by a profit-driven parent company.

Without taking sides on this particular debate (largely because I respect both arguments), the debate itself has spurred RSF’s exploration into alternative exit/liquidity strategies, as there are currently few available.  To return to my initial point, one intriguing strategy we have come across is the idea of selling the company to its employees.  ESOPs are nothing new, but these days, many ESOP companies are likely driven by clear tax advantages to the company, as well as to owners who sell a minimum threshold of their equity.  But I also see other benefits, particularly for social enterprises:

  • A company can better control and maintain its values;
  • A company can participate in wealth creation, not just job creation;
  • A company can take its time and grow sustainably, without pressure from institutional investors;
  • A true community of owners is created.

The idea is worth exploring.  Here at RSF, we aim to bring more visibility to the topic in order to seed the idea among both burgeoning and mature social enterprises in the hope of creating new and meaningful options for community ownership, wealth creation, and social impact.

Esther Park is the Director of the Lending Program at RSF Social Finance.

A Dialogue on the Banking Crisis

May 25, 2009

Federal Reserve Bank

By Don Shaffer

Public debate over the banking crisis in the past few months has been a fascinating examination of a system I have been studying for years.  So, I have closely followed the range of opinions flooding from the pens, keyboards, and voices of economists, journalists, politicians, and others.  Assessing the scale of banks and their impact on society is a topic that I see as a crucial piece of the puzzle in changing and reforming our broken financial system.

Recently I read some stimulating pieces that I’d like to share with you, the first of which was written by economist James K. Galbraith as a statement before the U.S. House of Representatives’ Committee on Financial Services.  (To download and read the full statement, click here.)  I believe Mr. Galbraith really hits his stride in section number three, titled: “The bank plan will not work.”  As he points out, “If we are in a true collapse of finance, our models will not serve and our big banks will not serve either. You will have to replace them both. Since several very big banks are deeply troubled, there is in my view no viable alternative to placing them in receivership, insuring their deposits, replacing their management, doing a clean audit, isolating the bad assets. Since these banks were clearly too large, in my view they should be broken up, and either sold in parts or relaunched as multiple mid-sized institutions with fresh capitalization and leadership.”  I would encourage you to read section three of his statement, at least, and consider his arguments with a critical mind.

Another essay I would recommend is “The Quiet Coup,” by a former chief economist of the International Monetary Fund, Simon Johnson, in the May issue of The Atlantic.  (To read the essay, click here.)  Please pay particular attention to the final section of the article, entitled “The Way Out.”  Here, Mr. Johnson lays out a case very similar to Mr. Galbraith’s.  I am particularly struck by his discussion about the inherent problems of gigantic-scale mega-banks:

“Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

“Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

“This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail explodes. Anything that is too big to fail is too big to exist.”

Lastly, I would encourage you to read the recent interview of President Obama in the New York Times magazine.  (To read the full interview, click here.)  The first part of the interview is entitled “The Future of Finance.”  The President has some encouraging things to say, but I can’t help feeling disappointed in the overall tone and substance of his responses… in which he says, in essence, “We’ll be fine with a bit more regulation.”  He seems convinced that we should just duct-tape our financial/monetary system back together, and re-acquaint ourselves with a strong and powerful Wall Street (oligarchy?) as a foregone conclusion.  Mr. Obama’s choices for key leadership positions in the administration reflect these views; in particular, Mary Schapiro as Chair of the Securities and Exchange Commission has functioned as a steadfast and loyal proponent of Wall Street – most recently as head of FINRA, the financial industry trade association.  Schapiro is one example, but Obama has also put into place many others with direct ties to the big commercial and investment banks.

All this said, I urge you to draw your own conclusions.  Certainly no one has a crystal ball, and no one can claim to know the best path to pursue at this point.  For 15 years, I have read The Wall Street Journal (nearly every day) and The Economist in an effort to understand how the financial system works.

The biggest issue for me is scale, and its relationship to power.  Mostly based on my study of American history, I’m a fan of small, entrepreneurial, decentralized marketplaces—in other words, networks of people and companies trading with relatively little financial intermediation.

In short, I don’t think a $2 trillion bank (e.g., JP Morgan Chase) is much good at innovation anyway.  And personally, I think services like online bill pay and convenient ATM’s are insufficient reasons for not switching to a community bank or credit union if you really think it through.  With a giant transnational bank, you have no idea what loans your money is being used for, or where your funds reside at any given time.  Plus, how can you trust “collateralized debt obligations” or other “structured” financial vehicles that are designed only to help the bank become a larger and larger pile of money?

Public equity markets suffer from the same issues as the banks.  There is absolutely no reason why the world needs over 8,000 different mutual funds, most charging fees well in excess of the value they create.  Merrill Lynch and other brokers have been exposed as hopelessly riddled with conflicts-of-interest and incentive/compensation problems.

But, Wall Street will live on.  Capital markets will exist, for good reason, for companies and industries that require large-scale R&D, manufacturing, and distribution, such as airplane engines, pharmaceuticals, semi-conductors, etc.  Hopefully, investors will reward only the most transparent and honest of the remaining players.

Most important, I think we will also see the growth of diversified, regional capital markets – not dependent at all on Wall Street – designed to support small-and-medium-sized, triple-bottom-line companies in sectors like food, energy, clothing, building materials, and a whole range of household products (furniture, toys, etc).  The goal here is that people save more, spend a higher percentage of their overall income on basic needs, keep their investment strategies simple, and their money closer to home.

To return to the issue of scale and power, these regional capital markets will ensure a healthy democracy in the U.S.  Every business student of the post-World War II era has learned about “efficient” flows of capital and how a “fragmented” market will invariably consolidate.  But, I don’t think this is true anymore.  The 21st century will have many fragmented markets, because investors and consumers will demand authenticity and real innovation from the companies they support.  This fragmentation or diversification will only be accelerated as a result of the current financial/economic crisis. This is how nature works, too.  An ecosystem rich in biodiversity is the most resilient.

At RSF Social Finance, we are excited to play a leadership role in the transformation to a more decentralized financial system:

•  in the “what” (our financial and advisory support for companies and non-profits that create tremendous positive social impact), and

•  in the “how” (our approach to working with investors and borrowers, and donors and grantees in each transaction that acknowledges the interconnected nature of life).

I hope we have a spirited discussion on the issues presented here and in the articles cited, both amongst the RSF staff and Board, as well as with you: our clients, partners, and friends.

Don Shaffer is President & CEO of RSF Social Finance.


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