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I just don't see why banks - rather than market participants generally - should put their capital at risk in order to achieve this.

Amassing information costs time and money. By default, all participants operate with imperfect information, and having all participants amass perfect or near-perfect information in parallel would be hugely, ridiculously inefficient.

So you have to have a dedicated information-gatherer.

The dedicated information-gatherer has to be a neutral third party (because knowledge is power, and the role of refereeing based on that knowledge is power, and nobody within shouting distance of sanity wants to surrender that power to the other side of the table in a serious business negotiation).

The neutral third party has to put its ass on the line. Otherwise, it can just pull magic ponies out of thin air (see, e.g., Standard and Poor's, Moody's and their friends).

The simplest (if not necessarily the most elegant) way to make the neutral third party put their ass on the line is for them to give out a lot of money and only get it back if their judgement is sound.

This is a point that your scheme will have to address: How do you make the banks-as-service-providers go bust if they fail to perform due diligence?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 3rd, 2010 at 05:26:53 PM EST
[ Parent ]
The function you describe is common to both a conventional intermediated transaction model and a partnership model.

But it's not possible for an agent to act as a fiduciary for both buyer and seller, and if acting as a 'middleman' counterparty, then there are two adversarial relationships to negotiate.

Whereas a development partner can often consensually agree with the other partners - with whom he is working as a service provider - a share in the outcome of a collective project. This is not difficult to document, but is not always possible because people are human, and expectations diverge.

My experience is that a partnership enterprise model is capable of delivering an agreement possible in no other way, but it's not a magic bullet.

JakeS:

The simplest (if not necessarily the most elegant) way to make the neutral third party put their ass on the line is for them to give out a lot of money and only get it back if their judgement is sound.

The simplest way IMHO is to appoint a custodian of the project, of the fund flows, and of the purpose of the project. That does not make them a counterparty - merely a steward. Transparency to all stakeholders is essential, and indeed in everyone's interests.

JakeS:

How do you make the banks-as-service-providers go bust if they fail to perform due diligence?

By making some or all of their income - which is essentially the reward for the use of their 'human capital' - contingent upon the outcome.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 06:25:10 PM EST
[ Parent ]

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