Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
... whether that is a shortage of assets or an excess of liabilities is a tangled questions, since one institutions liability is another institutions asset.

We are in a zone here which I find particularly intriguing.

Finance Capital consists of "Twin Peaks" - the distinct and conflicting claims over assets of Equity and Secured Debt.

The claim of Equity is an absolute claim of "ownership" of productive assets of infinite/permanent duration and there is no obligation to repay - although there is the capability to do so.

The claim of Secured Debt on the other hand is a repayment obligation secured by a claim over productive assets, either of finite duration, or of indefinite duration at the option of the lender (secured overdraft).

These claims are in fundamental conflict.

Your proposal of a Public Preferred Share is one of many possible Debt/Equity hybrids in a conventional Corporation or Trust, and it is an interesting and innovative suggestion.

But the trouble is that if such a "Public Trust" is based upon Company or Trust law it will suffer from the "Principal/Agency" problem of a conflict of interest between "public owners" and "private" managers....in this case private managers who are perhaps the greediest and sharpest bastards on the planet.

Now, back in the leisurely days of the protracted negotiations involving UK's Northern Rock - and before HM Treasury quite rightly "bit the bullet" and nationalised it - I posted

Northern Rock Around the Clock

and the following sketchy suggestion for a "Northern Rock Partnership"

A Northern Rock Partnership?
No prizes for guessing what I think should be done instead. In my view, a fee should be paid by Northern Rock to the Government for the use of the guarantee into a "Default Pool", and this accumulating fee should form Equity ranking alongside that of the existing shareholders.

This could be accomplished by putting the assets into the hands of a Trustee/Custodian - where most assets are already (quite unknown to the beneficiary of the Trust - the Northern Down's Syndrome Association!), via the opaque "Granite" SIV.

An LLP could be used as a framework / Special Purpose Vehicle for what would be a revenue sharing "Capital Partnership" between Investors and Managers instantly recognisable to Islamic investors.

In this way:

(a) the risks and rewards could be shared equitably, which I would bet my bottom dollar they will not be in the bailout as proposed by Goldman;

(b) there could be a single asset class consisting of proportional "units" or "nth's" in Northern Rock's net revenues after a provision is made into the Pool.

I think that a "Capital Partnership" approach using an LLC as a framework might improve upon your suggested solution.

Imagine a "Resolution Partnership LLC" as follows.

(a) Custodian member - to which all of the assets are transferred;

(b) Investor member - consisting of a "club" of all of the individuals or enterprises (public and private) which have a claim over the revenues from the assets, whether Debt or Equity;

(c) Manager member - consisting of a "club" of the individuals and enterprises responsible for managing the Partnership.

The revenues are then divided into proportional (%age) Units, eg "billionths" and shared in agreed proportions:

(a) between Investor and Manager - inter Member sharing;

(b) amongst the Investor and Manager consortiums themselves - intra member sharing.

This Resolution Partnership LLC is not an "Organisation" as a "Trust" would be: it doesn't own anything; employ anyone or even do anything - it simply acts as a "chaordic" framework (to use Dee Hock's phrase in respect of Visa, which he founded) for the member stakeholders to sort this unholy mess out consensually and collaboratively.

The outcome is to create a single continuous hybrid of Debt and Equity - simple "nth's" in LLC revenues - if there are any - which I call "Open" Capital.

The new "Public" Equity arising from capital utilised would become Units in the LLC Units ranking alongside - and diluting - whatever Units are allocated to existing virtually "wiped out" Investors.

I believe that the key attraction of a Resolution Partnership LLC model is that the "Principal/Agency problem" no longer exists, because the interests of both Public Investor "owners" and Private greedy bastard management are genuinely aligned.

Moreover, the "continuity" of partnership capital ensures - I think - that liquidity and solvency essentially become the same thing.


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

by ChrisCook (cojockathotmaildotcom) on Sat Sep 27th, 2008 at 05:40:46 PM EST
[ Parent ]

Others have rated this comment as follows:


Top Diaries

Occasional Series