Michael Fairbanks is a Co-Founder of SEVEN, a philanthropic foundation run by entrepreneurs, whose strategy is to produce films, books and original research to markedly increase the rate of diffusion of enterprise solutions to global poverty.

He is the founder and Chairman Emeritus of the OTF Group, a strategy-consulting firm based in Boston, and the first venture-backed U.S. firm to focus on developing nations. He was a U.S. Peace Corps teacher in Kenya, and a Wall Street banker.

His most recent projects include advising the President of the Inter-American Development Bank on its Opportunities for the Majority Initiative; working for the President of Rwanda to improve the competitiveness of that nation’s tourism, coffee and agro-industry sectors; and advising the Minister of Finance of Afghanistan on private-sector reforms. He conceived and oversees the Global Pioneers of Prosperity Program, in cooperation with OTF, Legatum, the Multilateral Investment Fund, and the Templeton Foundation, which finds and recognizes role model businesses in the world’s poorest nations.

He co–authored Harvard Business School’s landmark book on business strategy in emerging markets, “Plowing the Sea, Nurturing the Hidden Sources of Advantage in Developing Nations,” with a foreword by Michael Porter. Business Week Magazine said, “Plowing the Sea points the way toward creating prosperity in developing nations; ” the Boston Globe named it one of the ten best books of the year in Politics and Economics; and Exame magazine, Brazil’s leading business weekly, called it one of the ten best books of the decade.

He co-conceived and contributed to the global best selling book “Culture Matters: How Values Shape Human Progress,” edited by Sam Huntington and Larry Harrison at Harvard. His most recent book, edited with Malik Fal, Marcela Escobari-Rose, and Elizabeth Hooper contains essays by OTF colleagues and clients from around the world. It is entitled “In the River They Swim: Essays from Around the World on Enterprise Solutions to Poverty,” and was released in May 2009.

His latest column on HuffPo is well worth reading:

Communists are Back in Africa

Africa was always the chessboard on which stronger nations played. But the productivity of capitalist nations proved greater than the putative power of the Soviet Union. The communists left Africa, and billboards proclaiming, “All Glory to the Revolution” were replaced by pithy aphorisms: “Democratize, Stabilize, Liberalize, and Privatize.” These were important but insufficient prescriptions by what Nobel Laureate Joe Stiglitz said were “second-tier economists from first-rate universities.”

Now, the communists are back. The Chinese have a ravenous appetite for natural resources to fuel their thousands of factories; and a debate rages in Western capitals over the merits of Chinese engagement with Africa. Ten U.S. congressmen toured Africa last month and nervously inquired about Chinese activities. Western activists protest that Chinese investment comes at the expense of democracy and human rights, and fosters corruption. There is merit to these concerns, but where is the introspection? Why is the relationship between the West and Africa shaped by one form of aid or another? President Paul Kagame of Rwanda states, “We should be debating why so little investment is made in the continent, not where it originates.”

This may be about to change. A “Presidential Summit on Entrepreneurship” will be held this spring in Washington. It will be the highest-profile event ever regarding entrepreneurship and economic development, and will center on the relationship between the United States and Muslim communities, many of which are in Africa. This forum needs to be extended to all of Africa.

Most Aid Never has Impact

Eighty percent of assistance from the aid agencies, the not-for-profits, and the United Nations never achieves the desired goal; this is according to an aid agency that shelved their own report. Aid should be used in situations such as Haiti to mitigate the impact of natural disasters on vulnerable populations, but it has never been sufficient to lift nations out of poverty. In fact, there are reasons to believe the opposite.

The United Nations has 17,000 peace-keeping forces in Congo costing billions of dollars, but never addresses the underlying issues that caused the war: lack of governance, degrading poverty and intolerance. The U.N. Millennium Village program created high expectations, but failed to coordinate with national governments across Africa. They have programs for visitors that officials call “Poorism.” Tourists pay to visit villages and buy small crafts and agricultural products. One official showed me a brochure that sets rules for the busloads of visitors. The first rule is, please do no not feed the villagers.

These places are less like the model villages of the new millennium and more like the Potemkin villages of the last millennium: Russian towns built like theatrical sets, with large fires that glowed in the distance to portray economic activity.

Not-for-profit organizations are uneven in their impact. Pioneers like Paul Farmer who founded Partners in Health, or Greg Mortenson of “Three Cups of Tea” fame, are respected for starting with only a vision.

Other not-for-profit leaders, especially some of those who refer to themselves as Social Entrepreneurs, claim they borrow the best ideas of the private sector, and focus on innovation to serve the poor. Yet, they often spend more money on public relations than on R&D and training their own staff; and they place their headquarters closer to media centers and the affluent rather than the needy. Their impact is tiny compared to the multilaterals, or faith-based initiatives, or even the development aid provided by the Pentagon.

The Gates Foundation’s investments in health care and education promote a long-term perspective and catalyze others to solve some of the earth’s biggest challenges. But investments in business environments may be different. According to a successful East African entrepreneur, Gates is “the elephant that tramples the grass.” They invested so much money in coffee growing regions, for example, that they distorted incentives for local investors, forcing some to the sidelines. No one disputes that the Gates folks are smart, and have a heart as big as their endowment, but do they also have a mind for the poor?

Aid largesse can distort private initiatives, stifle democracies, amplify ethnic-based patron-client relationships, and promote corruption. Former Finance Minister of Afghanistan, Ashraf Ghani, who has been shortlisted to lead the U.N. and the World Bank, observes that aid can even “sever the sovereign relationship between people and their leaders.”

There are features of successful aid programs: a shared vision by both the provider and recipient, disbursement through national institutions, investment that increases competence beyond applying for aid, and no parallel donor structures that undermine all of the above. According to some leaders in Africa, the United States Agency for International Development (USAID) is one of the worst at meeting these criteria; the U.K.’s DFID is the ‘best of the West.’

Meanwhile, Shanghai hosted the African Development Bank meetings in 2007. Chinese Premier, Wen Jiabao, recently vowed to increase bilateral trade, extend zero-tariff treatment, provide interest-free loans to African nations, increase technology transfer, and to encourage his citizens to build sustainable businesses in Africa. Trade between Africa and China is already over USD 100 billion, though much of that is oil. The China Africa Development Fund has invested USD 540 million in 27 projects in Africa, and intends to invest USD 5 billion over the next few years in housing, energy, and industrial projects.

Africans have Choices

We are now in the mid-game: Many Africans believe that China values Africa and believes in its future more than the West. But the West can improve its position.

First, we need to value what Africans say: they don’t intend to trade their independence for a relationship with China. Rwanda, for example, doesn’t have to: GDP grew at 11.2% in 2008, and over 6% in the throes of 2009. Wages in key export sectors grew up to 30% each year since 2001. The country cut aid in half as a percentage of their budget, and was recognized as the top reformer in the world last year. Fifty-six percent of their legislature is women, which leads the world; women hold the key posts in the cabinet and judiciary; and free and closely scrutinized elections will be held again in August. Rwanda has a mutually respectful relationship with the Chinese, but theirs is not the Chinese model.

Second, the West should do what it can do better than anyone: focus on “Enterprise Solutions to Poverty.” The greatest thing we could do to build international trust and help poor people is to stop protecting industries where the West has lost competitive advantages. We should broaden the definition of international security from geo-strategic to upgrading firm-level relationships between our societies; and, we should bond with the thousands of African entrepreneurs who are already successful and give them ‘rocket fuel’ by connecting them to global networks of productivity, trade and investment. The best way to create many new entrepreneurs is to show that great ones are already there to emulate.

The West remains attractive to Africans. We share a difficult history and some languages and culture. But we are no longer the only ones who shape the discussion there. Our paternalistic attitude toward Africa does not work because Africans now have choices.

China is the largest developing nation, and regards relations with other poor nations as the basis for its entire foreign policy. Their leaders are sober, goal-oriented and have a long-term perspective. Our foreign aid vision lacks coherence, is uninformed, does not balance the past with the future, and is over-influenced by donor fashions and sentimentality concocted by PR executives with skinny passports.

I look forward to the U.S.A.’s Presidential Summit on Entrepreneurship. I hope future summits will cover all of Africa, and focus not on top-down solutions, or massive infusions of aid, or what the rest of the world should think or do, but on our own values and attitudes and what we can do better. We need to check our vanity and condescension, and look deeper for underlying causes and for the unanticipated consequences of our own strategies.

We need a better metaphor than the chessboard to explain a new approach to Africa. We should have a discussion for the times in which we live, be open to learn from the Africans, and focus on what we can do better than anyone: eradicating poverty through entrepreneurship. Until then, the Chinese will parry any frantic moves to discredit them, and patiently wait for the endgame.

Michael Fairbanks went to Africa as a U.S. Peace Corps teacher in 1979. He is the author of “In The River They Swim”. (www.sevenfund.org)

Wow, the Fed is taking what would appear to be a very hard line on pay practices at the top 25 banks. It has floated plans to scrutinize–and reject if it deems necessary–pay practices at these banks, including pay for many employees, not just the top earners.

Pay packages would require approval in advance from the Fed. This has the feel of a trial balloon to some extent. It will not go over well on Wall Street, but the industry has certainly brought a lot of criticism and anger on itself. It will like rely on claw backs and long-term incentives. These were ideas that top banks were embracing anyway. So the impact may be more symbolic than substantive. Still, it is eye-catching. 

By Jim Kim on FierceFinance.com

For more:
- here’s a CNBC write up

Empty docks:  Wheels of justice are grinding awfully slow

How many financiers do you think ended up in jail after America’s Savings and Loans scandals? The answer can be found in a fascinating, old report from the US Department of Justice.

According to some of its records, between 1990 and 1995 no less than 1,852 S&L officials were prosecuted, and 1,072 placed behind bars. Another 2,558 bankers were also jailed, often for offenses, which were S&L-linked too.

Those are thought-provoking numbers. These days the Western world is reeling from another massive financial crisis that eclipses the S&L debacle in terms of wealth destruction.

Insight: A matter of retribution

By Gillian Tett Published: September 3 2009 on FT.com

http://www.ft.com/cms/s/0/f197ed60-98a5-11de-aa1b-00144feabdc0.html

In a new executive education program, leading historian and HBS Professor Niall Ferguson explores why most quantitative economic models failed to anticipate the magnitude of the current global economic crisis, and illuminates future scenarios for the world economy.

The Descent of Finance
What will the U.S. financial services industry look like as the economy recovers—and how will this affect the global financial system? Faculty member Niall Ferguson offers his thoughts on why America—and the world—could emerge stronger than ever.

Overlooked by the mainstream media and only rarely discussed in the management journals is the resilience of the Co-operative business model.  The reason for this may well be the lack of management scandals, which have plagued the corporate and the nonprofit sectors over the past 20 years.

Co-operatives have also maintained a low profile in the current economic meltdown. There are almost 10,000 credit unions in the U.S. with 84 million members and assets in excess of $600 billion.  Not one of these defaulted or went to Washington for TARP money simply because they are close to their communities and know their customers.  Credit Union loans were not sliced and diced into ‘collateralized debt obligations’ by Wall Street, given triple a status by the ratings agencies and then sold to institutions worldwide.  These asset managers could not or did not check on the details of the underlying loans, a situation that is almost impossible to be replicated at a credit union.

What exactly is a Co-op?

The Co-operative Industry uses this definition:

“A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.”

The central role of Values is paramount in the Co-operative community:

“Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.”

Those values have been firmly recognized by The United Nations with their designation of July 4th, 2009 as the International Day of Cooperatives.

“Driving Global Recovery through Cooperatives” is this year’s International Day theme and it focuses on recovery rather than crisis.  It aims to highlight the role that cooperatives have in not only promoting economic growth, but also in promoting ethical values - values that have been severely challenged during the financial and food crisis. It underlines that cooperatives can effectively contribute to global economic recovery and that they will do so in respect of the Cooperative Values and Principles, which guide their operations.

The Principles follow seven internationally recognized precepts:

•    Voluntary and Open Membership
•    Democratic Member Control
•    Member Economic Participation
•    Autonomy and Independence
•    Education, Training and Information
•    Cooperation Among Cooperatives
•    Concern for Community

A brief history:

Co-operatives started out as small grassroots organizations in Western Europe, North America and Japan in the middle of the last century; however, it is the Rochdale Pioneers that is regarded as the prototype of the modern co-operative society and the founders of the Co-operative Movement.

The Rochdale Pioneers:

In 1844 a group of 28 artisans working in the cotton mills in the town of Rochdale, in the north of England established the first modern co-operative business, the Rochdale Equitable Pioneers Society The weavers faced miserable working conditions and low wages, and they could not afford the high prices of food and household goods. They decided that by pooling their scarce resources and working together they could access basic goods at a lower price. Initially, there were only four items for sale: flour, oatmeal, sugar and butter.

The Pioneers decided it was time shoppers were treated with honesty, openness and respect, that they should be able to share in the profits that their custom contributed to and that they should have a democratic right to have a say in the business. Every customer of the shop became a member and so had a true stake in the business. At first the co-op was open for only two nights a week, but within three months, business had grown so much that it was open five days a week.

The principles that underpinned their way of doing business are still accepted today as the foundations upon which all co-operatives operate. These principles have been revised and updated, but remain essentially the same as those practiced in 1844.

In the US, since 1916 the National Cooperative Business Association was the first, and remains the only national organization for all types of co-ops in the country. Dedicated to developing, advancing and protecting cooperatives, for nearly 80 years the NCBA has been the national voice for U.S. cooperatives, helping them compete in changing economic and political environments.

Internationally the Association has worked in the developing world for over 60 years, helping to empower local communities through cooperative development.

A 100 years after the Rochdale Pioneers’ Co-op was founded in the UK, the NCBA formed the Freedom Fund in 1944, to help cooperatives recover in war-torn Europe.

The following year, it played an integral role in creating the Cooperative for American Remittances to Europe, which provided economic relief to war-torn Europe. NCBA President Murray Lincoln was the first president of that organization, now known and recognized worldwide as CARE.

Some interesting facts and figures:

# Worldwide, some 750,000 cooperatives serve 730 million members.

# U.S. cooperatives serve some 120 million members, or 4 in 10 Americans.

# 29 cooperatives have annual revenue in excess of $1 billion, including such well-known names as REI, Land O’Lakes, Inc., ACE Hardware, Sunkist and Ocean Spray Cranberries.

#The top 100 co-ops have a combined $117 billion in revenues.

# Cooperatives range in size from large enterprises, including U.S. Fortune 500 companies, to single, small local storefronts.

# 270 telephone cooperatives provide service to two million households.

# Some 250 purchasing cooperatives offer group buying and shared services to more than 50,000 independents businesses.

# Cooperatives operate in every industry including agriculture, childcare, energy, financial services, food retailing and distribution, health care, insurance, housing, purchasing and shared services, telecommunications, and others.

# About 30 percent of farmers’ products in the U.S. are marketed through more than 3,000 farmer-owned cooperatives.

# Approximately 900 rural electric cooperatives own and maintain nearly half of the electric distribution lines in the U. S., cover 75 percent of the land mass and provide electricity to 37 million people.

# More than 1,000 mutual insurance companies, with more than $80 billion in net written premiums, are owned by their policyholders.

# More than 6,400 housing cooperatives provide homes for 1.5 million households.

Throughout the World, cooperatives are providing co-op members with financial services, utilities, consumer goods, affordable housing, and other services that would otherwise not be available to them.

The U.N.’s conference “Driving Global Recovery through Cooperatives” in July will bring the Co-operative business model to the attention of a broader business audience, perhaps Wall Street can find time to listen to some inspiring success stories.

________________

Just announced:

The Global Co-operative Development Fund

UK credit card provider Co-operative Bank, in collaboration with Deutsche Bank, has launched the first development fund for co-operatives.

The bank believes that its customers wants it to play a part in tackling global poverty and the new fund is one of the ways that it can achieve this aim.

Head of structured and asset finance at the bank Richard Wilcox said: “Investing in co-operatives can contribute to the economic development of a country, helping to alleviate poverty and reduce economic vulnerability - while providing a competitive risk-adjusted return.”

_________________

Has the Time Come to Nationalize Struggling Banks? Yes, but Carefully

After a generation of increasingly relaxed regulation of the financial services sector, the very concept seems stunning: Nationalization of banks in Europe and the United States. But with many global banks still teetering on the brink of insolvency — even after rescue efforts that have included multi-billion dollar infusions of capital and other forms of assistance — a different view is emerging. A growing number of economists — including, most recently, Alan Greenspan — now argue that temporary government takeovers of the most deeply troubled institutions may be the only remaining solution.
http://knowledge.wharton.upenn.edu/article/2166.cfm

The internationally respected Network for Sustainable Financial Markets has just released a blueprint for fundamental changes to the Credit Derivatives market. The Network suggests that proposed changes will bring fairness and sustainability to what has been a dangerously opaque and, as a result, mispriced sector of the financial system.

Prepared by corporate governance and insolvency expert Dr. Janis Sarra, of the University of British Columbia Faculty of Law, and endorsed by respected investment professionals and academics who are members of NSFM, the paper recommends 10 immediate systemic changes to create targeted and effective regulatory oversight of the credit derivatives markets.

Presenting the paper on Monday in Washington D.C. to a joint Task Force of the World Bank and the International Monetary Fund on the current financial crisis, Dr Sarra said “While there have been a number of industry and regulatory reports on the crisis, reform proposals to date are too limited in their perspective, in some cases recycling strategies that caused the current crisis.”

She added: “Current reform efforts are in peril of failing to address the real causes of financial market instability.  Regulatory bodies have to think more creatively and systemically about the nature of their task, so that the financial market system can better serve its core purpose of creating long-term sustainable value.”

Five recommendations have been made in relation to point of purchase and sale, with a further five relating to the point of settlement and insolvency restructuring proceedings.

According to Dr Sarra, the aim of the recommended changes is to “ensure that, through the application of rules for transparency and for conduct, buyers are better able to understand and manage the risks of a particular derivative.”

“The proposed changes will ensure credit derivatives can more sustainably and fairly play their vital role as means for diversifying lending risk.”

Professor Sarra added “These recommendations are first steps towards creation of a fair and sustainable credit derivatives market.”

The current system has some perverse effects, said Dr Sarra. “For example, the offloading of risk can mean originating lenders lose any incentive to be duly diligent in the original lending decision. Even more seriously, a creditor can make a loan and then purchase credit default swaps many times the value of the underlying asset. Because the value they would get from settlement of the swaps is greater than the original asset, they then have an incentive to have the debtor company fail and be unable to repay the loan.”

“Implementation of the recommendations would offer immediate protection to investors and create new momentum for the rebuilding of effective, fair and sustainable capital markets.”

While some countries already require some parts of these recommendations, an internationalised derivatives market requires them to be consistently applied across major financial markets.

The recommendations are:

1. Information disclosure sufficient to make informed decisions must be mandatory, not optional.

Disclosure must include:
a. Any adverse risk in the underlying asset.
b. Any risk to the sellers’ financial health.
c. For public companies, how their credit risk has affected valuation of derivative liabilities.

2. Counterparties to credit derivative contracts and investors must have underlying material risks disclosed to them and have enforceable remedies where that risk has not been properly disclosed.

3. Credit rating agencies must meet a mandated due diligence standard

a. They should be required to disclose all fees associated with a rating.
b. Purchasers should have effective remedies against rating agencies and others that do not meet mandated standards.

4. Central exchanges need standardized, transparent trading procedures and consistent standards of conduct and disclosure. That should include:

a. Credit documentation being made public through public registries or similar vehicles.
b. Credit default swaps being publicly reported, including trading and position recording by dealers.
c. A requirement that either a portion of exposure be left on the originating lender’s balance sheet, or that there be a mandatory seasoning period where the lender is required to hold the risk before it can be resold or repackaged.
d. Regulators facilitating the development of best practice standards for over-the-counter derivatives, including counterparty credit risk management, oversight, liquidity management and netting.

5. Where a derivative holder has no economic risk in a loan because it has fully hedged that risk, regulators should mandate that this be disclosed before the holder can precipitate insolvency or other proceedings.

6. If a company is being restructured, there must be mandatory disclosure of the amount of debt that has been hedged by creditors that wish to exercise their rights to participate or vote in the restructuring.

7. A court considering a restructuring plan should be required to take into account the real relative economic interests at stake, as distinct from the interests suggested by the face value of claims that are in fact protected by credit default swaps.

8. Insolvency restructuring legislation should be amended so that credit derivatives can be stayed for a period on the same basis with any other creditor, allowing the court to exercise oversight of the clearing process in a measured way that assists with the risk management aspects of the products and slows the speculative market.

9. Create timely periods for creditors to make claims against the insolvency company, to ensure that debtors can avoid a continually revolving door of credit default swap settlements. Given the internationalized nature of derivatives, these claims bar dates need to be made uniform across different jurisdictions.

10. Finally, a central clearing facility for multiple credit derivatives should be created, with regulatory oversight and transparency.

NSFM is an international, non-partisan network of finance sector professionals, academics and others who see the need for fundamental changes to improve financial market integrity and efficiency.

The NSFM has been formed to bring the insights of theory and practice to bear on the need for a more stable and inclusive financial system, one that will harness the innovative capacity of the financial sector for maximum economic, social and environmental good.

NSFM aims to look at the underlying causes of financial market instability and on development of fundamental reforms.

The paper released today is the first of a series of papers the network is publishing in coming weeks towards the design of a better and more sustainable financial system.

Complete paper available from http://www.sustainablefinancialmarkets.net/

Contacts:    Dr Janis Sarra  - sarra@law.ubc.ca – phone +1 604 947 2071