Monday, December 16, 2013
Nasdaq for Not-For-Profits
That’s the way Lindsay Beck, a two-time cancer survivor and the founder of a successful charity, started thinking about how the world of finance and Wall Street could revolutionize the staid nonprofit industry.
Ms. Beck was a graduate student at the Wharton School of the University of Pennsylvania when she blurted out a question that had been consuming her: “Could there be a Nasdaq for not-for-profits?”
The idea — creating the equivalent of a profit-driven stock market for nonprofits — might seem counterintuitive at first. It was a “radical idea, and maybe I was naïve,” she acknowledged.
But for the last year, she has pursued the concept. It has gained enough traction that it has won her meetings with executives at Goldman Sachs, Deutsche Bank and members of the Obama administration. A team of lawyers at Morrison Foerster has been working to understand the tax implications and how to comply with Securities and Exchange Commission rules.
Ms. Beck’s idea is just an idea, a germ of a concept that could go nowhere. And it is early, very early. But it has the potential to upend an entire part of the global economy if it succeeds. By some estimates, if just 1 percent of the money in the portfolios of wealthy individuals in the United States was directed to nonprofits through new financial instruments like social impact bonds or Ms. Beck’s exchange, the nonprofit world would be sitting on $1 trillion.
Wall Street is littered with clever plans to use financial instruments to change behavior — carbon trading, for example. Some have changed the world, and others failed miserably. As Douglas Horton said: “Good ideas are a dime a dozen. Bad ones are free.”
Several ideas about using financial instruments and a for-profit approach in the world of nonprofits are now taking hold. This month, Goldman Sachs announced a $250 million social impact fund. Morgan Stanley plans to raise $10 billion over the next five years for what it calls its “investing with impact platform.”
In September, JPMorgan Chase teamed up with the Bill and Melinda Gates Foundation to start a $94 million investment fund to finance late-stage drugs, vaccines and tools to fight diseases like malaria, tuberculosis and H.I.V./AIDS.
Considering the black eye that Wall Street has suffered in the public consciousness, some of these efforts will probably be greeted with cynicism. That may very well be part of Wall Street’s motivation, but that hasn’t stopped the nonprofit sector from jumping at the chance to explore how to use these funds to raise money.
Ms. Beck’s idea is an outgrowth of her experiences. She started a nonprofit, Fertile Hope, which helped female cancer survivors with pregnancy. Later, it merged with Livestrong (before Lance Armstrong confessed to doping and left the foundation).
Afterward, she decided to get an M.B.A. She began examining how to make the nonprofit world more efficient at fund-raising and made it her independent study project. She says she has long believed that charitable money is often misallocated; some of the most effective organizations struggle to raise funds, while some of the least effective charities are allocated millions.
That got her thinking: An exchange, like a stock market, would make the success — or failure — of organizations more transparent, leading to more money in the best hands. On top of that, if donors thought about their charity as an investment, literally, it would transform the nonprofit sector.
“When you take off your charity hat and put on your investor hat, you behave very differently,” she said.
She has been inspired, in part, by several programs that Goldman Sachs developed to sell so-called social-impact bonds. A group led by Alicia Glen, a managing director at Goldman Sachs who is a former lawyer and a former assistant commissioner for housing finance for New York City, has developed a series of such bonds.
Ms. Beck’s vision for an exchange “is very creative and visionary but it may take a long time to come,” Ms. Glen said. She added that although it might be years, if not decades, before such an exchange could be viable, “It is a very laudable goal.”
Ms. Glen should know. She helped develop the financing program for the Citi Bike program, in which Goldman Sachs paid for the purchase of the bicycles and stations in exchange for a potential profit that was capped by the city. Such an arrangement helped provide money for a program that the city could not otherwise have afforded.
The company also created a $9.6 million loan for New York City for a program run by MDRC, a social services provider, aimed at preventing former Rikers Island inmates from ending up back in jail. The program has clear goals and benchmarks. Goldman will directly benefit only if the program works. If recidivism drops by 10 percent, Goldman will be repaid the full $9.6 million by the city. If recidivism decreases more than that, Goldman could a profit, capped at $2.1 million. However, Goldman would lose up to $2.4 million, if recidivism does not fall at least 10 percent.
Goldman has used its own money to finance the programs. But now, it and other firms are coming up with ways to turn these types of programs into investments for its clients. JPMorgan’s nearly $100 million fund works because the Gates Foundation is offering to pay to protect investors from the potential downside of investing in some risky new drugs and vaccines.
“At the outset of the investment, you are underwriting both sides of the ledger: the financial side and the social side,” Ms. Glen said of these new bond products.
Still, Ms. Beck says that to expand such a program broadly, an exchange needs to be created to allow investors to trade these instruments. That way, they could hold the most successful ones and dump the duds.
She says the current spate of “impact bonds” aren’t really bonds; it’s a misnomer. From a technical perspective, she said, “They are really just multiparty contracts with contingent payouts.”
She is developing ways to create a common system to develop social impact bonds that are, in her words, “real bonds.”
Of course, her idea may be ahead of its time. When she was researching her idea, she came across an article from 2006 about a plan to hold initial public offerings for nonprofits. Still, she asked, What if?
WHERE TO NEXT? - Obamas Might Stay in Washington After Presidency Ends, by then, their eldest daughter Malia will be in college, and their youngest daughter Sasha will still be in high school as a sophomore. 'So we've gotta ... make sure that she's doin' well ... until she goes off to college,' the president said. 'Sasha will have a big say in where we are.' ... If the Obamas do stay in Washington and maintain a residence in the city, President Obama would be the first president to do so since Woodrow Wilson. In fact, Wilson, who was partly paralyzed from a stroke, is the only former president in U.S. history to maintain a residence in Washington, D.C., where he stayed until his death three years later. ...
Obama hinted that separating Sasha from her high school friends might be asking one sacrifice too many. ... Obviously they -- and Michelle -- have made a lot of sacrifices on behalf of my cockamamie ideas, the running for office and things,' Obama joked.
TOP STORY: NUMBER OF BANKS HITS LOW SINCE DEPRESSION - The number of banking institutions in the U.S. has dwindled to its lowest level since at least the Great Depression, as a sluggish economy, stubbornly low interest rates and heightened regulation take their toll on the sector. The number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer falling below 7,000 for the first time since federal regulators began keeping track in 1934, ... The decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011. ...
The falloff is raising alarms among boosters of community banks, who say such lenders - which represent the vast majority of U.S. banks - are critical to the economy because they are more likely to make small-business loans. The number of physical bank branches in the U.S. is also shrinking. From the end of 2009 through June 30 of this year, the total number of branches dropped 3.2 percent, according to FDIC data.
FAREWELL GOVERNMENT MOTORS - The U.S. government ended up losing $10.5 billion on the General Motors bailout, but it says the alternative would have been far worse. ... Treasury ... sold its final shares of the Detroit auto giant ... recovering $39 billion of the $49.5 billion it spent... Without the bailout, the country would have lost more than a million jobs, and the economy could have slipped from recession into a depression, Treasury Secretary Jacob Lew said ...
Since leaving bankruptcy, GM has been profitable for 15 straight quarters, racking up almost $20 billion in net income .... It also has invested $8.8 billion in U.S. facilities and has added about 3,000 workers ... The auto bailout was part of the Troubled Asset Relief Program, with the bulk of the money going to financial institutions. Treasury said it spent $421.8 billion on bailouts and so far has recovered $432.7 billion, including the loss on GM.
MORTGAGE DEBT RISES - The US has reached an important milestone in its recovery from the financial crisis after the first rise in outstanding mortgage debt since the beginning of 2008. After reducing debt for 21 consecutive quarters, US households increased their net mortgage liabilities at an annualized rate of 0.9 per cent in the third quarter of 2013 ... The rise in mortgage borrowing is a sign that US households are making progress in their painful deleveraging after the financial crisis, and may be better able to increase their consumption, supporting economic growth next year.
BIRTHDAYS THIS WEEK – Birthday wishes and thoughts this week to: Benjamin Bratt (50), Chris Evert (59), Al Kaline (79, Brad Pitt (50), Keith Richards (70), Cicely Tyson (80).
2013 TIME PERSON OF THE YEAR: POPE FRANCIS - TIME names Pope Francis the 2013 TIME Person of the Year. TIME Editor Nancy Gibbs, who met Pope Francis in Rome last week, writes: 'Rarely has a new player on the world stage captured so much attention so quickly-young and old, faithful and cynical-as has Pope Francis. In his nine months in office, he has placed himself at the very center of the central conversations of our time: about wealth and poverty, fairness and justice, transparency, modernity, globalization, the role of women, the nature of marriage, the temptations of power.... He is embracing complexity and acknowledging the risk that a church obsessed with its own rights and righteousness could inflict more wounds than it heals.... For pulling the papacy out of the palace and into the streets, for committing the world's largest church to confronting its deepest needs, and for balancing judgment with mercy, Pope Francis is TIME's 2013 Person of the Year.''
N.R.A. POWER - Inside the Power of the N.R.A.: It has been a year since the Newtown's shootings, and federal gun laws haven't changed. Here is why: Even as the votes in the chambers still favor the N.R.A., gun-control advocates have some cause for optimism. Time does not seem to be on the N.R.A.'s side. ... Between 1977 and 2012 the percentage of American households possessing one or more guns declined by 36 percent. ... The N.R.A. is all too aware of the headwinds it faces and has ramped up its efforts. In recent years, it has targeted young military veterans by offering them a free introductory 'Life of Duty' membership. It also works extensively with the Boy Scouts, David Keene [recently retired NRA president] told me, 'to try to get kids in the city to hunt and fish.' The N.R.A.'s signature method of recruitment, however, is to play on the fears of gun enthusiasts with over-the-top claims that President Obama and his administration will not rest 'until they've banned, confiscated and destroyed our guns' ...
Over time, this tactic could prove to be a losing one . Just as Tea Party rhetoric has hurt the Republican Party among young people and Hispanics, the N.R.A.'s seeming capitulation to the smaller, no-compromise gun groups risks turning off whole swaths of mainstream gun owners who may be more concerned with the job market and the cost of college tuition than with the prospect of a national gun registry. For now, the matter of universal background checks joins immigration reform and same-sex marriage as issues in which Washington Republicans lag behind nationwide public opinion. And so the more competitive gun-legislation battles have begun to take place at the state level. ...
The N.R.A. has had this issue to itself for a generation,' Mark Glaze, the executive director of the Bloomberg-backed Mayors Against Illegal Guns, said ... On the subject of the Manchin-Toomey defeat, he said: ... 'We might have started advertising sooner and more broadly. We might have paid millions rather than thousands of dollars to ship telephone calls into offices. But it's entirely possible that none of that would've made a difference, because you're at the early stage of a process that has several stages.
BUSINESS WEEK COVER, THE NEW GENERAL ... As Mary Barra takes charge of GM, the inside story of how the automaker came all the way back," by Tim Higgins and Bryant Urstadt : "GM is looking stronger than it has in decades. It's in its third straight profitable year and feasting on the fruits of bankruptcy, which in its case include lower labor costs, less debt, and the elimination of weak brands and redundant dealers. ... Warren Buffett has been buying the stock. China, where Buick is a status symbol-it was the ride of China's last emperor-is now the company's biggest market. And GM is no longer 'Government Motors.' On Dec. 9, ... the Department of the Treasury, which had been selling about 1 million GM shares a day as the year was ending, declared it had sold the last. The federal government will recoup about $39 billion of its $50 billion investment.
"Supporters of the Obama administration's decision to take over GM ... contend that the jobs saved at both the company and its huge network of suppliers more than repaid U.S. taxpayers. According to the Center for Automotive Research in Ann Arbor, Mich., the takeover preserved 2.6 million jobs in 2009 at automakers and companies that depend on the industry. The center calculates that a collapse would have eliminated $284 billion in personal income in 2009 and 2010 and cost the federal government $105 billion in unemployment benefits and reduced Social Security contributions. GM says it has invested $8.8 billion in U.S. facilities since 2009 and created 25,500 jobs for new and existing workers."
GOLD KEEPS TANKING - Bloomberg: "Investors are dumping gold-backed exchange-traded products at the fastest pace since the securities were created a decade ago, mirroring the steepest price drop in 32 years. Holdings in the 14 biggest ETPs plunged 31 percent to 1,813.7 metric tons since the start of January, the first annual decrease since the funds started trading in 2003 ... The removals erased $69.5 billion in the value of the assets as prices fell by the most since 1981. A further 311 tons will be withdrawn next year, according to the median of 11 analyst estimates"
COLLEGE FOOTBALL PICK OF THE WEEK – Saturday 12/21, 3:30 PM ET, ABC: The Royal Purple Las Vegas Bowl; #20 Fresno State Bulldogs (11-1) vs. #25 University of Southern California Trojans (9-4). SC is favored by 6, but we like The Bulldogs to win 42 – 35. Season to date (11-5)
SMALL COLLEGE FOOTBALL PICK OF THE WEEK – Saturday 12/21, 7:00 PM ET, ESPN: The Amos Alonzo Stagg Bowl, D-III National Championship Game; #1 Mount Union Purple Raiders (14-0) vs. #2 UW-Whitewater Whitehawks (14-0). We have be saying all year, this is the year of The Purple Raiders to win the national championship in a wild one, 42 – 40. Season to date (10-4)
NFL PICK OF THE WEEK – Sunday 12/22, 1:00 PM ET, CBS: Indianapolis Colts (9-5) vs. Kansas City Chiefs (11-3). Both teams in the playoff picture, KC has the home field advantage, 32 – 24. Season to date (11-3)
SPORTS BLINK - Sports Illustrated Sportsman of the Year: Denver Broncos quarterback Peyton Manning - Cover story by Lee Jenkins: "For two decades Peyton Manning has methodically elevated the standards of everybody from NFL quarterbacks to video-room interns to offspring named in his honor -- one film session, one spiral notebook, one dummy audible at a time.
NFL PLAYOFFS - Kansas City has become the fourth NFL team ever to make the playoffs a year after losing at least 14 games, clinching an AFC berth by destroying Oakland 56-31. ... The NFC East and North races are just as cloudy as ever following Green Bay's 37-36 comeback win at Dallas. The outcome keeps the Packers within a half-game of Chicago for the NFC North lead and leaves the Cowboys one game behind Philadelphia atop the NFC East. The Packers improved to 7-6-1 by scoring two touchdowns in the final 4:17. ... Eddie Lacy's one-yard scoring run put the Packers ahead for the first time all afternoon.
THE SWAMI’S WEEK TOP PICKS –
(NCAA D-I National Semi Final, Dec. 20) #15 New Hampshire Wildcats (10-4) 17 vs. #1 North Dakota State Bisons (13-0) 38
(NCAA Hockey, Dec. 21) #5 Providence Friars (11-2-3) 6 at Army Cadets (3-11-0) 2
(NHL, Dec. 21) Colorado Avalanche (21-9-1) 2 at Los Angeles Kings (22-8-4) 4
(NFL Upset of the Week, Dec. 22) Pittsburgh Steelers (6-8) 21 at Green Bay Packers (7-6-1) 17
Season to date (49-44)
MARKET WEEK - It’s a busy Monday for economic reports, starting with the Empire State Survey for December at 8:30 a.m. ET. At the same time, the government is set to release Productivity and Costs figures for November. At 9:15 a.m. ET, it’s the November read on Industrial Production. Will they or won’t they? That’s the $85 billion a month tapering question for the Fed as it gets ready to meet tomorrow and Wednesday. Either way, it could be a volatile week.
The Federal Reserve is scheduled to celebrate its 100th anniversary today. Fed Chairman Ben Bernanke will give brief remarks, followed by former chairmen Alan Greenspan and Paul Volcker.
DRIVING THE WEEK - Fed meeting starts Tuesday with announcement Wednesday at 2:00 p.m. and Bernanke's final press conference as Fed chairman at 2:30 p.m. ... Senate expected move to cloture on the budget bill on Tuesday. Could be close but there should be over 60 votes to push the measure to final passage ... U.S. Chamber CEO Thomas J. Donohue gives his annual "State of American Business" address Wednesday at 9:00 a.m. and will hold a presser along with the Chamber's Executive Vice President for Government Affairs Bruce Josten.
Next week: a Rink Rats Christmas.
Until Next Monday, ‘Mele Kalikimaka!”
December 16, 2013