Creating Community: Street Car Bistro

Street Car Bistro is a new business opening in my neighborhood.  The liquor permits are posted on the front door and the windows are covered with white sheets of paper with repeating patterns of “Street Car Bistro” and “www.streetcarbistro.com”.  Sheets on the front door are hand signed by Kathy and Jim - the owners, Sunny – the bar manager, and Vito – the executive chef.

The Street Car Bistro Web Site has a neighborly feel to it, offering “only fresh, locally grown food and a fantastic selection of beverages AND not so hard on your pocketbook so you can make it a regular hangout without going broke.” I interviewed Kathy and Jim for my blog.

My most pressing question – how were they able to finance their business in the current economic environment? The “buy local” movement has been a boost to local businesses, at least those that survived the recession.  However, this is the most difficult time to find funds to start a business that most people can remember. 

Kathy and Jim are enthusiastic about their new venture and were optimistic about their ability to borrow the money that they needed.  Kathy had owned a commercial photography business and Jim works in finance at The Standard.  They did their market research which gave them confidence that the neighborhood would support their vision.   They wrote a comprehensive business plan and began approaching banks, angels and ventures.  No one would lend them the money.  The banks are hampered by the new banking regulation put in place to prevent another “too big to fail” financial bailout. The angels and venture capitalists want 20% plus returns, an impossibility for a small, neighborhood business.

Finally, Kathy and Jim had to make a go/no-go decision.  They decided to go ahead, using personal assets, most in IRAs and 401k plans.  The IRS slaps a 10% penalty on using these funds and then taxes them at their marginal tax rate so these are vey expensive funds.  The US government puts up road blacks every step of the way, at a time when economic recovery depends on new businesses for new jobs.

Jim devised a “Founding Members Program” to help raise operating cash. Founding members get their name on a wall, a T-shirt and a discount of 5% to 20% depending on membership level.  Amy Cortese, author and blogger, Locavesting, talks about a similar program at a microbrewery in Austin, Texas which raised $20,000 in operating cash from their membership program and, as a bonus, had loyal customers from day one.

Amy Cortese is speaking at the Jump Starting Local Investing Conference on June 15^th and 16^th in Portland, only four blocks from the Street Car Bistro. Kathy and Jim called Amy and signed up for the conference.  Amy is excited to have an example of a local business using a locavesting strategy.  Kathy and Jim are excited about learning more about locavesting and still optimistic about getting a loan to finance their business.  I am excited about having a new neighborhood hangout with fresh, locally grown food and good beer.

Complexity Equals Corruption: Wall Street – Part II

JP Morgan Chase stayed above the fray during the 2008 financial debacle and seemed “bulletproof” until Thursday, May 10, 2012, when Jamie Dimon, CEO, announced a $2 billion trading loss.  The FBI is investigating, Jamie Dimon has apologized, and everyone is speculating on where to place the blame.

In Forbes on May 17^th, Bill Drayton, founder of Ashoka, opines “…. society and business remain deeply dependent on the old rules-and-enforcement system. This both hurts their people and makes it all but impossible for them to behave ethically. No multiplication of rules or managers, administrators, accountants, and police will prevail. Accelerating change, and more and more groups complexly and fluidly linked together; doom any rules-and-enforcement approach to ethics. No wonder corruption is so rampant across the globe.”

Read more Empathy-Based Ethics: A Strategic Essential

“Our old rules-and-enforcements systems make it impossible for people to behave ethically.”  A frightening thought that makes sense in today’s complex world.  If something is “legal,” is it “ethical?” Our systems are so complex that any systemic change can create unintended consequences that boggle the mind.  Our usual approach is to “punish” the offender(s), make and enforce new rules.  That doesn’t work so how do we proceed.

Wendell Berry says, “Change is going to come from “people at the bottom” doing things differently.”  Perhaps we need to go “back to the future” to find a banking model to meet today’s needs.

On May 15^th, CBS News aired Small town bank puts people before profits, a story about The Bank of Cattaragus. The Bank of Cattaragus was founded in 1882 and is the only bank serving this community of 950 people.  Patrick Cullen, President and CEO, doesn’t use credit scores to make loans and the bank has not had a loan loss in eleven years.  Colleen Young, VP and CFO and Patrick Cullen's daughter adds, "Our goal is not to make a ton of money. It's to help the local people." The bank's average net income is $23,000 annually.

Bank of Cattaraugus, 24 Main Street, Cattaraugus, NY 14719

In the world today, there are 53,000 credit unions (community-based, cooperative banks), operating in 100 countries.  Like the Bank of Cattaragus, these banks exist to serve their local communities.  In the United States, there are approximately 7,000 credit unions, 17% fewer than there were five years ago: i.e. the number of credit unions is decreasing at the time when it seems like a community-based banking model may be one answer to solving the global banking problem.

Ironically, the number of credit unions is decreasing because of new regulations promulgated as a result of the 2008 financial debacle.   Credit Unions did not fail or run up huge losses that required taxpayer bailouts.  Small credit unions simply don’t have the staff for the required compliance reporting. Ironically the regulations promulgated to prevent “too big too fail” losses didn’t prevent JP Morgan from losing $2 billion, but the regulations are putting Credit Unions and community banks like The Bank of Cattaraugus out of business.

Complexity Equal Corruption: Wall Street

Our financial institutions are a major roadblock to creating community in this country today.  The majority of Americans suffered financial setbacks in the 2008 financial meltdown.  Many people lost their jobs.  Students graduated and could not find jobs.  Homeowners were “underwater” as home values plummeted; many could no longer afford to pay their mortgages.  Foreclosures and “short-sales” increased dramatically as did homelessness.  American with retirement savings saw their nest eggs dwindle, in many cases losing 50% of more in value.

Our government seemed to ignore the plight of the average American.  Our government listened to the Wall Street establishment.  The Wall Street banks were “too big to fail.”  Our government used our money to “bail out the Wall Street Banks.”  Then the Wall Street Banks used the bailout money to fund their executive bonus pools if it was “business as usual.” People were angry, but how do you take on the government when our elected officials are not listening? 

On his April 27^th broadcast on BBC Radio More or Less: Behind the Stats, Tim Harford investigates Black-Scholes: The Formula That Changed the World.  Black-Scholes is a options pricing equation developed by Myron Scholes and Fischer Black in the 1970s at MIT.  Black-Scholes turned out to be a way to calculate the value of not just options, but many other financial assets, including derivatives. 

In 1997 Scholes and Robert Merton, another options-pricing expert won the Nobel memorial prize.  Scholes and Merton were partners in a hedge fund, Long­Term Capital Management.  In 1998, Long­Term Capital Management lost $4 billion in six weeks and had to be bailed out by a consortium of banks assembled by the Federal Reserve.

“Ten years after the Long­Term Capital Management bail­out, Lehman Brothers collapsed. And the debate over Black­Scholes and LTCM is now a broader debate over the role of mathematical equations in finance. Black­Scholes changed the culture of Wall Street, from a place where people traded based on common sense, experience and intuition, to a place where the computer said yes or no.”  Business schools taught Black-Scholes and OPM and quantitative analysis; not common sense, experience and intuition. 

In 1982, Sam Hayes, Professor of Investment Banking, headed the Harvard Business School Corporate Finance Advanced Management Program.  Executives from around the world spent three weeks in Cambridge, Massachusetts learning cutting edge finance.  Black-Scholes and OPM were two case studies for the program.  We were introduced to spreadsheets – on an Apple II computer using Visacalc, the program written by Dan Bricklin as his Havard MBA thesis.

Sam Hayes personally taught OPM (Other People’s Money).  Hostile takeovers and leveraged buyouts were all the rage. We learned how to identify sources of cash on a target company’s balance sheet and how to analysis their tax position.  The plan was to acquire the target company by borrowing the money and then use the target company’s cash reserves and “tax appetite” to pay off the debt. All these strategies were legal and in compliance with Generally Accepted Accounting Principles (GAAP) and the US tax code. The Harvard Corporate Finance program did not include discussions of ethics or morality. 

Spreadsheets and Black-Scholes spawned increasing sophisticated equations and models.  Business school taught the new models and equations and the new MBAs went to Wall Street to make their fortunes.  Finally computers ran Wall Street trading desks.  Few people, if any, actually understood how the models worked and reality came crashing down in 2008.

In his book 17 Equations That Changed The World, Ian Stewart, Mathematics Professor, Warwick University the story of Black­Scholes as a morality tale.

"It's very tempting to see the financial crisis and various things which led up to it as sort of the classic Greek tragedy of hubris begets nemesis," Stewart says.

"You try to fly, you fly too close to the sun, the wax holding your wings on melts and you fall down to the ground. My personal view is that it's not just tempting to do that but there is actually a certain amount of truth in that way of thinking. I think the bankers' hubris (arrogance) did indeed beget nemesis (punishment). But the big problem is that it wasn't the bankers on whom the nemesis descended ­ it was the rest of us."

Complexity Equals Corruption: Taxes

Our federal government is a major roadblock to creating community in the United States today.  Distrust of our elected officials is at an all time high, as high as 86.3% according to a February 2012 survey by American Pulse.   How can we feel safe to create close communities when we don’t trust our elected officials? How did we lose faith in our government institutions?

Fareed Zakaria, host CNN Fareed Zakaria GPS, identifies the US tax system as a major source of corruption and, I would argue, a major reason why Americans have come to distrust their elected officials.

Zakaria’s position;  “The US tax system has degraded the entire system of American Government.  Special interests pay politicians vast amounts of cash for their campaigns, and in return they get favorable exemptions or credits in the tax code.

The U.S. tax system is not simply corrupt; it is corrupt in a deceptive manner. Congress is able to funnel vast sums of money to its favored funders through the tax code ­­ without anyone realizing it.  The simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away: preferential tax treatment. “

In allowing preferential tax treatment to exist, our government represses our primary drive to belong (empathy) and brings out our secondary drives of narcissism and materialism. “The higher up on the materialist value scale one is perched, the more mistrusting of others one becomes.” Jeremy Rifkin.  Is it any wonder there is a “trust deficit” in America?

In 2010, the National Taxpayers Union estimates, “In 2010, paperwork burdens cost American taxpayers 7.64 billion hours, equal to3.82 million people working full­time with two weeks’ vacation each year.” According to Daniel Pink, “this is more than twice the working time of all the elementary school teachers in the U.S.”

The US tax code is 16,000 pages and growing longer every day. Zakaria advocates for a national sales tax because it is efficient and easy to administer, provides stable revenue and curbs consumption.  However, he feels “killing corruption” is most important so he is in favor of “any change that will fit the entire US tax code on two pages.”

Can we even imagine a two-page tax code? What will we do with all that time? For me, I imagine our tax anxiety would subside and give us more time to devote to our primary drive to belong.

• ·      We will hire more teachers and give all teachers more time with our children
• ·      We will have more time to spend with family and friends. 
• ·      We will have time to get to know our neighbors
• ·      We will have time to strengthen our communities
• ·      Our Gross National Happiness (GNH) will increase 
•     Our Gross Domestic Product (GDP) will remain the same

Creating Communiy

What does “Creating Community” mean?  For me, community means people working together for the common good; i.e. living together in harmony with nature and each other, a sustainable life style, justice and equity for all.  This is such a simple concept. Why is community so difficult to achieve?

Jeremy Rifkin, author, Wharton-trained economist, adviser to the European Union and lecturer at the Wharton School’s Executive Education Program, thinks that the survival of the human race and our planet depends on our ability to create community, a community that includes the whole human race, other creatures and the biosphere.  His view is that, while difficult to achieve, we have no choice and we better get started.

In the introduction to his most recent book, The Empathic Civilization: The Race to Global Consciousness in a World in Crisis, Rifkin explains his position: “A radical new view of human nature is emerging in the biological and cognitive sciences and creating controversy in intellectual circles, the business community, and government. Recent discoveries in brain science and child development are forcing us to rethink the long-held belief that human beings are, by nature, aggressive, materialistic, utilitarian, and self- interested. The dawning realization that we are a fundamentally empathic species has profound and far- reaching consequences for society. “

Rifkin’s theory is that human beings are by nature empathic. Our primary drive is the drive to belong.  In his view, human beings are “soft wired for sociability, attachment, affection and companionship.” If we are truly an empathic society, we will be able to extend our empathy to embrace the entire human race, our fellow creatures and the biosphere.  However, if our core nature, empathy, is repressed by our government, business practices, education and parenting, then the secondary drives of narcissism, materialism, violence and aggression come out.  “We need to bring out our empathic sociability so we can rethink the institutions of our society and prepared the groundwork for an empathic civilization.”

Whew! When I started this blog, my plan was to explore ways to create community in the City of Lake Worth, Florida and the Pearl district in Portland, a micro look at creating change in local communities.  Rifkin’s theory expands the scope to our entire civilization and instills a sense of urgency to create change, a macro issue facing our world.   I am shifting the focus of this blog to rethink the institutions of our society.  The first step in creating change is understanding.  My goal will be to explore the institutions of society to understand unintended consequences in the operations of these institutions today.

Invisible People

She came here on a bus from Guatemala when she was twelve years old.  ICE (U.S. Immigration and Customs Enforcement) stopped the bus in Texas, just inside the border.  The people on the bus were “processed.” She was alone and small and scared.  An ICE agent took pity on her and called her uncle in Florida.  Her uncle had “papers” and ICE allowed him to come to Texas and take her to Florida.

She went to school, she learned English, she excelled in school and she graduated.  After graduation, she went into limbo – along with 65,000 undocumented high school graduates in the United States.  She wants to be a math teacher, but she doesn’t have “papers.”  She cannot go to college, she cannot work, and she cannot get married.

Every day she shows up at a local agency and volunteers her time.  The agency wants to pay her for her work but is afraid to risk it.  She asks her father for $20.00 to buy personal items.  He hits her and tells her to use a towel.  He is the only one working in the family and the money isn’t enough.  He is stressed.

She wants to work but all employers are required by ICE to have new employees complete Form I-9 U.S. Immigration and Customs Enforcement and she does not have “papers.” She can work for cash – babysitting, cleaning houses, yard work – but even these jobs are hard to find when you are afraid to step out of the shadows.

She meets with an immigration lawyer.  He is kind and wants to help her.  He tells her that her only option is to “surrender” to ICE to begin the process of applying for legal immigration.  She remembers the young, single mother who went to her immigration hearing and never came back; no one picked up her two young children from day care.  She envisions the ICE Detention Center in Miami and eventual deportation to Guatemala, a place without family or friends. She puts her head on her hands and sobs.

If she could wave a magic wand, what would she wish for herself? She would take and pass the exam to become a Child Development Associate (CDA); she completed the educational requirements while still in high school.  She would get a part-time job in a local childcare center.  She would bring her paycheck home and help support her family, relieving the stress that her father feels.  She would enroll in the local community college and begin pursuing her dream of becoming a math teacher.  She would step out of the shadows and become active in her local community. 

Eventually she would marry and have children. She would teach math at the local middle school, volunteer at the local community center and be active in her church.  Her children would enjoy school, participate in sports, plant gardens, play piano and volunteer to help younger children with their homework.  She would vote in every election, pay taxes and run for public office.  Her family would be good neighbors; the neighbors that you want living next door.

On Monday ICE announced “Cross Check,” their largest operation ever.  ICE arrested 3,168 illegal immigrants with “criminal and civil violations.”  The fear comes back. She has “no papers” and “no papers” is a civil violation.  She is scared and retreats further back into the shadows.  

A Plea for the Return to Values-Based Banking

In April1998, John Reed, CEO Citibank and Sandy Weill, CEO Travelers, announced their merger, a merger that was illegal under Glass-Steagall.  At the press conference, John Reed said, “Sandy called his friend the President (Clinton) last night …… and told him what was going to happen.”  Reed and Weill already had assurance from Robert Rubin, Secretary of the Treasury, that Glass-Steagall would be repealed, one of many unholy alliances between business and government. John Reed left Citibank one year later, the loser in a power struggle with Weill.

Reed told Bill Moyer on January 12, 2012 that when he went into banking, the rule was “Never put on your balance sheet something you wouldn’t sell your mother.”  How did Reed get from this beginning to being a major player in bringing the world economy to its knees?

Reed was among the first wave of MBAs to hit Corporate America. When Reed joined the bank in 1965, “operations” was a set of clerical functions.  Reed introduced flow, systems and computers and transformed operations from clerical functions to a processing factory.

Reed’s senior staff laid out the process on paper and decided how to make it work.  No one interviewed the employees performing the clerical functions.  The employees were “cogs in the wheel." What could they possibly know?

The results – Reed’s staff “blew up the bank office of the bank.” Banks never made mistakes and suddenly Citibank had tons of mistakes.  Customer’s account balances were wrong; checks were returned to the wrong customer or not returned at all; too many other mistakes to list here.  Reed’s staff now had to visit the “back office” to clean up the mess they created.  Could this problem have been prevented?

Yes - The Toyota Way.  The two pillars of the Toyota Way - “continuous improvement” and “respect for people”- would have slowed down the process. However, the change would have been harmonious for customers, employees and all stakeholders of the bank.

Reed is credited with many banking innovations during his 34 years career.  If Reed had introduced The Toyota Way in the operations department, would these innovations have been handled differently? Would Citigroup have avoided being “too big to fail?”  Perhaps.

Reed does have the courage to admit that the Citibank/Travelers merger was a failure. On April 8, 2008, the Financial Times quoted Reed: "The specific merger transaction clearly has to be seen to have been a mistake, the stockholders have not benefited, the employees certainly have not benefited and I don't think the customers have benefited because our franchises are weaker than they have been."

In March 2010, Reed apologized to a Bloomberg reporter for his role in creating Citigroup, the recipient of $45 billion bailout funds and more than $300 billion in asset guarantees.  Reed also supports a return to Glass-Steagall.

The leaders of the other “too big to fail” banks have yet to show any remorse.  Their customers are demanding change; i.e. Occupy Wall Street and Move Your Money.  Customers have been successful in rolling back announced fees by utilizing social media.  The bank CEOs remain arrogant, continue to collect their big bonuses and stay disconnected from their customers.  Perhaps now is the time for banking to turn to The Toyota Way and learn “respect for people” and “continuous improvement”.

Do any of these leaders have the courage to admit failure and embark on a new path?