A Solari Report – Can Our Own Communities Serve as Financial Safe Havens in Troubled Times?

By Catherine Austin Fitts and Carolyn Betts, Esq.

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Our CommunitiesThe fall in global stock market prices over the last year has had a significant impact on most Americans’ retirement savings. When monthly 401(k) and IRA statements arrived last week, many small investors saw their investments drop in value by significant amounts. On Friday, October 10, a Wall Street Journal headline reported: “After Year of Declines, Investors Lose $8.4 Trillion of Wealth.”

The response of the federal government and the Federal Reserve to this situation is further eroding small investor confidence: while small investors and their pension funds suffer significant losses, Wall Street firms are receiving multi-billion-dollar loans, investments and bailouts and the executives responsible for creating a mortgage securities and derivatives scandal escape with rich golden parachutes.

A byproduct of reduced confidence in the public stock market is an increased interest in local investment. People concerned about their retirement savings express growing interest in investing locally for the following reasons:

  • Tangibles: As the air goes out of the debt bubble, capital has been shifting out of complex financial products and back into essential services and tangibles, including commodities, natural resources and precious metals. Thus, many of the basic goods and services created and managed locally should be rising in value now and in the future.
  • Credit Crunch: As financial centers hoard capital to address their own losses, many small investors see that if they send their savings to Wall Street, Wall Street is not likely to circulate it back to their community. The way to ensure that your cash accounts are circulating locally is to deposit in local banks or similar local or regional financial institutions.
  • Community: We Americans are committed to our communities. The prospect of helping local small businesses create the jobs and income flows that will help our friends and family members in hard times makes local equity an attractive investment alternative. For the same reasons, those responsible for philanthropic and social venture capital investment decisions are interested in community investment opportunities.
  • Green: If we are going to reduce waste in our society, we must do it one place at a time. For those of us interested in “going green,” there is a lot of opportunity in our own backyard.
  • Risk: Centralized government and banking policies are resulting in rapid inflation of our money supply. This causes our currency to drop in value, inflating prices. As a result, the cost of food, energy and other essential items in our household budgets rises. In the face of inflation and potential disruptions in quality and availability, the economics of investing in food and energy self-sufficiency at the household and community level become more attractive. An investment in becoming energy self-sufficient takes the sting out of falling levels of dividend and interest income. A lower overhead is the dividend that cannot be cut.
  • Financial Intimacy: Given current significant levels of financial system fraud, sticking with the people and things that we know, understand and trust is a good way to make sure we are financing legitimate enterprises and are not paying a “corruption tax.”
  • Equity in Purchases: Investing in the businesses and farms that we patronize creates an opportunity to build equity from our own purchases.

Traditionally, local banks have done a good job of circulating customer deposits by making loans to small business, farms and other enterprises in their areas. As the credit crunch deepens, however, it is critical for us to do our homework and support depository institutions that our research indicates are financially sound and circulating their customer deposits in the form of responsible local loans.

Since equity investment is the foundation of financially healthy, sustainable companies, both start-ups and existing businesses are well advised to seek equity capital as well as debt financing. While small investors can pool their capital by investing in mutual funds that hold stock in large corporations, few liquid opportunities exist for small investors to make community-based investments.

So the question is, how do we build the the financial bridges between capital leaving the global stock markets and local entrepreneurs and businesses and farms who can effectively deploy such capital in a way that contributes to a more robust economy in our community? In developing investment vehicles for small investors to invest locally, we will want to address system-wide issues:

Regulatory Issues: Right now, it is easier for most Americans to “invest” money in the lottery than in equity in local community businesses. Traditionally, many regulatory and legal impediments have created significant obstacles to investing locally. For example:

  1. (1) Under federal securities laws, stock must be registered with the Securities and Exchange Commission unless an exemption from registration is available. Registration is prohibitively expensive except for offerings in the millions of dollars. If a community-based offering is made only to investors within a single state and certain other federal contacts can be avoided, the offering may be conducted under the securities laws of the state in which the business is located and the investors reside. In most states, however, an “intrastate” offering still entails significant costs for an attorney to provide investors with the required disclosure and make the required regulatory filings and an accountant to provide financial statements and tax advice.
  2. (2) Generally, small issuers claim a private offering exemption that is available for sales directly by an issuer not involving a public offering, but the offering cannot be advertised publicly and significant financial and other disclosure is required. This exemption is available for sales to an unlimited number of “accredited” investors but only to 35 or fewer investors who are not accredited. This means that the size of the offering may be quite limited unless the issuer is able to sell most of the shares to accredited investors, The definition of “accredited investor” includes institutional investors and major corporations, but an individual qualifies only if he or she has annual income of at least $200,000 ($300,000 together with a spouse) or net worth of at least $1 million. Thus, many small investors do not qualify as accredited investors.
  3. (3) Investors in private offerings, whether under state or federal law, often must show that they have a level of sophistication that enables them to understand the merits and risks of the investment or have an advisor with such ability. Many small investors would not have that level of sophistication unless they were to take classes or otherwise study investment analysis and/or had experience in the type of business conducted by the issuer.
  4. (4) Many, if not most, small investors hold a significant portion of their investment assets in the form of IRAs or 401Ks, which must satisfy the requirements of the Employee Retirement Income Security Act (“ERISA”). ERISA places strict restrictions on the type of investments that may be held in such accounts by putting the onus on the trustee to show that the investments are “safe.” This showing is difficult for securities that are not publicly traded. Finding a trustee willing to put in the time it takes to satisfy the fiduciary duties under ERISA and assume the significant risks of departing from the traditional types of investments presents a challenge.
  5. (5) Pooled investments of any significant size or complexity may entail satisfying technical requirements under the Investment Company Act of 1940 (or similar state laws in the case of intrastate offerings). An exemption from this law is available for non-public offerings to 100 or fewer investors, but this exemption cannot be claimed if the offering is advertised publicly. If no exemption is available, many complex requirements having to do with recordkeeping, registration of the investment company’s investment advisor, capital requirements for the investment advisor, financial statement and other disclosure and independence of the governing body will apply. Undertaking this compliance would not be feasible except in the case of a very large offering.

The challenge is to navigate these requirements responsibly without creating unacceptable risks for less experienced investors.

Liquidity and Diversification: Traditional investment vehicles for private venture capital investment have been illiquid and involve large minimum capital requirements. We need to find ways for local investors to pool their capital and achieve diversification and liquidity. Securities law requirements play a role here, too, because generally, securities offered in non-public offerings are restricted and cannot be sold except under an exemption from registration requirements. Some markets for unregistered securities do exist, but the requirements for sales generally preclude participation in this market by investors who do not satisfy standards for income and net worth exceeding even the requirements for accredited investors.

Expertise: Most small investors have grown comfortable with investing in liquid securities and mutual funds through their brokerage accounts. Under existing constraints, local investment opportunities are complex and difficult to understand even for sophisticated investors. We need to attract professionals who can capitalize on what we have learned about investment clubs, venture capital and angel networks to create and manage local investment pathways. In addition to needing to understand and work with the securities law and ERISA constraints described above, professionals charged with the task of carrying out community offerings will need to be able to work with community leaders and state regulatory authorities to assure that safety and accountability to the relatively inexperienced segment of the investing population can be achieved. The costs of employing such professionals at market rates for the necessary services would be significant.

Human Capital: Many of our best and brightest young people are leaving small communities for greater opportunities elsewhere, while retirees with investment capital are closed out of the mainstream. We need to find ways to engage all the generations to work together to ensure that we have the best human capital available to create, finance, govern and manage enterprises locally.

Strategic Control: Many small business owners seek debt financing for permanent working capital needs to avoid sacrificing privacy and decision-making freedom to outside equity investors. Stimulating local equity investment will necessitate the creation of capital structures that ensure business owners retain privacy and strategic control. An example of a capital structure that may satisfy these requirements is the “A/B” share model, whereby shares with limited or no voting rights are issued to passive investors. Such a structure may be suitable for relatively unsophisticated investors only where some intervening third party (such as an investment advisor) is in a position to protect the interests of investors.

An obstacle to achieving an effective network of community based investment vehicles across the country is the knowledge management, legal and other costs required to create the early deals upon which others may be based. For a given community, the costs may be brought down if it joins with other communities to find ways to share these costs, thereby amortizing them across a sufficiently large capital base for the resulting products to compete with existing capital market investment vehicles. Alternatively, this type of effort could be funded by philanthropic dollars or social venture investment looking to kick-start private reinvestment in small and green business and communities. With focused investment, powerful state-of-the-art digital methodologies may be used to create and share deal templates, “how to” manuals, lessons learned, software innovations and databases and similar knowledge management tools so that each community does not have to reinvent the wheel. Given recent downsizing in financial industry employment, community investment is a potential area of opportunity for professionals with financial experience and skills.

While creating a safe haven for our capital in our own communities is a complex undertaking, the opportunities are growing to invest in our neighbors and ourselves. During the period October 24-28, I will be participating in “Financial Permaculture: The Greening of a Rural American Community” (www.financialpermaculture.com) in Hohenwald, Tennessee. We will grapple with these and other issues in simulations designed to help participants find ways to finance small business projects involving ethanol, a green business incubator and natural homebuilding businesses.

If you can, please join us there. For those who can’t come for the entire time, there will be sessions open to the public. For those of you are not close by, participating blogs will be covering the event. See: financialpermaculture.org.

So in person or virtually, join the conversation! Let’s make our communities a safe haven for both our families and our capital.

Related Reading:
A Solari Report: Independent Media Sustainability: A Review of Existing Media Capital Structures

12 Comments

  1. My retirement is with a statewide multi-employer plan. Counties invest millions in their employee’s retirement benefit through a trust usually managed by a state chartered administrator. The administrator is managing without the knowledge of the pump and dump fraud. I’d love to see financial permaculture presented to a national association conference that administrator principles attend. Also, a white paper brief done by one of the research groups in the retirement industry that is not bought and paid for by Wall Street.

  2. Having worked in the legal field for 15 years, I wonder: Why can’t Social Security be redone to state that it is an investment. We have all given with blood to get by on our paychecks without the money given to FICA. If that were an investment, like a mutual fund or whatever, we would at least have an investment at retirement age.

    Franklin D. Roosevelt started Social Security because there were so many poor old people during his time. Then of all the selfish, greedy things a few presidents later they said there is so much money in Social Security it will never be needed. So they voted to let congress play with it and spend it at their pleasure. Money that we worked for to give to congress.

    Now they say Social Security may not be there for the upcoming generations. So undo the congress playground. So let the Social Security be only for Social Security and if there is too much money in there, then for sake of fairness and right of ownership, give Social Security recievers a dividend or raise to amount to something. Once a person is on SS then they are locked in at a certain rate with never a hope of their investment giving them any relief.

    We gave and are giving an untold amount every month for our entire working career and should be rewarded with getting the interest from this investment. I know it is not considered an investment so rework SS to be an investment.

    Thank you for your time and your efforts to make America better financially.

    Claudette C. Nichols
    5125 Old Canton Rd. Condo 204
    Jackson, Ms. 39211

    601 957 3840

  3. My reply focuses on the ‘reinventing the wheel’ comment in Catherine’s blog.

    For the past 3 years or so we have had a small sustainability group here in
    Northeast Wisconsin.

    In the early days we knew we wanted to do something but had little power to
    accomplish anything. There was also the problem of academics introducing a form of
    catechism given in discussion groups and study circles which was developed in Sweden
    as the result of years of theory.

    I will not go on to criticize that. My own research continued away from these
    dabblings in feel good exercises. And so I found (not founded) on my own The
    Institute for Local Self Reliance located in Minnesota.

    As far back as 1982 David Morris and his associates were finding solutions to the
    the event that hit the whole world in the late 1970’s: The Oil Embargo. The
    difference between the implementation of change in Europe and the non-implementation
    (after the crisis passed) in US is what puts us so far behind the learning curve.

    The point is that many solutions to financing local and decentralized energy sources
    was being done back then.

    For this discussion I will highlight one solution: mini bonds to improve or build
    decentralized power plants which exist as part of the energy grid. Micro investing
    in such projects with off the shelf technology and a relatively rapid payback time
    (three years or so rather than the more conventional 10 year period of municipal
    bonds) would be the incentive for individuals to invest in their own communities by
    buying bonds in increments of $100- $500 with no entity holding more than 5% of the
    total.

    There is also the difference of a utility issuing these bonds and a municipality
    which involves whether or not a tax free status for local investment is given.

    David Morris and others who write about self reliant cities have been doing this
    work for many years. There are pieces of legislation that are part of that history
    and so less time is needed in adapting what some individual communities may have
    already accomplished.

    I am not a consultant nor am I in any way speaking as a professional. The goal is
    to get beyond the feel good greening of anything or everything and this is a way of
    creating that large pool of low risk individual investment locally.

    Catherine, I encourage the other readers here to listen to your latest discussion
    with Dennis Bernstein in “Community Business” on Flashpoints. What you are doing with the
    Financial Permaculture meme may be the breakthrough that is needed for local self reliance.

  4. Catherine:

    I’m sorry but I’m probably off topic here but I was listening to you on Coast to Coast and George Norry was trying to figure out why the price of oil and gas is diving down so quickly. Here is the e-mail that I wrote him and I hope it makes a nice edition to your site in understanding the aspect of the bubble economy based on oil future speculators and how that was the final tipping point of what I believe pushed the bubble economy over the edge:

    Hi George:

    I was listening to your 10/16/08 show on the net and I thought I’d help you and the show understand the REAL reason why the price of gas and oil is dropping like a rock over the last 15 days. Here in Atlanta the price of gas has dropped $1.17/gallon!!!! Just today we have seen the Q.T. gas station on the corner drop their price 3 times in one day!

    I am strongly of the opionion that our current economic woes and financial crises is a direct result of $3 to $4 per gallon gas. When people who have a mortgage rate they can’t really afford and lots of credit card debt, it doesn’t take but a few hundred dollars more a month being diverted from paying their bills and house payment and instead end up in their gas tank. The REASON why gas and oil has experienced such volatility and record prices (and now record lows) is because of price manipulation in the oil futures market, primarily through the realtively new commodity futures trading exchange known as the Intercontinental Exchange. Upon it’s formation in 2000, the Comodity Exchange Act was changed, voted on and passed literally in the early morning hours of a lame duck seesion to EXCLUDE the regulation of energy futures. If you noticed, this “deregulated” oil futures market came into being right at the same time as ICE. Please see buried in this video that explains it all of Michael Greenberg, former Director of the Commodities Futures and Exchange Commission (1997-99) practically begging the senate to simply add one word to the current Commodity Exchange Act (The Word = Energy) and defang the “Enron Energy Loophole” that speculators have been using on ICE to manipulate the price of oil/gas http://www.youtube.com/watch?v=QtuXc8gz90k. Please note that Keith Olberman links all of this to John McCain. For more info on the use of the Energy Enron Loophole plesae see this informative site: http://www.stopoilspeculators.com/.

    I believe it was the Enron Energy Loophole that pushed our economy over the edge by allowing speculators to drive up the cost of gas causing everything else we buy to sky rocket in price. As I said, when your cash is going into your gas tank and your budget is on the edge to begin with, it doesn’t take a genius to figure out that eventually you just might not make your new house payment on your ARM mortgage.

    Now here is why the price went down. If you noticed, Warren Buffett invested $5 Billion about 3 weeks ago in Goldman Sachs which I am sure gave Buffett a tad bit of influence there. It just turns out that Goldman Sachs is manipulating the oil futures market right before the election (see this article buried deep in the Saturday section of the Washington Post: http://www.lewrockwell.com/orig7/stojan1.html. In the article the claim is made that the price of gas is being manipulated down by Goldman Sachs (using the Enron Energy Loophole) as Goldman Sachs just pulled about $6 Billion out of oil futures that were betting on the price go up, to futures betting that the price was going to go down. Over the next week or so all the other hedge funds, speculators, etc followed suit and guess what happens? The price of oil/gas drops like a rock just like when it went up after Katrina. The price volatility has very little to do with supply and demand and everything to do with the exploitation of the Enron Energy Loophole of the Commodities Exchange Act. Isn’t it interesting that the exploitation of this loophole by trades OTHER THAN Enron started occuring right around the time of Katrina, which just happened to be at the peak of the housing bubble. I figure what happened is that speculator saw that they could get away with this and have been doing it ever since with all their huge hedge fund buddies.

    Well, just to let you know, Congress is very much aware of this mess and when “you know who” gets elected the law is about to change. And oh yeah, make no mistake about it. I bet Henry Paulson has nothing to do with this. Warren Buffett just did the entire American Economy a huge solid on this one. He’s a good man.

  5. Hi, I’ve been enjoying your commentary on Coast to Coast. I’m really interested in the “local community” as a safe-haven idea. I moved to the Big Island in January, and it’s really been interesting to observe the Island’s economics at play during the past few weeks.

    I believe that the community (and the fact that we’re geographically isolated to an extent) have somewhat helped protect us from the turbulent swings.

    We started a sign and banner company in March, and have been extremely busy the past few months. We’re hiring 2 new employees next week and are excited.

    Also, there are cruise ships in the bay at Kona, and it seems that things are good (sure, I talk with business owners who are slow,) but overall, there is commerce and the American Dream is still available!

    Thanks again for your great information on Coast to Coast, I am slow thankful for a show like C2C, I really get great info from George & Co!
    Chris Anderson
    Lets Go Banners, Inc.

  6. Hi, Catherine:

    This website is a great resource!

    I don’t know if you are able to answer, but I heard once I heard you on the radio saying that places such as fast-food restaurants, etc. are fronts for activities such as sex-trafficking and narcotics. I honestly don’t understand how such a thing would work. Are you able to explain.

    Also, Nouriel Roubini has said that we are going into a deep recession, but he seems to believe this will clear up in a couple years. It seems you think differently, and I was wondering if you had any thoughts about what he is saying.

    Much thanks, and hope you are well!

    –Laur

  7. Hi Catherine:

    Very informative. Perhaps as a first step, one can overcome many of above cited problems by pooling community resources large enough to establish a publicly listed holding company with the mandated to invest (in both debt and equity) in defined communities or regions. In this way it would have the liquidity of a stock and the structure of a mutual fund and achieve many of the above cited goals. As a model, think of Berkshire Hathaway where it invests in publicly traded equities, debt, and takes equity stakes in private businesses. Obviously we would want something a lot smaller and regionally focused but the model is right there. However, not too small otherwise we lose the necessary economy of scale. The key would be to find the right investment management team to run the holding company and be good stewards of the invested capital.

    I would be very interested to hear what Catherine and other think.

  8. I was reading this at work today at the home page, so it took me a bit of time to find it again in the Archives. This is the kind of stuff that’s really downhome kind of reading, and easy, practical steps to take. But first, I have to get someone to listen. I think there is a leader at my church who will listen. She has taken the lead in getting a “Green Team” organized, set aside one Sunday refreshments to be all organic, and inspired a young man to lead a beach cleanup. She and her husband also host monthly raw food potlucks in their home with guest speakers. Next month’s topic is going to be about money. I think it’s these kinds of little groups in our communities that can get the grassroots of Financial Permaculture growing.
    Thank you, Catherine. I’ve been a regular visitor to your website for a year–can’t remember how I even found it. You and Gerald Celente are my most trusted financial voices on Coast to Coast.

  9. Have you ever read a post wherein the writer says …”I’m not an expert, but…”
    Please stop saying “I’m not an expert”.
    Reading Catherine’s Solari site and others such as Web of Debt makes you an expert.
    It’s the clowns in gov’t who are not expert.

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