limited liability partnerships

Over in the latest Lib Dem Voice debate, on whether we should support FairTrade or not, the name of Dr Michael Hudson has come up in the comments, and I thought this was worth highlighting (H/T Disinter):

I am quite familiar with the work of Michael Hudson and Fred Harrison as they are both prominent advocates of Land Tax and the work of Henry George. Here Hudson is putting into much better words than I have so far been able to what I have been advocating since the run on Northern Rock or before about why the current bank bail-outs will not work and are aimed not at rescuing the real economy, ie us, our jobs and homes and personal wealth, but that of the lobbyists and the financial sector that keeps politicians in office, and in lucrative work of course after they've given up office!

Basically we need to have a biblical style Jubilee - the one in fifty years in which all debts were written off, those who had become indentured to landowners to pay off their debt are freed, and the origin of the happy cry of "Hallelujah". This would be better than the write-offs and government guarantees being so gleefully doled out by governments around the world. Banks, or some kind of Zombie fund, could take on the toxic debt and renegotiate them down to the value of the underlying asset - the home or perhaps the business - and turn the debt back into a performing asset rather than toxic debt - even potentially making a profit on the current market value of the debt.

This is something I've been working with trying to setup in Oxfordshire - using limited liability partnerships into which the debt, the property and the rental yield from the property are put to turn the nearly repossessed home into an affordable home for the occupant but also an income generating asset for the lender. But why is it just us off-beam unschooled economists who are promoting this sort of thing? Where are the adventurous young bankers coming up with this sort of thing? Oh yes, that's right, it's easier if they can just persuade our governments to bail them out and let the tax payer take the risks of their over-enthusiastic lending.

A week or so ago Mike Killingworth challenged us on Liberal Conspiracy to show what "Lovable Banking" might look like in response to the daily emerging news that we've been shafted regularly by the banking system since, oh, at least 1695. Some of you will know that I have long taken an interest in things like local currencies and mutual finance and perhaps also that I've been looking into the use of the Limited Liability Partnership structure as a way of building multi-stakeholder less toxic alternatives to purist shareholder capitalism.

Well a couple of weeks ago I was contacted out of the blue by a chap, Frank Churchill, also in Oxfordshire, who has been looking at similar structures. In his case originally I think as a less toxic alternative to developing world microcredit systems (did you know that the effective interest rate including all charges and so on on Grameen or Kiva micro loans can get as high as 80%!) and as a way of monetizing voluntary work - mainly involving carers. We've both been steadily battling along on our own on this, trying to understand the structures and build solutions to common issues around them - in my case, mostly things like affordable housing and supporting local businesses.

And so we've got together and are, hopefully, on the verge of setting up a "think and do tank" (to coin a strap line from another - less popular amongst liberal economics followers - organization, the New Economics Foundation; but don't let that put you off - some of the issues are the same but we believe the responses are more mutual and liberals than theirs) in the form of a "Community Finance Partnership".

The Limited Liability Partnership structure was created, ironically perhaps, to get the professional firms such as accountants and lawyers out of being personally liable for the debts of their partnerships - the vast accountancy partnerships in particular were worried about the sort of "Enron scenario" of being held liable for multi-million pound lawsuits and were threatening to move their registered offices away from the UK if we didn't give them limited liability. But inadvertently they have created a beautifully simple mechanism for bringing all the parties to an enterprise - the providers of capital, landlords, customers, workers and suppliers and so on - in, if they wish, to share in the risks and the rewards of pooling their contributions to the success of that business as partners.

A partnership agreement can involve different classes of partner receiving different shares of the profits depending on the worth of their input to it - just as a co-operative structure does. Companies may be partners, or even other LLPs as well as individuals. And the partnership itself is tax transparent so each partner is responsible for accounting for the profit or loss in their own tax affairs. Some of you will be aware that I think limited liability in general is a Bad Thing that takes the personal responsibility away from business owners, but in this case it matters very little since every connection with the business could become a partner and share that responsibility explicitly.

The Community Finance Partnership can we believe fulfill a great number of roles, offering a portfolio of products for consumers and a steady return based on those to investors - the aim is to produce an index-linked rate of return in the form of a "rent payment" for the use of the capital partners' (investors) funds. "Customer partner" products might include interest free mortgages - called Property Investment Partnerships, personal loans such as with Credit Unions and business finance "repaid" through a portion of the successful businesses' turnover.

One "flagship" product we are hoping to develop is the idea of a local complementary currency, probably in the form of a Nectar-like loyalty card system that businesses with a base in the geographical area can buy into and which would be able to monetize currently unpaid work like volunteer carers whose value to the local community and especially health services is enormous. The possibilities are almost limitless. For example another idea would be to finance the equivalent of PFI schemes - for example if Oxfordshire County Council wants to rebuild some schools, but with local investors sharing in the reward. And such a structure could be used to provide the mutual finance system for universities I mentioned earlier today.

Think a cross between a loyalty card system, a credit union (more on the US or Irish style than the British), a mutual building society but with the ability to lend to business and not just on homes, and possibly a friendly society offering local mutual insurance and pension products. It's early days yet, and we're still working up what each product would look like in financial terms and the sort of prospectus we'd be able to offer investors, but I'm very excited about it! We think the time is ripe for a return to more human scale financial institutions that people can become a part of on a local more human scale.