Right now, superfiduciares are investing the funds we have entrusted to their good judgement almost exclusively into enterprises formed for substantially the same purpose, which is to execute one or another specified strategy for trading in one or another kind of tradeable security, either in some specified public trading market or in one or another private alternative trading market.

This is causing those markets, which have grown to monopolize our entire financial system, to become dysfunctional, and that dysfunctioning is having rippling effects throughout the global economy and society, and into your own personal economy, as well.

These markets are “dysfunctional”. Not “malfunctioning”.  They are not “broken” and so they do not need to be “fixed”. To the contrary, they are functioning with marvelous efficiency and efficacy. Their function is to provide a market clearing price, and they are doing that remarkably well.

What they are not doing so well is meeting the needs of our superfiduciaries, and so, by derivation, of ourselves.

• We are not getting income security in our retirement.
• We are not getting social responsibility and public accountability in our financial system.
• We are not getting social equity in our economy.
• We are not getting personal empowerment in our politics.

What we are getting includes:

• illusory returns
• inadequate cash flows
• misalignments of incentives
• miscreant market manipulations
• social and environmental depradations
• rapidly accelerating cycles of ever larger securitized asset trading prices that go bust with increasing frequency, and increasingly catastrophic consequences for finance, for enterprise, for the economy, for society and for you.

Here’s our story about how things have come to such a pass.

Before 1972, superfiduciaries were not permitted to trade in securities. It was against the law.

In 1972, that law was changed.

Since 1972, we have seen a massive influx of superfiduciary funds into the securities trading markets.

We have learned two things.

1. Superfiduciary funds invested as equity in the economy is good.
2. Superfiduciary funds invested as equity in the economy through securities trading is not so good.

We can do better.

The prohibition against superfiduciary participation in securities trading was based on the laws of fiduciary duty, and the rule that a fiduciary must be prudent in the handling of funds entrusted to their good judgement. The law has always been – and still is – that speculation with fiduciary funds is not prudent.

However, in the 1950s and 1960s, economists studying prices in the US stock markets came up with the idea that these markets, though erratic, are also rational: that over all and over time, the market always “discovers” the “right” price for every security.  Out of this idea was developed the theory that a portfolio of properly diversified trading positions would mimic the market overall: although individual share prices would be erratic in the moment, over all, and over time, the portfolio would deliver reliable returns.

It became a popular Wall Street sales pitch to tell the world that portfolio diversification – what is sometimes called Modern Portfolio Theory – is a prudent way for individuals to invest in a stock market that is experientially incontrovertibly erratic and unpredictable.

Then, in 1969, the US Congress changed the rules by which what are called “public charities” – which includes large endowed philanthropies, like the Ford Foundation – would be granted exemption from the income tax. The new rules required these charities to pay out at least 5% of their endowments every year in order to preserve their tax-exempt status.

At the time, the only investments recognized as prudent under the laws of fiduciary duty were government bonds, real estate mortgages and real estate ownership.  Interest rates were 3%.  That meant large endowed philanthropies – like the Ford Foundation – would have to start spending down their endowments – slowly putting themselves out of a job – or give up their tax-exempt status – also putting themselves out of a job.

The Ford Foundation took action.

It commissioned two lawyers, Messrs. Carey and Bright, to review the laws of fiduciary prudence, and find a way to allow the Foundation to invest in stocks in order to realize higher returns, so it could remain tax-exempt and also avoid spending down its endowment.

These lawyers did what lawyers do. They found a loophole.

In their review of fiduciary duty, they correctly reported that the law requires prudence of a fiduciary, and also that speculation is never considered prudent under the law. However, they also observed that many persons recognized as being prudent persons of business were commonly engaged in securities trading through portfolio diversification, in reliance on Modern Portfolio Theory. This implies that securities trading through proper portfolio diversification according to Modern Portfolio Theory could be recognized as within the limits of fiduciary prudence.

The National Commission on Interstate Laws then took it upon itself to promulagate a uniform law that modified the long standing common (i.e. court made) laws of fiduciary prudence in line with the reasoning advanced by Messrs Carey & Bright: if an action was considered prudent for a person of ordinary business knowledge and experience, it would also be accepted as a prudent thing for a fiduciary to do; since people of ordinary business prudence regularly invest in public company shares through portfolio diversification, fiduciaries could also trade in shares through a diversified portfolio.

This uniform law, known as the Uniform Management of Institutional Funds Act, was promulgated by the Commission during its annual convening in August 1972.

By 1973, 43 of the 50 United States had enacted the Act as their own state law.

Harvard acted first (even though Harvard is a university, not a “public charity”, and so was not ever really at risk of losing tax-exempt status if it did not spend down its endowment). The Harvard endowment recognized that its trustees did not have the skill and knowledge required to pick stocks and manage a portfolio. So, it hired a young lawyer to figure out a solution. The solution was to hire consultants to pick stocks for them. This was something that wealthy individuals had already been doing with their own personal trust funds for many years.  The young lawyer then formed a new firm – Cambridge Associates – that became the first consulting firm to be hired by a fiduciary fund to manage a diversified portfolio of corporate shares.

The practice spread slowly at first, but spread it did. Over the next 10 years or so, it became increasingly standard practice for university endowments, endowed foundations and eventually even pension funds to follow the lead of the Harvard endowment, and hire consultants to manage portfolios of public company share trading positions for them.  What once was a sleepy little trust banking business for the rich and privileged grew into what we know today as Asset Management, or more broadly, Financial Services.

Fiduciary funds were helped along on their journey into securities trading by the invention, in 1978, of the 401(k) plan.  This eliminated the need for asset managers to deal with pesky fiduciaries, who fretted over the wisdom of their trading decisions, and sought to hold them accountable for performance according the the needs of their governing charters of trust. It allowed them instead to aggregate tax-exempt individual retirement savings themselves, directly, via a Mutual Fund, that they could use to trade in securities without any real accountability to anybody.

The number of trading strategies proliferated as the volumes of money invested to fund those strategies grew.  It was not long before plain old ordinary corporate shares were not enough to feed this beast.  A new business of Financial Innovation – that is, inventing new strategies for trading in securities and also inventing new securities in which to trade – was next to form.

This was a huge bonanza for so-called Investment Bankers – people who invented new securities in which to trade, for a living – and self-described Asset Managers – people who invented new strategies for trading in securities, for a living!

So, now our financial system is dominated by securities trading as the dominant and default form of finance, and our trading markets are dominated by so-called Institutional Investors, who comprise really two very different demographics: paid professional securities traders who call themselves Portfolio Managers or more frequently today Asset Managers, who are paid to trade, and take a fee on every turn; and fiduciaries of society’s savings, who are now called Asset Owners, whose fiduciary duty is to hire the best Asset Managers they can, and whose performance as fiduciaries is measured through peer benchmarking: they can fail to achieve their chartered purposes as fiduciares – to generate adequate cash flows, forever – by trading in securities through professionals, just as long as their professional traders don’t fail any worse than the professional traders hired by their fiduciary peers.

It is a remarkably seductive, self-reinforcing system that has lead us to the Global Financial Crisis of 2008 and the current state of the world financial system today.

It is time-consuming – and many may find it tedious – to trace the details of how this devolution of fiduciary prudence into peer benchmarking lead us to the dysfunctioning financial system that we have today, so let’s just to this for now.

Let’s just ask ourselves, what if?

What if we are right? What if fiduciary funds are not the same as fiduciaries for individuals, and also not the same as the individuals for whom they are fiduciaries? What if the standards of ordinary prudence that work well enough for individuals trading in a securities market dominated by individuals by and selling securities with their own money, in pursuit of their own personal and idiosyncratic purposes, cannot be accepted as the standard of fiduciary prudence for superfiduciaries investing other people’s money entrusted to their good judgement for the purpose of being able to write the checks they are entrusted to write, today and everyday, over an endlessly repeating, and in that sense, evergreen succession of days, across the generations, without end.

What can we do about it?

Evergreen is a technical answer to this technical question that defines the fiduciary duty of every superfiduciary:

“How can I generate adequate cash flows, forever?”

The evergreen answer is elegant in its simplicity. To generate cash flows, invest in cash flows.

Every enterprise succeeds because it generates cash flow by completing commercial transactions with its customers, today and every day across an open-ended succession of days, to an indefinite, but inevitable, end.

Every superfiduciary needs cash flow to meet its fiduciary duty to write the checks it is chartered to write, today and every day, across an open-ended succession of days, without end.

The cash flow profile match between enterprise success and superfiduciary success is nearly exact. There is only this one important different. Enterprise is ongoing indefinitely, but not endlessly.

Times change. People adapt to changing times. New knowledge is constructed. New work is empowered. New enterprises are organized to bring the benefits of that new work to others. People change the choices they choose. Enterprises that once were important to many people become increasingly important only to a smaller and smaller collection of people with very specific needs. New enterprises take their place in a new economy.

Superfiduciaries just keep going.

So, the solution that superfiduciaries need is a way to acquire a share of the cash flows of enterprise, while that enterprise remains important to the economy, and also to move on to the next new enterprise, when times change, the economy evolves, new enterprises rise in popularity, and old enterprises fade away.

That solution already exists. It is the proven reliable equity payback method for sharing in cash flows that superfiduciaries already routinely use to finance large scale real estate developments.

It is a too-little known truth about modern finance that Wall Street may beat at the heart of New York City, but Wall Street did not finance the New York Skyline. Superfiduciaries using the proven reliable equity payback method for cash flow sharing did.

Evergreen looks at this and asks What if?

What if superfiduciaries took this proven reliable equity payback method of cash flow sharing that work so well for financing enterprises in the real estate business, and adapted for their use in financing enterprise doing any kind of work, anywhere in the economy?

This is radical, and revolutionary.

It is also elegant in its simplicity.

It is the evergreen solution to the superfiduciary problem, a technical answer to the technical question that defines the fiduciary duty of every superfiduciary.

It changes everything!