Good morning. I would like to make a pitch for a product that we're offering - a Katrina CD - if you have $100. We have a $2T market in socially responsible investments. Much of the market has been typecast for being served by small and philanthropic organizations. It's an unfair characterization, which has dissuaded people from looking at it as a viable market. We want to change that.

Our fund is focused on large institutional investors, pension plans, and others. The fund invests in geographic-specific locations. We can invest in Harlem, South Dakota, or Texas, among other places. While investors can target their investments, they can also get an aggregate return. We only invest in AAA rated securities and exclusively in individuals who make less than 80% of median income.

The fund itself provides a co-mingled return, which is important for banks with CRAs. Over the last 7 years, we were able to show how individuals refinancing mortgages are a slower investment, because they need to wait for a greater drop in interest rates.

In an effort to help all investors, we focus on those who are under the median and lower income levels and in the Hispanic and African American communities.

We provide capital to communities. We've been active in the new market’s tax credit. We want to transform practices of organizations, have enough scale in the marketplace and have great impact through lending partners.

We focus on trying to be able to talk to the "wingtips", people on Wall Street, as well as the Birkenstocks, the lower income people. Our performance is pretty good. We have a number of investors who are here today. Our lending partners are located all over the country. We're a national organization, which creates some tension for CRA banks. Investors like to see the geographic diversity, which mitigates the risk factor.

With securitization we raised three types of capital. Two of them are contributions from philanthropic organizations. The other type is social investments, which have a concessionary return, where the investor is looking for repayment of principle.

We have two rated debt securities. We have been able to do this with some support from several people in the room. This has never been done before, and we had a lot of help to put the data in front of the SEC. We think it will helpful for future transactions.

With new markets, it's important to understand the incredible amount of added complexity regarding scale. We have gone from one organization to several complex organizations. It takes a certain amount of scale to use the tax credit.

I haven't heard enough about how we are capital constrained. We need to find ways to get a lot more capital into this market.

We are Wall Street investment bankers who work in unusual parts of the world. At the end of the day, we are not making rich people richer but are making poor people a little less poor. We've brought together experience from a lot of parts of the developing world.

Microfinance is key in alleviating poverty. These loans are technically an asset class. They are very different than anything else we see. They roll over every 4-6 years and their performance is totally uncorrelated to world events. How do we get access to this? It could provide a market rate of return and, as a social investment, it is a grass roots way to alleviate poverty.

This year is the International Year of Microfinance, established by the U.N. As Michael said, just today it was reported that Pierre Omidyar, founder of eBay, donated $100M to Tufts for microloans. What instruments are there to invest in this arena? There is a lot of potential here and individuals are helping to make a difference.

Can we increase the sophistication of the sector without giving up what we're doing? How far behind the times are we? It seems like 20 years. Sometimes we want to be this far behind, such as when sticking with low-income neighborhoods while the others are leaving. But we don't want to be behind in terms of paperwork.

If you look at the way funds serve their investors, we're about 1200 years behind the times, like tinkers going through the village hawking their wares. What if we bring it up to modern shopping, where an institution could say what they want to invest them and we have them available?

We look at the degree to which we can customize. We want to move to a system that pushes the wealth, not just to one person, but instead to the entire company. Or what if it is pushed out to the community? Or what if we could leverage a dollar of philanthropy for every dollar that is made? That's how we created the first Underdog Legacy Fund.

We just closed a deal with a fair trade coffee company. A former Microsoft employee established the company, which is 100% nonprofit controlled and establishes community development programs in various countries. We want to maximize impact while still getting venture capital returns. We get to do interesting projects.

You might know about the Community Development Venture Funds, but I wanted to make sure to mention them. There are also now clean technology investments, which are picking up some of the community development work.

There is Legacy Ventures, which doesn't do a single community development project, but that's the work they do. They have everyone bring $1M to the table and get them into funds they would never be able to otherwise offer. Their only caveat is that they have to give away their money - all of it - the principle and the interest. If you're going to be a little different, it's best not to be a little different but a lot different!

How can we steal what's right about that? There is a group called Symphony which started with a venture fund that puts $150m into social ventures. They got Morningstar to do rating. They were able to take it public, and people could invest in a public security with no custody issues.

What if we did mini-funds of funds? What if we created a public security, instead of trying to underwrite one fund at a time? We could do this with public and private sector money.

Q: What is the role of social investors if we're getting more adept at being more conventional?

Ron: For Frank and Peter and Underdog, we're trying to make larger pools of capital. We can outperform comparably rated securities, because it takes longer to set up and there is some subsidy. Social investors will be the originators, so that the top end of the market goes to the public.

Frank: We have to very clear by what we mean by “social investor”. Some say it is concessionary, and some say it isn't. There are a lot of different terms out there. Maybe there are segments that should be more clearly defined.

Q: What are the returns your investors are getting?

Frank: They are in a range. We get blocks of money and convert money to a position in an unrated vehicle. We have different structures within the social investment world. Prudential takes a higher risk without taking a higher return. We're negotiating with individual institutions which could be more regularized.

Peter: Back to the first question. You can find a vehicle that meets your investment goals and still meets the desire for social impact. We have to sit down and figure out if we're the right partners. We're attracted to those who want to talk about impact. The SRIs are going to be unnecessary if everything is mainstream. In the last 10 years, we’ve started to decrease the number of areas that are underserved. The ideal, over time, is that we will have different underserved areas.

Q: We have a portfolio of 30 microloans in Vermont. In a rural area with low volume, we'll never reach the levels in this field. What might be available?

Peter: If you grew from the 30, you would be the entity that would attract equity investments that could be structured as a nonprofit model.

Frank: We've used a loans-to-lenders model because the transaction costs are too high for us to take on each of the loans.

Ron: There is an opportunity for an association to be a consolidator. This would be an attractive investment because you have broad diversification.

Michael: Maybe, Peter, you could add the U.S. to a new fund that also includes the other countries you have?

Q: In microenterprises there is a robust movement here in the U.S. I'm also curious about the upside-down pyramid. What are the models to go beyond the CRF?

Michael: The capital constraint is the access to equity, not debt.

Peter: The continuum between microfinance and medium-size investments is interesting. Microlending has much more granularity. You can check the performance, and the default rate is consistently much less than 2% better than middle-income U.S. citizens and their credit cards. As communities grow and poverty is diminished, there is room for small enterprises that can be incorporated into these structures.

David: If you look at the inverted pyramid, you look at the parts that tend to leverage well. There are a lot of externalities that you don't see in the picture. What props up the pyramid that you don't see? There are transaction costs, legal fees and some of these you can bill in but some you can't.

Frank: One of our ideas is to shrink the percentage of the deal. We want to leverage that. Granularity is essential to us. If we could come together as an industry, we might be able to raise the bottom piece from equity. It would be such a small part of the overall costs. We're bootstrapping over time, and we can only go as far as we can given the capital constraints.

Ron: We need to attract credit enhancers to the market. There's a lot of spread for people to buy up. Whether its microloans or not, there were some banks that wouldn't make mortgage loans to people in certain neighborhoods no matter what. That's changed now with the credit enhancers. The economics in these communities are supportable by capital. I measure whether something is socially responsible by whether the end user is benefited by the investments.

Michael: The government is talking about revamping the tax code. What about earnings from investments from certified CDFIs being tax exempt?

I want to thank the panelists for their participation.

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