Wall St. and Business Wednesday (Nov. 23 -27): E-Letter To Alan Hughes and Black Enterprise Re: Black America’s "Access To Capital" Problem

I read with great interest the cover story of your excellent November 2005 issue, "Why Black Business Must Rebuild New Orleans," which explains the problems facing the Black economy in the Gulf Coast, and even suggests and alludes to some possible solutions to that problem. The focus of the article on the problem - what went wrong and the scope of the challenges facing Black producers and consumers - more so than the solution, was properly placed, as your thesis was why black business must rebuild New Orleans and not how they would do so. However, it was clearly implied by the emphasis of the article, that you believe that the redevelopment of the region depends heavily on Black Gulf Coast entrepreneurs and business owners in the region receiving government contracting opportunities.

Your article focuses on the estimated $100 to $200 billion price tag for rebuilding the devastated area, and suggests that government contracting is the lynchpin of an economic development strategy. You write, "Contracting opportunities would grow black businesses and, in turn, increase the number of black employees and generate higher average incomes in a city that’s long been plagued by poverty and crime. It would also bring back some of the displaced black business community and possibly lead to more construction companies."

You quote Margaret Simms, vice-president of governance and economic analysis with The Joint Center for Political and Economic Studies in Washington, D.C., and member of the BE Board of Economists, as saying that "at least $2 billion should go to" Black construction firms in Louisiana and Mississippi.

I enthusiastically support the idea of government contracting opportunities for Black business and entrepreneurs. But I do not place the same emphasis on it that you do, not even as it relates to the rebuilding of the Gulf Coast, which rightfully should be a burden shouldered heavily by the State (local, state and federal central authorities).

As you know, Katrina and its aftermath exposed virtually every inadequacy, not only in terms of local, state, and federal government, but sadly, also that of Black America and the Black economy. Although I know that your important magazine represents much more than advocacy of access to capital through government contracting, I find it sad that we find ourselves in the position of having to apply to the government for the right to earn money for rebuilding our own communities. There is something that seems circuitous, if not inappropriate or even unseemly, in this arrangement.

That is one of the reasons why we have launched our Black Electorate Economics University (BEEU) which began enrollment last week. A major part of the thesis of BEEU is that for the Black community’s entrepreneurs and business owners, generally speaking, there are primarily three avenues to "access capital". They are government (through contracting, loans and grants), formal capital markets (investment banks, private equity and venture capital), and the nuclear and mass indigenous pools of capital (family, Black-owned commercial banks, local investment clubs, purchasing clubs.) And of course there are hybrids or mixtures of more than one avenue. For instance there is the Small Business Association’s (SBA) Small Business Investment Company (SBIC) program which allows the government to match capital raised by private sources and provide it to small and mid-sized businesses.

Of all of the three avenues to access capital, we think the most promising are the latter two – formal capital markets, and mass indigenous pools. While access to capital through government should continue to be sought and fought for, it should not be an exclusive or primary focus, for a variety of reasons that we elaborate on at BEEU.

Of the two aforementioned preferred sources, the great uncharted territory lies with what we refer to as mass indigenous pools of capital. This source of capital, has been the source of wealth and economic development for every immigrant ethnic group in this country – with the Italian and Jewish communities providing excellent examples. At BEEU - from the great Jewish loan societies to the Bank of Italy which evolved to become the Bank of America - we explain how kinship systems that pooled capital resulted in survival, economic development and wealth creation, especially after disasters. BEEU makes the case that even the Black economy’s relationship with criminal entrepreneurship can be explained, rather than demonized, and shown to have a redemptive quality when viewed from the perspective of economist Reuven Brenner’s "five sources of capital" (which states that crime is one of two sources of capital people seek when primary sources are unavailable) and the lyrics of the Boogie Down Productions classic, "Drug Dealer."

And it is for that reason that we suggest that as much emphasis be placed in supporting, challenging, and encouraging the Millions More Movement (MMM) - the premier potential mass indigenous pool of capital – to establish its promised Black Economic Development Fund and apply it to the problem facing the Black Gulf Coast economy; as is currently being placed on obtaining access to capital, through government contracting. The MMM Black Economic Development Fund, in my mind, would not interfere with or replace government contracts, it would aid the economy in ways that government contracting could not. In fact it would compliment whatever the government was doing, and in fact, through the proper arrangement – several SBICs perhaps – the MMM Black Economic Development Fund could actually partner with the government. Operating within civil society, pooling capital from the masses, the MMM Black Economic Development Fund could directly provide capital to businesses or indirectly to them by direct investment in a Black-managed private equity company like Provender Capital, ran by Mr. Fred Terrell, or even, eventually, an asset management company, like that evolving under the direction of BET Founder Robert Johnson. Or, the MMM Black Economic Development Fund could invest in, and bank with Black-owned banks throughout America, providing capital to them that would result in increased liquidity to Black entrepreneurs. Specifically, in the Gulf Coast, the MMM Black Economic Development Fund could start by targeting struggling Black-owned banks like Dryades Savings Bank, Commonwealth National Bank, and Liberty Bank and Trust.

The possibilities are seemingly endless and what makes mass indigenous pools of capital even more attractive is they, as Stephen Shipman, Executive Vice President, Director of Research, and Portfolio Manager of Bjurman, Barry & Associates, argues, make share holders out of those previously solely dependent upon labor and whose choices are limited, excepting migration. This increases the capital to labor ratio among the poor and in the Black economy, and provides an incentive for native Gulf Coast residents to remain or return to rebuild their communities, with increased leverage.

Anyone who does not understand why such leveraging of a mass pooling of capital is merited, perhaps, does not understand the massive nature of the problem. You adequately depict that problem, writing, "The immediate effects are obvious: the instant devastation of businesses and the complete loss of markets. In Mississippi alone, more than 2,000 black-owned businesses generating sales and receipts of $126 million were severely affected. In Louisiana some 20,000 black companies that generated nearly $866 million were impacted by the storm. In total, black-owned businesses in the region, formerly generating $3.3 billion a year, could be irretrievably lost."

Now that - through your excellent article - we have established "Why Black Business Must Rebuild New Orleans," we need to move onto "How Black Business Must Rebuild New Orleans." Because of problems regarding the lack of size of Black businesses – or scalability - mentioned in your article, as well as issues of discrimination, and also just the sheer size of the effort, I believe we should balance our focus on accessing capital from government with a program that includes developing and tapping formal capital markets and mass indigenous pools of capital.

I would be honored if you joined us at Black Electorate Economics University (BEEU) this coming year to consider our thesis and engage us with your insights and understandings as it relates to not only rebuilding New Orleans but all of our wasted cities and rural areas.


Sincerely,

Cedric Muhammad
Publisher
BlackElectorate.com
http://www.blackelectorate.com/

Wednesday, November 23, 2005