The Milken Institute's signature tool for generating solutions is the Financial Innovations Lab.® Each Lab assembles a multidisciplinary group of investors, industry experts and public officials to tackle a specific financing or policy question. During an intensive daylong workshop, they explore the problem from every angle. It's a roll-up-your-sleeves approach that encourages collaboration and practicality. The results are fully documented in our Financial Innovations Lab Reports — and the recommendations are ready to be put to work in the marketplace and the policy arena.



September 2009

Scaling Enterprise Finance and the Future of Biofuels

Washington, D.C.

Alan Boyce, President and CEO of Adecoagro, leads a discussion about obstacles to second-generation biofuel production.
The popularity of biofuels as a commodity and an investment has grown significantly in the past few years. Major market players have begun investing in these alternative fuels, and producers' revenue is expected to almost triple from 2008 to 2018. In addition, the Obama administration expects biofuels to be pivotal in addressing climate change and creating a greener economy.

Yet many institutional, technological and financial barriers still exist, slowing the development of a solid biofuels market.

To find out how finance might channel more capital into biofuels production, the Milken Institute, in conjunction with the U.S. Department of Agriculture's Office of Energy Policy and New Uses, convened a Financial Innovations Lab in Washington, D.C. The diverse group of participants included leading scientists and technologists, biofuel producers, rural stakeholders, banks, institutional investors, venture capitalists, public decision-makers, think tanks and clean-tech industry associations.


Joel Kurtzman, Executive Director of the Milken Institute's SAVE initiative, discussed the opportunities that biofuels present for the environment and investors alike. Some of the challenges he identified were misallocated funding, badly designed incentives and inconsistent policies. Stephen Kaffka of the California Biomass Collaborative discussed how regulations and environmental assessments had affected biofuel crops.

Christopher Groobey of Wilson Sonsoni Goodrich and Rosati gave the history of project finance as it relates to biofuels, and participants reviewed how insufficient expertise, scarce working capital and backlash from the food industry had damaged investors and the biofuel industry at large. This history lesson was important, Groobey said, because it changed the financing methods and expectations of new project lenders.

Other barriers discussed ranged from the political to the practical. Biofuels production faces opposition because of questions about its contribution to food shortages, the energy returned on investment and its environmental impact. In addition, companies can't maintain a consistent supply of raw materials, in part because they can't provide enough product to satisfy the contractual demands of potential buyers, creating a chain that hurts the industry's long-term goals.

Corinne Young is the director of Government Affairs for Myriant Technologies LLC, which develops second-generation biofuels.

Potential solutions

Some options explored were hedging strategies for biofuels producers, product diversification and loan guarantee programs. One notion that met with favorable reviews was establishing a chartered corporation that would guarantee biofuel securities and loans. Another was attaching "toll arrangements" to biofuel payment agreements, or guaranteeing profits to biofuel producers on the condition that a share of those profits go directly toward expanding production.

Also popular was the idea of creating a working group involving the Environmental Protection Agency, the Department of Energy, the U.S. Department of Agriculture and the U.S. Treasury to improve communication on energy goals and to enable joint decision-making.

A full report is available here. For more information, contact Caitlin MacLean, manager of Financial Innovations Labs, at

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July 2009

Feeding the World's Hungry: Fostering an Efficient and Responsive Food Access Pipeline

Washington, D.C.

More than 1 billion people will go hungry each day this year, according to the Food and Agriculture Organization (FAO) of the United Nations. With a staggering need fueled by the global financial crisis, repeats of last year's food riots in the developing world loom.

High food and fuel prices, climate change and natural disasters, weak local and regional markets, and mismatches between supply and demand - these factors have challenged the world's ability to end hunger. Procuring and distributing food aid efficiently and quickly is critical to food security, but organizations that provide humanitarian food assistance - including international relief agencies, national governments and non-governmental organizations (NGOs) - often face significant obstacles to obtaining food at the best price and delivering it quickly to those in need.

In response to these challenges, the Milken Institute, with support from the Bill & Melinda Gates Foundation, hosted a Financial Innovations Lab on fostering an efficient and responsive food access pipeline. The daylong workshop at the University of California's Washington Center brought together a diverse group of experts from around the world, including representatives from development finance institutions, humanitarian organizations, commodity exchanges, the U.S. government, foundations, financial institutions, and research organizations. Lab participants considered the current obstacles to delivering food aid and brainstormed possible solutions.

Betsy Zeidman, director of the Center for Emerging Domestic Markets and a research fellow at the Milken Institute, outlined the scope of the problem. She described the challenges that humanitarian agencies face as falling into two categories:

  • Risk management challenges, which involve price and supply issues that compromise the agencies' ability to secure food at a reasonable price and in sufficient quantities.

  • Funding challenges, which involve the unpredictable nature of funding streams that rely largely on donations.

    Lab participants examined two potential solutions to risk management: physical grain reserves and alternative commodity procurement tools. They also explored models from other sectors that could address the unpredictability of funding.

    Improving Risk Management

    Grain reserves can mitigate supply risk by serving as an access point for humanitarian agencies in emergency situations. Brian Wright, a professor in the Department of Agricultural and Resource Economics at the University of California, Berkeley, gave an overview of how humanitarian agencies might incorporate grain reserves into their food access pipeline to improve their response time. These reserves also help smooth spikes in commodity prices, he said.

    Kshama Fernandes, vice president of IFMR Capital, discussed the benefits of warehouse receipts programs, storage facilities that allow farmers to use their stored commodities as collateral to gain access to financing. Lab participants saw various challenges with grain reserves, including where they would be located, the potential for fraud, and the need for strong management and clear rules for stock release and replenishment. Brian Wright noted that call options might serve as an even better alternative to physical reserves.

    Julie Dana, senior financial specialist at the World Bank, described forward purchases and alternative procurement tools that humanitarian agencies might use to manage price risk. She reviewed traditional procurement tools, such as reserves, in-kind commodity donations and spot purchases, and described the advantages of alternative tools, including pre-positioned stocks, forward purchases, call contracts, futures and options.

    As one example, the government of Malawi used a call option to assure supply and cap the price of maize during the lean season, Dana said. In addition, the United Nations World Food Programme (WFP) has had success with its forward purchase pilot, according to Robert Opp, special advisor to the executive director at the WFP.

    Some Lab participants expressed doubt that the boards of humanitarian agencies would fund call options premiums. But Panos Varangis, principal banking specialist at the International Finance Corporation, likened options to a form of insurance and stressed that they are worthwhile even if they are not always exercised because they can be huge cost-saving mechanisms in the event of a crisis.

    Stabilizing funding streams

    A humanitarian agency's funding will be inefficient by definition, as the clients are not the customers, said Michael Klein, an advisor to the WFP. Because outcomes do not affect donors directly, inefficiencies will naturally occur, he said.

    Although a number of sophisticated financial instruments have long been used in the private sector, they have not been used as widely by food aid agencies, Klein noted. Updating the tools humanitarian agencies use and improving their efficiency is critical, he said.

    Glenn Yago, director of Capital Studies at the Milken Institute, presented various financial models that have been used in other sectors to stabilize funding, including advance market commitments, the World Bank's Green Bond, the Caribbean Catastrophe Risk Insurance Facility and the International Finance Facility for Immunisation.

    Whatever the model, Lab participants stressed that the costs of funding day-to-day operations be separated from the costs of funding emergencies because the two needs differ substantially.

    Click here for a full report detailing the Lab's findings.

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  • 31

    March 2009

    Infrastructure Finance: The Grid, Renewables and Beyond

    Washington, D.C.

    The Milken Institute, in conjunction with the U.S. Department of Agriculture's Office of Energy Policy and New Uses, convened a Financial Innovations Lab in Washington, D.C., to address strategies for financing upgrades to the U.S. electrical grid.

    This event focused on how America can achieve long-term sustainability of energy production and consumption, as well as how rural communities can profit from the shift to wind and solar power. Participants included leading scientists and technologists, rural stakeholders, utilities, regulators, banks, institutional investors and venture capitalists, public decision-makers, think tanks and clean-tech industry associations.

    The Milken Institute's Joel Kurtzman highlighted key issues that need to be addressed in order to scale up generation and transmission of renewable energy. Not only has there been a lack of investment in the electric grid for the past five decades, but that neglect is compounded by the absence of comprehensive regional planning, complex cost allocation rules and inadequate financial incentives for new transmission developments. Piecemeal regulation and a lack of federal authority also create significant challenges for choosing sites.

    Richard Kauffman, CEO of Good Energies Inc., pointed out that both a "centralized" and a "distributed" solution for the development of renewable energies could lead to efficient outcomes. Renewable portfolio standards, for example, could be either national or regional. He also observed that capital market solutions could emerge to provide long-term financing for these assets of similar maturity. Doug Gotham of Purdue University noted that the job of utility forecasters is getting increasingly difficult due to growing congestion on the grid and the lack of long-term planning for generation and transmission resources.

    Substantial investment to expand the electrical grid is certainly needed, according to Richard O'Neill, chief economic advisor at FERC. But he argued that a lot can be done in the short term to optimize the operations of the actual configuration of the grid in order to accommodate as much renewable energy as possible.

    Carol Werner of the Environmental and Energy Study Institute discussed the challenges faced by community wind projects (i.e., locally owned, commercial-scale wind projects that optimize local benefits) on a daily basis. These include a lack of adequate financing instruments, lukewarm support from policymakers, the absence of a national market for community wind, and inadequate distribution and transmission infrastructure. Some possible solutions were outlined, such as the establishment of a "national community wind clearinghouse," expanded public financing options (such as state-revolving funds, grants and low interest-rate loans) and revised interconnection priorities.

    William Lazarus of the University of Minnesota analyzed the role of farm-based anaerobic digesters as a potential energy source. Although today there are only 125 operating manure digesters in the whole United States, with a total electric generation capacity of 35 MW, AgSTAR estimates that some 6,500 large dairy and swine operations could potentially operate profitable biogas systems. This mobilization could provide 802 MW of capacity to the electric system and significantly increase farmers' income.

    Juan Torres of Sandia National Laboratories noted the lack of technology options for storing electricity; the only viable opportunity for extensive energy storage lies on the generation side in the form of fossil fuels. Although it may not happen for 15 to 20 years, the breakthrough in this field could come the day when plug-in vehicles are deployed on a large scale, enabling all residential and commercial buildings to add storage capability to their own small-scale energy systems. Torres also analyzed the role of geothermal energy, a mature and attractive technology whose potential is still largely unexploited worldwide.

    The final panel of the day focused on possible financial solutions. Richard Pietrafesa of Destiny USA illustrated the financial model used to fund the development of his resort, a platinum LEED facility that sits on a former brownfield in upstate New York. Pietrafesa explained how, in partnership with government, Destiny USA was able to leverage Payments In Lieu Of property Taxes (PILOTs) and other government programs to finance all project development.

    Nancy Pfund of DBL Investors talked about two of the business ventures financed by her firm: Tesla Motors and Bright Source Energy. For Tesla, DBL Investors was able to obtain bond guarantees from the DOE, although the process required time and struggle. Bright Source Energy, the world's largest solar power plant, was financed almost exclusively through power-purchase agreements (PPA) with California utilities, thanks to the stringent renewable portfolio standard effective in the state. According to Pfund, though, inadequate transmission capacity remains the biggest challenge to the feasibility of such projects. Carol Whitman, a senior legislative principal at the National Rural Electric Cooperatives Association, stressed the difficulty of applying traditional financing methods to coops, which are not-for-profit, non-taxable entities.

    Carol Werner emphasized the need to standardize financial instruments and expressed some frustration at the risk-averse attitude of most banks when it comes to financing renewable projects.

    The remainder of the day was devoted to addressing regulatory issues. All participants agreed that these hurdles shouldn't excuse inaction. Predictability of regulation emerged as a crucial factor that could help investors take on more risk and inject more capital into the green energy sector and its infrastructure. The current financial and economic climate provides a one-of-a-kind opportunity to redefine the roles of the federal government, states, municipalities and the private and financial sectors in tackling the big challenge of sustainability. It's a moment we cannot fail to seize.

    A full report on the Lab is available here. For more information, contact Caitlin MacLean, manager of Financial Innovations Labs, at

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    February 2009

    Responding to the Affordable Housing Crisis

    New York

    The fallout from the mortgage meltdown has been most acutely felt in the nation's low- and middle-income communities, where families are losing their homes at higher rates and foreclosures are driving neighborhood deterioration. An increasing number of loans are in distress, and lenders continue to hold on to properties they can't sell. The prospects for a scalable approach to affordable housing are dim at exactly the time when it is most needed.

    The Milken Institute held a Financial Innovations Lab to explore mechanisms and strategies for addressing the issue. Is there a way to finance the acquisition and disposition of foreclosures while simultaneously easing the affordable housing crisis? During the daylong session, various proposals were debated by experts from banks, foundations, community development organizations, research institutions, and federal, state and local governments.

    Mary Tingerthal of the Housing Partnership Network (HPN) introduced the National Community Stabilization Trust (NCST), a partnership that brings together four leading community development nonprofits: HPN, Enterprise Community Partners, the Local Initiatives Support Corporation (LISC) and NeighborWorks America. The NCST coalition aims to stem the decline of communities awash in abandoned and foreclosed properties by providing a clearinghouse for distressed REO (real estate-owned, or foreclosed) homes. The group helps local communities obtain REOs from servicers and investors, converting them to properties that support affordable housing and stable communities. Working with major loan servicers, NCST is currently testing its model in the Twin Cities, New York City, Rochester and Memphis. Under NCST, the purchase price is an agreed-upon "net realizable value" - that is, the market value under normal conditions, less the costs the seller would avoid by participating in the program (e.g., holding costs such as maintenance, taxes and insurance; transaction costs; decline in value over the holding period; capital costs saved by early receipt of proceeds; etc.).

    Capital allocations are needed immediately to build a comprehensive affordable housing strategy at the local and state levels, according to Harold Simon of the Community Asset Preservation Corporation (CAPC) of New Jersey. CAPC uses a portfolio acquisition approach, works with multiple mortgage servicers and cross-subsidizes its properties. The organization prices assets from the ground up - identifying the actual cost to rehab and dispose of the property. Once those costs are identified, assets are targeted for demolition, land banking, sale at market rate, or rehab and development as affordable housing. The program began last year with the purchase of a portfolio of 47 loans. There is great opportunity for expansion right outside CAPC's front door, as vacant properties are rampant in Newark. While several years ago there were 350 REOs (of which 275 properties sold), Newark now has 950 REOs and posted only 100 sales last year. Simon urged immediate leverage of Neighborhood Stabilization Program funds (administered by the U.S. Department of Housing and Urban Development) at the state level.

    Tom Streitz, director of housing policy and development for the City of Minneapolis, presented details of a pilot program he is implementing. The city purchases only the most distressed properties in identified strategic areas, with some targeted for demolition and some for land banking. Funds are provided from the city budget as well as from HUD's Neighborhood Stabilization Program (NSP), which currently has $5.9 billion in funding to tackle the problem nationwide. Streitz commented that one of the biggest challenges is that municipalities aren't set up to act quickly enough to compete against private investors in the acquisition of foreclosed properties priced at distressed levels.

    The afternoon session focused on the disposition of assets. Bill Goldsmith of Mercy Portfolio Services described the Chicago Neighborhood Stabilization Program and mentioned real estate developers - both for-profit and nonprofit - as the main obstacle to building viable affordable housing solutions. Mercy Portfolio Services, together with the City of Chicago and the Chicago Neighborhood Stabilization Corporation, plans to acquire 1,400 vacant homes starting in March 2009 with the help of NSP funds. By the end of December 2013, most homes will be transferred to future homeowners using various strategies such as lease-to-purchase, interim rental and equity-sharing ownership. Two hundred of the 1,400 homes will be demolished and either rebuilt or used for the purpose of land banking.

    Bruce Marks, representing the Neighborhood Assistance Corporation of America (NACA), advocated a return to what he called "basic lending" and underwriting of mortgages, stressing the need for income verification and proper documentation. His organization developed and successfully uses an online software solution that features a user-friendly application process and stores a borrower's documents. This greatly facilitates the underwriting of mortgages, and enables NACA to offer a 30-year fixed-rate product with an interest rate of 4.25%, with no down payment and no closing costs. Only 0.0023% of homeowners who bought this product defaulted on their mortgages.

    The role and importance of the private market in reducing foreclosure rates and helping residents stay in their homes through restructuring individual mortgage loans was repeatedly discussed during the course of the day. One strategy brought forward was aggregating risk capital from accredited investors and matching these funds with those seeking equity investments, such as affordable housing agencies or individual prospective buyers.

    Further limiting the number of vacancies and foreclosure evictions was cited by many as the key to stabilizing low- and middle income communities. While the overriding sentiment among attendees was grave concern about the current housing crisis and its negative consequences for disadvantaged communities, some participants expressed great hope that this moment could be seized to build long-term affordable housing solutions. But they also highlighted the importance of being aware of unintended consequences in crafting new policy.

    A full report on the Lab's findings is available here. For more information, contact Caitlin MacLean, manager of Financial Innovations Labs, at

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    February 2009

    Stimulating Investment in Emerging-Market SMEs

    New York

    Risk capital - patient, non-asset-based capital that facilitates growth of new and expanding companies - is too scarce for small- and medium-sized enterprises (SMEs) in developing countries. Although SMEs are critical engines of job creation and economic growth, risk capital remains largely unavailable to such businesses, undermining their ability to expand and benefit their communities.

    To address this issue, the Milken Institute (with support from hosted a Financial Innovations Lab. Fund managers, investors, entrepreneurs, researchers, and representatives from development finance institutions and foundations gathered to identify the obstacles in expanding capital access for SMEs and to explore potential solutions.

    A major challenge in financing emerging-market SMEs is the difficulty of exiting the investments. Underdeveloped capital markets and a shortage of buyers in these countries make exits hard to achieve, thereby increasing investment risk and decreasing the number of potential investors.

    Lab participants explored both first-party exits, in which the entrepreneur buys back the investor's shares, and third-party exits, in which the company is sold to another financial investor or to a company within the same industry (i.e., a trade sale). Case studies of each exit type, prepared by Tom Gibson, president of the Institute for SME Finance, provided examples of successful SME investments and challenged participants to think about how to replicate these results.

    In addition to examining the structures of successful investments, participants considered ways to increase capital to emerging-market SMEs. Reducing costs - by making back-office functions more efficient, for example - is one way to increase overall return. Furthermore, use of technical assistance can help accelerate a company's value.

    Participants also highlighted the importance of the relationship between investor and investee, including good communication between the parties. Finally, several participants noted the value of the investor being local to the investment. Thierry Sanders, director and founder of the BiD Network Foundation, explained BiD's plan to use business angel networks to source deals and scale-up capital to where it is needed most.

    Innovative financial solutions were also considered. Wayne Silby, founding chairman of the Calvert Funds and president of the Calvert Social Investment Fund, discussed the potential creation of a permanent capital vehicle for SMEs. Jim Polan, vice president of SME Finance at the Overseas Private Investment Corporation, explained his idea for the development of an exit finance facility.

    Click here for a full report on the Lab's findings.

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    November 2008

    Environmental Innovations in Israel: Revolving River Restoration Fund


    Jordanian, American, Palestinian and Israeli participants of the Financial Innovations Lab, November 6, 2008. Mishkenot Shananim.
    Booky Oren, former CEO of Israel′s water company Mekorot and the President of Miya Water and Eng. Sa'ad Abu Hammour, Deputy CEO of Jordan′s water company Miyahuna.
    U.S. financial and policy innovation pioneers Susan Weil of Lamont Financial, Steve Townley of the Missouri Environmental Improvement and Energy Resources Authority and Peter Taylor of Barclays Capital explained how a state revolving fund works as a finance mechanism during the lab.
    The Milken Institute Israel Center held a series of events in November 2008 to address water shortages, wastewater and environmental degradation issues facing Israel and its neighbors. Participants began with a tour of the Kidron River Valley, an important revitalization project in need of funding. The group of U.S. and Israeli water experts also met with Ministry of Finance officials to discuss possible finance models that could replace the current antiquated funding structure.

    The center then conducted two Financial Innovations Labs to discuss financing water restoration in Israel, Jordan and areas under control of the Palestinian Authority. Water engineers from the United States and the Middle East joined representatives from local municipalities, the capital markets and academia to design an implementation plan.

    The first session, held at Mishkenot Sha'ananim in Jerusalem on November 5, 2008 featured U.S. financial and policy innovation pioneers Peter Taylor of Barclays Capital, Susan Weil of Lamont Financial and Steve Townley of the Missouri Environmental Improvement and Energy Resources Authority, who explained how a state revolving fund works as a finance mechanism. This model allows government grants to be matched by local resources to ensure a steady flow of capital into river projects. The revolving structure allows the fund to make loans to local river/stream projects, which in turn generate income to repay the original investment and recapitalize the fund. Local river authorities can leverage their resources, which are secured by the revolving capital in the fund, to issue bonds for more than one project at a time.

    The second session, held the following day, focused on the ability of such a fund to work regionally, with the creation of a multinational committee to oversee restoration projects. According to Aaron Wolf, a professor of geography in the Department of Geosciences at Oregon State University and an expert in water conflict management and transformation, cross-boundary water solutions are only successful when all parties can move past political mistrust. Gidon Bromberg, director of the Friends of the Earth Middle East, also noted that a legal framework must be established for the creation of a multinational committee, with active participation from local communities.

    Two subsequent meetings were held to form steering committees, one focused on Israeli rivers, the other addressing regional issues. The work of the committees was complemented by research undertaken by the Koret-Milken Institute fellows assigned to the Ministry of Finance and the Knesset.

    The Lab resulted in two separate reports: one on the revolving river restoration fund and one on transboundary water issues that is available in English, Hebrew or Arabic.

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    October 2008

    Housing: Beyond the Crisis

    Washington, D.C.

    From the subprime meltdown to the unprecedented government bailouts, the current turmoil in the mortgage market is sending shock waves across the political and financial landscape. Federal and state legislators are struggling to find the appropriate regulatory response, capital markets are refining their financing models and the future of housing in America is at risk.

    To address these critical issues, the Milken Institute hosted a Financial Innovations Lab at the German Marshall Fund in Washington, D.C. "Housing: Beyond the Crisis" focused on incentives, market structures and regulatory mechanisms that would enable home buyers to continue obtaining credit from banks, maintaining a flow of financing for affordable housing that is both efficient and attractive to investors.

    Bringing together researchers, policymakers, and business, financial and professional practitioners, the Milken Institute's Financial Innovations Labs aim to create market-based solutions to business and public policy challenges. Participants in this event included governmental officials, bankers, academics, lawyers, policy advisors, and representatives from rating agencies and nonprofit organizations as well as other experts from the housing and capital markets. The Lab was convened to explore financial innovations that would allow risk-sharing in the housing and mortgage markets, and most importantly, generate concrete plans of action.

    The Lab was split into two sessions: one on capital market solutions and the other on affordability products. Both sessions featured presentations and case studies, followed by lively and provocative discussion among the 45 participants. The morning session, moderated by Phil Swagel of the U.S. Treasury Department, focused on current capital market solutions: securitization, covered bonds and shared equity products.

    Panelists Tad Rivelle of Metropolitan West Asset Management, Tom Deutsch of the American Securitization Forum and Frank Nothaft of Freddie Mac analyzed the recent problems with securitized products and ways to use these products appropriately. The latest data demonstrates that the deterioration of collateral caused the current wave of massive deleveraging. Much of the discussion focused on the measures necessary to reboot securitization and other financial instruments to promote liquidity and lower costs while increasing transparency. All participants urged a return to the fundamentals of risk analysis in mortgage products and markets. Additionally, the panel recognized the need for a process to unwind securitizations to address bad loans.

    Trip Foley of the Treasury Department and Alex Pollock of the American Enterprise Institute focused on the increased use of covered bonds, noting their success in Europe. Unlike asset-backed securities, covered bonds remain on the issuer's consolidated balance sheet and are backed by a pool of assets in case the originator becomes insolvent. They hold great potential, but participants raised questions about how much regulation would be needed to define and standardize this market, as has been done in Europe.

    The concept of shared equity products, in which investors receive a portion of the equity in a home in exchange for providing a portion of the down payment, was analyzed by Ralph Liu of AeFT Inc. and Jim Gray of NCB Capital Impact. Gray argued that these products ensure occupancy, promote ongoing maintenance and avoid foreclosure; he believes they are effective, sustainable and durable. Liu presented his SwapRent model, in which distressed homeowners can essentially switch to renting their property through an economic landlord, who would credit full or partial monthly payments toward the homeowner's mortgage while sharing any appreciation in the value of the property.

    During lunch, the participants enjoyed a presentation by John Courson, incoming president of the Mortgage Bankers Association, who discussed the future of real estate as an investment and the industry's strategies in moving forward.

    The afternoon session, moderated by James Barth of Auburn University and the Milken Institute, shifted the focus to risk-sharing innovations and the potential for these products to revive the market. Dan Kildee of Genesee County, Michigan, presented the model of Genesee County's land bank, a public authority created to efficiently acquire, hold, manage and develop tax-foreclosed properties, as well as other vacant and abandoned properties. Kildee maintained that the use of land banks could help communities prevent foreclosures and spur housing renovations and new development.

    Catherine Godschalk of Self Help outlined her organization's lease-to-purchase product, which is currently being piloted in North Carolina. This model creates a credit enhancement in the securitization process, buying loans from lenders to be subsequently resold to Fannie Mae and repackaged. These 30-year fixed-rate mortgages would offer borrowers a lower mortgage payment than other saleable financing choices. The organization also stresses borrower counseling, an important factor in the day's discussion of transparency in lending.

    Adam Levitin of Georgetown University Law Center offered his perspective on how modifications in bankruptcy law could enable financially distressed individuals to renegotiate terms of their mortgages, lowering foreclosure rates and improving value recovery. Finally, John Weicher of the Hudson Institute discussed the limitations of payment assistance programs, especially seller-financed models, which seem to offer little benefit to homeowners while producing higher default rates. Other down-payment assistance programs that might be designed without such moral hazard were considered.

    Finally, Jason Bordoff of the Brookings Institution and David Wyss of Standard and Poor's exchanged views about how the election will influence the direction of the housing and mortgage markets and what lies ahead when the next president takes office.

    Click here to read a full report.

    On October 2, the Milken Institute hosted a related Forum in Santa Monica, "Demystifying the Mortgage Meltdown: What It Means for Main Street, Wall Street and the U.S. Financial System." Click here to read a summary or watch the video.

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    January 2008

    Developing Archaeological Discovery and Conservation

    Santa Monica, CA

    The demand for archaeological artifacts has encouraged a billion-dollar black market and the destruction of the world's cultural heritage through looting and vandalism. From Peru to Thailand, this destruction not only causes tremendous artistic and historical loss, but also strips local economies in developing nation of potential revenue streams.

    The trade of antiquities blends the legal with the illicit; much of the illegal trade moves within an established and respected market. A murky chain of events exists between the looter and the dealer or curator, which often makes it difficult to determine, for example, whether Incan pottery on the New York auction block was in fact stolen from a site or released from a long-held private collection. It may be impossible to quell the desire to own a piece of the past, but much can be done to regulate the supply.

    To address these critical issues, the Milken Institute hosted a Financial Innovations Lab focused on incentives, market structures and regulatory mechanisms that would foster legal archaeological discovery while generating local economic development to stem looting and promote site preservation.

    Participants included museum curators, conservators, archaeologists, governmental officials, academics, lawyers, auctions houses, collectors, antiquities dealers and economists, as well as other experts from the capital markets.

    Participants identified the major problems facing the market, including:

  • limited resources to protect sites
  • inability to quantify supply of objects still underground
  • poor infrastructure in countries of origin to regulate legal markets
  • minimal enforcement of multinational laws against wealthy museums and collectors.

    Many of the Lab's experts feel that archaeological artifacts belong to the country of origin and that sales of objects should be prohibited unless deemed appropriate by the state. Other experts, however, feel that antiquities are part of the collective global identity and "belong" to the international community.

    During the regulatory session, much of the debate focused on the Portable Antiquities Scheme, the legal trade of artifacts in the United Kingdom. The Scheme, fiercely opposed by archaeologists as legitimizing looting, has seen relative success in the U.K. in tracking antiquities and educating the public on its cultural heritage. It allows citizens to sell a portion of any antiquities found in a legal market, and was created in response to the increased use of metal detectors to locate Roman coins by local communities. Participants debated the likelihood that this program could be replicated in less developed nations, given the limited resources available.

    The financial solution session focused on long-term leases, museum sponsorship and archaeological development bonds. Participants, especially those from the archaeological community, were reluctant to promote solutions that place an unbalanced focus on artifacts, as opposed to cultural heritage as a whole.

    Archaeological development bonds would channel investment from private investors, philanthropies and governments to countries of origin to increase site protection and generate capital for local communities. By pooling potential revenue streams, including tourism, object leases and media licensing, the bonds would create sustainable funding for excavations around the world.

    Participants agreed that more research must be done to better understand the size of the current market for antiquities, as well as to develop legally and culturally appropriate solutions to the looting crisis.

    A full report on the Lab's findings is available here. For more information, contact Caitlin Maclean at

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  • 2007


    December 2007

    Financial and Policy Medical Innovations Lab


    Capping a tremendous year for the Israel Center, Milken Institute Chairman Mike Milken completed a visit to Israel in December 2007, meeting with Prime Minister Ehud Olmert, President Shimon Peres and Israel's top scientists to galvanize the country's human, social and financial capital around a nascent but promising biotech sector.

    Widely covered by the media, the highlight of his visit was a Financial and Policy Medical Innovations Lab, held in Jerusalem and attended by more than 100 scientists, policy makers, entrepreneurs and business leaders to look at the challenges and opportunities of Israel's biotech sector, building on the strengths of its high-tech human capital. The Lab was designed by the Milken Institute at the request of President Shimon Peres.

    Milken engaged the gathering at the Lab in a look at the potential of the nation's human capital - noting that Israel has more scientists per capita than any other developed country and, extrapolating from Nobel laureate Gary Becker's calculations, "the human capital of Israel is worth several multiples of the officially reported size of Israel's assets as published by the Bank of Israel."

    However, Milken also warned that Israel's education system inadequacies needed to be swiftly and effectively addressed to avoid depreciation and further drain on the human capital assets.

    "Israel must address the challenges within its educational infrastructure. Continuing and increased focus on the country's elementary and secondary education system for all citizens will better prepare the next generation to participate in the global knowledge industries of the future," he said.

    He also noted improvements needed in the financial infrastructure and regulatory systems, "Barriers need to be reduced to allow for easier entry for entrepreneurs, the capital market needs to be expanded and the concentration of ownership in the banking system needs to be cut."

    President Shimon Peres agreed with Milken, calling for more regulatory flexibility and financial support for entrepreneurs. He also stated that the need for medical services and products in developing regions, such as Asia and Africa, presents a key opportunity for both goodwill and sustainable business opportunities.

    "We have to think differently, mobilize our talents to make ourselves a better people and show the world that goodwill may be the real force of our time," Peres said.

    Prime Minister Ehud Olmert also attended, focusing his comments on his vision of dedicating 10 percent of Israel's GDP to research in development, which in turn would attract foreign investment. Thanking Milken for his tremendous contribution in drawing attention to the importance of the industry and to the Milken Institute for organizing the event, Olmert said, "This is one of the most important seminars, in terms of practical ramifications for the Israeli economy, which has been held in Israel in many years."

    Other participants included Yarom Ariav, Finance Ministry director-general; Professor Shlomo Ben Haim, biotech entrepreneur and investor; Professor Raphael Walden, chair of medical programming for the Jerusalem Congress and Deputy Director of the Tel-Hashomer General Hospital; Dr. Ora Dar, Director of Life Sciences, Office of the Chief Scientist; Professor Shlomo Mor-Yosef, CEO of the Hadassah Medical Organization; and Dr. Orna Barry, a biotech and venture capitalist expert.

    The Milken Institute brought to the Lab a set of conceptual tools that could leverage great success from the country's existing biotech industry resources. These concepts, which can be found throughout the work of the Milken Institute, the Milken Institute's FasterCures/The Center for Accelerating Medical Solutions and in another Milken organization, The Prostate Cancer Foundation, include using the capital markets as an agent of change to increase global prosperity, transferring successful financial technologies to new regions and industries, using philanthropy to leverage increased funding from public and private sources, and sharing research and medical data to accelerate the development of cures.

    Through a mix of presentations and working group discussions, Lab participants were brought up to date on the latest information and ideas, and also had an active role in brainstorming new ideas to break up roadblocks and discover new routes to foster growth in Israel's biotech sector.

    Those present noted that Israel faces challenges in the areas of under-investment in technology transfer, a lack of locally based financial services infrastructure and shortfalls in the training and retention of researchers.

    "It is much harder today to bring a medical device to market than in the past. Regulation is stricter, there are changes in intellectual property laws, and the process for insurance reimbursement has become longer and more complicated. If I once was able to bring a new medical device to the sales stage for $20 million, today it could cost at least $100 million" said Professor Shlomo Ben-Haim.

    In specially designed workshops, Lab members tackled these issues and developed several solution-generating ideas for both policy and financial innovation. These ideas included:

    •Development of Israel as a global medical financial center, to include strengthening the graduate education systems in business and finance, developing Israeli-based financial services to provide a full spectrum of funding and financing services, and fostering acumen in the specifics of medical research and biotech financing

    •Increasing information technology infrastructure for health records and clinical trials to accelerate medical solutions

    •Creating global collaborations in curing infectious and chronic disease, with specific programs for Turkey, India, Kazakhstan, China and other rapidly developing regions.

    The next steps are to compile a report on the content of the Lab, the creation of working groups to further develop the solution concepts and to bring the Israeli biotech community back together to work on implementation during the Jerusalem Congress in May 2008.

    We also expect to present the findings and a current update on implementation during the 2008 Milken Institute Global Conference.

    Media coverage of the Milken Institute Financial and Policy Innovations Lab can be found online at:

    Jerusalem Post Abstract 1
    Jerusalem Post Abstract 2

    Additional articles at Globes Online available, if registered, by searching for "Milken" in the archives.

    See related documents:
    Financial and Policy Medical Innovations Lab Program (PDF)

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    October 2007

    Catastrophic Risk: Cat Bonds and Beyond

    New York

    The increasing incidence of disaster -- from Hurricanes Katrina and Rita to tsunamis and earthquakes -- has highlighted the need for catastrophe protection and insurance for individuals, communities and companies.

    In response, the Milken Institute hosted a "Financial Innovations Lab for Catastrophic Risk: Cat Bonds and Beyond" on October 25, 2007, at the Metropolitan Club in New York City. The Lab focused on identifying and analyzing capital market solutions for financing catastrophic risk management.

    Participants included insurance professionals, investment bankers, academics, lawyers, rating agencies and risk-modeling experts, as well as other experts from the insurance and capital markets. The goal of the Lab was to identify obstacles to the expansion of the market for catastrophe (cat) bonds and risk-linked securities, and to develop strategies to tackle those barriers.

    The agenda identified four primary barriers that translated into four sessions featuring presentations, case studies and the lively participation of the 48 participants. At the start of the day, Markus Schmutz from Swiss Re provided an industry overview of risk-linked securities. Schmutz noted that the market for catastrophe bonds has grown substantially, from around US $700 million in 1997 to approximately US $13.5 billion outstanding at the moment. He also outlined the benefits of cat bonds -- such as full collateralization and multi-year pricing of contracts -- as attractive alternative sources of capital.

    The first identified barrier dealt with limits in the secondary market and concerns about liquidity. Gerald Ouderkirk of Goldman Sachs and Albert Selius of Swiss Re, who both head trading desks for cat bonds, described the market for the bonds as liquid and pointed to the lack of issuances as one of the barriers of expansion. Selius provided an overview of exchange-traded instruments and recent developments on derivative exchanges, which are currently active in catastrophic risk trading. Ouderkirk noted that hedge funds were the primary participants in the secondary market space over the past 12 months.

    One session was dedicated to the role and perspective of investors in the cat bond market. Eric Silvergold of Guggenheim Partners explained that despite the attractiveness of these bonds (including low correlation with other asset classes), fixed-income investors typically do not have the economics to invest in them. There is a need, he said, to democratize access to risk-assessing tools.

    Rating agencies play a crucial role in the issuance of risk-linked securities, Rodrigo Araya of Moody's noted that they can help develop the market lies by educating investors and offering sponsors a clear and reasonable rating approach.

    Another session dealt with transaction costs. Jeff Cooper of Allstate Insurance Company highlighted the many hesitations insurers have in becoming buyers of cat bond coverage. Cooper estimated that currently the transaction costs for cat bonds run at approximately 20 percent higher than for typical reinsurance contracts. However, Michael Millette from Goldman Sachs pointed out that the higher transaction costs result from the novelty of capital market insurance solutions and said he expects them to decline substantially.

    The final session of the day addressed the importance of public-private partnerships in tackling the challenges of providing risk coverage to communities and nations. Stuart Miller of AIR Worldwide gave a presentation on an innovative issuance by the Government of Mexico, which placed the first sovereign cat bond in history to provide funding for emergency losses in the aftermath of an earthquake in Mexico City.

    Click here for a detailed report of the Lab's findings.

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    October 2007

    Achieving Energy Independence

    New York

    The Milken Institute conducted its third Financial Innovations Lab for Achieving Energy Independence on Tuesday, October 23, 2007, at the Metropolitan Club in New York. The purpose of the Lab was to address the real state of the art with regard to alternative energy.

    The Milken Institute's Financial Innovation Labs are proprietary research tools that bring together researchers, policy-makers, and business, financial and professional practitioners to create market-based solutions to business and public-policy challenges.

    Participants in this Lab included members of SAVE, the Strategic Action Volunteer Effort, inaugurated by Michael Milken in April 2006, to bring together volunteer teams adept at deploying state-of-the-art financial technologies and capital-market solutions to tackle particular issues. Those attending also included leading scientists and technologists from Sandia National Laboratories, the National Renewable Energy Laboratory, the California Institute of Technology and Stanford University.

    The goal of the working session was not to provide answers about technologies to a group of capital market leaders, said Ron Stoltz, Head of the California Liaison Office of Sandia National Labs, at the start of the day. Rather it was to provide the informational context that would lead to better questions.

    Professor Arnulf Grubler of Yale University and a lead author of several studies by the Nobel-Prize winning Intergovernmental Panel on Climate Change, introduced a term that reappeared throughout the day: "timescales." The IPCC climate-change scenarios, and the history of previous large-scale changes in energy supply, point to timescales of 30, 70 and 100 years, he said. Within this long-term framework, government policies and fluctuations in prices play an insignificant role in the climate and technology outcomes.

    The key driver of outcomes is demand, as experienced through end-use applications, he said. For example, Thomas Edison invented the light bulb and then started an electric company to supply its power. That power company built its delivery systems around alternating current (AC) electricity, rather than the direct current (DC) system prevalent at the time, because AC is a better fit for the light bulb -- the end-use application.

    An important finding in Grubler's research, he explained, is that markets select dominant technology clusters based of end-use requirements. This insight leads to a new and different set of questions for both policy analysts and capital market participants, he said.

    So what is the potential for renewable energy? Dan Arvizu, Director of the National Renewable Energy Laboratory, recalled being asked this question in Washington, D.C., at a meeting with political leaders. Using transportation fuels as an example, he replied that the United States could achieve energy independence quickly if it relied in equal parts on domestic oil, biofuels and higher fuel efficiency.

    That answer illustrated an important insight of the day: carbon reduction is not a single-technology solution, but a combination of current and new technologies and greater energy efficiency.

    Two gaps persist in the renewables landscape, said Arvizu: delivery of renewable technologies at less than $30 per barrel and investment in energy efficiency. One example of the latter is the zero-energy home, which he characterized as a low-hanging fruit.

    Terry Michalske, Director of Biological and Energy Sciences at Sandia National Laboratories, provided a nuanced road map on biofuels. Moving the discussion beyond the use of ethanol, he suggested a broad scope of use and an important role for biofuels in an economic transition to reduced carbon emissions. The optimal sources of cellulose vary significantly across the varied climates of the United States, he said. Each source requires a tailored biological process for conversion efficiency, and thus a different infrastructure (production facilities, distribution systems, and auto fuel systems). He added that biofuels do release carbon and that as the U.S. economy becomes more carbon-efficient, it is expected that their use will decline. Michalske also pointed out that the emerging biofuels industry has yet to take advantage of the bountiful tool set developed in the biotech industry, and its adoption will greatly enrich and speed biofuel development.

    Franklin Orr, who directs the Global Climate and Energy Project at Stanford University, reinforced two frequent themes of the day: the enormous scale of the climate change problem (and consequently its solution) and the need for a portfolio of technologies. To illustrate the magnitude of the challenge, he explained that for carbon sequestration alone, the country would need a new infrastructure 40 percent the size of the infrastructure developed for the global oil industry.

    Sequestration in geological cavities created by oil and gas extraction is possible in the near-term, said Orr, adding that at current rates, there is capacity for 10 years of emissions. More research is needed for sequestration in saline aquifers and the cavities created by coal extraction, but they have a 100-year capacity. Carbon, once emitted, remains in the atmosphere for about 300 years before sinking into the ocean, so carbon capture at the point of emission is needed. (Further, it is more expensive to extract carbon from the atmosphere, and carbon-intense oceans are profoundly harmful to our marine ecosystem, he warned.) Consequently, new coal plants must be sited close to the geological opportunities for sequestration. The United States has abundant geological capacity for sequestration, he said, but China does not, again suggesting that there is no single technology solution for carbon emissions from coal power plants.

    But what if carbon emissions could be transformed from a "bad" to a "good"? Andrew McIlroy of Sandia National Labs, used the example of algae for biofuels. Carbon is a nutrient for algae growth, he said, and there are R&D projects focused on the opportunity to take carbon out of the air to use to feed the organic material used to make biofuel. Another example is the use of CO2 for enhanced oil and gas extraction, with a current price of $50 per ton.

    McIlroy also identified opportunities in non-carbon greenhouse gases, each hundreds and thousands of times more harmful to the climate than carbon. These gases are emitted in smaller quantities than carbon, but because of their concentrated impact, the right incentives could make a big difference in emissions. He also noted that carbon credits or the $25 million Earth Challenge Prize offered by Richard Branson could motivate breakthrough streams of research.


    To view the lab presentations, click on any of the links below:

    Dan Arvizu: "Alternative Energy: Solar, Wind, Geothermal"
    Terry Michalske: "Biofuels"
    Franklin Orr: "Carbon Sequestration"
    Andrew McIlroy: "Novel Concepts: Carbon Sinks and Carbon Recycling"
    Arnulf Grubler: "Putting Climate Change in Context"

    See related documents:
    Financial Innovations for Achieving Energy Independence

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    March 2007

    AB32 and Beyond: A Laboratory on the Next Steps in California's Policy on Global Warming

    Santa Monica, CA

    When Gov. Arnold Schwarzenegger signed into law AB32, which mandates the widest restrictions on carbon dioxide emissions in the nation, the focus of debate immediately shifted to how the state would implement the new law.

    In an effort to help sort that out, the Milken Institute hosted a workshop,"AB32 and Beyond," that brought together public policy leaders, heads of industry, financial executives and others to examine the implications of the legislation, particularly on the expanding carbon trading and alternative energy markets.

    The session, moderated by Joel Kurtzman and Glenn Yago of the Milken Institute, included a primer from Dan Skopec, undersecretary of the California Environmental Protection Agency, who has been instrumental in educating different stakeholder groups on the major features of the bill. He laid out the preliminary timeline for the implementation of AB32, emphasizing that the next few months will be crucial for the market advisory committee, which must recommend emissions-trading guidelines and design features to the state's Air Resources Board.

    Richard Sandor, founder and CEO of the Chicago Climate Exchange (CCX), the world's first greenhouse-emission registry, reduction and trading system, spoke about the origins of the exchange and how it will be able to help California industry comply with AB32 mandates.

    Jane Brunner, a councilwoman in the City of Oakland, one of the earliest government members of CCX, discussed her city's sustainability and carbon-reduction programs. Measuring and verifying the impacts of their programs were the motivations behind joining CCX, she said.

    Joe Pettus, a senior vice president of Safeway, explained why his company felt the need to join both CCX and the California Climate Action Registry. His company, which is one of the largest commercial users of electricity in the U.S., was motivated by the desire to know exactly when, how much and from where their energy (and hence carbon emissions) flowed. Determining their ecological footprint was important to them not only from a business standpoint but also from a reputation and stewardship standpoint.

    Other panelists were Dennis Albiani, former deputy legislative secretary with the Schwarzenegger administration, who talked about the genesis of the bill; Dan Braun, director of Global Environmental Finance at Stark Investments, who provided the capital-market perspective and value propositions resulting from AB32; and Bill Marcus of Calyon Financial, a key player in domestic and international carbon-trading regimes.

    Participants realized that every move California makes in this area will be closely scrutinized, and therefore, careful planning and consideration of complex economic and social issues cannot be overlooked, they agreed.

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    December 2006

    Investing in Emerging Market SMEs

    New York

    The Milken Institute and the Boston College Institute for Responsible Investment co-hosted this Financial Innovations Lab on investing in emerging-market small and medium enterprises (SMEs). Attendees included institutional investors, emerging-market analysts, private equity funds, corporations, foundations, rating agencies, capital aggregators and international development agencies.

    A robust SME sector can contribute significantly to the growth and stabilization of emerging-market economies. Expansion can generate strong returns for investors, and these firms create jobs and wealth. Additionally, they often produce solutions to a country's pressing social and environmental challenges.

    However, despite increasing investor interest, challenges in accessing information and mitigating risk limit the ability to tap this opportunity, attendees said. The session examined these challenges and, most importantly, generated solutions and action items that participants and others can pursue.

    During the day-long session, participants explored mechanisms for increasing investment in emerging-market firms. These included, among others: definition of terms related to emerging-market SME investment, increased partnerships between aggregators and investors, developing common standards for reporting, and clarification of the SME business model and value chain.

    Participants worked through specific investment instruments designed to increase capital flows to SMEs and produce financial and extra-financial returns. Some highlights:

    • Christine Eibs Singer of E+Co, a capital aggregator investing in clean-energy enterprises, described her firm's successful blended value investment model. This model focuses on triple-bottom-line returns on investment: financial, social and environmental. She also spoke of the need for technical assistance for SMEs.
    • Andrew Gaines of Gaines Partners discussed risk mitigation strategies to combat the three "C's" associated with investing in emerging market SMEs: country, currency and credit risks. Using a single portal that harbors a variety of insurance tools would help investors reduce their risk.
    • Noah Beckwith of Aureos Capital described the challenges of private equity investment in the SME space. These include legal, financial and scaling constraints that make private-equity investment costly and cumbersome. However, as the market grows, so may the tools to mitigate these constraints.

    Other participants suggested various innovative tools, including creation of a SME trade association; establishment of a global currency, credit enhancement and/or technical assistance fund; increased reporting; and a shared services platform to reduce costs. Participants also noted the importance of local partnerships, in particular citing empowerment of local banking institutions as a key to serving SMEs.

    The findings and results of this lab will be summarized in a report to be published in 2007.

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    November 2006

    Achieving Energy Independence - A Lab of the Strategic Action Volunteer Effort (SAVE)

    New York

    Glenn Yago of the Milken Institute, right, leads the SAVE Financial Innovations Lab discussion, which examined alternative-energy investment gaps and oppportunities.
    The Milken Institute's Strategic Action Volunteer Effort (SAVE), which convenes a team of highly experienced volunteers willing to take on and solve complex problems, was launched in April 2006. Its maiden project, Achieving Energy Independence, tackles the urgent issue of our dependence on fossil fuels and the consequences of climate change.

    On Nov. 9, 2006, the Milken Institute conducted its first Financial Innovations Lab for Achieving Energy Independence at the Bloomberg headquarters in New York City. Participants included a select group of high-level representatives from the worlds of finance and energy.

    The hands-on workshop sought to clarify alternative-energy investment gaps and opportunities, with a particular focus on the transportation sector and the alternative fuels and technologies available today that will help us move away from oil and petroleum.

    Two promising developments in the sector were given special consideration: bio-fuels and coal-to-liquid technology. Participants sought to identify and work through specific investment instruments designed to increase capital flows to the alternative-energy sector and produce financial returns.

    While everyone agreed that there is an urgent need to increase investment in and accelerate adoption of alternative fuels and new technologies, much of the discussion revolved around asset and risk management in an industry that is perceived as young and uncertain.

    Participants debated the issues of attracting long-term investors, scalability, the mechanisms required to hedge - or insure - against volatile oil prices, and the role of government and legislation in addressing both the supply and demand sides of the alternative-energy equation.

    The discussion resulted in some creative financial solutions: an insurance policy against falling oil prices; green bonds and BTU-backed bonds; the creation of a fixed-income product or a futures market for alternative fuels; credit enhancement or a finance lease from the government; and, most importantly, the bifurcation of credit risk and equity risk to hedge against the long-term volatility of oil prices.

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    September 2006

    A Recovery and Economic Development Plan for Northern Israel: The Day After, II

    New York

    Following up from the first Financial Innovations Lab held in Santa Monica, which examined a large array of financing options for Northern Israel's post-war recovery, a diverse group of financial, legal and philanthropic experts met in New York to discuss implementation of the two top solutions: development of a bond authority for infrastructure and public-private projects, and expansion of the KIEDF Small Business Revolving Loan Fund Model.

    A representative from the Israeli Finance Ministry stated that many existing and statutorily approved infrastructure and business finance projects remain unexecuted due to budgetary constraints.

    The group decided that a Northern Israel Bond Authority would generate capital to develop these promising projects for the region. Financial and legal experts suggested that the bonds may be issued by a U.S. conduit in partnership with an Israeli project sponsor.

    The group explored several financing options. They also determined that adding a layer of credit enhancement to any financing model would decrease risk and increase the likelihood of investment. With sufficient legal support oversight and evaluation, the implementation of the bond authority could become a reality in the coming year.

    Participants discussed the success of the KIEDF Revolving Loan Fund model for small-business growth. Through the fund, KIEDF puts philanthropic dollars to work in the private sector, providing small-business, micro-enterprise and microfinance loans to entrepreneurs. Because the model is already effective, little discussion on improvements or challenges occurred during this session. Rather, participants encouraged KIEDF to continue and expand its work. The group thought particular emphasis should be given to small businesses that, because of the war, currently have restricted bank accounts.

    Lab participants suggested that the small-business loans provided by KIEDF, and small-business loans in general, be securitized in a targeted collateralized loan obligation (CLO). A targeted Northern Israel CLO would allow KIEDF and banks to go one step further in lending, providing further liquidity in the constrained small-business credit sector.

    The lab concluded with a discussion of next steps for implementation of the bond authority and the Northern Israel CLO. A report with the findings and next steps will be released in the coming months.

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    September 2006

    A Recovery and Economic Development Plan for Northern Israel: The Day After, I

    Santa Monica, CA

    In the aftermath of the war in Lebanon, the Northern region of Israel is struggling to recover. According to the Israeli Finance Ministry, the July 2006 Second Lebanese War will cost up to $5 billion.

    Even before the war, the Northern region had already experienced a relatively weak labor and housing market, and lower performance in commercial and industrial activities than the national average.

    To successfully achieve growth and development, the region requires an influx of capital. But traditional funding sources, such as government agencies or foreign aid, are typically insufficient or cumbersome to access, particularly for Northern Israel. Therefore, the region needs to focus on alternative funding options.

    As part of the Financial Innovations Lab series, the Milken Institute researched and explored several alternative financing options for facilitating recovery and growth in post-war Northern Israel. The first of these labs was held at the Milken Institute in Santa Monica. The second was held on Sept. 15 in New York City (view summary).

    Participants at the first lab explored an array of financing options. Over the course of discussion, participants determined that two alternative funding options were the most feasible and pressing: development of a bond authority for infrastructure and public-private projects, and expansion of the KIEDF Small Business Revolving Loan Fund model.

    Through development of a bond authority, the government and private partners can raise capital for needed infrastructure, such as expanded highways and renovated rail lines, which will bring business to Northern Israel. With expansion of the Small Business Revolving Loan Fund model, the area's entrepreneurs will receive a much-needed influx of working capital at favorable rates.

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    March 2006

    L.A. Economy Project: Financial Innovations for Capital Access

    Santa Monica, CA

    This lab brought together business leaders, bankers, community organizers and researchers to act on the capital-access recommendations presented in the Milken Institute's Los Angeles Economy Project report. It was one of several meetings of L.A. leaders prompted by the release of the project's report in December 2005.

    "These meetings," said Los Angeles City Council President Eric Garcetti, "act as a bridge between research and legislation and action...with the goal of increased participation in the Los Angeles economy."

    Key speakers at this lab included Kirsten Snow Spalding of the California Pollution Control Financing Authority, who talked about the California Capital Access Program (CalCAP); Ian Cudlipp of Four Corners Capital Management, who discussed collateralized loan obligations; and Shari Berenbach of the Calvert Foundation, who presented information on community investment notes.

    Several recommendations and action items emerged from the meeting:

    Use L.A. partners to increase California Capital Access Program activity in Los Angeles.

    This program would operate within CalCAP, and would bolster CalCAP loans to L.A.-based businesses. In the state program, the lender and borrower generally each pay 2 percent of the loan amount into a loan loss reserve, and the state contributes a 4 percent match. This 8 percent reserve mitigates the lender's risk. CalCAP has a provision for an independent contributor to create incentives by helping to cover the borrower's or lender's costs. In an L.A.-focused program, the independent contractor could be the City of Los Angeles or a local foundation. In addition to, or in lieu of, offsetting the borrower's or lender's contribution to the loan loss reserve, the contributor might also help pay the lender's cost of marketing and loan origination, increasing outreach and usage of the program. The program could be sector- or neighborhood-specific, and would make use of existing infrastructure.

    Next Steps: Gain mayoral and City Council support; secure an independent contributor.

    Develop an L.A. Community Investment Note

    The Calvert Community Foundation can help structure an L.A.-targeted Community Investment Note, to be marketed to local institutions and investors. Notes would likely be at least $5,000 (though could be as little as $1,000), with a flexible interest rate to be chosen by the investor (generally between 0 percent and 3 percent) and term between one and 10 years. Funds raised by the notes would be invested in local community development financial institutions. Local foundations and philanthropists could credit-enhance the loan pool to help mitigate the risk as well as help support the cost of marketing and originating loans, and due diligence and placement of proceeds. In addition to small-business lending, funds could be used for affordable housing and community development. Calvert has created similar customized note programs, including a geographically focused effort for the Gulf Coast in the wake of Hurricane Katrina.

    Next Steps: Identify lenders, philanthropic organizations, individuals and government agencies who might contribute to the cost and management of the program; explore structuring options with the Calvert Foundation.

    Develop an L.A.-focused Small-Business Collateralized Loan Obligation

    Collateralized loan obligations (CLOs) can increase lending activity by purchasing loans and offering lenders liquidity. If the loans are packaged and credit-enhanced with a layer of equity (perhaps from a local foundation) or insurance wrap, the resulting security could be rated and prove attractive to institutional investors (e.g. LACERS, CalPERS) or banks seeking CRA credit. Currently some small-business loans are securitized, but an L.A.-focused CLO would pool many more local small-business loans. A diversity of industries and types of loans could be included. The servicing of the loans could be maintained by the original lender or passed to the purchaser. Philanthropic support could help cover the marketing costs.

    Next Steps: Identify pools of potential loans to be included; identify potential philanthropic and government partners.

    For more information about the Los Angeles Economy Project, visit

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    December 2005

    Financial Innovations for Faster Cures: Securitization of Medical Solutions II

    New York

    Following up on the first Financial Innovations Lab, which examined how creative financial techniques may be able to bridge the funding gaps in medical research, a diverse group of financial, legal, philanthropic, insurance and medical-research experts met in New York to discuss the specifics of how this can be done.

    With the cost to produce new drugs growing more expensive (reportedly, as much as $800 million), increased regulatory scrutiny and fewer blockbuster drugs to help the bottom line, research-and-development activity has declined at the major pharmaceutical companies, resulting in fewer new drugs being discovered.

    One problem is the enormous risk to investors because of the long time frame involved for bringing new drugs to market, and the huge uncertainty of whether they'll pan out.

    So the question to those attending this lab was simple: What innovative financial structures have evolved that could be applied to the biopharmaceutical industry that would reduce this risk to investors and pump more money into medical research — especially early-stage drug discovery?

    "Why is it that the large pharmaceutical industry, which was once a full-service provider in drug development, has continued to withdraw from risky early-stage discovery and development?" asked Glenn Yago, Director of Capital Studies at the Milken Institute. "Why is it that the venture capital market and equity investors have been avoiding support for risky early-stage discovery and development? And how do we overcome this?"

    Attendees spent the day looking at a variety of potential mechanisms, such as special-purpose vehicles, structured finance and the securitization — the pooling of assets that can be sold as a security — of intellectual property, like drug patents.

    Jeffrey Brandt, a patent attorney, agreed that a well-assembled portfolio can have a value greater than the sum of its parts. But there are risks.

    "Owning intellectual property is like having a tiger by the tail," said Brandt, who is President of JLB Consulting Inc. "The good news is you own a tiger. The bad news is you've got it by the tail. You're probably going to have to do something with it. You need to understand what you own in terms of using it."

    Among the major issues are finding the right financial instrument, the right disease, the right patents and the right stakeholders to reduce the risk and ensure the best outcome. Jay Eisbruck, Managing Director of Moody's Investors Service, said this would not be easy.

    "The only way to make it work would be to cross-collateralize all these different drugs into one deal," he said. But "everyone is going to think their drug is going to be more successful than everyone else's, so they're going to not necessarily want to share the benefits of that. To make this work, you would have to find a way to get people to at least subordinate some of the benefit of their drugs for the benefit of the overall transaction to make it work."

    Many venture capitalists have pulled out or cut back on their investments, attendees said.

    "Venture capitalists are becoming more risk-averse," said Martha Amram, an author and Founder of Growth Options Insights, LLC. "So we have a gap here of how to reduce the risk further so additional funding sources will come in."

    By involving many of the different players in these discussions — insurance companies and foundations, for example, that could help bridge the financing gap — Milken Institute researchers hope to forge agreement on new ways to fund drug research.

    The objective of the labs is to explore a range of market-based alternatives to closing the early-stage funding gap and accelerate cure development for infectious and chronic diseases.

    The findings and results of this lab and the first one, held in Santa Monica on Nov. 29, 2005, are summarized in a report available here.

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    November 2005

    Financial Innovations for Faster Cures: Securitization of Medical Solutions I

    Santa Monica, CA

    Much progress has been made against some of our most deadly and debilitating diseases. But despite these advances, cancer, Alzheimer's, diabetes and other illnesses continue to devastate individuals and families.

    One of the primary weapons in this battle is the development of new drugs that can cure or offset the effects of these diseases. But because of the enormous costs of developing new drugs, the length of time to get them to market and the high risks for investors, the discovery of new life-saving medicines has slowed.

    This financial innovations lab, and a similar one in New York City on Dec. 13, focused on how we can use creative financial techniques to increase investment in medical research and commercialization. A diverse group of experts in finance, medicine, philanthropy and intellectual property met to help figure out what new financial instruments and strategies could be created to break the drug-discovery finance logjam.

    "People are dying who shouldn't be dying," said Glenn Yago, Director of Capital Studies at the Institute, who hosted the event.

    Attendees agreed that fundamental shifts that have taken place in the pharmaceutical industry over the past five years that make it more difficult to fund research for promising, but early-stage drugs.

    With the cost of getting a new drug to market estimated at $800 million, many drug companies now rely on smaller biotechnology firms to pay the bill for this research. But venture capital funding for these small companies has dried up because investors don't want to take the risk of losing their money on unproven drugs. They're more interested in drugs that have proven themselves in late-stage clinical trials.

    As a result, it's tough to put deals together that will help move these potentially life-saving drugs along the research pipeline, they said.

    "Pharmacology is the most difficult (industry) I've faced," said Joe Daniele, chief operating officer of Acorn Technologies, Inc., who has completed more than 350 IP deals over the years.

    Lab members talked about what has worked and not worked to help fill this funding gap, such as special purpose vehicles and structured finance, and how you value intellectual property such as drug patents.

    But much of the focus was on a financial instrument strongly supported by research at the Milken Institute: securitization — or the pooling of assets that can be sold as a security.

    Is there a way, for example, to estimate the future value of royalties over a number of years from a portfolio of patents relevant to a particular disease group or medical problem? This portfolio could then be turned into marketable securities, which would provide capital to accelerate research.

    Attendees also discussed how insurance companies or foundations whose missions are aligned with particular diseases might help bridge the financing gap by, for instance, providing loan-loss guarantees. This would require a fundamental shift in the thinking of foundations, many agreed.

    The objective of the labs is to explore a range of market-based alternatives to closing the early-stage funding gap and accelerate cure development for infectious and chronic diseases. Designing capital structures with credit enhancement, advanced sales and other financial, marketing or business strategies that align interests of foundations, investors, patients, governments and businesses is expected to advance health solutions.

    The findings and results of the two labs are summarized in a report available here.

    The labs were made possible, in part, thanks to the generous support of Adjoin and Bioacclerate.

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    November 2004

    Hydrogen Highway Financial Innovations Laboratory

    Santa Monica, CA

    It is the stuff of novels, television drama and scientific conferences, but is the Hydrogen Highway a reality or mere wishful thinking?

    In January 2004, California Gov. Arnold Schwarzenegger introduced the California Hydrogen Highway Network to accelerate the introduction of a hydrogen-powered transportation system in California. Its purpose is to create a network of hydrogen stations throughout the state by 2010, reaching 2,000 stations and 2 million vehicles by 2030.

    Is it viable? Many in the field seem to think so.

    The Hydrogen Highway Financial Innovations Laboratory held Nov. 18 at the Institute brought together 30 experts in public and private finance, technology, industry and policy to discuss viable pathways to creating a "hydrogen economy." At the end of the day, the participants, who broke into focus groups addressing financing mechanisms, technological development, societal issues and cross-cutting solutions, came up with recommendations to be submitted to Schwarzenegger.

    The essential ingredients of a viable hydrogen economy, the group agreed, were political will and cash. Despite formidable barriers to implementation, motivation is also a driving force toward achieving that end. Early-stage key players identified by the group were hydrogen producers and equipment manufacturers. These include government, project financiers, big auto OEMs, energy utilities, hydrogen retailers (stations) and renewable-energy players. Initial end users identified were fleets and government, and only in the long-term, public consumers.

    A clearly identified downside was the lack of private capital available for infrastructure. Venture capitalists are not interested in government-subsidized markets, nor will private investors fund projects that have no revenue stream for at least five years. Private investors need clearly defined, focused opportunities, they said, as well as a broader market than one limited to California. On the upside, while infrastructure will have to be funded by public means, models exist for converting government-built infrastructure to private projects, among them, the solar industry and the defense industry.

    In the technology and public policy arenas, members determined that the central issue is how to direct current technology toward the policy of hydrogen economy. They also looked at existing infrastructure that could be utilized in this regard, including railroad and cell-phone infrastructure, military bases and Cal Trans stations, and agreed to study natural gas to determine the existence of a parallel track.

    Among the societal drivers cited were energy scarcity, energy diversity, carbon dioxide emissions and global warming, yielding benefits such as better air quality, job creation and export opportunities.

    The general consensus emerged that hydrogen is the energy future, leaving the question of how California becomes a leader in that future. Public awareness and buy-in were considered critical by the group and they raised the possibility of an initiative similar to the voter-approved stem cell initiative as a starting point.

    The technology team felt that, realistically, hydrogen would gain a major foothold among the population closer to the year 2030, citing the cost of the car as one factor and hydrogen's adoption as a commodity by major oil companies as another.

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