DECEPTION, DENIAL, and DEUTSCHE an Italian Scandal Haunts the Most Important Bank in Europe P36

January 23 — January 29, 2017 | bloomberg.com

DECEPTION, DENIAL, AND DEUTSCHE An Italian scandal haunts the most important bank in Europe p36

“WE ARE THOSE PEOPLE CLINGING TO THEIR GUNS AND RELIGION. YOU HAVE ARRIVED AT THE VERY PLACE!”

p42

“I am certain many in “One might expect a successful “Mr. Trump is negotiating strategy to have 100 percent opposed the Saudi leadership ambitious objectives and a credible to what you do for have sleepless nights fallback position. May certainly has the former, but we doubt the prime a living, and we can’t on Yemen” minister has the latter” help you”

PHOTOGRAPH BY ROSS MANTLE FOR BLOOMBERG BUSINESSWEEK BLOOMBERG FOR MANTLE ROSS BY PHOTOGRAPH p12 p15 p22 Cover Trail January 23 — January 29, 2017 How the cover gets made

① Opening Remarks Technology is opening up opportunities for the disabled 6 “The story’s on Deutsche Bank. They’re wrapped up in a scandal Bloomberg View Trump’s reckless trade talk • Another way to curb “black money” in India 8 involving an attempt to hide hundreds of millions of euros in losses at an Italian bank.” Movers Trump and Brexit lift Goldman and Morgan Stanley Bye-bye, big top 11 “Do you mean to tell me that a bank Global Economics may have acted deceptively and that corruption may even have been The limits of Saudi Arabia’s power are exposed in Yemen 12 at an institutional level?”

Fed-up Brazilians look for someone to Make Brazil Great Again 14 “Yes.”

No one’s calling the U.K.’s prime minister “Theresa Maybe” anymore 15 “A bank? The type of company that, since the founding of the The good times roll in Quebec’s job market 16 very ﬁrst bank, has always behaved with honesty and wisdom, and with Companies/Industries the best interests of the public in mind? A bank, that shining beacon The next president could give Big Pharma a huge headache 18 of light in a dark world full of nastiness and cruelty?” Amazon sees a prime opportunity in non-Prime shoppers 19 “Are you done?” Brazil’s brewers ﬁnd they need to sell more than sexism 20 Politics/Policy “Yes.”

A completely different kind of lobbying ﬁrm for a completely different kind of president 22

A little-known ethics official picks a high-proﬁle ﬁght with Trump 24

Scott Pruitt has spent years attacking the EPA in court and out. Now he’s been tapped to run it 25 2 Technology

To hire more women and minorities, tech turns to ... well, let’s just call it Diversity 2.0 27

The face of Facebook’s carefully managed Facebook page 28

Hey, you, cut the cost of my cloud 29

Mobile-gaming company Lightneer wants to teach kids about quarks 30

Innovation: An ultrahigh-resolution DSLR camera that will ﬁt in your pocket 31 Markets/Finance

Startup Behavox is using AI to build a sort of Minority Report for rogue traders 32

Low-cost-fund giant Vanguard keeps quiet about its own executives’ pay 33

Homebuilders are conﬁdent they’ll see a Trump bump 35 Features

Italian Job How Deutsche Bank helped the world’s oldest bank hide a €367 million loss 36

Capital Carp The VC kid who went to Kentucky to turn a trash ﬁsh into a cash cow 42

Cyber Screw-Up Mauritania hired an upstart to tap its cell networks. It did not go well 48 Etc.

Executive health programs are the right prescription for busy CEOs 55

Fashion: Personalize your lapel with a pin 58

The Critic: Sallie Krawcheck says women should consider opting out of mainstream corporate America 59

Travel: Get away from it all without getting away from it all 60

Food: McDonald’s beefs up its Big Mac menu 62

What I Wear to Work: Andrew Herman got himself a custom-made sport coat 63

COVER: ULRICH BAUMGARTEN/GETTY IMAGES BAUMGARTEN/GETTY ULRICH COVER: How Did I Get Here? Lululemon Athletica CEO Laurent Potdevin found a creative way to avoid the French army 64

Index People/Companies

Ross, Wilbur 8, 24 A Rousseff, Dilma 15 Accenture (ACN) 27 Rovio Entertainment 30 Adylov, Erkin 32 12 Al-Assad, Bashar 12 Saudi border Aldi 19 guards S Altitude Aerospace 16 Safeway 19 Amazon.com (AMZN) 19, 28, 29 Sandberg, Sheryl 28, 59 Ambev (ABEV3:BZ) 20 Sanders, Bernie 25 America Rising 24 Shake Shack (SHAK) 62 American Electric Shaub, Walter Jr. 24 Power (AEP) 25 Shinola 44 Apple (AAPL) 11, 27, 29 ShopRite 19 Avenue Strategies 22 Slack 27 Slice Intelligence 29 Snowden, Edward 50 B Sotheby’s (BID) 11 Bain & Co. 32 SecondHouse 60 Baird, Ross 44 State Street (STT) 33 Bank of America Merrill Surf Office 60 Lynch (BAC) 34 Synergy Consultants 18 Barnier, Michel 14 Behavox 32 Bennett, Barry 22 T Bessemer Venture Partners 31 Taco Bell (YUM) 62 Bezos, Jeff 28 TaskRabbit 27 Bidwell, Clinton III 32 Temer, Michel 15 Bin Salman, Prince Tiffany (TIF) 11 Mohammed 12 TP ICAP (TCAP:LN) 32 BlackRock (BLK) 33 TPG 44 Bogle, John 33 Treﬁs 29 Bolsonaro, Jair Messias 15 Trudeau, Justin 12 Bombardier (BBD/B:CN) 16 Trump, Donald 8, 11, 18, 22, Bono 44 24, 25, 32, 34, 35, 44 Bose 29 Twitter (TWTR) 27, 34 BP (BP) 44 Branson, Richard 44 Brasil Kirin (2503:JP) 20 Deutsche Bank (DB) 11, 37 Hsieh, Ed 60 Price, Tom 18 U Breather 16 DeVos, Betsy 24 M Proofpoint (PFPT) 29 Ubisoft Entertainment (UBI:FP) 4 DigitalOutposts 60 MacInnis, Matt 62 Protiviti 32 16 Doria, João Jr. 15 I Madsen, Nikolaj Astrup 61 Pruitt, Scott 25, 35 Ubl, Stephen 18 Downey, Robert Jr. 28 IBM (IBM) 50 Manning, Chelsea 11 United Airlines (UAL) 56 D.R. Horton (DHI) 35 IDC 29 MarketWatch (NWSA) 18 In-N-Out Burger 62 Marshall Wace 32 Q

Infosys (INFY) 29 Marvel (DIS) 28 Qualcomm (QCOM) 11 V BUSINESSWEEK. OOMBERG Inhofe, James 25 Mattel (MAT) 11 Quazzo, Deborah 30 Vanguard Group 33 E Inkling 62 May, Theresa 14 Venneman, Nancy 16 E! (CMCSA) 15 Intesa Sanpaolo (ISP:IM) 37 McDonald’s (MCD) 62 Vesterbacka, Peter 30 27 Eclipse Ventures 31 McKinsey 18 R Village Capital 44 Stacy Edward Jones 19 McNabb, Bill 33 Raytheon (RTN) 12, 50 Brown-Philpot Eisenberg, Jesse 28 J Meltwater 63 Refuga 61 Ellevest 59 Jain, Anshu 37 Merkel, Angela 37 Revolution LLC 44 WXZ British American Ellis, Mat 29 Jaunt VR 29 Merrill Lynch (BAC) 37, 59 Rey, Roberto Miguel 15 Walmart (WMT) 19 Tobacco (BATS:LN) 11 Essilor (EI:FP) 11 JCPenney (JCP) 11 Microsoft (MSFT) 27, 29 Reynolds American (RAI) 11 Wolf Intelligence 50 Brown-Philpot, Stacy 27 ExxonMobil (XOM) 11 JPMorgan Chase (JPM) 14 Mondelēz International (MDLZ) Ringling Bros. and Barnum & Woo, David 34 Justus, Roberto 15 16, 19 Bailey Circus 11 Xi Jinping Järvilehto, Lauri 30 Morgan Stanley (MS) 11 Rolls-Royce Holdings Zappos 44 C F Morningstar (MORN) 33 (RR/:LN) 11 Zuckerberg, Mark 28, 44 Cameron, David 14 F.A.B. Partners 37 Munoz, Oscar 56 Canon (7751:JP) 31 Fabor, Peter 60 K My.Suit 63 Capito, Shelley Moore 25 Facebook (FB) 27, 28 Kenyatta, Uhuru 11 Carson, Ben 22 Faissola, Michele 37 Kerry, John 12 How to Contact Case, Steve 44 Fin Gourmet Foods 44 Konttori, Lauri 30 N CBBP 20 Fink, Laurence 33 Krawcheck, Sallie 59 Netﬂix (NFLX) 11 Bloomberg Businessweek Chaffetz, Jason 24 Ford (F) 11 Kumar, Manish 48 Nike (NKE) 11 Chan, Priscilla 28 Forrester Research (FORR) 29 Nomad House 61 Editorial 212 617-8120 Ad Sales 212 617-2900 Charles River Ventures 31 Founders Factory 30 Northrop Grumman (NOC) 50 Address 731 Lexington Ave., New York, NY 10022 China Grand Pharmaceutical & Fox News (FOXA) 24 NPD Group 62 Healthcare (512:HK) 18 Freeman, Morgan 28 NSO Group 50 E-mail [email protected] Fax 212 617-9065 Cisco Systems (CSCO) 50 Fresh Direct 19 Subscription Customer Service URL Citigroup (C) 37, 59 businessweekmag.com/service Clinton, Hillary 18, 44 O Reprints/Permissions 800 290-5460 x100 or Cloud Cruiser 29 G Obama, Barack 11, 24, 25, Cloudability 29 Gartner (IT) 50 28, 35 e-mail [email protected] CloudHealth Technologies 29 Georgiadis, Margaret 11 Oklahoma Gas & Electric 25 Cloudyn 29 GitHub 27 48 Omidyar, Pierre 44 Letters to the Editor can be sent by e-mail, fax or CNN (TWX) 22 Glock 50 Manish Ommanney, Charles 28 Kumar regular mail. They should include address, phone Community Choice Financial 22 Goldman Sachs (GS) 11 Orvoine, Cédric 16 number(s), and the e-mail address if available. Consumer Intelligence Google (GOOG) 11, 27, 29, 31 Outsite 61 Research Partners 19 Grupo Petrópolis 20 Connections with the subject of the letter should Conway, Kellyanne 24 GSoft 16 be disclosed, and we reserve the right to edit for Costco (COST) 19 GSV Acceleration 30 L P sense, style, and space. Cowen Group (COWN) 19 Guisset, Emmanuel 61 Laroia, Rajiv 31 Panera Bread (PNRA) 62 Crilly, John 44 Lee, Mitchell 27 Pearson (PSO) 11 Cryan, John 37 Lennar (LEN) 35 Penguin Random House 11 Corrections & Clariﬁcations Cummings, Elijah 24 H Lewandowski, Corey 22 Penny 27 “A Scandal at Korea’s Retirement Giant” (Markets/ Hed, Niklas 30 Light 31 PepsiCo (PEP) 11 Finance, Jan. 16-Jan. 22, 2017) should have cited Heineken (HEINY) 20 Lightneer 30 Petroleo Brasileiro (PBR) 15 Grosvenor Capital Management, not Grosvenor D Herman, Andrew 63 Lululemon Athletica (LULU) 64 Pinterest 27 Da Silva, Luiz Inácio Lula 15 Hines, Stephanie 56 Luu, Lula 44 Potdevin, Laurent 64 Group, as being picked to help manage the National

De Baene, Simon 16 Hooley, Joseph 33 Luxottica (LUX:IM) 11 Powell Jobs, Laurene 44 Pension Service’s hedge fund investments. BL FOR LATIF AKBAR ZISHAAN BY PHOTOGRAPH KUMAR: FALLON/BLOOMBERG; T. PATRICK BROWN-PHILPOT: CAREY/BLOOMBERG; GLEN ARABIA: SAUDI

By Michael Schuman I was hurtling through Shanghai in a Even now I can’t see in the dark and have cigarette-scented taxi, not quite sure almost no peripheral vision. As my taxi where I was headed. Cab jaunts through sped through Shanghai, I couldn’t read unfamiliar places can be a bit stressful the street signs or building numbers. for anybody. You feel vulnerable and After the sun began to set, it became too dependent on a driver you don’t difficult to tell one street from the next. know and can’t necessarily trust. But And I couldn’t read the taxi meter. I’ve for me, such trips in rickety taxis rattle gotten ripped off before by unscrupulous my nerves even more than my spine— cabbies, and I prefer not to rely on them Technology is helping because I’m almost blind. to tell me how much I owe. the disabled become I have a genetic condition called ret- So that night I experimented with initis pigmentosa, which is causing my some technology. I have an app on my as productive as other sight to deteriorate over time until there iPad that transforms the camera into a workers will be little, or possibly nothing, left. powerful magnifier. I use it mainly to ILLUSTRATION BY 731 technological breakthroughstechnological would and otheraidsto helppeoplelike me again andagain,onmattersmuch as any otherpassenger. andquicklyread ascomfortably e-books over With aKindleiPadapp, abook. Ican on alongflightandholding thedevice It’s very useful, butIcan’t imaginesitting that projects thetext onto asmallscreen. littlemachine for printed material nifty touse.Forand easier Ihave instance, a read. Butthey’ve become more efficient profits, andhouseholdincome. good is forgrowth,disabled corporate workers, gives theboosttechnology the andpolicymakers aretalent seekingfresh where businesspeopleare for scrambling only afew years ago. Inagingsocieties, in ways thatwere much more difficult to contribute economically opportunity giving workers millionsofdisabled an be asproductive. Theseinnovations are gadgets my colleaguesuseallow meto perform well. Thesame computersand equipment orotheraidsformeto special bias. There’s noneedtospendmoneyon workers in2015. abled intheU.S. that ofregular was twice The unemployment rateamongthedis- and itsconsequences remain very real. concerns are unfounded,butthestigma expensive. Studieshave shown those productive, more trouble, andmore workers,disabled fearing they’re less often, managers against discriminate also fortheentire global economy. Too hasgrown worse.disability myto maintain productivity, even asmy hasgiventechnology metheopportunity as easy-to-adjust PDFs. Simply, emerging papersarriveand academic inmy in-box as quickly asever. reports Economists’ ofthescreen soIdigestness information thesizeoftextfine-tune andbright- magazines ondevicesthatallow meto read newspapers media,Ican and digital fully sighted.Thankstotherevolution of and work asefficiently asI could ifI were enlarge iconsandfonts,lettingmewrite essay I’vethis customizedto onaPC ride.I’mwriting thanataxi more critical screen averted. toread. Disaster large, enoughonmybright, andclear and zoomedin.There wasthefare— ontheapp,the metermightbe,tapped IaimedtheiPadatwhereseat? Ithought meter,the taxi alltheway from theback restaurant menus. ithelpmesee Could read smalltext cards and onbusiness That means a lot, notonlyThat meansalot, formebut I could never have foreseen how There have always beenmagnifiers Technology should helpendsuch Advancing rescues me technology change my life. WhenIwas diagnosed problem didn’t Ipursuedmy exist. determined tolive my lifeasifmy eye with for retinitis pigmentosa, stemcell there’s currently nocure ortreatment hope Iwon’t go blindat all.Although Even more, advances scientific offer usecomputerswithgreat efficiency.can that peoplewho are completely blind recognition has advanced software so ity. Andthat’s likely tocontinue. Voice- worry toomuch aboutwhat might come. across Asia.Andonceagain,Idon’t still traveling, andstillreporting stories from 6feet away. ButI’mstillwriting, barelyrated, andIcan recognize my wife Sure, my hasallbutevapo- nightvision writing amemoircalled Asia.Iconsideredeled through Central andtravfor athree-month sabbatical I’d never recover. Iasked my editors time withmy remaining eyesight—time ferent from everybody else.Iwaswasting matter how much Iwasdif- Ideniedit, I’ddecided No mistake. madeaterrible sparked Iincident apersonalcrisis. lenging, my world more confining.The thatlifewouldreality get only more chal- Iwokemy Inthatmoment, sight. tothe about and, forthefirsttime,distressed got backto my Iwas disoriented table, the dimlightandcrowds. By thetimeI to read menus andfind my way through much more food, Istruggled thanusual severalI hadtovisit counterstoorder Singapore in2000. At arestaurant where with what thefuture mightbring. affect my work very Ididn’tmuch. bother slowly, wasdeteriorating vision itdidn’t my Because dent andflewofftoAsia. dream ofbecomingaforeign correspon- 20 or30years down theroad. what Iwould andwould notbeabletodo bank tellers,itwasimpossibletoknow telephone answering and machines, But in1983,when we were usingstamps, or surgeon wasprobably notanoption. a jobthatdidn’t require eyesight. advised me,rather heartlessly, to choose who firstdiscovereddoctor condition my gadg would helpmeovercome my disabil howanticipated changingtechnology in that restaurant, Icould never have result innovation. ofallthis Struggling would hampermy ambitions.Theeye concerned thatmy sight deteriorating Myepisodes. parents were seriously My a renewed inpart, is, optimism Today my outlookhasbrightened. That changed, quite suddenly, in I justignored theentire matterand But what exactly wasthatcareer? Pilot etry wasstillconfinedto etry retinitis pigmentosa at age 14, such Final Journey Star Trek . - -

as well have beenonJupiter. Itookout me, thefamedceilingpaintingsmight Chapel,where theSistine I visited for monthmymy wifeand Last e-books. landing, leaving mesittingidly without off theirgadgets 30 minutes before in Chinastillforce passengers toshut tothese technologies get by. Airlines yet adjusted tohow use thedisabled One guard even mocked usasdramatic allowed. Explanations fell ondeafears. barkingby thatphotoswere security not my iPad magnifier, only to get swarmed perhaps even reversed. thatmyresearch thepossibility raises and reporting stories still writing,traveling, but evaporated, butI’m My night visionhasall time I’minShanghai. knows how my iPad willsave methenext such technology. Andforthefuture? Who productiveeconomically life because of howtion is amore many lead peoplecan world’s workers. Whatgets atten less threatenand othertechnologies the a lotoftimeworrying about how robots be ableto break themdown. We spend locked will find thedoorsofopportunity becomemoretechnologies widespread however, Ihave reason to hope.Asnew Ihadandtheydidn’t.the technology meandthesepeople was ence between tools, Irealized that theonly real differ- bling together leather shoes witharchaic time. Watching studentsonbenchescob- a classroom was like stepping backin themselves. support abled can Entering for anybody, becominganindepen- wherea country are opportunities scarce skills, like knittingorbasiccarpentry. In theblindold-fashionedschool teaches found itdepressing. Thehighly regarded athon runner, Henry Wanyoike, when in Kenya to write aprofile ofablindmar- would belike without technology. Iwas much more inconvenient forhim!” venient foryou,” my “Itis wifeshot back. mysorry husband’s incon- blindnessis my colleagues,” hesaidoftheiPad.“I’m fakers. inconvenient “It is formeand vision’s behalted— can deterioration and accessible, somanyand accessible, who disabled theonly way is dent craftsman thedis- he took meto theschoolfor theblind where after a helearnedto function credits theplaceforsaving life.I his stroke robbed Wanyoike himofsight. Unfortunately, theworld hasn’t Looking backat thatLooking experience, Yet I’malsofully aware ofwhat life - 7 8 View Bloomberg and any oforderly prospect market-driven arrangements. trade resolved, Trump could very well theWTO, Nafta, killorcripple would surely challenge, facealegal but before would thecases be orother and imposingtariffs, quotas, restraints. Such moves such take unilateralaction to thepresident ofemergency, intimes granthimwidepowers to agreements, authority trade delegating aswell asotherstatutes measures, term.Laws intheshort especially authorizing existing collectives: usandthem. the lowest cost;it’s monolithic two battle azero-sum between borders togive consumers everywhere thebestproducts at thinking,isn’tthis about myriad companiescompetingacross told the nations that are sellingto usassuppliers to us,” Wilbur Ross should treat ourselves astheworld’s customerandtreat biggest appears tobelieve management inthetop-down oftrade:“We stays together orfallsapart. difference tothe U.S. whether theEU, “a Germany,”vehicle for and theU.S. thatitmakes deal—but anewtrade no design can toquit theEuropeanon itsdecision Union, he’s saidtheU.K. and he’s saidtheU.S. might“pullout.” Congratulating Britain promotes liberaltrade and China.He’s theWorld called Trade which Organization, Agreement, andputpunitive from onimports tariffs Mexico withdrawtrade pacts, Free from American Trade the North intends to execute agenda, radical his there’s littleto stop him. overof poverty thepastseveral ifheactually decades—and andliftedhundreds ofmillionspeopleoutglobal stability tially amount to therepudiation ofasystem that hasfostered have been stunningintheirrecklessness. proposals His essen- Even by standards, DonaldTrump’s his ontrade statements of international commerce isatstake A meticulously constructed system anddelicate Trade Disaster The LoomingTrump Congress wouldn’t beabletodomuch torestrain thetrade Trump’s nomineeforcommerce secretary, meanwhile, Trump threatenedDuring thecampaign, to ripupexisting Financial Times and adjudicates disputes, “a disaster,” disputes, and adjudicates . Theglobaleconomy, according to as terminating previous commitments as terminatingprevious commitments testing elections. testing elections. on therolls andthus “donations,” ableto collect without con- power parties—more ofwhich than1,500 toderegister remain should have Commission severe TheElection sanctions. the scrutiny, caught filingfalse andpoliticians returns face should reliefsshould lose theirtax iftheydon’t openthemselves upto Their booksshould be checked auditors. by third-party Parties donations, withmoneymoved rather digitally thanincash. comes from donors. undisclosed ofthemoneygiventhree-quarters toIndia’s sixnationalparties just tolerateblackmoney, Anestimated italsorelies onit. routinelyCandidates more. system spend10times doesn’t This low fornationalraces—so candidate paign spending setalimitof7 million rupees($103,000) per cam- finance.Theruleson blackmoney andpolitical between as buyers were forced todelay purchases. targets. Carsalessawyears theirbiggest drop last month in16 businesses andtheircustomers thanitwas fortheintended theory: Themoneylaunderers rose tothechallenge. of themoney. There’s ofevidence to support thesecond plenty thanbelieved,cash ortheyfoundnewways tolaunder much denominations. EitherIndianswere hoarding farlessillicit havenotes beendepositedinbanksorexchanged forother tive thattheproblem may now beharder tosolve thanbefore. to Butefforts get aroundcrime. thebanhave beensoeffec- evasion,tax andordinary corruption, the profits ofpolitical notes hasbackfired. money”— “black Theideawasto root out India’s cont down, rebuilding itwon’t beeasyorquick. And ifthesystem ofinternationalcommerce world only tocollapsingconfidence and lead can recession. regret supporters Declaringatradewaronthehe andhis it. and healthinsurance. relieve thestress, aswould more effective unemployment to helpworkers retrain andmove tonewjobswould also upsomeofthesepoints.Doingmoresome credit fortaking and spread thebenefitstomore workers. Trump deserves of reform,tax deregulation, andinvestment intherightkind tunity, andeffective insurance. social Education reform, money.” Thatrequires change political It was meant tostem theinﬂuence of “black Reform Isn’t Working Why India’s Rupee infrastructure could raise thelong-term couldraise infrastructure rateofgrowth Parties shouldParties berequired thesources to disclose ofall A better strategy would by begin recognizing thelink thebanmay haveIn fact, beenabigger nuisance forlawful Since November 97 anestimated percent ofthebanned If Trump follows through ontrade,itwon’t belongbefore The rightapproach to focus is oncompetitiveness, oppor- roversial and1,000-rupee to ban500- decision that fewtake itseriously. To read MarkGilbert incorrectness, goto embrace of political Justin Fox onTrump’s hard Brexit and on Theresa May’s Bloombergview.com is carelessly is torn

ILLUSTRATION BY TOMI UM

Movers “We have a whole country of By Kyle Stock people who are eligible to vote who

President Obama commuted don’t vote. And so the whole idea British American the 35-year sentence of Chelsea Tobacco sweetened Manning, ending it in May. The that we put in place a bunch its bid for Reynolds former U.S. Army intelligence American analyst was convicted of leaking classified material. Obama has of barriers to people voting $49.4b shortened prison terms for almost 1,400 people, more than French lensmaker his 12 predecessors. doesn’t make sense.” Essilor agreed to buy Italian eyeglass giant President Obama commenting on voting rights at a final press conference on Jan. 18 Luxottica Mattel tapped Google’s Americas Netflix signed up a record 7.05 million customers in the fourth $24b President Margaret quarter—5.12 million in international markets—topping analysts’ estimates ExxonMobil bought Georgiadis as chief for growth. The company expanded to 130 new countries a year ago. oil leases for 275,000 executive officer. acres in Texas and The toymaker New Mexico typically promotes leaders from within, but $6.6b A newly discovered Georgiadis moth, sporting a Burberry topped may have mop of blond scales earnings estimates, strategies on its head, was helped by a weak for luring given the species pound—and an uber- kids away name Neopalpa expensive handbag from screens. donaldtrumpi. It lives in Mexico and $19.7k Southern California. JCPenney plans to open dedicated Nike shops in two-thirds of A flurry of trading in the wake of its stores the U.S. presidential election and the Brexit vote helped Goldman 600 Sachs and Morgan Stanley top earnings estimates. Morgan U.S. consumer 11 Stanley profit rose 84 percent, prices rose faster in Kenya’s election commission launched a massive voter-registration its best fourth quarter since the December than they Ups drive in advance of August elections, targeting 4 million to 6 million financial crisis. have in 2½ years MBERG; MBERG; Kenyans. Opposition parties are going after those potential voters in an effort to beat incumbent President Uhuru Kenyatta. 0.3%

Deutsche Bank Ringling “No one will emerge as Ford unveiled settled U.S. charges Bros. and a winner in a trade war,” its 2018 Mustang of mortgage-backed Downs China President Xi Jinping in Detroit. The securities fraud Barnum & Bailey cautioned in remarks made company is hoping more power and Circus said it at the annual meeting of the a face-lift will reverse last year’s $7.2b will shut down World Economic Forum in 13 percent decline in deliveries. Davos, Switzerland. Rolls-Royce Holdings in May after settled long-running Tiffany posted a 146 years. bribery probes in the dismal U.S. antitrust regulators sued U.S., U.K., and Brazil Flagging ticket Last year was sales slumped the hottest on Qualcomm for its licensing practices. 0.5% record, according The company allegedly gave Apple $817m increase in further last to data from the sales during the lower fees on its patented technology, The number of year when the National Oceanic holiday period, Americans who could show retired its and Atmospheric in exchange for the hardware giant as tightened go uninsured without Administration. Earth using its chips exclusively in iPhones. security around elephants. the Affordable Care Act has managed to hit Trump Tower Qualcomm said it would ﬁght the suit. a high in each of the slowed traffic to its past three years. 32m New York ﬂagship. Business was weak Sotheby’s sued a abroad as well. seller, claiming that a 16th century painting it bought is a fake $672k Since legalization, Former Sara Lee CEO Brenda Barnes died at −29% a Colorado pot glut 63. Barnes famously gave up a seniittor post at Pearson shares swooned on Jan. 18 after the publisher has weighed on weed PepsiCo in 1997 to spend time with her three forecast years of gloom in the U.S. textbook market. It’s prices children. Seven years later, she joined Sara Lee selling its stake in Penguin Random House to raise cash. and promptly won the top job. ILLUSTRATION BY OSCAR BOLTON GREEN; (MOTH) VAZRICK NAZARI/ZOOKEYS JOURNAL; (KENYA) THOMAS MUKOYA/REUTERS; (XI) JASON ALDEN/BLOO JASON (XI) MUKOYA/REUTERS; THOMAS (KENYA) JOURNAL; NAZARI/ZOOKEYS VAZRICK (MOTH) GREEN; BOLTON OSCAR BY ILLUSTRATION (FORD) COURTESY FORD; (SOTHEBY’S) COURTESY SOTHEBY’S; (OBAMA) NICHOLAS KAMM/GETTY IMAGES KAMM/GETTY NICHOLAS (OBAMA) SOTHEBY’S; COURTESY (SOTHEBY’S) FORD; COURTESY (FORD) −48 8%% Global Economics

January 23 — January 29, 2017

The War in Yemen Test

A hospital in Haradh, near the northwestern border, bombed by the Saudi-led coalition

Riyadh fails to check Iran’s regional inﬂuence “It’s hard to describe this Saudi intervention as a success” That Saudi Arabia has better weapons succeeding. The Yemen war grinds In Yemen, a country of about than its enemies in Yemen is no on; in Syria, Saudi-backed fight- 27 million people, more than 10,000 surprise. That one of the richest Arab ers were driven out of their strong- have been killed or wounded since countries is nonetheless struggling to hold in Aleppo; Egypt, kept afloat by the Saudis intervened, according get its way in one of the poorest is. Saudi Arabia’s dollars, has sometimes to the United Nations. The elevated “From the start of the war, the threat seemed reluctant to fall in line with number of civilian casualties has changed and increased,” said Saudi Riyadh’s foreign policy. prompted some of Riyadh’s Western Colonel Massoud Ali al-Shwaf on Dec. 8, The Yemen conflict wasn’t supposed allies to review or halt weapons sales adding that his border guards come to drag on. Saudi Arabia intervened in to the kingdom. under regular attack while patrolling March 2015, at the head of a Sunni-led The Saudi government hasn’t dis- the frontier along Saudi Arabia’s Najran coalition that’s launched intensive air- closed the price tag of its Yemen war province, where mountain ravines and strikes and deployed a limited number or the extent of support for opposition desert expanses make it challenging at of ground troops. It’s trying to rein- fighters in Syria. But the conflicts have the best of times to stop infiltration and state the Yemeni government, which been a burden at a time when slumping smuggling. “We have the casualties to enjoys international recognition yet has oil prices have sapped the kingdom’s prove it,” he said. lost control of the northern part of the coffers, forcing unaccustomed austerity Saudi Arabia’s youthful leadership country, including the capital, Sana’a, on the country. Cost-cutting, including has vowed to translate the country’s to Houthi rebels. The Saudis say the a 20 percent salary reduction for min- vast oil wealth into regional clout, but rebels have ties with Shiite-ruled Iran, isters and the suspension of bonuses there’s little evidence that strategy is the kingdom’s chief regional rival. for government employees, pushed s SaudiArabia

ASMAA WAGUIH/POLARIS (2) from itsdependence onenergyexports, an ambitiousplan towean the economy crown prince andarchitect of deputy Mohammed binSalman,theSaudi the peopleofcountry.” andenormous sufferingon structure enormous damage onYemen’s infra- Houthis totheirknees.Ithasinflicted paign hasnotmanaged tobringthe Washington. Saudi “The bombingcam- Institute in dent oftheArabGulfStates Yemen who’s executive vicepresi- Seche, aformerU.S. ambassadorto vention asasuccess,” says Stephen weren’tMinistry answered. for commentfrom the Saudi Foreign show.years, bankdata central Requests declined $200billioninthelasttwo The valueofSaudi assetsabroad has the lowest sincetherecession in2009. in 2016,according tothegovernment, down economicgrowth to1.4percent The war began just as Prince just asPrince The warbegan “It’s hardSaudi this inter- todescribe Graves of Houthi ﬁghters inthe northern city city northern of Sa’ada followed by Iran—which authorized is to adealpare won’t production, be Arabia’s U-turn inNovember, agreeing groups. Even Saudi withinOPEC, fromterritory Saudi-backed Islamist Assad, anIranianally, recapturing is country. InSyria, President Bashar al- control much disputed—still oftheis Yemen—whose withIran connection ence intheregion. Yet therebels in to haltthespread ofIranianinflu- doesn’t speakonits behalf. Embassy inWashington, thoughhe Nazer, totheSaudi consultant apolitical among theSaudi public,” says Fahad the waringeneral doesremain high “support fortheSaudi intervention and rarepaganda is now. Nevertheless, maneuvers. Suchpro- military cast 31-year-old broad- TV andstate prince, fighter jetsofthe flying pastportraits royal. depicted Billboards inthecapital was emergingasthemostpowerful Saudi Arabiasays it’s fighting ’s Clout manufactured guidance missile ofprovidingInstead last monthtohalt somearmssales. made clusterbombs.TheU.S. moved Dec. 19thatitwillstopusing British- Saudis, the kingdom announcedon country’s weapons tradewiththe U.K. lawmakers urged areview oftheir ofthewar.about theconduct After Aden onDec.18. of soldiersinthesouthern city 50 bomberkilledmore suicide thanState pose agrowing threat. AnIslamic control, andal-Qaeda Islamic State backed government still anditsallies Yemen. Inthesouth,which theSaudi- the only threat theSaudis facein amines andwhiskey. Therebels aren’t amildnarcotic,khat, oramphet- fighters, oftenfueled mountain by They have areputation asskilled by theaccord toboostitsown output. style Divorce, Theresa May- Saudi alliesare expressing unease The Houthis are toughopponents: 14 Raytheon a moment Quebec ishaving Brazil, too! to bepresident of Move over, I want want over, I Move 16 15 -

13 Global Economics

systems, the Americans will focus barriers and would get time to adjust movement of EU citizens across on helping the Saudi forces improve to the new order. the U.K. their targeting. And in Canada, Prime May would like to achieve her wish On first impression, May’s speech Minister Justin Trudeau is under list in the two years allocated for was a success. Having dropped in value pressure to cancel an $11 billion deal divorce talks, a timetable that may before her address, the pound enjoyed to sell the Saudis combat vehicles. not be realistic given that any trade its biggest gain against the dollar since Then-Secretary of State John Kerry, pact would need the signoff of all 27 2008. Business leaders praised May for who visited Riyadh in December, said EU members. Failure to get what she giving the clarity they need to invest. it’s urgent to bring the Yemen war wants would mean her taking the U.K. The Brexit blueprint puts to rest to a close. Yet there’s relatively little out of Europe with “no deal” at all, recent suggestions that the prime international effort in thatdirection, she said. minister should be dubbed “Theresa in contrast with the multiple though This is bold talk. “One might Maybe” for being too cautious. It also largely unsuccessful attempts at expect a successful negotiating strat- appeased the pro-Brexit lobby of Tory peace in Syria. “I am certain many in egy to have ambitious objectives MPs that engineered the downfall of the Saudi leadership have sleepless and a credible fallback position,” her predecessor, David Cameron. nights on Yemen,” says Paul Sullivan, says Malcolm Barr, an economist at The ultimate verdict on May’s strat- an adjunct professor of security JPMorgan Chase. “May certainly has egy could be years away. Only when studies at Georgetown University the former, but we doubt the prime the final details of any U.K.-EU trade in Washington. “War is hell, and minister has the latter.” agreement are clear, after as many Yemen is an especially bad hell.” To those in Europe who think May as two years of discussions, will it be —Glen Carey, with Nafeesa Syeed is asking for too much, she argued possible to evaluate her approach. that agreeing to her terms would be Everything rides on how the EU reacts. The bottom line The war in Yemen is a costly distraction for Saudi Arabia, whose economy is “economically rational.” Britain is “a While the U.K. wants to be “reliable feeling the pinch of austerity measures. crucial—profitable—export market” for partners, willing allies, and close their companies, she said. She warned friends,” it will also fight back if the those who want to punish the U.K. for EU decides to punish it, May said. its decision to leave that they would Retaliation “would not be the act of a be committing “an act of calamitous friend. Britain would not—indeed we 14 Brexit self-harm.” could not—accept such an approach.” May Spells Out Her Such a tough approach carries risks. The prime minister notably didn’t It will almost certainly trigger a battle spell out what she would be prepared Ambitious Wish List between the prime minister and pro- to do in the event a deal can’t be European members of Parliament reached. She did talk about cutting who are concerned that a hard- business taxes radically and attracting Tariff-free trade? Yes. Unlimited line approach to Brexit negotiations the best and biggest companies away immigration? No, no, no could wreck the British economy. from Europe to the U.K. Retaliation “would not be the act She sought to deflect their attacks by She also implied that the current of a friend” promising a parliamentary vote on the collaboration on security, intelli- final agreement—although her aides gence, and the armed services could In her much anticipated speech on said a vote against a particular deal be reduced, an outcome that May sus- Jan. 17, U.K. Prime Minister Theresa wouldn’t derail Brexit. pects would hurt Europe more than May laid out in detail her agenda The shape of the final agreement the U.K. She mentioned Britain’s highly for Britain’s departure from the ultimately won’t be up to May. It will regarded intelligence services four European Union. Among her aims: be the views of the other member times in her speech—as often as she lock in tariff-free trade with the EU, states, molded by the hands of EU said the words “customs union.” quit sending large sums of money to chief negotiator Michel Barnier, that A big question is whether May is Brussels, clamp down on immigra- will be decisive. The EU, in the end, repeating the mistakes Cameron made tion, and restore lawmaking powers to doesn’t have to offer the U.K. a new in last year’s referendum. Just as he British politicians and British judges. free-trade pact. underestimated the willingness of Instead of the EU membership EU officials welcomed May’s voters to risk economic prosperity in that evolved over four decades, May statement of specifics, while repeat- exchange for gaining control over law- told an audience of European diplo- ing their long-held position that they making and immigration, May runs mats in London, she wants a “bold won’t enter negotiations before she the risk of failing to see the impor- and ambitious” trade deal with the formally initiates the exit process tance to Europe of protecting the EU bloc. Her ideal accord would allow by invoking Article 50, which starts as a political project whatever the tariff-free trade between Britain and the clock running on talks. The EU cost. Europeans in this camp want to the EU, while she would secure the leadership also made clear that the deny her the trade deal that she says freedom to strike new pacts with U.K. won’t be allowed to enjoy the would be best for both parties. They other countries. London-based banks full advantages of membership in the say Britain must be made to pay a price would still provide services across union without accepting the respon- for leaving, so other countries won’t the continent without bureaucratic sibilities—most important, the free be tempted to follow it out of the bloc. ILLUSTRATIONS BY SIMON ABRANOWICZ eight months. Municipal eight months. Municipal inlessthan tion scandals to corrup- ministers his Temer, haslost sixof current Michel president, impeached lastyear. The sor, DilmaRousseff, was succes- Lula daSilva. His President LuizInácio major figures suchasforme ruption probe hasensnared years. cor- TheCarwash two past the an estimated7percent over Itcontracted boomfizzledout. modity on record inearly 2015, when thecom- nose-dived intothedeepestrecession of therest oftheworld. Theeconomy has beenbuildinginBrazil,asmuch mess. Itneedssomeonetocleanitup.” a is country ofBrasilia.“The capital violent satellitecitie from Planaltina,oneofthepoor, Santos, a29-year-old kitchen outside ofpolitics,” says Jefferson by Brazilianstandards. 2018 presidential circus colorfuleven hasopenedthedoorfora discontent worse!” Butitdid,andthenational slogan: “Itcan’tCongress. His get any won in aboutpoliticians aseat cism a circus clown exploiting thecyni- with 400,000 votes. write-in In2010 placed third inthemayoral election a resident ofRio deJaneiro’s zoo, Tião,In 1988thechimpanzeeMacaco Trump of TheirOwn Brazilians Lookfor a Elections market willstop theEUfrom retaliating. thatcalculating thethreat of losingtheU.K. asa The bottom line —Tim Ross own version ofahard Brexit, too. EU, thesepeoplefear. Theywanttheir leading tothebreakup ofthewhole encourage othercountriestoexit, Giving theU.K. agood dealwould

someone tocleanitup” country isamess.Itneeds“The corruption, they want anew face Fed upwithrecession and The disdain forgovernment-as-usualThe disdain “from foraleader desperate Brazil is TheBritishprimeminister is s surrounding the e d r r -

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past push-ups onthebeachin a ofhimselfonTwitterdoinga picture both “explosive.” year heposted Last favorably toTrump, saying they’re And there are many ofthem.” books, includg he’s theauthor ofseveral get-rich-quick and owner ofa marketing company, interviewer.vision Aformer withhim atall,”identify hetoldatele- fan ofthenewU.S. and wealthy. Unlike Bolsonaro, he’s no Paulo, João DoriaJr., alsopopular, is saying hewasprepping for2018. (think Speedo, butcutmore loosely), breeding thatkindofanger inBrazil. a bigdealvalidatesthepeoplewho are speak publicly like hedoesandstillbe tions. “Having someonelike Bolsonaro nongovernmentalof political organiza- a coalition ofNossasCidades, director says AlessandraOrofino, executive similar totheTrump phenomenon,” of Rousseff “It’s andotherleftists. very agofour decades oversaw thetorture vote his tothecolonelwho dedicated “scum.” he During theimpeachment, keep immigrant outwhat hecalls loosenguncontrol,punishment, and himself asanoutsider. of Deputiessince1990butportrays sented RiodeJaneiro intheChamber a formerparatrooper who’s repre- Following closely: Jair Bolsonaro, foryears,prison ledinrecent polls. that couldsendhimto money-laundering ch d trial oncorruptiona or voided ballots. bla percent—cast 32.5 A record number— liked theirchoices: how littlepeople months ago showed elections three elections o ,cu g ud c s, boo Bolsonaro hascompared himself The newly mayor installed ofSão Bolsonaro wants to reinstate capital Bolsonaro wantstoreinstate capital Lula, settostand e g h h bl p pu e y C Caviar LifestCaviar bl o n Bolso d ho h is Success Style With ucs t Style ith Success oof o a lo local version local oste App Ap h president: “Idon’t es t n a h prp nd to ar nk d arges entice o h

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n , , the h . He left,” he said ashesigned copiesofhis well-known plastic surgeon, recently generation,” Roberto Miguel Rey, a years. doubled inthepasttwo Unemploymentback. hasalmost frompoverty 2004 to2014 have fallen 35 millionpeoplewho emerged from economy. At least 10percent ofthe Workers’ hasdimmedwiththe Party out intothestreet forjoy.” screaming shewhen says. Lulawaselected, “Iran Her happiestest moment. wasin2002, when she was 39. Thatwasherproud- she earnedherhighschooldiploma fromwith onephotograph, theday plasterwallsarecrumbling adorned inahousewhose kitchen assistant, Rodrigues, who lives with Santos,the “Everything hedoesworks out,” says could take hervote away from Lula. Sousa says theonly Justus onewho is Só Entre Nós resulted intheeasy-listening album public relations; abriefsingingcareer moneyin run. Justus, 61,madehis de S.Paulo 2009, toldthenewspaper of and star waters. Roberto Justus, a doesn’t have tosteal.” He alreadypolitics. hasmoney, sohe the mayor: “Doriaisn’t involved in Trump inexplaining devotion his to what many have Americans saidabout has vowed up. toclean He echoes downtown, adilapidated area Doria orangeserving juiceatasnackbar the presidency,” says Jorge 22, Lopez, don’t wanttobelieve “He’d it. win so sure, adoringsupporters andhis for president next year, analysts aren’t such as enterprises program tosellstate-run iticians,” hesays, sketching outa outofthehandspol- the country “We needtotake themanagement of the impoverished periphery. c c “Iamgoing tooffer hope tothis forLulaandthe Her affection In Planaltina,Valda Rodrigues de Other neophytes are testingthe While Doriahassaidhewon’t run hl Do While enter to of thecity, from thewealthy t t ricts ricts Petroleo Brasileiro Global EconomicsGlobal -year-old won dis- allbuttwo 5 59 says. “IamaBrazilian.” sa o to pay—struck achord. The t egardless of their ability regardless oftheirability to combatrampantcrime r t - thathe’s consideringa to opentheirdoorstoall, and force private hospitals t O Aprendiz That credo—and promises That credo—and ( Just Between Us from 2004 to millionaire O Estado ) in2008. . 15 16 and David Biller and David prettier.”the country least,” hesays ofRey, “hemightmake nobody “At should beruledout. since 2004. cred: He’s beenon But like DoriaandJustus, hehasTV inBeverly practice and hashis Hills. Paulo, Rey intheU.S. wasraised inSãobeach resort ofBúzios.Born consecutive monthinDecember. the nationalaverage forafourth in November, alow, andheldbelow unemployment ratefellto6.2percent country’s labormarket growth. The it accountedfor42percent ofthe other nineprovinces combined, and jobs in2016,more thanCanada’s build upsuccessfulorganizations.” good. We have theidealenvironment to creative, andthecostofliving really is De Baenesays. “Great engineers,we’re oflifeinQuebec,”incredible quality nationwide.to increase “We have an jobs,thekindpolicymakers expectogy positions are skilled IT and technol- top provinces forjobs.Many ofthe in Canada’s economy tooneofits a transformationfrom thelaggard hasundergonein thepastdecade 2017, DeBaenesays. and additionalhires are comingin than 60percent inthelastyear alone, more than200workers—it grew more had fouremployees. Today, and consultingcompany in2006,it Montreal-based development software his When SimonDeBaeneco-founded Welcome toQuebec Poutine,The Habs, Jobs: Canada of SãoPaulo andaplastic surgeon. Brazil’s national electionin2018 includethemayor The bottom line EconomicsGlobal

Santos says point thatatthis up successfulorganizations” It’s idealenvironment “the tobuild source of specialized ITgigs The province hasbecomeamajor Montreal, oncethecountry’s Quebec added85,400 full-time That’s good news forQuebec,which autobiography at theupmarket New players intherunupto Dr. 90210 —Bruce Douglas—Bruce GSoft onE! has on which policymakers are increasingly panies, known exporters, asITservice Quebec,” Marjaeesays. quite impressed withwhat’s going onin defeat inthe2014 “We election. are suffered Québécois a Parti ist record 2015–16year, fiscal andtheseparat- ($1.7 billion)budget surplusinthe delivered anunexpected C$2.2billion That’sdebt. changing,hesays. Quebec sovereignty weighed ontheprovince’s issue of andthe when deficits perpetual Canadian bondmarkets sincethe1980s, Management inToronto, hasworked in managerand portfolio atManulife Asset resources manager, saidinane-mail. 60 percent, FrancesWilk, human staff, which now numbers 83, expanded teamto17service peoplelastyear. Total itscustomer quadrupled Francisco, NewYork,ing London, andSan rooms andworkspaces includ- incities that allows userstobookmeeting tothreetwo years, Orvoine says. add 120positionsannually inthenext plansto count by 180in2016.Ubisoft and Montreal afterincreasing head has 3,400 employees inQuebecCity dent forhuman resources, says Ubisoft in1997.city Orvoine, vicepresi- Cédric do sowhen itsetupanoutpostinthe Assassin’s Creed Ubisoft Entertainment and videogameproduction company tage ofgovernment breaks. tax Film opened Montrealtake officesto advan- new ventures. Othercompanieshave drawing is severalfrom Canada,thecity resulted intheprovince’s secession inthe1970sgained steam andalmost movementbecause ofanationalist that ofeconomicdecline,partly decades the recent jobsgrowth. After suffering business capital, is theepicenterof is business capital, a Albert Canada Quebec Unemployment rate, adjusted seasonally Provincial Progress 11/2011 11/2016 GSoft belongstoanewgroup ofcom- Hosen amanagingdirector Marjaee, Breather , aMontreal-based startup , wasamongthefirstto , themaker of 4% 5.5% 7% 8.5% 10% Frederic Tomesco turn.” to Montreal. wheel hasstarted “The atLaurentianomist BankSecuritiesin creation, says seniorecon- EricCorbeil, ing, which should stimulate more job toboost consumerspend- starting is Venneman says. nitely helpswhen we dothebidding,” U.S., “theweak Canadiandollardefi- inEuropepotential projects andthe Venneman. Nancy ident, With many 80, according toitsfounderandpres- bringing itsheadcountinMontreal to clients, recruited 26peoplein2016, and countsBombardier amongits repairs airplanesalready inservice Aerospace companies are growing. and C$897,600 inVancouver. December, vs. C$694,900 inToronto mark homepriceswere C$312,700 in onesilveris lining.Montreal bench- an economicthinktank. the Montreal-based InstitutduQuebec, according toMiaHomsy, of director settoshrinkis asthepopulationages, dropped outofthelaborforce, which November more than20,000 people might mask adeeperproblem. In about 450 jobs. in Montreal year andeliminate this plantplans tocloseaproduction cookies, saidinNovember thatit International 1,500 oftheminQuebec. globally over thenext years, two recently saiditwillcut7,500 jobs companytransportation Aerospace struggling. still is and to centralbankestimates. revenuetriple-digit, growth, according within thegroup are seeinglarge, often 1.5 percent ofexports of gross domesticproduct andabout of Canada’s output—3.4 percent total generatesThe sector atiny proportion turns away from naturalresources. pinning theirhopesasthecountry Canada’s labormarket growth. jobs last year andaccounted for 42percent of The bottom line The rise infull-timeemploymentThe rise And even local someestablished The residential market real estate The improving jobnumbers also Quebec’s manufacturing industry Cristina andDimitra Lindblad, Kessenides Edited by Christopher Bloomberg.com —Sandrine Rastello and , which modifiesand Quebecadded85,400 full-time , themaker ofOreo —but companies Power, Altitude Bombardier Mondelēz

DATA: STATISTICS CANADA

Companies/ Industries

January 23 — January 29, 2017

to negotiate on behalf of Medicare, which accounts for almost 30 percent Pha’sWo st of prescription drug spending in the U.S. Today, the U.S. relies on a private- sector approach that involves private insurers and pharmacy-benefit manag- Nigh ers negotiating pricing deals with drugmakers, including in Medicare’s Part D drug coverage program. The industry says that setup works just fine. “Today, medicines are pur- chased in a competitive marketplace where large, sophisticated purchasers aggressively negotiate lower prices,” said Stephen Ubl, chief executive officer of Pharmaceutical Research and Manufacturers of America (PhRMA), the industry lobbying group, in a statement. “We look forward to working with the new administration and Congress to advance proactive, prac- tical solutions to improve the marketplace and make it more responsive to the needs of patients.” 18 Despite Trump’s tough talk, changing policy will be challenging. He would need to get a GOP- dominated Congress on board. So far, Republicans don’t seem receptive, and Trump’s own nominee to lead the U.S. Department of Health & Human Services, Tom Price, has opposed price negotiation. If Trump tries to take on the drug industry, “God help him,” pDrut g companies fear negotiating prices with Uncle Sam said Andy Slavitt, acting administrator of the Centers for Medicare & Medicaid “America would” be lifting a rock to hit its own feet” Services, at the J.P. Morgan Healthcare Conference on Jan. 9, according to Pharmaceutical executives initiallyll medicines than anyone else. The MarketWatch. “He’s not wrong, but celebrated Donaaldld Trump’s elecl c-- -main U.S. government health pro- you need … a fair amount of stamina if tion, expecting ththe bbusinessmanb to be ygrams for the poor and the elderly you are going to deal with the pharma- friendlier to their industry than Hillary psp5ent almost pe$195- billion on pre- ceutical industry on this topic.” Clinton, a tough critic. But worries gscription drugs in 2015. Medicaid, One reason: Big Pharma’s tre- about his ire soon setit in, and dth the the prog ram f or th e poor, g e ts mendous clout. An analysis by fears proved justified on Jan. 11, when fixed rebates from drugmakers. Yet health policy and corporate conduct Trump said the industry was “getting Medicare, the program for seniors, researcher FairWarning, based on away with murder.” His prescription spends almost three times as much and spending data provided by the non- for reducing drug prices: make phar- is prohibited by an industry-backed profit Center for Responsive Politics, maceutical companies bid for the gov- law from negotiating with drug com- found that there were more lobby- ernment’s business. panies. The U.S. Department of ists in Washington working for drug- The mere threat of Washington using Defense and the Veterans Health makers and wholesalers in 2015 than its potentially huge bargaining clout to Administration by law get fixed rebates there were members of Congress. For hold down prices has given the indus- from drugmakers, and they’re allowed each of the last 13 years, more than try a massive headache. Unlike other to negotiate for even better deals. 60 percent of those lobbyists had pre- rich countries, the U.S. doesn’t directly In a 2015 poll by the Kaiser Family viously worked in Congress or for the regulate the price of drugs. As a result, Foundation, the vast majority of government, making them particularly

Americans spend more on prescription Americans favored allowing the U.S. connected. And the drug industry has 2014 EVALUATEPHARMA, DATA: MUKAI. KRIS BY ILLUSTRATION In Brazil, keeping the beer ﬂowing without the machismo 20

made more than $147.5 million in politi- debate produces unpredictable pol- may be wise, “but if you move cal contributions since 2003. itics: 12 Republicans supported the resource-dependent industries like Trump’s promises are more than measure, and 13 Democrats opposed it. generic-drug manufacturing back to the a bit hyperbolic. In 2016 he said that Echoing comments he’d made U.S. it may not be beneficial or create renegotiating Medicare drug prices earlier about the automotive industry, jobs for ordinary people,” Shao says. would save $300 billion a year. But Trump on Jan. 11 also criticized the U.S. —Doni Bloomfield, with Hui Li Medicare spent less than half that pharma industry for manufacturing The bottom line Trump is considering making much on medicines in 2015. overseas. “They supply our drugs, but Big Pharma bid for the government’s business, a Simple dealmaking also won’t be they don’t make them here, to a large prospect that gives drugmakers agita. sufficient. In 2007 the Congressional extent,” he said. Trump pledged to “get Budget Office (CBO) said letting the our drug industry back.” But reshap- secretary of the HHS negotiate with ing pharma’s complex manufactur- drug companies would have a “neg- ing chain could lead to higher prices, ligible” effect on spending—unless experts say. Retailing the agency were given more lever- U.S. International Trade Amazon Goes After age, such as the power to prefer one Administration data show that drug over another. If the U.S. did have only about a quarter of the roughly The Walmart Shopper that leverage, it could save a signifi- $330 billion in medicines consumed cant amount. That could be as much annually in the U.S. are imported. The online giant will accept food as $16 billion a year, according to America gets most of its low-value stamps for its groceries researchers at Carleton University drug chemicals—called active phar- and Public Citizen, if the HHS got the maceutical ingredients—from China “There are very few retailers who same prices the VA receives. And if or India. Changing that would entail can serve the high and low end” Medicare required the industry to relocating a heavily polluting and provide rebates for poor beneficiaries, low- margin bulk chemicals indus- For years, Amazon.com has tar- 19 as is required for Medicaid, that would try to the U.S. Meanwhile, unravel- geted shoppers who can easily afford save the U.S. about $145 billion over ing an elaborate global supply chain a $99 annual Prime subscription to 10 years, according to the CBO. That designed to lower costs and mitigate gain faster free shipping of its mer- would be significant: An estimated risks might leave Americans paying chandise or spend hundreds more $324.6 billion was spent on pharma- more for drugs or even cause short- on other timesaving services such as ceuticals in the U.S. in 2015. ages, because new production facili- Amazon Restaurants, which provides There could be other ways to cut ties must undergo a lengthy approval quick takeout delivery from eateries in drug prices. Last year, Clinton floated process by the FDA. hipster havens like Brooklyn, Seattle, a plan to create a team to help make “Moving manufacturing indus- and San Francisco. The company’s cheaper drugs available, monitor sharp tries across the board back to the latest expansion move goes after a jumps in prices, and potentially recom- U.S. is an ideal, a dream, but if it’s less free-spending group: Starting this mend penalties for unjustified hikes. forced, America would be lifting a summer, Amazon will deliver grocer- Both Republicans and Democrats in rock to hit its own feet,” says Shao ies to food stamp recipients. Congress have offered other propos- Yan, CEO of Hong Kong-based It’s one of seven online retailers als, including speeding approval by the China Grand Pharmaceutical & chosen to join the U.S. Department of U.S. Food and Drug Healthcare, which supplies drug Agriculture’s Supplemental Nutrition Administration ingredients globally. Assistance Program (SNAP), which last % of generic drugs, Asian drug executives say U.S. com- year provided more than $66 billion of 39 which are cheaper panies import bulk drugs and chem- help to 44.2 million needy Americans. than brand names, icals because the costs are less than Among the other newcomers to the and allowing tem- manufacturing them in the U.S. Also, two-year pilot program will be Fresh porary importa- competition among a big pool of global Direct and the online operations of tion of medicines suppliers allows U.S. companies to supermarket chains Safeway and U.S. share of global from abroad drive down prices. “There is certainly a ShopRite. This will be the first time drug revenue to offset price scale effect that Chinese or Indian com- SNAP has accepted online payment increases. panies have reached when it comes to for groceries. Those plans, active pharmaceutical ingredients and Low-income shoppers are an intrigu- too, would face resistance. On Jan. 12 small-molecules manufacturing,” says ing target for Amazon, which has been the Senate rejected a budget amend- Franck Le Deu, a senior partner at con- trying with mixed success to disrupt the ment that would have allowed imports sultant McKinsey. $800 billion grocery market. More than from Canada, where medicines are Attracting higher-end operations 80 percent of food stamp recipients live cheaper, by a 52-46 vote. The pricing including innovative drug development in or near big cities where Amazon 20 help aretailer suchasAmazonachieve generatesThis order volume thatcan withtheshopper.in regular contact groceries frequently, puttingaseller Peopleing andelectronics. purchase buy higher- also into thestore withhopesthey’ll food atorbelow costtoget people petitors suchasWalmart thatsell ies hastaken apage from big-box com- central locations. ies todoorstepsorrequire pickup from if Amazonplanstodeliver thegrocer- for theirgroceries. For now, it’s unclear shoppers seehow paying they’re can than inacrowded store, where other ents usethebenefitmore discreetly recipi- program alsoletsfoodstamp tion andlower prices.Thedelivery outwithitsvastselec- tostand nity markups, providing itanopportu- stores withlimitedinventory andhigh recipients convenience includes stamp bottom ofthecustomerspectrum.” the way tothetopandallway tothe uniquelyAmazon is positionedtogo all retailer hasbeenabletobridge thegap. tomers are mostly low-income. Noone mostly and affluent, University. “ Management Clara InstituteatSanta Kalyanam, oftheRetail director the incomespectrum,” says Kirthi serve thehighandlowcan endof inHarlem.projects and baby foodtolow-income housing abox alsocart ofcereal,Side can bread, creamer toManhattan’s Upper West ten-free chiaseedbarsandorganicsoy warehouses. Soatruckdelivering glu- Where Food StampsAre Spent Companies Superstores $34b So far, Amazon’s push intogrocer- Its competitionforurbanfood “There are very fewretailers who already hasanetwork ofnearby margin itemslike cloth- Costco stores $3.6b Convenience $3.7b Groceries $3.9b Supermarkets $20b / customersare Walmart Industries

Combo

FISCAL 2016. YEAR DATA: USDA cus- commissaries, and commissaries, including farmers markets, military $1.2b isspent at other locations other locations senior centers half its $298 billioninannual U.S.half its$298 for Walmart, their benefitsfurther.” while helpingthemextendparticipants grocery shopping experience forSNAP throughaccessible onlinegrocery shop- andfilledinthegaps. service The retailer hassinceexpanded the Amazon’s same-day delivery service. and Washington were excluded from NewYork,Boston, Chicago, Dallas, neighborhoods ininantly minority gation showed thatsomepredom- last year afteraBloomberginvesti- trip tothestore. Amazontookheat willing topay upto$8extra toskip a shopperan hourtoatime-strapped a bottleoflaundry detergent within company betterknown fordelivering provide apublic- Itwillalso for thosewithoutcars. able food-shopping optionsare scarce and ruralareas where healthy, afford- of eliminating“fooddeserts,” urban would putAmazononthefront lines chases nationally. before allowing pur- onlinefoodstamp out any payment issues andsecurity pilot program work willlettheagency with limitedshopping options.The benefit tourbanandrural residents sees accesstoonlinegroceries asa and electronics.” deliver,that Amazoncan like fashion customers tobuyinothercategories focused on program is International. “Whilethis initiativese-commerce atMondelēz former Amazonexecutive who runs tion costs,” says NeilAckerman, a to create more transporta- efficient are combinedwithcurrent routes costs perunitlower astheseroutes drive andtransportation logistics estimates Cowen Group. last year, to$70 billion,by 2021, will more thandoublefrom grocery spendingintheU.S. profitable. Annual online tomake e- crucial thatare ofscale economies The push is potentiallyThe push badnews is “We are committedtomakingfood recipients foodstamp Serving The USDA, whichSNAP, administers “For continues Amazon,this to petitive improve can pricing the “Amazon’s andcom- selection statement. said inane-mailed lowest pricespossible,” Amazon ping, offeringallcustomersthe groceries, italsoallows for

which gets more than relations boostfora commerce “While thisprogram“While groceries, italso other categories other categories customers tobuyin and electronics” allows for deliver, like fashion that Amazon can that Amazon can is focused on —Spencer SoperandCraig Giammona would naturally wanttoacceptthem.” food stamps,” hesays. “SoAmazon customersusepers. “Someofthese Chicago, which surveys Amazonshop- Intelligence Research in Partners says ofConsumer MichaelLevin that number rose to11percent, $25,000 ayear; by theend of2016, Prime membersearnedlessthan In2014,earning less. 6percent of it boostmembership amongthose ship when theysignup. Thathelped the full$99feeforyearly member- ing tothosewho can’t afford topay makingitmoreplan forPrime, appeal- introduced a$10.99-a-month payment woo lessaffluent shoppers. In April it Brian Yarbrough. to tap,” says Edward Jones analyst andmarketdemographic forAmazon shoppers, too. “It’s awhole new chasingthose onlineretailerbiggest is 60 percent ofBrazil’s beermarket markets globally. wavefriendly” intothe“gender- tapping tisements, sexual intheiradver- stereotypes beer producers are toningdown commercial. Thecountry’s topfour supply season:theraunchy this beer inshort is staple one summertime and almostnaked Carnival dancers, In Brazil,landoftheitsy-bitsy bikini Without theBabes In Brazil, It’s Now Beer— Brewing families. Amazon wants apieceof that business. provides $66billioninfood aidannuallytopoor The bottom line pers intheU.S. Now theworld’s

This isn’tThis Amazon’s firstattemptto they want tobeapproached” Approaching “women theway dropping sexist commercials A slowing market hasbrewers Ambev grocers forlow-income shop- Aldi chaintling German-owned already retailer is bat- mortar The world’s biggest brick-and- revenue from grocery sales. , which controls more than TheU.S. food stamp program andotherdiscount commonplace inmany

YOUTUBE (5) Companies/Industries through such brands as Budweiser and Beer’s Changing Marketing Message Skol, is still producing edgy market- An old spot for Ambev’s ing content, but it’s focused on diver- Skol beer reimagined sity, like its recent Budweiser the dressing room commercial showing a passion- curtain, so it only covered a woman’s ate kiss between two men during Ambev face. By 2016 the prime-time TV. Since last summer, company was running a Heineken has been running a Budweiser ad featuring a prime-time gay kiss. version of its “Moderate Drinkers Wanted” campaign in which trendy partygoers of both sexes have a blast In a 2014 ad, Heineken promoted a shoe sale dancing, chatting, and drinking to distract women, so but know when to say no to the they wouldn’t bother men during the soccer next beer. Heineken finals, drawing criticism Brazil is the world’s third- for being sexist. Now it largest beer market, but with preaches moderation to a long recession taming drinkers’ drinkers of all genders. thirsts, production last year retreated to 2010 levels. Appealing to more Change is relative. From female drinkers is a key strategy for instructing men on how to gracefully exit the boosting sales for Ambev, as well ocean when aroused, as for rivals Heineken and Brasil Itaipava now features Petrópolis Kirin, which each have about its previously bikini-clad spokeswoman in a full 8 percent of the market. bathing suit riding a “The way beermakers commu- dolphin after a tsunami. nicate is changing drastically—it used to be much more sexist, and it wasn’t just by a few select brands,” says Glaucia Gouveia, marketing director machismo-laced beer marketing. A The biggest holdout among top beer- 21 for Brasil Kirin, owner of the brand Skol campaign about a decade ago makers is Grupo Petrópolis, Brazil’s Devassa, which means “depraved” in famously reinvented dressing-room No. 2 producer. The public face of the Portuguese. Until about six months curtains to cover only a woman’s face. brand Itaipava, model Aline Riscado, ago, Kirin had joyously highlighted the An ad for Helldorado beer showed a is almost always wearing a swimsuit in various connotations of the brand’s man making a T-shirt with the words “I ads—though the situations of the spots name in racy advertisements. Now it’s love boobs.” And a 2015 spot for Grupo have grown tamer. refocused Devassa’s marketing around Petrópolis’s Itaipava beer instructed Itaipava’s ads focus on “reinforc- the beer’s Rio de Janeiro origins. male swimmers on the proper way to ing the spirit of summer and happi- “Women’s buying power is catching check out a female sun worshiper and ness,” says advertising manager Eliana up to men’s, perhaps even surpassing still emerge discreetly from the ocean Cassandre. She disputes the idea that it,” Gouveia says. “It’s important for while visibly aroused. women don’t identify with the strat- advertisers to approach these women Brewers say societal norms are egy. “We think this identification the way they want to be approached.” starting to change. “You’ve got to feel happens independent of the physical What makes the shift all the good about the brand of beer you’re portrayals and the clothing used and more notable is that it’s happen- serving to your friends,” says Paula is instead based on the character’s ing in a nation where sexual stereo- Nogueira Lindenberg, Ambev’s market- attitude,” she says. types are widespread—as is violence ing director. Besides the social implica- Smaller brewers are still pushing the against women. A September poll by tions, creating ads that acknowledge the gender limits. In January the Proibida a Brazilian newspaper showed that sensibilities of female consumers makes brand by brewer CBBP elicited plenty more than 40 percent of men there business sense, says Mauricio Turra of social media jokes when it intro- think women share some responsibil- Ponte, a professor of marketing and sus- duced a pink-label Rosa Vermelha ity when they’re raped. And in a case tainability at the Escola Superior de Mulher (Red Rose Woman) beer that’s that drew international criticism just Propaganda e Marketing in São Paulo. “delicate and perfumed.” Said one quip- weeks before the 2016 Olympic Games “While men still consume more alco- ster on Twitter: “All that’s missing is the began, video and photos of a 16-year- holic beverages than women in percent- PMS medicine.” —Fabiola Moura and old girl being sexually assaulted by age terms, consumption growth among Jessica Brice as many as 30 men were plastered women in recent years is faster than The bottom line After years of using sex to on social media, with many people among men,” he says. “Companies need sell beer, some Brazilian brewers are avoiding “liking” the posts and blaming the to understand it, develop products to female stereotypes. victim in comments. satisfy this group, and then at some The new generation of ads in Brazil point they need to communicate that. Edited by James E. Ellis is a far cry from its traditionally That’s what we’re seeing now.” Bloomberg.com Politics/ Policy

January 23 — January 29, 2017

Trump’s K Street O

Bennett and Lewandowski, ﬁred by Trump’s campaign, are banking on their connections still being valuable

Corey Lewandowski rebrands himself as a ﬁxer peddling access to the White House Of all the D.C. lobbying shops, “there aren’t too many who limit themselves to one person’s agenda” “You see that window right there? Lewandowski’s personal proximity to corruption and repeatedly vowed to The one right next to the big arch?” Trump—and that’s the basis for his new “drain the swamp,” a phrase second says Corey Lewandowski, pointing at business. “We’re not here to compete only in the Trump lexicon to “make the second floor of the White House with guys who are lobbying Capitol America great again.” On Nov. 16 his two blocks away. “That’s gonna be Hill,” Bennett says. “We’re here to lobby transition team announced that incom- Mr. Trump’s bedroom.” the administration.” ing officials would be required to sign Lewandowski, Donald Trump’s The arrival of a new president typi- five-year lobbying bans to prevent them former campaign manager, is stand- cally means a gold rush for Washington from cashing in on their service once ing in his corner office atAvenue lobbyists as companies, foreign govern- they leave his administration. Strategies, a lobbying firm he’s ments, and interest groups scramble Trump’s well-advertised disdain for founded with Barry Bennett, the former for access and influence in the adminis- lobbying might seem to augur poorly campaign manager for Ben Carson tration. Trump’s arrival promises to be for a firm seeking to peddle influ- who later worked for Trump. The geo- different—at least according to Trump. ence. Lewandowski and Bennett dis- graphic proximity to the White House Throughout the campaign, he lam- agree. Not only do they reject the

is important, because it amplifies basted the capital as a den of insider idea that their business conflicts with BUSINESSWEEK BLOOMBERG FOR KAHN GREG BY PHOTOGRAPH The nation’s ethics director takes on the nation’s CEO 24

Trump’s anti-EPA EPA nominee 25

commentary was so stridently sup- always an issue. This is not a startup portive of the Republican nominee—to where revenue is the issue. Bandwidth whom he still spoke regularly—that it is the issue.” was hard to tell he wasn’t still working Although Avenue Strategies only for Trump. In fact both Avenue put out its shingle in late December, Strategies principals were fired by Lewandowski says the firm has Trump—Lewandowski in June, Bennett already landed 11 clients, includ- in July—yet they remain doggedly loyal ing Community Choice Financial, to him. “I’m an unapologetic Trump an Ohio payday lender; the incom- supporter,” Lewandowski confirms. ing governor of Puerto Rico, which is To advertise their support, they’re trying to avoid falling into receiver- taking the highly unusual step for a lob- ship; and Calfee, Halter & Griswold, bying firm of creating a pro-Trump a Cleveland law firm to whose clients super PAC (the Great American Agenda Avenue will offer strategic advice. PAC) that they’ll fund with their own (Neither firm nor the governor’s press money. The PAC’s purpose, Bennett office in Puerto Rico responded to says, will be to “build grass-roots energy requests for comment.) More are and support for the Trump agenda, the likely to come aboard. The two found- cabinet nominees, and the Supreme ers had just returned from meetings ffice Court pick.” While the PAC won’t be in Paris and were about to fly to Abu especially large (it will probably raise Dhabi, Doha, and Morocco. In addi- less than $1 million), Bennett says he tion to their corporate work, they plan hopes it will “build a list of a million to remain involved in electoral politics, people who we can count on raising both in the U.S. and abroad. The pair their voices to Congress—we’ll help are in discussions with candidates in them every day with something they Colombia, India, and Mexico. can do to push the agenda forward.” As with earlier campaign hands Like so much else in the dawning who have turned to lobbying or “cor- Trump era, Avenue Strategies’ porate strategy,” Avenue Strategies’ super PAC appears to be without prec- founders are selling their ability to edent. “Lobbying firms sometimes set help clients navigate the power struc- up faux grass-roots groups to push an ture of the incoming administration. issue,” says Viveca Novak, a spokes- In Trump’s case this is particularly woman for the Center for Responsive difficult to discern, both because of Politics, “but I haven’t ever heard of a the transition team’s organizational lobbying group setting up a super PAC, chaos and because many top appoin- especially not one for a president.” Yet tees lack traditional Washington back- the benefit of such a move for a lobby- grounds. “This administration is relying Trump’s swamp draining, but they ing firm isn’t hard to discern: Trump so much on outsiders,” Lewandowski insist they’ll actively abet him in the job. appears to keep a running ledger of says, “that there are very few people “I think what Donald Trump said was, who is and isn’t loyally supporting in D.C. who know who those individu- Washington lobbyists have used their him and could respond favorably to als are. That’s where we come in. I think special access to the detriment of the Avenue’s very public show of support. my advantage to a company would be American people,” Lewandowski says. Evidently, plenty of businesses telling them how to navigate the gov- “Our goal here is to help companies believe he will. “So far our entire mar- ernment so that they can be successful. grow and expand, which falls directly keting operation has consisted of Companies are looking to understand in line with the goals of this administra- answering the phone,” Bennett says. the priorities of this administration tion.” Apparently Trump agrees. In a “We’ve probably had 50 different enti- across the board, at all the levels.” statement to Bloomberg Businessweek, ties reach out to us. I’ve been involved In an effort to measure just how much the incoming president gave his seal in a couple startups, and revenue is business is at stake in the Trump admin- of approval: “Corey is a terrific and istration, the government-analytics talented guy, and I wish him well.” firm Govini recently produced a report, Lewandowski’s fealty to Trump “So far our entire Trump’s Swamp: The Reprogramming is the stuff of legend. After Trump marketing operation has Potential for Agencies and Contractors fired him during a low point in the in 2017, that identified $406.9 billion campaign, he became a paid polit- consisted of answering in federal contracts set to expire this ical contributor to CNN. His on-air the phone” year. As Govini put it, the federal 24 —Joshua Green says, “hasbeenvery, very good.” a problem. “Business,” Lewandowski in control ofRepublicans, thatisn’t yet of Washington, now— andTrump—for ness. ButwithRepublicans incontrol thatitcouldlimitbusi- of course,is themselves tooneperson’s agenda.” “But there aren’t toomany who limit that are Republican,” says. Bennett so. are “There lobbying shops intown will bepurely Trumpian—and proudly appeal. Avenue Strate business together tobroaden afirm’s goRepublicans andDemocrats into themselves by party, andoften distinguish affiliation, theytendto bying firmstohave anideological a living, andwe can’t helpyou.’ ” 100 percent opposed towhat you dofor to pay ustotellyou, ‘Mr. Trump is says.Bennett “You’re notgoing tohave client that’s againsttheTrump agenda,” to thepresident. “We’ll never take a won’t betoward any clientroster, but in anotherkey way: loyalty Itsprimary differs from traditionallobbying firms Avenue couldbevaluable, ity Strategies itself indemand.Butwhileproxim- this atop thatenormousmarket would find ceived asclosetothemanaboutsit market ontheplanet.” ership of his business empire business ership rather ofhis revealed intentiontoretain own- his with growing concernasTrump in official ethics watchedWashington alittle-known governmentelect, first press conference aspresident- On Jan. 11,asDonaldTrump heldhis Trump Enemy No. 1 The Quiet Official Who’s Ethics be thebusinessworld’s entrée toTrump. contracts expiring in2017, Lewandowski hopesto The bottom line Politics

a pricetopay tobethe president” “I don’tthinkdivestiture istoohigh to step backfrom hisbusiness Walter ShaubhatesTrump’s plan The downside tosuchanapproach, While it’s notuncommonforlob- then,thatafirmper-No surprise, government represents “thelargest With some $400billionof federal Withsome / Policy gies, by contrast, about President-elect Donald Trump’sabout President-elect interview, one document orobtained held onehearing, Oversight hasnot Committee “The firednal Democrats backatChaffetz. request butcongressio- forcomment, spin room forDemocrats.” News, saying, “He seems tobeinthe after Shaub onFox inaninterview letter toShaub. Thesameday hewent public relations,” Chaffetzwrote inhis guidance,notengageclear ethics in “Your agency’s toprovide is mission that theirmeetingbeheldinpublic.) month.(Shaubthis hassincerequested interview moned himforaclosed-door he’d overstepped mandateandsum- his Oversight toldShaub Committee, that RepublicanUtah who chairstheHouse day, Representative Jason Chaffetz,the Republicans inWashington. Thenext keeping score. It’s alsodrawn theire of knownhairs ofapresident-elect for mally publicity-shy Shaub inthecross- transition team,onethat’s putthenor- ment’s andTrump’s agency topethics thegovern- battlebetween escalating hasmet.”decades that every president inthepastfour nomineesarebest ofhis meetingand failed to“meetthestandard thatthe on tosay Trump’s plan perspective.” Shaub went a conflicts-of- “meaningless, from it by sons,calling his assets inatrustoverseen his ness while placing step backfrom busi- his basted Trump’s planto 13 minutes, Shaub lam- Institution. For almost afternoon attheBrookings impromptu appearance that speech andarranged tomake an had beenpremature. He drafteda plan,itwasclearthatShaubout his good forAmerica!” “Brilliant! Divestiture good is foryou, interest, Shaub outtohim, tweeted ident hewould have of noconflicts after Trump promised thataspres- plans tofully divest. InNovember, Trump tobehis forwhat hemistook (OGE), hadpreviously praised U.S. Officeof Government Ethics the soft-spoken ofthe director than divest. Walter Shaub Jr., Shaub’s didn’t agency respond toa It wasthemostpublicsalvo yet inan lawyerBut asTrump andhis laid interest conducted one conducted “Donald Trump is — going to talk tohis going totalk children, butnot about business.” Conway Kellyanne that he was serious about maintaining that hewasseriousaboutmaintaining “extraordinary by any measure” and that Trump hadtaken stepsthatwere Kellyanne Conway toldBloombergTV saidinastatement. ranking Democrat, Elijah Cummings(Md.), thepanel’s current plans,” Representative against the risks causedagainst therisks by [Trump’s] Any replacement Trump may select befiredmeaning hecan atany time. at thepleasure of thepresident, oftheOGEserves Obama, thedirector year termin2013 by President Barack Although hewasappointed toafive- group’s rapidresponse director. obstruction,” says ScottSloofman,the of campaign the SenateDemocrats’ officeintoan armof turned theethics deserve toknow ifWalter Shaub has people American senators. “The Shaub dence between andDemocratic tion requests seekingany correspon- Shaub andfiled government informa- has already questioned themotives of do opposition research onDemocrats, afor-profitRising, company setupto ofAmerica.”United States price topay tobethepresident ofthe “I don’t thinkdivestiture toohigha is ownthan his appointees?” heasked. dent holdhimselftoalower standard if thelaw doesapply. “Shouldapresi- meaning thepresident as should act oftheirleader,”people oftheservices “without depriving theAmerican flicts recuse himselffrom assetscausing con- that’s because thepresident can’t apply hesaid, tothepresident. But, ing Trump’s own nominees,doesn’t executive-branch appointees, includ- lawthat themainethics governing ments. At Brookings, Shaub conceded On Jan. 12,Trump senioradviser The fightmay costShaub job. his A conservative America group called n. “Donald Trump is goingseparation. “DonaldTrump is government forwarning official roles andtheirprivate invest- lk to his children,lk tohis butnot to ta flicts between theirpublic between conflicts about business,” saidConway. cials toresolve orlimitany investigation ofthekey ently rushing tolaunch an ments, yet now itis appar- massive globalentangle- ing federal ethics lawfederal ethics requir- edly notedthatthepres- ident is exemptident is from a Trump hasrepeat- executive-branch offi-

SAMUEL CORUM/ANADOLU AGENCY/GETTY IMAGES Politics/Policy would require Senate confirmation. No lawsuit against the EPA’s 2009 con- accepted at least $270,000 in donations matter how long Shaub retains his job, clusion that greenhouse gases pose a from employees or PACs associated there’s plenty of work to do. Through threat to public health, a finding that with oil and gas companies, accord- Jan. 15, Shaub had signed off on 15 of later provided the legal basis for regu- ing to data analyzed by the National Trump’s cabinet picks, but earlier lation of carbon dioxide. Institute on Money in State Politics. he’d complained in a letter to Senate If confirmed, Pruitt will be able to Pruitt has also established himself Democrats that Republicans were rework, rescind, or simply not enforce as an ally of the coal industry, even rushing the confirmation schedule. scores of environmental rules. “It’s though Oklahoma has limited coal Two committees ended up post- almost a parody. If you just sort of deposits and boasts abundant sup- poning consideration of two of put ‘not’ in front of everything in the plies of wind and natural gas used to Trump’s wealthier picks, Wilbur Ross EPA job description, you’d get Scott generate low-cost electricity. In 2015, for secretary of commerce and Betsy Pruitt,” says David Goldston, govern- when Oklahoma Gas & Electric DeVos for secretary of education. The ment affairs director for the Natural sought to extend the life of a 37-year- agency tweeted on Jan. 17 that it was Resources Defense Council. “We see old coal plant by installing $500 million making good progress nonetheless, Pruitt as a worst-case example of what in pollution scrubbers, state regu- completing work for 71 percent of the an EPA administrator should be.” lators twice rejected the plan as too nominations Trump’s transition team During his confirmation hearing in expensive. Yet Pruitt’s office inter- had submitted. But it still hadn’t signed front of the U.S. Senate Committee vened, helping persuade regulators off on several notable nominees, on Environment and Public Works to approve the plan, which is now including DeVos, whose hearing began on Jan. 18, Pruitt outlined a vision for being challenged in court. without senators having access to her scaling back the EPA’s reach while In 2012, when American Electric ethics filings. —Bill Allison also pledging to support clean air and Power agreed to retire two coal- water and to hold polluters respon- fired power plants andgenerate The bottom line A little-known government ethics official has picked a high-proﬁle ﬁght with Trump sible for violations when necessary. more electricity from natural gas and over his business ties. “We must reject as a nation the false wind, a plan Oklahoma’s Republican paradigm that if you’re pro-energy, governor and energy secretary both you’re anti- environment, and if you’re supported, Pruitt fought back, asking pro- environment, you’re anti-energy,” for an expert witness to scrutinize said Pruitt, who appeared to walk back the deal and challenging its poten- 25 Environment his previous opposition to the EPA’s tial costs. Al Armendariz, a former Pruitt Faces Fire on efforts to address climate change. “I regional EPA administrator who believe the EPA has a very important helped broker the settlement in Climate Views role in regulating CO2,” he said. which AEP agreed to retire its two coal Democrats stayed on the attack units, says the interventions show during the hearing. After Pruitt said Pruitt is willing to support coal at the Senate Dems grill Trump’s EPA the impact that humans are having on expense of consumers in his home pick on ties to fossil fuel industry climate change is debatable, Senator state. “His ideology to protect the coal “We see Pruitt as a worst-case Bernie Sanders criticized his answer industry even superseded the local example” as a dodge, saying: “You’re telling me economic benefits.” there needs to be more debate on this Supporters argue that Pruitt will In a transition filled with uncon- issue, and we should not be acting restore much-needed balance to ventional cabinet picks, Oklahoma boldly?” Pruitt replied that the EPA an EPA that’s overstepped its reach Attorney General Scott Pruitt, whom administrator is constrained by statute under Obama. During the nomi- President-elect Donald Trump has and that his personal opinion on nee’s hearing, Senator James Inhofe, tapped to head the Environmental climate change is “immaterial.” a Republican from Oklahoma, called Protection Agency, stands out. As Pruitt’s tenure as Oklahoma’s attor- him a fighter who’s tried to “protect Oklahoma’s top lawyer for much of the ney general opens a window into how the state and local interests [from] past seven years, Pruitt has established he might lead the EPA. After being overzealous and activist agencies” himself as a loyal friend of the fossil elected to the job in 2010, he quietly that “advanced a radical environ- fuel industry and become one of the phased out his mental agenda.” Senator Shelley country’s main antagonists of the very Scott Pruitt, EPA office’s environ- Moore Capito, a Republican from agency he’s poised to lead. administrator mental protec- West Virginia, says she thinks Pruitt Pruitt has challenged more than nominee tion division and will help rein in the federal govern- a dozen EPA actions, including established a “fed- ment and get the “EPA back to its core President Barack Obama’ s Clean Currently: Attorney eralism unit” to mission.” —Jennifer A. Dlouhy general, Oklahoma Power Plan, limiyts on mercury challenge federal Age: : 848 The bottom line As Oklahoma’s attorney general, from power plants, and rules and regula- Not: able: dPlayed second Pruitt was part of numerous lawsuits against the regional haze reg ulations bbas e onb a ll baseball tions. Pruitt has EPA, the same agency he’s been tapped to lead. designed to protect the air shlcholarshi hiphp at the deep ties to the Universityf of Kentucky y around national pap rks. He fossil fuel indus- Edited by Matthew Philips also signed onto a failed try, having directly Bloomberg.com

The Facebook ninjas Angry Birds defectors keeping Zuckerberg’s get educational 30 page fresh 28

Cost-cutting software Innovation: A powerful for cloud users casts a and pocket-friendly big shadow 29 digital camera 31

January 23 — January 29, 2017

In the Land of the Blind Hire

Companies are trying affirmative action—but don’t call it that “That internal conversation … made people haul ass” In October 2013, Tracy Chou publicly 8 percent of new engineering hires be authentic conversations and learn challenged tech companies to tell the black, Latino, or American Indian— more about how to make meaningful world what percentage of their software but only 22 percent of engineers hired progress,” says Candice Morgan, head engineers were women. Surprisingly, in 2016 were women. For this year, it’s of diversity. it worked. Within a year, Apple, lowered the goal to 25 percent. Pinterest is doing better than Facebook, Google, and others had “Obviously, we were all hoping most. The typical tech giant’s diver- all published their lopsided gender it would be better and closer to sity numbers have barely budged in numbers—and race stats, too. Chou, 30 percent,” says Chou, who co- the past two years, and some have then an engineer at Pinterest, became founded the advocacy group Project fallen. At first, many companies tried a face of the tech diversity movement. Include in May and left Pinterest in to make hiring more “blind”—stripping Pinterest branded itself as a company June. (She says she wanted to try some- names and pictures from résumés, for trying hard to hire women, blacks, thing new.) Pinterest says it focused example. Some now want to do more and Latinos. In 2015 it published a set on hiring women for more senior posi- than cover their eyes. of ambitious goals, including hiring tions, which take longer to fill, and Twitter has set specific hiring women for 30 percent of its open engi- that its targets are meant to be chal- goals. Facebook is giving recruiters neering jobs. The pinboard site met lenges. “Setting public goals focused double the credit for “diversity hires.”

ILLUSTRATION BY SIMON ABRANOWICZ SIMON BY ILLUSTRATION some goals—including that at least and encouraged the team to have more Microsoft, whose proportion of Technology Percentage of Pinterest engineers 22% hired last year who are women women hired keeps falling, is tying dominate Valley engineering depart- interview process, Srivastava asked the manager bonuses to diversity hiring. ments to sympathize with concerns four guys why they were interested in Even companies such as Penny, a four- about equality of opportunity, Chou her. They listed some aspects of her man personal-finance startup in San acknowledges. But at Pinterest, she personality, and they were blunt: It was Francisco, are trying to account for says, the pressure to meet public goals also because she’s a woman. the value of other perspectives. These made a difference. “That internal con- “I liked that they didn’t tiptoe around businesses embrace affirmative-action versation—‘We’re not going to hit this, that,” she says. She started on Jan. 9. hiring, though most are careful not to and it’s going to look really bad if we —Ellen Huet call it that. don’t’—made people haul ass and get The bottom line Tech companies are trying to “I have quite a few clients saying, their s--- together,” she says. hire more aggressively for diversity, though they ‘We want to take it one step further,’ or Things haven’t gone as well at typically use language that disguises their efforts. saying, ‘Listen, we did the unconscious Facebook, where former recruiters say bias thing, and we didn’t get a lot out of they were told to make diversity a prior- it,’ ” says Y-Vonne Hutchinson, a diver- ity in 2015. The numbers remain pretty sity consultant for tech companies and much flat: 17 percent women in tech- another co-founder of Project Include. nical jobs, 3 percent Latino, 1 percent Social Media While companies studiously avoid black. Two former recruiters, who When a Facebook Page words like “affirmative action” and asked not to be identified because they “quotas,” she says, “It’s happening in a weren’t authorized to discuss the work, Matters to Facebook way that wasn’t happening last year.” say they blame the circle of engineer- Slack, the $3.8 billion workplace chat ing leaders who have veto power over startup, practices “intentional hiring,” every offer and weren’t held to the according to Leslie Miley, its direc- same goals. Facebook says its interview- tor of engineering. “What I want is a ers take a training course on bias and level playing field,” he says, adding that it’s working to improve the numbers. his criteria can include such factors as Hiring with an eye to diversity doesn’t whether candidates are veterans, went always yield the best results, say two to community colleges, or were the first former employees at GitHub, a site 28 in the family to get a degree. Slack has where coders store and share work. pushed its proportion of women engi- They say an internal diversity-focused Mark Zuckerberg’s mix of family neers to 24 percent from 18 percent team created in 2015 sometimes drove and business has a lot of help since 2015. Stacy Brown-Philpot, the hiring managers to focus too much on chief executive officer of TaskRabbit, a candidate’s background and miss out “His image in the digital domain who is black, said in October her on the ideal person for the job. GitHub needs to be controlled” company needs to “overindex” some declined to comment. groups to fulfill her pledge to make its Still, the best employees aren’t always When Facebook went public five years staff look like America. “I don’t know if the ones who ship code the quick- ago, the world had a pretty vivid picture I would say it’s affirmative action,” she est, says Mitchell Lee, co-founder of of who Mark Zuckerberg was. As much quickly added. TaskRabbit is inching Penny, the personal-finance startup. as anything, that image was of Jesse toward a staff that, like the U.S., is Penny’s first four employees were Eisenberg’s fictionalized performance 13 percent African American. twentysomething dudes with similar as Zuckerberg in The Social Network: Hutchinson, a black woman ideas about how to script their financial an intense, socially inept kid billionaire whose mother got a federal adviser chatbot. So Lee spent the fall who always wore a hoodie, whether he job partly because of affir- looking for a fifth person to broaden the was meeting with financiers or trying mative action, says while bot’s sensibility. He rejected the hypo- to screw a co-founder in court. Over she’s conscious of clients’ thetical of a fifth same-y guy who was the past couple of years, Zuckerberg sensitivity to the term, equally qualified. “Somebody with a has made a concerted effort to steer his Silicon Valley’s faith in diverse background and a totally differ- image in a different direction. meritocracy hasn’t gotten ent perspective is more qualified for the Near the end of 2014, he began the job done: “Affirmative position,” he says. holding Q&A sessions with groups action gets a lot of blowback, Facing less pressure to be politic than of people wherever he was traveling but it was one of the most Facebook or Slack, Lee isn’t shy about around the world, fielding softballs successful ways of getting using the words “affirmative action.” ranging from lessons on startup- people from under- In December, after sifting hundreds of building to his favorite pizza top- Chou represented groups résumés, he hired Vertika Srivastava, pings. Those town halls have evolved into jobs and insti- an Indian American woman who went into near-daily posts on Zuckerberg’s tutions they were to the University of Michigan, devel- own Facebook page, mixing news of excluded from.” oped software at consulting company company milestones with personal It can be difficult Accenture, and has little experience epiphanies, soft-focus photos from for the white and with Ruby, Penny’s main program- his life as a new dad, and responses to

Asian men who ming language. At one point during the user comments. “What he’s learned (1) APPLE COURTESY (8); GETTY IMAGES (10); BLOOMBERG PHOTOS: 731; BY ILLUSTRATION PHOTO (1); GETTY IMAGES LEFT: FROM “If an 18-year-old Technology thinks he’s coming across in an authentic way, over the last two years is that his that’s really workplace inequal- improve his understanding of their image in the digital domain needs something” ity and her husband’s communities. (By contrast, in 2011 his to be controlled,” says David sudden death. And within goal was to eat meat only if he’d killed Charron, who teaches entre- Facebook, it’s an article it himself.) The CEO is also spending preneurship at the University of of faith that Zuckerberg’s more time meeting with diplomats and California at Berkeley. “And he’s simply image is pretty much synonymous beginning to figure out how to invest growing up.” with the company’s, employees say. 99 percent of his personal fortune— Zuckerberg has help, lots of it. If people think Zuckerberg is innova- about $2 billion in cash and other Typically, a handful of Facebook tive and charming, so is Facebook. That assets, plus $52 billion in Facebook employees manage communica- may help explain the PR team’s more stock—in philanthropic causes. tions just for him, helping write his ambitious recent efforts to compare the With all that in mind, it’s fair to posts and speeches, while an addi- CEO to Iron Man. wonder whether Zuckerberg wants to tional dozen or so delete harassing In December, Zuckerberg, his wife, run for public office. He isn’t saying, comments and spam on his page, say his baby daughter, his parents, and but his online mix of serious business two people familiar with the matter. his dog all appeared in a series of and dad jokes can’t help but feel a little Facebook also has professional pho- videos dramatizing his yearlong effort political. For a point of comparison, tographers snap Zuckerberg, say, to create a smart-home device akin check out Barack Obama’s social media taking a run in Beijing or reading to to Amazon.com’s Echo. Zuckerberg accounts sometime. —Sarah Frier his daughter. Among them is Charles dubbed the project Jarvis, as in the AI The bottom line There are more than a Ommanney, known most recently for butler that Robert Downey Jr. uses in dozen employees writing Zuckerberg’s posts or his work covering the refugee crisis for the Marvel movies. scouring the comments for spammers and trolls. the Washington Post. Company spokes- The Facebook team shot one video woman Vanessa Chan says Facebook is from Zuckerberg’s POV, one from that an easy way for executives to connect of his wife, Priscilla Chan, and one with various audiences. from that of Jarvis, voiced by Morgan While plenty of chief executive offi- Freeman. There are some cringewor- Software cers have image managers, the scale of thy moments, including the one after Holding Down the this team is something different. So is Zuckerberg asks Jarvis to play a good its conflation of Zuckerberg’s personal Nickelback song, and Freeman’s voice Costs of the Cloud 29 image with that of his company, the says there aren’t any. diaper-changing photos next to the user Groans notwithstanding, the PR blitz Analytics startups help manage growth stats. “I don’t know that there seems to be working. Zuckerberg’s companies’ server needs are a lot of other business leaders that posts typically get at least a couple would find the same level of comfort hundred thousand shares; the Jarvis “I didn’t have any tools sharing their personal and business video clocked more than a million. beforehand. I was basically blind” stuff in the way that he does,” says USC’s Cook says his 18-year-old son Fred Cook, director of the University of follows Zuckerberg and reported Rich Sutton knew he was spending Southern California Center for Public that “he seems like a regular guy.” too much renting server space. He’s Relations, who has worked with Jeff “If an 18-year-old thinks he’s coming a vice president for engineering at Bezos and Steve Jobs. across in an authentic way, that’s really Proofpoint, a $3 billion maker of Facebook’s a little different in that something,” says Cook. cybersecurity software that boosted its respect. Chief Operating Officer Sheryl Jarvis was Zuckerberg’s personal revenue 41 percent last year, accord- Sandberg has used challenge for 2016. His stated goal this ing to analyst estimates—nice, but well her page to discuss year is to travel to all 50 U.S. states and shy of its attendant rise in cloud com- Digits puting costs. Proofpoint rents about 2,000 servers from Amazon Web Services (AWS), Amazon.com’s cloud arm, and paid more than $10 million in 2016, double its 2015 outlay. “Amazon Web Services was the largest ungov- erned item on the company’s budget,” This year Apple will Sutton says, meaning no one had to sell $3.1 billion worth of AirPods, researcher approve the cloud expenses. Treﬁs estimates So he’s signed up with Cloudyn, one 41% of a growing number of software startups trying to help businesses control Apple’s share of revenue in the growing wireless-headphones market, according to researcher Slice Intelligence. That includes AirPods and their cloud costs. For a monthly fee Beats. No. 2 Bose has 16 percent. of 2 percent to 3 percent of a client’s AWS costs, Cloudyn’s software assesses how much server power the company needs and offers suggestions to In Big Bang Legends, players Technology build quarks into atoms to ﬁght antimatter monsters

reduce its bills. Sutton says he’s been outsourcing giant Infosys able to keep spending unchanged for over the summer. six months using Cloudyn, which has The companies are facing helped him compare costs and figure two serious risks. First, out just how many server-hours a given some clients can cut their worker or project uses, making it easier costs only so much, says to pick the right volume discount. Sophia Vargas, an analyst at Cloudyn, like rival Cloudability, Forrester Research. Second, has been around for five years. cloud providers have been CloudHealth is four years old; pioneer refining their own cost-management Lauri Konttori, the Angry Birds maker’s Cloud Cruiser, seven. Their services tools. “Our customers have access to creative director, left to start their have become less niche now that some a number of specialized tools” for this venture with backing from London 600 companies in the Fortune 1000 purpose, says AWS’s marketing vice startup accelerator Founders Factory use cloud services from the likes of president, Ariel Kelman, including and Rovio’s co-founder Niklas Hed and Amazon, Microsoft, and Google. checklists of ways to cut spending. then-marketing chief Peter Vesterbacka. Researcher IDC estimates about Still, cost calculators from one cloud Lightneer decided to skip the three 20 percent of companies that use the provider or another will always be R’s. The company’s first game,Big cloud also use these kinds of cost- less trustworthy than those from a Bang Legends, attempts to familiarize cutting services. third party, says IDC analyst Robert children as young as 4 years old with Because the cloud buyers’ needs Mahowald. Especially if battles among particle physics by building the con- and the sellers’ prices can change Amazon, Microsoft, and Google grow cepts directly into its structure. Players quickly—AWS’s prices have changed fiercer, he says, “it’s convenient to have fire a high-energy particle beam to about 75 times in the past eight years, a low-cost intermediary.” —Olga Kharif capture quarks, then assemble them though they’ve started to stabilize— into protons to form atoms of various The bottom line About 1 in 5 businesses that rent these services can make the $97 billion computing capacity through the cloud now use elements. Each of the first 10 elements server-rental marketplace a lot easier specialized software to keep better tabs on costs. of the periodic table, from hydrogen to navigate. “We are helping you with to neon, is represented by a different what to buy and when to buy it,” says animated character with a distinct per- 30 Cloudability Chief Executive Officer sonality whom players can use to battle Mat Ellis. monsters made of antimatter. There are Ellis’s company, based in Portland, Education no quizzes here. Ore., says it can save the average cus- From Angry Birds to Parents shouldn’t expect their kinder- tomer 20 percent or more on cloud gartner to finishBig Bang Legends with services and that it managed about Particle Physics the equivalent of a physics degree, but it 10 percent of the $8.7 billion spent on will make key terms more familiar, says AWS around the world in the first nine Deborah Quazzo, co-founder and man- Rovio veterans bet they can make months of 2016. Virtual-reality tech- aging director of GSV Acceleration, a learning game kids want to play nology maker the venture fund that led a €2.8 million Jaunt VR, which “Something like this could be quite ($3 million) funding round for Lightneer uses as many as useful in building conﬁdence” last year. “Something like this could be $97 a few thousand quite useful in building confidence, so billion AWS servers at The problem with most educational that when children get to secondary once, will save video games is that fun takes a back school and they have to learn the ele- $250,000 in a year seat to education. Games such as ments for physics and chemistry, they Current estimated with CloudHealth’s Math Blaster and Number Munchers aren’t intimidated,” says Keith Taber, size of the public help, estimates are little more than glorified quizzes, a professor of science education at the cloud computing Simon Wynn, and it’s no wonder kids would rather University of Cambridge. marketplace Jaunt’s vice pres- play Candy Crush or Angry Birds, says The subatomic focus came from a ident for techni- Lauri Järvilehto. Ideally, he says, the suggestion by Vesterbacka, who, along cal operations. Even as Jaunt’s server educational component should be with investing, has joined Lightneer as needs have grown, its AWS costs have “invisible”—kids should learn without a marketing adviser. While at Rovio, he remained nearly flat, says Wynn. “I realizing it. negotiated education-themed Angry didn’t have any tools beforehand,” he Järvilehto is co-founder and chief Birds licensing deals with NASA and says. “I was basically blind.” executive officer ofLightneer , a CERN, the Geneva nuclear research lab Cloudability and CloudHealth mobile-gaming startup betting it’s that runs the Large Hadron Collider, both raised more than $20 million in developed the right spoonful of sugar. the world’s most powerful particle venture capital in 2016, bringing their Like much of his team, he comes from accelerator. CERN scientists agreed to funding totals to about $40 million Rovio Entertainment, the Finnish advise Lightneer. each. Cloudyn and Cloud Cruiser maker of Angry Birds. After Rovio dis- After an early test of Big Bang have each raised about half that; solved its educational-games division in Legends in a classroom of 10-year-olds,

Cloudyn received $4 million from IT 2015, Järvilehto, then a consultant, and Järvilehto’s heart sank when one girl (4) LIGHT COURTESY (1); LIGHTNEER COURTESY LEFT: FROM Technology

“I had invested in a lot of good said she “didn’t learn anything” playing lenses and the game. But when he asked the 25 stu- cameras, and dents how many quarks are in a proton, Innovation I started to wonder, ‘Why is every kid raised a hand. “It’s then I real- it these need ized that this idea of invisible learning to be so big?’ ” was actually going to work,” he says. Eric Klopfer, a professor who heads Pocket DSLR the learning-game-focused Education Arcade at MIT, says most kids can’t Form and function Innovator Rajiv Laroia really learn even basic science concepts The Light L16 aggregates images from multiple Age 55 by osmosis. “Learning is a conscious phone-camera-size sensors to create pictures Co-founder and chief process, and the game or surround- with a resolution as high as 52 megapixels, a technology officer of Light, a little higher than the best digital single-lens reflex three-year-old, 75-employee ing experience needs to make it so,” (DSLR) camera on the market. he says. Still, there’s research to back startup in Palo Alto Järvilehto. In a 2011 study, academics from Sheffield Hallam University in 1. the U.K. found that building math con- Origin Laroia, an electrical engineer cepts directly into a game about fighting and amateur zombies led kids to play longer, and do photographer, better on a subsequent math test, than conceived of the a version of the game that only intro- camera in 2012 Funding Light while serving as has collected duced the concepts in periodic quizzes. entrepreneur-in- $64.7 million from Big Bang Legends made its debut in Point The L16 is about the residence at venture investors including the Finnish iOS App Store in December, size of a smartphone, but capital firm Charles Charles River thicker. A photographer points River Ventures. Ventures, Bessemer where it quickly topped the educa- the face, with its 16 sensors, Venture Partners, tional category. Lightneer says it’ll start at a subject, then uses the Eclipse Ventures, and putting the free game in more coun- touchscreen to zoom in or out. Google’s VC arm. tries in the spring. Its revenue comes from in-app ads, mostly from other 31 game makers. There’s also an animated TV series in the works, and the element characters were designed with cuddly toy potential in mind. If Big Bang Legends succeeds, Lightneer is planning games incorpo- rating chemistry and biology. What’s Järvilehto’s definition of success? “We’d like to get this game into 100 million hands,” he says. That would make Big 2. Bang Legends second only to Minecraft in the world of educational games. It sounds less crazy, he says, when you consider that most Lightneer staffers have worked on more conventional games that racked up more than a Production The billion downloads. company plans to Lightneer’s pitch to kids and their begin making the L16 Shoot Pressing the shutter parents is a less tested marketing strat- by the middle of this button fires 10 sensor year. Light will offer modules of varying focal egy than selling directly to schools, as it on its website for lengths, depending on the many educational-game makers have $1,699. A comparable selected zoom. An internal done, says Lee Banville, editor of indus- DSLR camera runs processor stitches the about $3,000. images together to produce try news site Games and Learning. a single image with uniformly “On the other hand,” he notes, there’s high resolution. Minecraft, “which was never built to be Next Steps a learning game.” —Jeremy Kahn Laroia says future Light cameras will have telephoto capabilities. He also wants to partner with other manufacturers to bring the technology to smartphones, The bottom line Big Bang Legends will test whether Lightneer’s mobile-game experts can self-driving cars, and security applications. “What I saw with the preproduction make learning about quarks a little bit fun. L16, compared to a professional-level Canon DSLR, was really astounding,” says Adam Ottke, an editor at photography news site Fstoppers. “To have that Edited by Jeff Muskus power in a ‘snapshot’ camera is something entirely new.” —Michael Belfiore Bloomberg.com Markets/Bathroom Finance January 23 — January 29, 2017 three times Yells on today phone

Stays Logs on at late midnight 32 Four-hour lunch break

A startup asks ﬁnancial companies to help it build a database of signs a trader could go rogue “It really doesn’t pay to be insular when it comes to compliance” You’re young and want to get ahead. Hedge fund Marshall Wace and and they are the ones who are going First in and last out of your Wall interdealer broker TP ICAP are to get fined next.” Street office. You work weekends and already using the software to monitor Finance companies are spending as message colleagues with trading ideas employees, and some of the biggest much as one-fifth of their revenue on at all hours. Guess what? You’ve just investment banks and commodi- compliance, hiring tens of thousands ticked off some of the boxes that may ties dealers in the world have begun of investigators, out-of-work traders, mark you as a potential rogue trader. testing it. After paying fines of more and former intelligence officers to sift Former Goldman Sachs research than $200 billion in the past eight through employee communications. analyst Erkin Adylov is building a years for a catalog of failings—money Under rules that came into effect in library of trader behavior, based laundering, market manipulation, ter- March 2016, senior managers in the on case histories of hundreds of rorist financing—banks are looking to U.K. can be held accountable for the past miscreants, for banks looking improved trader surveillance to keep actions of their underlings and even for red flags. Using thousands of them out of regulators’ crosshairs. face jail sentences. inputs, including stress levels in “If you don’t know what your Behavox uses machine learning, voice recordings and the frequency employees are doing, then you’re also known as artificial intelligence, to of visits to the staff canteen, Adylov vulnerable,” Adylov, a rail-thin, scrutinize every aspect of an employ- and his team at London-based startup 33-year-old native of Kyrgyzstan, ee’s working life. Finance workers’ Behavox grade employees on how says in the rapid staccato typical of activities —from e-mails to ID card likely they are to go bad before they traders. “Some banks don’t seem to swipes—are already frequently logged. do anything wrong. want to know how exposed they are, The technology allows computers to Homebuilders cheer the possible dawn of deregulation 35

teach themselves how to collate and faces. The regulatory crackdown His idea was to bring open source analyze huge volumes of data, flagging that has reshaped finance since the collaboration and machine learning to for further investigation anything that crash may ease with the election of bank compliance. deviates from the norm for individu- Donald Trump as U.S. president. The Turning some compliance functions als or their peer groups. This could be billionaire has pledged to roll back the over to software could help financial something as seemingly innocuous as 2010 Dodd-Frank Act. If scrutiny of companies save money. “Even if regu- shouting on the phone, tapping into banks relaxes, that could curb spend- lations are relaxed, the business case a work computer in the middle of the ing on compliance. for reducing the expenses of compli- night, or visiting the restroom more “Six years of legislation would take ance will remain very compelling,” than colleagues. time to unwind, but the tone at the top says Mike Baxter, a partner in Bain & The system checks these behaviors in the U.S. has changed dramatically,” Co.’s financial-services practice. But against case studies of past traders says John Harvie, a director at con- Adylov’s ambitions go beyond cost who have strayed from the straight sulting company Protiviti. “This could efficiency. Banks today are “all over and narrow. Behavox has built algo- change the way regulators are able to the place, all doing compliance differ- rithms derived from 16 years of pub- operate, and not just in the U.S. Under ently, with no way to collaborate,” he licly available enforcement cases Brexit, the U.K. could also end up with says. “These guys just can’t solve the against traders and banks all over the less regulatory pressure as London problem on their own.” —Gavin Finch world. After detecting anomalous tries to compete with other markets.” and Edward Robinson conduct, it gives it a risk score based None of that daunts Adylov, who’s The bottom line Financial companies spend in part on that person’s past record no stranger to adversity. Born in a as much as 20 percent of their revenue on of compliance with the rules. It also small town in what was then part of compliance. AI may help them spot red flags. maps relationships among employees the Soviet Union, he was a goatherd and flags potential problems, such as until he won a George Soros grant at a trader having a particularly close the age of 16 to study in the U.S. for a relationship to someone in the back year. Later his parents, who earned 33 office who monitors trades. $120 a month, sold their home for Money Management While other companies use similar $2,300 to pay for a one-way plane How Well Is Vanguard’s technology to watch trading floors, ticket to Hawaii for their son, who’d Behavox is compiling a central repos- secured a scholarship at Hawai’i Boss Paid? itory of behavioral patterns accessi- Pacific University. ble to all clients. Adylov calls it the Adylov worked four jobs to fund his Its CEO is said to have earned conduct risk exchange. When a client studies, including one as a gardener more than $10 million in 2015 discovers an employee has done for money manager Clinton Bidwell III. something wrong, Behavox encour- Impressed with Adylov’s intelligence “It is … a competitive advantage ages the firm to share details on an and charm, Bidwell took him on as a not to be laying it all out there” anonymous basis. research assistant. The complexity and His challenge is to per- technical nature of the job With $3.9 trillion in assets under suade companies to share appealed to Adylov, and management, index fund pioneer potentially embarrass- soon the only thing he Vanguard Group is an influential ing information about wanted to talk about was shareholder, able to weigh in on how their inner workings. If company stocks. “It was executives across corporate America he can build a network almost like I discovered should be paid. At the same time, big enough—more than a new world that I didn’t because of its unique corporate struc- the three companies that know existed,” Adylov says. ture, Vanguard itself has legions of have signed up so far— He won a scholarship indirect owners—including retirement it could change the way to the London School of investors who have poured money into banks police themselves. Economics and Political such funds as the Vanguard 500 Index “With this system, users Science, after which he and Vanguard Total Stock Market benefit from eyes and joined Goldman Sachs Index. The company is owned by its ears across the industry in 2007 in London as an funds, which in turn are owned by Adylov and the behaviors that are being equity research analyst. Fast- their investors. Yet Vanguard has been spotted and fed into it,” says Conor forward seven years, and Adylov able to keep its own management’s Kiernan, chief technology officer at was a top money manager at hedge pay private, including that of Chief Marshall Wace in London. “It really fund GLG Partners. He then decided Executive Officer Bill McNabb. doesn’t pay to be insular when it he wanted a less predictable career, In early 2015, McNabb penned letters comes to compliance.” and he set up Behavox in 2014 from to boards at Vanguard’s 500 biggest

OPPOSITE: GETTY IMAGES; THIS PAGE: JASON ALDEN/BLOOMBERG JASON PAGE: THIS GETTYOPPOSITE: IMAGES; Secrecy isn’t the only hurdle Adylov his apartment in South London. holdings—the company owns about Markets/Finance

5 percent of every publicly traded isn’t public but “client-owned,” accord- Likewise, she wrote, the independent U.S. business—explaining his thoughts ing to its website. The company says board of directors of the Vanguard on governance and encouraging them this structure helps it drive fund funds set pay for the company’s senior to pay “sensible compensation tied expenses lower—it charged an average officers with “Vanguard shareholders’ to performance.” While the Valley 0.18 percent of assets per year in best interest in mind.” She declined to Forge, Pa.-based money manager votes 2015, far below the industry norm, comment further. to approve the vast majority of execu- and some of its Holding down compensation for Vanguard assets tive pay programs, it has hundreds of under management biggest funds cost executives such as McNabb and other discussions with members of boards just 0.05 percent. employees would be one way to each year about executive compensa- $4t Other asset man- reduce fund shareholders’ costs, but tion and governance. agers face the those investors also have an interest “It’s an interesting twist,” says David conflict between in performance. Vanguard has to Larcker, a professor at the Stanford $2t customers wanting compete for talent in the richly paid Graduate School of Business who the lowest possible financial-services industry. studies governance and executive pay. costs and owners About two-thirds of its assets are in “They’ve begun actively challenging 0 requiring a profit. index funds and ETFs, which passively companies more.” But Vanguard’s 1975 2016 At Vanguard, those track market benchmarks instead of lack of transparency on pay, he adds, two parties are one trying to pick individual stocks and makes it hard for outsiders to judge if it and the same, so when the company bonds. Such funds are less expensive has its “own house in order.” becomes more cost- efficient, it returns to run, but not as autopilot as they may McNabb received $10 million to that gain in the form of lower fees. sound. “Managing index funds involves $15 million in compensation for 2015, Vanguard hasn’t reported figures on a very specialized skill set and a good according to people familiar with the pay to senior officers since the 1990s. degree of experience, because markets matter. That’s not out of line with McNabb has argued that keeping are living, breathing creatures,” says the pay enjoyed by the chiefs of two the company’s compensation under Ben Johnson, director of global ETF big competitors with large index wraps is good for it and its fund inves- research at Morningstar. fund product lines. New York-based tors. “It is actually, from my perspec- A key element of Vanguard’s exec- BlackRock, which runs the popular tive, a competitive advantage not to utive pay is a deferred compensation 34 iShares exchange-traded index funds be laying it all out there,” he said on program, set up by founder John and is the only money manager Oct. 18 on Bloomberg TV. “Keeping Bogle in 1983. It pays out an annual bigger than Vanguard, with $5.1 tril- that part of the equation private— dividend on partnership units—a lion in assets, paid CEO Laurence Fink between us and the individual—it’s kind of phantom stock—that’s based $25.8 million in 2015. Joseph Hooley been a really good thing in terms of on business results, relative fund of State Street, with $2.3 trillion in hiring and attracting talent.” performance, and cost efficiency. assets, received $11.3 million. Vanguard spokeswoman Arianna McNabb has worked for Vanguard Fink’s and Hooley’s pay packages Stefanoni Sherlock said in an e-mail for 31 years and was named CEO in are known because they that “we believe that determining the 2008, two weeks before the collapse work for publicly traded specific structure and pay is a decision of Lehman Brothers. Since that year, Quoted companies. Vanguard best left to the companies’ boards.” Vanguard’s assets have grown by

“I’m telling everybody to get a Twitter account. … It would not surprise me [if] over the course of the next month you get strong U.S. data, dollar goes up 3 percent, and three days later the president of the United States is going to be tweeting at 3:00 in the morning saying guess what, the dollar’s now overvalued.”

David Woo, a foreign exchange strategist at Bank of America Merrill Lynch, describing his advice to traders in a Bloomberg TV interview

The dollar dropped on Jan. 17 after Donald Trump told the Wall Street Journal the currency was too strong ILLUSTRATION BY KURT WOERPEL Confidence amongbuilderssurgedConfidence less thanhalfof what itwasin2006. still of single-family homesis struction down. butcon- Homebuilding rising, is melt- housing crash andthefinancial following the for homeconstruction try, after what theyseeasalostdecade Huffines hopingforaresurgent indus- White House, has the government.” risk tothehousingmarket rightnow is Huffines says ofTrump. biggest “The these out-of- near a51-year low. rein “He can in home’s as cost, ers say, ofa accountingforaquarter Regulation housingprices,build- raises piece forthe1,000-home subdivision. create alake heenvisions asacenter- Engineers hasbeenblockingadamto clean water. TheU.S. Army of Corps streambeds, endangered and species, wetlands,adding torulesprotecting in Texas, blamesBarackObama for pledge tocut tial developer expects himtohonora That’svaluable. because theresiden- Dallas area pastureland much more Trump’s madehis instantly election it, Donald As DonHuffines sees Trump for aMoodLift Homebuilders Lookto Housing transparent onitsown compensation. shareholder voice onexecutive pay, butitisn’t The bottom line company. year, according tofigures from the already low 0.2 percent ofassetsper been shaved down further, from an average costofVanguard’s fundshas inflows. During McNabb’s tenure, the arecordattracted $305 billioninnet In2016thecompany’sucts. funds index fundsandotherlow-cost prod- matic shift ofinvestor dollarsinto trillion,driven by inpart adra- $2.8

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University / Finance

35 HOW TO MAKE A €367 MILLION LOSS DISAPPEAR

36 A DUBIOUS TRADE LEADS TO A CRIMINAL TRIAL FOR DEUTSCHE BANK By Vernon Silver and Elisa Martinuzzi

On Dec. 1, 2008, most of the world’s banks were still panicking enthusiasm. “We are not discussing [our] balance sheet here,” he through the financial crisis. Lehman Brothers had collapsed. said. (Bailey, through a spokesman, denies he made the remarks.) Merrill Lynch had been sold. Citigroup and others had required Outside the room, one of Faissola’s longtime colleagues was multibillion-dollar bailouts to survive. But not every institu- raising questions about the deal. William Broeksmit, a manag- tion appeared to be in free fall. That afternoon, at the London ing director who specialized in risk optimization, was concerned outpost of Deutsche Bank, the stolid-seeming, €2 trillion about the winner-loser construction. A Chicago-born son of a German powerhouse, a group of financiers met to consider a United Church of Christ minister, Broeksmit had decades earlier proposal from a team led by a trim, 40-year-old banker named been a pioneer in interest rate swaps, the financial instruments Michele Faissola. that had rewritten the possibilities—and profitability—of invest- The scion of an Italian banking family, Faissola was the head ment banking. But Broeksmit, 53, was also against reckless deriv- of Deutsche’s global rates unit, a division that created and sold ative deals, which is how he viewed Faissola’s proposal, according financial instruments tied to interest rates. He’d been studying to a person familiar with his thinking. Eleven minutes after the the problems of one of Deutsche’s clients, Italy’s Banca Monte dei meeting began, Broeksmit e-mailed one of its attendees with Paschi di Siena, which, as the crisis raged, was down €367 million a warning about the Paschi trade and its “reputational risks.” ($462 million at the time) on a single investment. Losing that The message had no effect. When the meeting ended after much money was bad; having to include it in the bank’s yearend almost 90 minutes, Faissola got a go-ahead—setting in motion a report to the public, as required by Italian law, was arguably much scandal that has resulted in a criminal trial now under way in worse. Monte dei Paschi was the world’s oldest bank. It had been Milan. A judge there has accused Deutsche Bank and five former operating since 1472, not long after the invention of the printing executives, including Faissola and Dunbar, of colluding with press, when the Black Death was still a living memory. If inves- Paschi to falsify its accounts in 2008. (None of Deutsche’s top 37 tors were to find out the extent of its losses in the 2008 credit managers at the time has been accused of wrongdoing. Faissola crisis, the consequences would be unpredictable and grave: a run declined to comment for this article, as did both banks. Dunbar on the bank, a government takeover, or worse. At the Deutsche didn’t respond to requests for comment.) meeting, Faissola’s team said it had come up with a miraculous Eight years after the financial crisis, the stakes could hardly be solution: a new trade that would make Paschi’s loss disappear. higher. Being the biggest bank in Germany makes Deutsche the The bankers in the room had seen some financial sleight of most important bank in Europe, and the Paschi trial is an uncom- hand in their day, but the maneuver that Faissola’s staffers pro- fortable reminder that its operations, already with barely enough posed was audacious. They described a simple trade in two parts. capital to meet industry standards, are threatened by persis- For one half of the deal, Paschi would make a sure-thing, money- tent scandal. Deutsche is also facing investigations into whether making bet with Deutsche Bank and use those winnings to extin- it helped clients launder billions out of Russia. This month the guish its 2008 trading losses. Of course, Deutsche doesn’t give bank agreed to pay $7.2 billion to resolve a U.S. probe into its sub- away money for free, so for the second half of the deal, the Italians prime mortgage business, admitting it misled investors. Deutsche would make a bet that was sure to lose. But while the first trans- has paid more than $9 billion in further fines and settlements action was immediate, the second would play out slowly, over related to claims of tax evasion; violating sanctions against Iran, many years. No sign of the €367 million sinkhole would need to Libya, Syria, Myanmar, and Sudan; rigging the $300 trillion Libor show up when Paschi compiled its yearend financial reports. market; and other alleged breaches of the law. The audience for the proposal that day was Deutsche’s global The strain has intensified concerns about Deutsche’s market risks assessment committee, a top-level panel that reviews balance sheet, which contains one of the world’s largest pots transactions with legal, regulatory, and reputational consider- of most-difficult-to-quantify risk. The bank says it’s trimmed ations. Respectively, that means asking: Is a given trade within the some of its exposure, as John Cryan, who became chief exec- law? Is it within the looser framework of industry rules and stan- utive officer in 2015, attempts to clean up his predecessors’ dards? And even if so, can Deutsche pull it off without maiming messes. But if Deutsche ever requires government help, such as its brand—its basic ability to operate as a trustworthy member of a bailout, the effects could be catastrophic for more than share- the global financial system? holders. In recent years, as the euro community has faced one sol- To at least one member of the committee, the possibilities vency problem after another in Greece, Portugal, and elsewhere, of Faissola’s trade seemed wondrous. “This is fantastic,” said Germany’s Angela Merkel has been chief scold. She’s insisted on Jeremy Bailey, Deutsche’s European chairman of global banking, fiscal pain for irresponsible actors and pushed for banking rules according to testimony of an executive who later recounted the that keep taxpayers from picking up the bills again for reckless exchange for an internal disciplinary panel. “You can book a financiers. Her government coming to the aid of Deutsche Bank [profit] in front and spread losses over time?” Bailey added. “We after lecturing others on restraint would be the ultimate euro zone should do it for Deutsche Bank.” irony. In a worst-case scenario, it could trigger a furor that Ivor Dunbar, the meeting’s chairman, curbed Bailey’s finally brings down the continent’s currency, already made fragile by Brexit, refugees, and the rise of nationalist politicians. derivatives trader earned a bonus of almost £90 million (then The bank’s deal with Paschi is a microcosm of how $130 million) in 2008 alone. Deutsche bankers also increased Deutsche’s embrace of derivatives, questionable accounting, their bonuses in the runup to the crisis by creating and selling to and slow-walking of regulators have eroded the market’s trust clients mortgage securities that were marketed as high-quality to the point that no one really knows how close the company is investments but were in fact loaded with home loans destined to the edge. What exactly happened in the days surrounding the to go bust. For clients, Deutsche became a go-to bank when they December 2008 meeting in London is key to the Italian prosecu- wanted risk and complexity. tion. The German financial-markets regulator, known as BaFin, already tried to get to the bottom of the matter, commissioning In May 2002, when it was 530 years old, Monte dei Paschi asked an independent audit in January 2014. Deutsche Bank to sell it something complicated. Paschi had The ensuing report has never been made public, but recently listed its shares on the Italian stock exchange and was Bloomberg Businessweek obtained a copy. It shows that auditors under pressure to grow. It owned a piece of another bank known asked Faissola what happened that afternoon in London. Other today as Intesa Sanpaolo and wanted to convert some of that stake participants recalled details and dialogue, the report says, but into cash for acquisitions, while still benefiting from any rise in Faissola drew a blank about the event he’d helped run. Broeksmit Intesa’s shares—a kind of have-cake-and-eat-it-too arrangement. wasn’t interviewed. On Jan. 26, 2014, the day before the audit It was exactly the kind of bespoke financial product the new, risk- began, his body was found at his London home, hanging from friendly Deutsche was growing fat on. The two banks created a a dog leash. venture called Santorini Investments— essentially, a derivative bet in the form of a company. The bet would pay off if Intesa shares Founded in 1870, Deutsche Bank was for most of its existence rose and would lose value if they fell. Later restructuring made content to take deposits and make loans; in the 1920s it partic- Paschi the sole shareholder. ipated in the founding of the airline Lufthansa and the merger The switch meant that in 2008, when bank stocks tanked of automakers Daimler and Benz. Then, in the 1980s and ’90s, in the worldwide financial crisis, Paschi took all of the losses, Deutsche watched as rival lenders in London and across the U.S. which swelled from €180 million in early October to more than turbocharged profit growth by snapping up boutique investment €300 million in the following weeks. The bank’s own shares were banks and hiring or building teams to sell higher-margin financial on their way to losing half their value since the start of the year. If products. To join the bonanza, Deutsche in 1995 hired one of its Paschi included the Santorini loss in its Dec. 31 reports, the con- leaders from Merrill Lynch: Edson Mitchell, a redheaded chain sequences would be dire: Italy’s central bank could take over its smoker from Maine who was nurturing a team of future finan- administration or force a bailout that would wrest control from cial leaders. His crew included Broeksmit, the swaps innovator, its owners, a politically connected Siena foundation. As the losses and Anshu Jain, a prodigy at selling such risky, fee-laden prod- grew, Deutsche executives knew time was running out for Paschi 38 ucts to hedge funds. Three years later, Deutsche made an even to find a solution. Having done the first deal, they went to Paschi more emphatic attempt to buy its way into investment banking’s management with a proposal for a second that would both help culture and profits, acquiring Bankers Trust—a New York deriva- the Tuscan bank and be a new source of fees for Faissola’s group. tives house notorious for its cowboy culture—for about $10 billion. On Nov. 3 they sent Paschi draft contracts for the sure-to-win/ If longtime Wall Streeters gawked at first at the German inter- sure-to-lose trade that straddled the new year. Each prong of the loper, they quickly recognized that Deutsche had adopted their bet simply wagered on an index that was the exact inverse of the aggression and then some: Mitchell and his deputies expanded other. Essentially, the trade had little economic purpose—only Deutsche’s London-based investment banking operation until it an accounting one. made half the bank’s revenue by the turn of the century. That’s typically a red flag to auditors and regulators, and it Mitchell didn’t live to see Deutsche complete its transformation took almost a month for Deutsche to alter the deal so it contained into a financial omnivore. Three days before Christmas 2000, he a small amount of actual risk. The bankers did this by mixing in was riding in a small Beechcraft Super King Air 200 plane along two interest rate triggers—that is, prices to be fed into a formula the coast of Maine toward his vacation home in Rangeley. The that would determine how much money the participants in the wreckage was found the next morning, not far from the summit trade had to pay or receive from each other. But that created a of Beaver Mountain. He was 47. Afterward, Jain took over as head slight possibility that Paschi could win both sides of the bet. To of global markets. One of his deputies was Faissola. mitigate this potential Deutsche loss—as much as €500 million— Faissola represented the next generation in Deutsche’s Deutsche added a third trigger. Underlying the now complex flow- investment banking push. He was born in 1968 in Sanremo, charts of rates, payments, and triggering events was the asset the coastal town whose legendary song contest launched the on which the transactions were to be based: about €2 billion in tune Volare, and his uncle was president of the Italian banking Italian government bonds. association. While running Deutsche’s global rates division in Further illustrating the incestuousness of the deal, Paschi London for Jain, Faissola built his own fortune, at times earning would need to buy the bonds and hand them over to Deutsche tens of millions of pounds a year. He drew the jealousy of British as collateral. Deutsche, for the sake of its own accounting, would co-workers because, as a foreigner, he was able to legally avoid need to sell the bonds to come up with cash that it then would U.K. tax on his bonuses. Faissola’s town house in Chelsea fea- give right back to Paschi to pay off the Santorini loss. And Paschi tured an indoor pool. would buy the bonds in the first place from a third bank that had In the first years of the millennium, Deutsche bankers chased bought them from Deutsche. new sources of riches around the globe. People who piled into By Dec. 1, 2008, Faissola’s group was ready to present the deal uncharted areas or pushed the rules were rewarded handsomely. to Deutsche’s risks assessment committee, which sent it along to Starting in 2005, Deutsche traders in Europe, North America, a final bureaucratic stage: the market risk management approval and Asia manipulated a benchmark interest rate to benefit their committee, where Broeksmit had influence. Top management own derivative bets, according to an indictment made public last had just handed Broeksmit broad authority to police risk year in federal court in New York City. Deutsche’s most profitable across the firm, rehiring him after he’d taken a hiatus as a DEUTSCHE BANKERS WHO PILED INTO UNCHARTED AREAS OR PUSHED 39 THE RULES WERE REWARDED HANDSOMELY MORE THAN $10 BILLION IN TRANSACTIONS 40 NEVER APPEARED ON THE BOOKS consultant. Michele Foresti, a managing director who reported communications chief. At about 9 p.m. on March 6, a bank to Faissola, e-mailed Broeksmit on Dec. 2, copying his boss. “I employee noticed that Rossi was missing from his fourth-floor understand market risk management doesn’t want to give us office. A window had been left open. Authorities found Rossi’s green light to close this transaction,” Foresti wrote, noting the body in a courtyard below. Rossi, 51, wasn’t himself the subject of small chance of a €500 million loss. “I feel the risks are impor- any inquiries, but his home had been searched two weeks earlier tant but we should be able to manage them, could we sit down by police. His death was at first ruled a suicide, but the inquest to discuss as soon as you have 5 mins?” Broeksmit’s reply was has been reopened based on evidence his wife presented, includ- terse: “I think this should be presented to Anshu.” ing security video that shows Rossi fell out backward. Anshu Jain was by then co-head of investment banking at Several months after Rossi’s death, in January 2014, Broeksmit Deutsche. Foresti sent another e-mail at 3:52 p.m. the next day: was supposed to meet his wife of almost 30 years at a cafe near “still waiting for [committee] approval, faissola is in anshu’s their home in the South Kensington neighborhood of London. office.” What, if anything, Jain knew about the deal was an avenue He didn’t show. When she returned home, she found his body later explored in the German regulator BaFin’s audit. It found hanging from the leash attached to a door. In a dog bed, he’d no evidence to suggest Jain was aware of the transaction and left suicide notes, including one addressed to Jain, his longtime couldn’t conclude whether he’d been involved in its approval. colleague. The New York Post reported last year that the note Jain told the inquiry that he wasn’t part of that process, though to Jain contained an apology. A summary of Deutsche Bank’s he couldn’t rule out having heard about the Paschi transac- own review of the suicide, seen by Bloomberg Businessweek, tion in a general meeting. Faissola said he couldn’t recall having doesn’t mention the note and says the review found no direct talked with Jain about the transaction. Faissola could have been link between Broeksmit’s death and his work at Deutsche. in Jain’s office for many reasons. ( Jain declined to comment for this article. Foresti, who’s a defendant in the Milan case, also BaFin’s auditors interviewed Faissola on Aug. 28, 2014. He told declined to comment.) them he couldn’t recall details of the period in which the Santorini Deutsche’s risk committee signed off on the Santorini project deal closed. Faissola also said he couldn’t recall telling Deutsche’s by the end of the day, after first securing a concession that Paschi lawyers in 2012 that the transaction could be characterized as would sign a memo pledging to inform its own auditors about the “window dressing” Paschi’s financials, as another source had deal and consult its own legal and accounting advisers. The two told the investigators. parties executed the first part of the trade that night by phone, and Faissola laid blame on Paschi and defended his role. “Nobody the rest of the paperwork was signed over the following two days. could have anticipated that the top management of a top The deal allowed Paschi an immediate gain of €364.1 million, European bank, fully regulated, with credible advisors and audi- neutralizing the derivative loss. Deutsche netted about €60 million tors, had allegedly ‘crooks’ on the board,” he told auditors hired in fees, according to documents seen by Bloomberg Businessweek. by BaFin. Faissola left Deutsche Bank in 2015, as did Jain and his Internally, the profits were credited to Faissola’s unit. co-CEO, Jürgen Fitschen. (Neither Jain nor Fitschen is accused 41 Deutsche also benefited from the way it accounted inter- in the Italian case.) nally for its side of the deal. That complex shuttling of Italian In February 2016, Deutsche said BaFin had closed its inqui- bonds? The bank decided that all of the back-and-forth maneu- ries into Paschi and other matters, pointing to changes the bank vers canceled themselves out and did not need to appear on its had implemented and further measures it planned to take. An balance sheet. Deutsche began to apply the practice to transac- overhaul of the management board and the departure of senior tions around the world, totaling more than $10 billion that never executives contributed to the regulator’s assessment that the showed up on its books and making the bank look smaller and company had done enough, a person with knowledge of the less risky than it really was. In September 2009, it was Broeksmit matter said at the time. again who took notice. In an e-mail about a similar deal, he wrote On Oct. 1, 2016, a judge in Milan handed down his indictment in that such accounting techniques “may be a rounding error at this the Santorini affair. The trial, which began with an initial hearing point, but [they are] growing quickly.” in December, is expected to run throughout 2017. Doubts about the financial health of Deutsche Bank have eased, but the stock An anonymous whistle-blower contacted Italian authorities and is still about 80 percent below its 2007 high, and with legal costs the U.S. Federal Reserve about Santorini, and they started par- uncertain, management hasn’t ruled out needing to raise more allel probes in 2011. In the fourth quarter of that year, Deutsche capital. New CEO Cryan is expected to introduce a strategy as appeared to resist the Fed’s questions, and likely because of the soon as February, when the bank announces its final 2016 results, delays and insufficient replies—according to the BaFin audit—the which analysts estimate will barely show a profit. Brought in Fed issued a subpoena in April 2012. to right the ship, Cryan has been contrite. “We didn’t always Jain was promoted to co-CEO the next month. He proposed control ourselves,” he said at a Davos panel on Jan. 17. And those Broeksmit as the new chief risk officer, but had to back off big bonuses? Gone. Senior employees won’t be getting any for after BaFin objected, noting that he’d never managed a large the last year. number of employees. Broeksmit retired in February 2013— Meanwhile, Paschi is about to be nationalized in the biggest out of the bank, but well aware of the mounting investigations bank takeover by the state since the 1930s. And Faissola has into the Deutsche-Paschi deal. In subsequent months he com- kept busy. After his resignation he founded an investment plained to a psychiatrist that he was suffering from anxiety company, based in Jersey in the Channel Islands, called F.A.B. about being investigated. Partners. The F stands for Faissola. It counts among its clients At the same time, Santorini exploded in Italy as a national the Qatari government. With a stake of almost 10 percent, the scandal. In January 2013, Bloomberg News reported that Paschi regime is the biggest shareholder in Deutsche Bank. According executives had used the deal to improperly obscure losses— to recent reports, Faissola’s latest project is advising the Qataris provoking criminal investigations, tanking the bank’s stock, and, on whether to boost that position—and extend his former in February 2013, leading to a government bailout of €4.07 billion. employer a lifeline. —With Matt Scully, Donal Griffin, and Among the casualties was David Rossi, Paschi’s Ambereen Choudhury RONNY HOPKINS, A COMMERCIAL INSTEAD OF REVIVING FISHERMAN IN OLD JOBS, AS TRUMP KENTUCKY; ASIAN CARP BEING PROMISED, KID FINANCIER PROCESSED IN PADUCAH ROSS BAIRD IS TRYING TO SAVE RURAL AMERICA BY CREATING NEW JOBS, ONE ASIAN-CARP-FILETING FACTORY AT A TIME

RED STATE BY PETER ROBISON

PHOTOGRAPHS BY ROSS MANTLE

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BAIRD: COURTESY VILLAGE CAPITAL Gourmet headquarters before circling back: dishes. Often loaded with MSG, the cakes It’s housed in a onetime barbecue joint across upset her stomach. But when she made from an abandoned gas station. Workers in them from Asian carp, they were springy blue “American Carp” T-shirts—a joke natural- and fresh-tasting. izing the foreign species—sliced fish at tables Carp became an obsession that she and covered in guts and blood. “Seven to 9 a.m., Crilly juggled with their academic jobs. They we do bladders,” one said. Lula Luu and John sank $1.5 million in savings into a business Crilly, the energetic former academics who they named Fin, for fish innovation. Skeptics BAIRD SPEAKS TO started the company, moved here from New ENTREPRENEURS IN told them you couldn’t make money from Orleans because Paducah is near the conflu- SALT LAKE CITY U.S. surimi. Chinese carp farms, which ence of the Ohio and Tennessee rivers, as operate with little regulatory oversight and well as Kentucky Lake, a vast reservoir created by a Tennessee can dump wastewater straight into sewers, had the market Valley Authority dam, which are all rife with Asian carp. cornered with cheap product. The shrimpers lost interest in Luu got a Ph.D. from the University of Kentucky in nutri- carp after the Gulf oil spill when BP set up a compensation tional sciences, with a focus on health disparities in minor- fund; they worried the paid work might cut into their relief ity groups. Crilly, a former psychiatry professor at Tulane in income. The couple put 110,000 miles on their Toyota Camry New Orleans, has researched mental health and suicide in in one year, searching for other regional fishermen and selling rural populations. In 2010 he and Luu started a New Orleans fish paste in Asian supermarkets and nail salons staffed with nonprofit job retraining agency. Among their clients were Vietnamese immigrants. They even got an audience with then- Vietnamese shrimpers looking for offseason fishing work. Secretary of Commerce Gary Locke, who promised to help if Crilly read an in-flight magazine article about some chefs’ they prepared an “ironclad business plan.” (They completed one, but never got a call back.) In 2014, Baird and Village Capital organized a three-month SERVED WITH training program for agriculture startups in Louisville. Village SPICED YOGURT, Capital has made investments in more than 70 com panies by putting entrepreneurs through these workshops, then MINT, OR CILANTRO, having them rank one another in order to decide who gets funding. Luu and Crilly pitched their idea, and it was one of THE WHITE FISH two winners. Baird put in $50,000, with a plan to get $150,000 back. (The deal gives him 2 percent of Fin Gourmet’s revenue LOOKS AND TASTES until it reaches that target.) “If you walk into TechCrunch LIKE TILAPIA Disrupt,” says Baird, referring to the prominent conference, 45 “Lula and John don’t look or talk like your average tech entrepreneur. But they’ve identified a very specific market efforts to beat back the Asian carp invasion by eating the fish, and know what they’re doing,” he says. and wondered if they could be another source of income. One problem: A series of Y-shaped bones run through the filets. As I talked to Luu and Crilly at Fin Gourmet, fisherman Ronny Crilly sliced thousands of fish himself before finding a way to Hopkins, more beard than man, stepped into the office. Everyone remove them efficiently. I’d speak with, including the fisheries director of the Kentucky Luu and her mother had fled Vietnam in 1980. Growing Department of Fish and Wildlife, described Hopkins as the state’s up in Tennessee, Luu hated Vietnamese fish cakes, made dean of Asian carp harvesting. Above his white, Duck Dynasty- from a paste known as surimi that’s a staple in many Asian style facial hair was a camouflage cap and a face the color of a persimmon. Hopkins, 66, launched into an HOPKINS WHEELS IN A CART OF FRESH CATCH analysis of the commercial fishing industry’s short comings, variously likening its problems to a broken wagon wheel, a goose that’s shot at, and a mixed-up puzzle. He seemed to have swapped talking points with Baird. “The industry is there, we just don’t have the money to make this thing bloom and blossom,” he said. After a stop at his concrete storage room to receive a fish delivery, Hopkins and I were bumping along U.S. Highway 60 to Kentucky Lake, hauling his 24-foot flat- bottomed fishing boat behind his modified Ford Econoline van. Perched in the back as Hopkins drove were his fishing partner, Sam Roberts, and Roberts’s 19-year-old son Ethan. Hopkins pointed out American Indian burial grounds and the 1,000 acres his ancestors once owned. At one point he casually reached to the center console for a packet of peanut butter crackers. “I’m totally illiterate,” he said, as if covering another talking point on the tour. I’d seen him tabulating fish hauls on a pad, so I said he seemed to do pretty well with numbers. “Oh, numbers, I can do numbers,” he said. “But words. … See, I know this is peanut butter because I’ve had it before, but if I’m not careful, I’ll get Swiss cheese.” When Hopkins invited me on the boat, he’d said a storm was coming and he’d need to get his nets out of the water that afternoon. I mentioned what I’d promised my wife about the life jacket. For the first time since we’d met, he was speechless. He opened and closed his mouth, fishlike, then turned away. At the dock he handed me a pair of his old waders with a hole in the seat. It RACHEL GREEN GRINDS CARP AT FIN GOURMET was windy and about 25F; none of us wore a life vest. Raghu started traveling back and forth to Kentucky, where, Hopkins held the tiller and maneuvered his boat to his float- he tells me, “I’ve become quite close with the local people.” He ing nets, which Roberts and his son hauled up, tossing silvery, came to admire their ability to “live off the land” while “some- bug-eyed carp into an open hold where they flopped and sprayed what living in squalor,” he says. “Some of the people there, blood. It was then that Hopkins chose to announce that he’s a they’re not living from check to check, they’re living from dollar felon: “I’ve threatened too many people.” Catching my look, to dollar.” He even gave the illiterate Hopkins a sparkling Twitter Roberts told me not to get scared until I saw a concrete block persona. Using Hopkins’s name and a photo of him in front of and an anchor. He laughed, and then alluded to another famous an American flag, Raghu fired off boasts about Kentucky carp 46 Obama phrase. “We are those people clinging to their guns and to influential food writers at theNew York Times, Grub Street, religion. You have arrived at the very place!” The next part of and Eater NY. Hopkins’s monologue was hard to follow, but it involved a tangle Kentucky’s lieutenant governor came for the October 2015 with Russian mobsters in New York over the caviar market. ribbon-cutting of the factory. But behind the scenes things “White-collar crime,” he said, archly. weren’t going smoothly. Crilly says he asked Wang, who was There’d been trouble more recently over carp, too, that approving payments, to buy American-made fish-gutting brought the law. machines he had used before. Wang imported a less expensive brand from South Korea designed for salmon. Bones in the The same year Luu and Crilly met Baird, they also met Andre bellies of the carp jammed them. The manufacturer sent tech- Raghu, a New York-based consultant who’d worked globally nicians who didn’t speak English. Within weeks of the opening, helping big companies develop sustainable supply chains. Raghu Luu says, Wang told her they were down to $700 and needed knew Dave Wang, a New Jersey-based former finance officer help meeting payroll. (Wang declined to comment.) at a Chinese company who brought in some of his friends as When Luu and Crilly sought an explanation, she says, they got a letter firing them as partners and accusing them of diverting funds for their own business. Early “WE’VE MET DANGEROUS that November, Blue Shore’s employees weren’t PEOPLE, NASTY PEOPLE, paid, says Amanda LaGore-Smith, who’d been split- ting time between the factory and Fin Gourmet. SELF-RIGHTEOUS/SELF- Local electricians, plumbers, and others who’d been getting the factory ready also stopped receiv- PROCLAIMED EXPERTS, ing checks. At one point, a group of them gathered CHEATS, AND IMPOSTORS” around Wang in Hopkins’s storage room. One sep- tuagenarian contractor grabbed Wang by the strings of his hoodie. The contractor has told neighbors investors. The Chinese saw Kentucky as a place of untapped about keeping two Uzis in his truck—a loaded one in the front potential and cheap raw material. Raghu says he hoped to seat and an unloaded one in the back. The sheriff was called, balance the profit motive with social good. For a while they all and people calmed down, according to some of those present. worked together to turn a former catfish processing facility into The big hopes for local employment faded amid lawsuits. a marquee operation called Blue Shore Fishery. It planned to In December 2015, Blue Shore sued Fin Gourmet, Luu, and employ 66 people and sell 100,000 pounds of Asian carp a day to Crilly in Graves County Circuit Court on nine counts including overseas buyers, turning the undesirable fish into a “Kentucky- breach of contract, fraud, and breach of fiduciary duties. Fin proud” export. The Chinese supplied $2.2 million, Hopkins the Gourmet countersued for defamation. The contractors filed fish, and Fin Gourmet the expertise. suit against Blue Shore, seeking more than $120,000 in missed payments. LaGore-Smith, now the floor manager at Fin Gourmet, says she’s still owed overtime. Hopkins and other fishermen say they haven’t sold fish recently to Blue Shore. Another contractor told me, “If I see Andre, Andre’s gonna get his ass kicked.” Reached by phone, Raghu declined to comment on payments because of the litigation. He blamed the breakup on a difference in strategy, as Blue Shore sought to export fish products and Fin Gourmet was CHA CA FISH CAKES (ABOVE) AND DRIED FISH MAW focused on creating branded products for domestic markets. Fin Gourmet now employs 15 in its processing shack. Pay is Hillbilly Elegy than from Our $10 an hour to start. Kneading a bowl of fish maw, Jessica Pastor- Kids, a 2015 book by Bowling Perez says the job is better than her last one, at a call center Alone author Robert Putnam that slapped her with demerits for any absence, like picking up that concludes that it will be her sick daughter at school. Accumulate 48 demerits, and you a generation’s work to rebuild were fired. LaGore-Smith met Luu through a Paducah rehab the nation’s profoundly center called Ladies Living Free and says she’s been sober now neglected communities. for three years. She never lived in a single place for more than After my visit, it was hard not to feel deflated. The measure a year growing up. “I never thought I would be part of some- of career stability for those 15 people depends on a dynamic duo thing that somebody would want me to be a part of,” she says. of Ph.D.s trained in public health, psychiatry, and social work, The stories aren’t all inspirational. Luu and Crilly had to fire willing to sacrifice millions in savings and years of their lives. three employees who started getting high on the Tuesdays they How do you scale that across Trump country? And how many were excused for drug court. Crilly is working on a memoir forward-thinking investors have the patience for it? about the characters they’ve encountered. “We’ve met dan- Not many, in Luu’s experience. She went to the Social Capital gerous people, nasty people, self-righteous/self- proclaimed Markets, or SoCap, conference in San Francisco in September experts, cheats, and impostors,” it begins. “We’ve also met won- hoping to meet nationwide distributors of sustainable fish. The derful people.” Baird’s working on a memoir, too, about the conference brings together venture capitalists and philanthro- challenges of creating startups. He takes inspiration less from pists who view themselves as “socially conscious,” “triple bottom line,” or “impact investors.” This is often thought of as a global movement. But the domestic version is having a moment, in part because some coastal elites in tech and 47 finance saw the revolutionary writing on the wall even before the election—because they’d backed the increasingly sophisticated apps, robots, and artificial intelligence that cost millions of jobs. Steve Case, Baird’s largest investor, began promoting what he calls a “Rise of the Rest” investment thesis for his Revolution LLC fund three years ago, hosting con- ferences in 26 cities, mostly between the coasts. Among its investments is Shinola, the Detroit watch and leather goods manufacturer. Baird joined him on many of the stops. Case says he’s heard from friends shocked by the November election, asking what they can do. “Maybe it’s a shake-the-snow-globe moment, and it will lead people to recalibrate, rethink, and take some of these challenges, but also opportunities, seriously,” Case says. In December the giant private equity fund TPG formed one of the most ambitious ventures yet to seek financial and social returns, a $2 billion fund called Rise that includes investments from Laurene Powell Jobs, Richard Branson, EBay founder Pierre Omidyar, and U2 singer Bono. It will invest half its funds in the U.S., in economically distressed territory similar to Baird’s. At SoCap, Luu mingled with about 2,500 “changemakers” dedicated to, as organizers put it, “accelerating a new global market at the intersection of money & meaning.” To Luu, much of it sounded like happy talk. “I think they want something to make them feel good,” she says. She was impressed when one investor there leveled with her. He told her his investments fell in one of two categories: a good deal or a good story. He needed a few good stories, but lots more good deals. Her fish company CRILLY AND LUU was a good story, but he already had plenty of those. 48

KUMAR IN NEW DELHI The Mauritania Exploit

AFTER EDWARD SNOWDEN SHOWED THE WORLD WHAT

THE NATIONAL SECURITY AGENCY COULD DO,

EVERY COUNTRY WANTED NSA-LEVEL TECHNOLOGY.

MANISH KUMAR, A SCRAPPY INDIAN BROKER, WAS

HAPPY TO PROMISE BIG THINGS. THEN HE WAS HIRED

TO HELP A WEST AFRICAN NATION TAP ITS CELL-

PHONE NETWORKS, AND THINGS WENT WAY, WAY SOUTH

BY JORDAN ROBERTSON AND MICHAEL RILEY

PHOTOGRAPHS BY ZISHAAN AKBAR LATIF Just after lunchtime one day in February 2015, Manish Kumar entered the presidential palace in the Mauritanian capital of Nouakchott via the side gate—the one reserved for private business. His government SUV was driven by a gregarious man in a loose-fitting white robe, who navigated the vehicle toward the back of the com- pound, away from the main palace building’s soaring glass atrium and modern-looking turrets, which give it a Martha Stewart-meets-Gunga Din look. The driver pulled up to a smaller structure with a massive satellite dish on top, where Kumar was to meet Ahmed Bah dit Hmeida, an official with the innocuous-sounding title of counsellor to the president. A month earlier, Bah, whose responsibilities include overseeing an electronic spying apparatus aimed at his boss’s enemies, had transferred half a million dollars to an account in the British Virgin Islands, as a down payment for a sophisticated technology suite offered DELHI’S GHAFFAR MARKET, WHERE KUMAR LEARNED HIS TRADE ... by Kumar’s company, Wolf Intelligence. The full contract was worth $2.5 million, plus an annual service agreement. backed by a threat: If Wolf’s system wasn’t fully functional by the It was the biggest score of Kumar’s blossoming career as a globe- end of the visit, neither Kumar nor the technician he’d brought trotting cyberweapons dealer. with him would be leaving the country. Uncertain if Bah was A native of India, Kumar was no more than a competent coder, serious, Kumar, a teetotaler and meditation enthusiast, joked who mostly hired out bug-hunting and other demanding tasks that he’d need a vegetarian menu in prison. Bah didn’t laugh. essential to the success of a digital spy contractor. And Wolf Intelligence was still an upstart with little reputation to speak of. Kumar is 30 years old and over 6 feet tall, with short-cropped But Kumar was ambitious, and his timing was good. Two years obsidian hair and softly handsome looks that might have landed after Edward Snowden had revealed the extent of National Security him on a Bollywood set had he made different life choices. Though Agency espionage around the globe, most every country on earth he’s still relatively small-time, in a few years he has managed wanted to develop its own mini-NSA. to penetrate deep into the cyber-arms industry, thanks to high At their most advanced, cyber arms—code that governments demand and an extraordinary amount of hustle. use to spy on or sabotage computers—are created by Ph.D.s In August 2016, a year and a half after his encounter with Bah, 50 working for defense contractors such as Raytheon and Northrop Kumar met with a reporter while visiting family in northern India. Grumman. But the market for those products is limited to the U.S. It’s highly unusual for someone in his business to provide an in- and the select few allies who can afford them. The rest is domi- depth look at his work, but in a series of interviews over three nated by lone-wolf savants and boutique companies whose inter- days, he discussed everything from his parents’ disappointment actions are characterized by what economists politely call a trust in his career path to labor troubles with the hackers he hires. He deficit. It’s hard for buyers and sellers to know whether their coun- also spoke extensively about his deal with Mauritania, which had terparts are scammers, thieves, or something more dangerous. by then spiraled into an international incident. Mauritania, a country of 4 million people on Africa’s western On one of those afternoons, Kumar stood on the wide main coast, has seen 10 coups and attempted coups since indepen- street of Ghaffar Market in central New Delhi. The place smelled of dence in 1960 and is perhaps best known to the West as one of roasted lotus seeds, sold by vendors beneath a riotous canopy of the few countries in the world where slavery still exists. It’s also power, cable, and phone lines. In the muggy midday heat, young a hot spot for Islamic fundamentalism, which has made its gov- men tapped away on laptops, offering to jailbreak older iPhones; ernment both an American ally in the war on terrorism and an a 21-year-old hacker selling this service for 1,000 rupees ($14) was avid consumer of spy tech—for use against terrorism suspects, but inundated by eager customers. Other technicians pitched pass- also, potentially, journalists, activists, and political opponents. ersby on the ability to read the e-mails of a wayward lover or turn From Wolf, Mauritania sought software that would allow it to a boss’s smartphone camera into a spy device. Kumar spent many attack multiple targets connected to a large network. This could of his formative years in Ghaffar, and after 45 minutes of catch- include, notably, a nationwide mobile phone provider—an espe- ing up with friends, he remarked that he’d been lucky to get out cially attractive mark in a country that has only 51,000 fixed phone of Mauritania alive. “One small mistake and everything’s gone— lines and where even goat herders have cell phones. Wolf’s pro- money, life, everything,” he said. motional literature promised customers the ability to perform a Kumar learned to hack in Pilani, a brutally hot speck of silent SMS attack, a sophisticated technique that allows full control Rajasthan where a successful jute miller founded one of the coun- of someone’s smartphone without requiring the target to click on try’s top technical universities a half-century ago. Kumar’s family a link or otherwise interact. wanted him to become a doctor. To please them, he spent after- Kumar sometimes overpromises—he’s a salesman—and when he noons studying, but at night he taught himself how to code by arrived at the palace that day, he knew that his company couldn’t watching YouTube videos. At 20, he launched a web-design busi- yet provide the attack it was promoting. Wolf needed a special ness with a $40,000 stake from his family, but it soon went broke. piece of code capable of circumventing security measures on He began considering other options. “Eat, sleep, die—I didn’t want both Android and Apple smartphones. Kumar knew that hackers to do that,” he said. in Israel had developed it. The catch was that it cost $1 million, a A year after the business went under, he wrote a book called fee he’d be able to cover only if he could persuade Mauritania to The Secret of Hacking, which gained him some renown. (Not all of deliver its next payment. it was good: “Targeted at the complete beginner,” one Amazon Bah had other ideas. As one of his assistants poured the men reviewer wrote, “and when finished you will be a complete begin- tea, the president’s counsellor presented Kumar with a deadline, ner with an hour less time on your hands.”) He began running courses for IT outsourcing companies, teaching students to probe (about $6,000). Chiesa took a chance on it, but following an elab- their networks for security holes. Soon, he brought some of his orate handoff in the Milan airport, he found that the code worked most talented pupils into a new, less-straight-and-narrow venture: only if it was embedded in a file type that rendered it nearly useless finding zero days—flaws in popular software that allow hackers for stealth attacks. (Recalling the incident later, Chiesa heaped a to take control of computers and phones—and selling them to particularly Italian version of scorn on Kumar. The Indian broker buyers in Romania, Russia, and Ukraine. had showed up, Chiesa said, in a yellow-and-white button-up shirt He soon realized that he’d have to leave India if he wanted to “that I would never give to my worst enemy” and “terrible” black get ahead in the cyberweapons business. The market for offensive sport shoes. “He is totally unprofessional.”) technology hadn’t yet experienced its Snowden-era boom, but it Undaunted, in 2014 Kumar founded Wolf Intelligence and was already creating openings for small multinational operators, began working to make it worthy of discerning buyers. When which tended to be nimbler, hungrier, and less constrained by he became aware that India was viewed as the economart of spy ethics than the large corporations that make defensive technol- technology, he hired Europeans to man booths at military equip- ogies such as antivirus software. Hackers were setting up shop ment trade shows around the world. When he noticed an Israeli exploit dealer wearing shoes made by Geox, an Italian brand, he started wearing them too. (Chiesa presum- ably would have approved.) Wolf established a global headquarters in Munich and offices in Dubai and Romania, hiring a Swiss chief executive officer named Martin Wyss. Kumar (who is formally the company’s director) was pitching just about anything an aspiring spy operation could want, from encryption-cracking software to a hack-proof $4,000 mobile handset. His sexiest offering was an automated platform that could scan a target network’s traffic to identify users of encryption and privacy tools, flag them, and search a library of exploits to recom- mend attacks. But for all Kumar’s hustle, he lacked a major client— a government or a big defense contractor. So, toward the end of 2014 he made a bid for the big time, renting a booth at one of the main industry trade shows, Milipol ... AND HACKERS PITCH SERVICES TO PASSERSBY Qatar, where he’d previously been an attendee. There, giants such as Raytheon, Glock, Northrop Grumman, 51 in locations with beautiful beaches, big villas, or friendly laws— IBM, and Cisco Systems would be angling for a piece of the Thailand, Spain, the Netherlands. Shadowy middlemen known as booming Middle East and Africa defense markets, pitching coun- exploit brokers pitched their work to government clients, using tries like Egypt, Qatar—and Mauritania. spec sheets and proof-of-concept videos. Companies, governments, and individuals work hard to defend That October, in the sprawling 65,000-square-foot show floor their networks from such mischief—the cybersecurity sector sold at the Doha Exhibition and Convention Center, more than 250 more than $80 billion worth of defensive technology and services companies vied for the attention of representatives from at least last year alone, according to IT market research firm Gartner. 60 countries. Among the officials was Bah, who led a Mauritanian Identifying the vulnerabilities that remain requires powerful com- contingent to Wolf’s booth. Kumar’s presentation impressed them puters or unusual skill. The rarity of those finds is reflected in enough that they requested a more extensive demo off the show the prices they command. A middling exploit for WordPress, floor. Six weeks later, they signed the $2.5 million contract. “That the popular web publishing software, might fetch from $10,000 was the best moment of my life,” Kumar recalled over dinner at a to $30,000, while an elegant zero day for the Firefox browser restaurant in Connaught Place. He sent Shammi Kapoor, a contrac- recently sold for $500,000, according to a broker familiar with the tor from New Delhi, to Nouakchott to deliver a server and laptops, sale. Exploits for popular consumer technology, such as the latest then made the journey himself to install the software. Soon, he versions of iOS and Android, can command well over a million was on the palace grounds, sitting across from Bah. dollars. That’s because they can turn mobile devices into location Kumar tried to explain that he didn’t have the silent SMS exploit trackers or surreptitious voice recorders, as well as provide access yet, but Bah didn’t believe him. After Bah delivered his threat to to e-mails and text messages. The targets can be jihadis, journal- prevent Kumar and Kapoor from leaving Mauritania, the pair ists, or opposition politicians—enemies of the state, however the returned to their hotel. Believing they were being monitored, state cares to define them. they decided escape would be too risky. The next day, in a hastily Kumar filled up three passports with entry stamps trying to arranged phone call between Bah and Wyss, the Swiss executive find his niche in this world. He traveled to Israel, ground zero for reiterated that Wolf didn’t have the exploit. He also pointed out the global cyber-arms industry, to work with a company selling that the Mauritanians didn’t have much of a spy system without Wi-Fi interception and other surveillance services. He taught it. Bah relented. classes in Italy and the Middle East. And he made contacts, lots of Kumar flew to Europe, where he spent weeks scrambling them. “The right presentation to the right target, that’s how you to salvage the deal. In April he flew with Wyss to meet the make money,” he said. “Not the right product.” But he needed to Mauritanians at a luxurious home in central Paris. Waiting for them understand what clients wanted, how to get in the rooms where were Bah and Ahmedou Ould Abdel Aziz, the son of President big deals happened. Mohamed Ould Abdel Aziz, a former general who’d helped depose The learning process didn’t always go smoothly. Once, he two governments before winning election in 2009. Bah sat on the approached Raoul Chiesa, a Rome-based broker, with a Microsoft floor while Aziz sat on the sofa, a sign of the son’s status. Office exploit he’d acquired, offering it for a laughably low €5,000 The Mauritanians agreed to pay the remaining balance of $2 million if Kumar would send someone to the country until the He arrived in Nouakchott accompanied by Kukreja and Wolf’s software was operational. According to Kumar, Bah said he needed Dubai-based distributor, Rohit Bhomia. Kumar spent two weeks this sign of good faith to keep the bookkeepers happy. Kumar waiting, mostly at the beach, to give his demo before finally being agreed to send a different Indian technician, Nafees Ahmed, then summoned to the same command center where he had met with got back to work trying to acquire the missing code. Bah. He set up four laptops and connected them to a central An Israeli acquaintance had put Kumar in touch with a Tel display, then ran through some basics, like how to gain control Aviv–based exploit broker named David “Dudi” Sternberg, who of a Windows computer. President Aziz, who Kumar calls “very said he could provide what Kumar needed. The deal Sternberg intelligent,” left without saying a word. Within a few days, Bah demanded was peculiar. Before even getting a meeting, Kumar paid Wolf the next $1 million installment. would have to deposit $100,000 in a Hong Kong bank account. More accurately, Bah paid Bhomia, who acted as a kind of He would then have to pay an additional $400,000 to see a proof fixer for Wolf. Closing big deals in the region usually involves of concept video demonstrating the exploit. To get the product graft, and according to Kumar, Bhomia was Wolf’s chief palm- itself, he would have a month to pay a final half-million dollars. greaser. Bhomia got a 30 percent cut of any deal he worked on, Miss the deadline, and the deal was off. (Sternberg didn’t respond about a third of which, Kumar said, went to payments for offi- to inquires sent to a cell number provided by Kumar.) cials. (Bhomia said via e-mail that he hadn’t spoken to Kumar in A million dollars is a lot for an exploit, but Sternberg was offer- more than a year and declined to answer questions. A spokes- ing something extraordinary. Few users realize it, but all mobile man for the Mauritanian president didn’t reply to messages phones allow silent SMS, in the form of invisible text messages left on his cell phone.) that carriers send to load updates or perform other administra- After taking his cut from Mauritania’s latest payment, Bhomia tive tasks. Sternberg said his exploit would corrupt this process told Kumar he thought it unlikely that they’d see the final $1 million to deliver spyware that could surreptitiously send e-mails, loca- Wolf was owed. If so, the company would make almost no profit tion data, and conversation recordings back to the hacker. on the deal after deducting the cost of the silent SMS exploit. The Kumar still didn’t have Mauritania’s next payment, so to get two argued, with Kumar shouting that Bhomia should return his the first $100,000 he turned to an old friend, Manish Kukreja, a cut temporarily so the company could pay Sternberg. Kumar New Delhi hotel owner who was something of a mentor to him promised Bhomia twice his usual fee on the last payment from as well as an investor in Wolf Intelligence. Kukreja agreed to put Mauritania. Bhomia said he was walking away and advised Kumar up the money on the condition that he go along to Tel Aviv, to to do the same. protect his investment and watch the action. Not ready to abandon the deal of a lifetime, Kumar and They visited Sternberg at his office on Tel Aviv’s tech-dominated Kukreja returned to Israel. Kukreja told Kumar he was willing Raoul Wallenberg Street. The room was a high-priced man cave, to put up the $400,000 to see the demo of the silent SMS exploit, replete with black leather sofas, expensive PCs, and a small fridge. but Kumar had doubts. What if Sternberg was scamming them? Sternberg, a giant of a man who appeared not far shy of being If the exploit turned out to be useless, Kukreja would be out 52 Donald Trump’s proverbial 400-pound hacker, wore a dark shirt $500,000 and Kumar’s deal would collapse with his worker being and blue jeans. For about two hours, the three talked about the held as collateral. And even if the hack was real, the Mauritanians deal and the surveillance business while Sternberg chain-smoked might take it and refuse to pay anyway. Bhomia was right, Kumar and quaffed energy drinks from his packed mini-fridge, offering decided—the final $1 million would never arrive. But he still the same fare to his guests. “We’re all drinking Red Bull, and it’s needed to get Ahmed out of the capital. That’s when the inter- creating emotions inside. Kukreja is looking at my face, and I know national incident began. he’s thinking, ‘We get this technology and sell to five or six customers,’ ” Kumar said. “We thought we’d be rich. We figured we In mid-August 2015 a bodyguard named Cristian Provvisionato could make $20 million minimum, maybe $50 million.” was on a beach in Savona, Italy, enjoying the start of the coun- Nonetheless, they left Israel without putting down the next try’s summer holiday season with his girlfriend, when he got a $400,000. Mauritania was still delaying payment, and Bah was call. On the line was Davide Castro, his boss at Vigilar Group, peppering Kumar with complaints. According to Kumar, Bah said a Milan-based security company. Provvisionato could make an the software Wolf had so far installed wasn’t functioning prop- easy €1,500 a week, Castro told him, if he would cut his vacation erly and that Ahmed wasn’t helping. Kumar also learned that short, pack a dark suit, and jump on a flight to Mauritania. He Mauritanian officials had held onto Ahmed’s passport rather than would then help a guy from a company called Wolf Intelligence returning it promptly, as they’d previously done with Kumar’s. give a presentation to government officials. His passport might He concluded that Bah hadn’t wanted someone there to please be taken at the airport, but it would be kept safely and returned the bean counters so much as he’d wanted a hostage. quickly. He’d be gone less than two weeks. Mauritania’s security forces are regularly accused by human A burly former vinyl flooring installer, Provvisionato had rights groups of torture, illegal detention, and extrajudicial kill- recently completed a bodyguard training course in England, and ings. Usually their targets are individuals accused of terrorism, he was now on a six-month contract for Vigilar. The jobs so far but occasionally they’re journalists or protesters, too. Kumar gen- had been pleasingly uneventful and glamorous, especially Giorgio erally preferred not to think about the morality of his profession, Armani’s corporate 40th anniversary party, whose guest list had but this time his client’s darker tendencies were threatening him, included then-Italian Prime Minister Matteo Renzi, Leonardo his employee, and his company. DiCaprio, and Cate Blanchett. Bah, who hung up on Bloomberg Businessweek when reached Provvisionato wanted to keep Castro happy, so he took the by cell phone and didn’t respond to messages, told Kumar that job in Mauritania. Two days later, he landed in Nouakchott. He if he wanted the money Wolf was owed, he’d have to come back was met at the airport by a toothless man who took his passport to Mauritania and demonstrate the company’s technology to and drove him to an apartment Wolf was renting in a dingy part President Aziz, who could then sign off on the next payment. It of the city. Inside, he found another Italian, Leonida Reitano, was clearly risky, but while Kumar was on a brief trip to India he who told him he’d been hired by Castro for the same job, fresh consulted a spiritual adviser, who told him that though he was off another gig passing out brochures for Wolf at a surveillance dealing with unscrupulous people, they needed him as much as show in Johannesburg. Now he needed to go home. Reitano said he needed the money. Kumar decided to fly back to Mauritania. he hadn’t met anyone from the government and only one person from Wolf: Nafees Ahmed, a technician who’d left the country PROVVISIONATO, PICTURED a few days earlier, saying he was sick. Provvisionato found IN FEBRUARY 2015 AS A Reitano’s story strange, but he liked and trusted his colleague FREE MAN; IN APRIL 2016 and the money was good. He spent his week in Nouakchott AFTER LOSING WEIGHT sitting around Wolf’s apartment, enduring its slow internet and WHILE INCARCERATED; broken air conditioning. IN JANUARY 2017 DURING Aware that Castro was hoping to parlay some minor logisti- A VISIT WITH GULLO cal work his firm had been doing for Wolf into a bigger partnership, Kumar had asked for Castro’s help getting “a European” to manages to keep his business going.” Mauritania for a presentation of Wolf’s technology. He’d added In a meeting last year with that the Mauritanian government had expressed interest in a Mauritania’s justice minister and an weapons deal and that Bah was intrigued by Vigilar’s ties with Italian vice ambassador to Morocco, Italian law enforcement and European arms makers. It was a des- the Mauritanians told Maurizio that perate move. In his mind, Kumar said, he was trying to buy time they wouldn’t release his brother as he looked furiously for an alternative version of the silent SMS unless someone returned the exploit. He’d also calculated that, in the event he couldn’t find $1.5 million the country believed Wolf it, the Mauritanians would be less likely to disappear an Italian Intelligence had taken under false pre- citizen than an Indian one. Kumar had effectively slipped Ahmed tenses. (Kumar said the money was out of the country by trading him for a stranger. for Wolf’s technology alone and that With the date of Provvisionato’s return flight approaching, Bah always knew he needed to buy the Kumar advised Castro that the presentation was off and that silent SMS exploit from a third party.) he should get his guy out of Mauritania. There was no risk, Paolo Bonissone, a spokesman for Kumar assured him, but there was also no point in wasting Italy’s Ministry of Foreign Affairs, said more money keeping Provvisionato there. To address the issue in a phone interview that the case had of Provvisionato’s passport, which was still being held, he told been discussed in a meeting between Castro to advise his employee to contact Italy’s diplomatic rep- the two countries at the United resentatives and tell them he was a commercial fish exporter Nations General Assembly in New York whose passport had been stolen and that he needed an emer- in September, but that it hadn’t been gency exit document. resolved. “Every Italian in danger is Provvisionato was alarmed and confused by Castro’s instruc- our concern. This is a dangerous sit- tions. He tried to get help, but Italy’s honorary consul wasn’t at the uation,” Bonissone said. office when he went in. Over the next several days, his exchanges Maurizio Provvisionato said with Castro became increasingly frantic. On Sept. 1, Kumar flew Mauritanian officials told an Italian 53 to Milan, where, with Castro sitting next to him, he reached Bah delegation a few months after the on a secure chat. Kumar proposed another meeting in Europe, UN meeting that they can hold his but Bah wasn’t interested. So Kumar tried a threat: If Bah didn’t brother for up to three years while return Provvisionato’s passport and let him leave the country, he they conduct their investigation. would go to the Italian authorities with the whole story. “Why, if the Mauritanian government Later that day, Provvisionato disappeared. Castro, Cristian’s thinks he is guilty ... do they never twin brother, Maurizio, and Cristian’s girlfriend, Alessandra send him to the jail?” Maurizio wrote Gullo, all tried to reach him without success. The landlord of in an e-mail. “Because after their investigations they know that Wolf’s apartment told the family that some men had shown up, he is a victim, but the Mauritanian government wants revenge.” put Provvisionato in a car, and driven away. That was all they Kumar, for his part, said he’s still working to get Provvisionato could find out for months, until finally Mauritanian officials out of Mauritania. During one of his last communications with acknowledged that they knew where Provvisionato was. On Bah, in October, he suggested that the two sides seek a resolu- Nov. 23, the country’s Moroccan embassy sent the Italian ambas- tion at that year’s Milipol Qatar conference in Doha, where he sador a two-sentence memo confirming that Provvisionato had and Bah had first met two years earlier. Bah agreed, Kumar said, been detained for participating in fraud against the Mauritanian then didn’t show up. government. Six months later, he was formally charged with Still, the conference was a big success for Wolf. Business had fraud and money laundering. been booming since cybersecurity researchers discovered that Provvisionato remains in Mauritania, held at a military bar- an Israeli company, NSO Group, was selling a tool that used three racks on the outskirts of the capital, where his family has visited zero-day exploits to hack iPhones via text message. The vulner- him several times. According to Maurizio, Provvisionato has lost abilities had been fixed, leaving NSO Group’s clients scrambling as much as 60 pounds, his gums are infected, and he’s suffer- for new equipment. Kumar was pursuing deals with Thailand ing from untreated diabetes. In a handwritten note in English to and Qatar. In December, he said, he’d landed a $500,000 con- Bloomberg Businessweek, Provvisionato said Castro had “used and tract with the Egyptian government, after months of pitching. swindled me” to save Reitano. “I always showed my innocence The deal would have closed more quickly had he showed up and my good faith in this event,” he wrote. “I was in the dark on in person, but he’d been afraid it would expose him to a snatch- the real situation and the sale was already gone, but in spite of all and-grab by Mauritanian security forces. “There have been some this I continue to stay under arrest for one year and four months.” bad moments, but the company needs to be grown,” Kumar said. Castro declined to comment, while Reitano, reached by He added that Egypt had paid him half the money upfront. He e-mail, said he knew nothing of Wolf’s troubled deal. He said would get the other half when he met a familiar, lofty demand: he’d come away from his job in Johannesburg unimpressed delivering a suite of software and exploits that allowed the gov- with Kumar and that whatever the Wolf founder had planned ernment to silently hack mobile phones. in Mauritania had probably fallen apart. “The guy is a total —With reporting from Pauline Bax in Johannesburg and

COURTESY ALESSANDRA GULLO AND MAURIZIO PROVVISIONATO MAURIZIO AND GULLO ALESSANDRA COURTESY disaster,” Reitano said. “I cannot understand how he still Gwen Ackerman in Jerusalem

IT’S TIME TO START PLANNING A OOUOPTINGO’ OU T OF THE OL’ PSINS ‘WORKATION’ A BIGGER BIG MAC OBO’BYS’ CLUB FOR Y OUR LAPEL

All the Doctors Will See You Now ExecutiveExeecutiviveve healthheeaalth programsprogrraamsms aareare convenientcconvnvevenient forffoorr thethe C-suite—andCC-suite—an-sui-suitee—a—and greatgreatreaatt foforr hhospitals’hospitaospitalss’’ babalancbbalancealaancenccee sheetssheetsheets By SaSamm GGrobartGrobarrroobaart PhotographPhototoograph byby CorCoreyCorereeyy OlsenOlseen Etc.

am in good health. I am out of shape. reasons for doing so aren’t entirely altruistic. No company These two facts—one I hoped to be true, and one wants to be in a situation where the chief executive officer I absolutely knew to be true—were delivered to me at suddenly becomes ill, like when United Airlines’ Oscar Munoz the end of a thorough two-day medical exam in early underwent an emergency heart transplant only five weeks INovember at the Mayo Clinic in Rochester, Minn. I after assuming the job in 2015. “It’s a relatively small expense underwent this battery of tests not because I was at as a percentage of an executive’s total compensation, but risk for any major illness, nor because I’m a hypochondriac it’s worth it if they find something,” says Sue Holloway, who (I mean, no more of one than any unfit 42-year-old man has a right to be), but because the renowned medical center offers something called the Executive Health Program, which sounded “Think about the exceedingly fancy. Executive Health is to a doctor’s visit what the Concorde kinds of lives many was to domestic coach. It’s designed “for the busy executive on the go,” not unlike the services advertised on 50-year- of these executives old signs at my dry cleaner. And though high-end healthcare offerings such as this one are taxed heavily under the lead. They travel Affordable Care Act, and companies are always looking to cut expenses, neither issue has diminished the demand for these all the time, they’re services at Mayo. Even with a price tag that hovers at about $5,000 in out-of-pocket costs—not including food, lodging, out at business and airfare, which can easily double that figure—Executive Health admissions at Mayo rose from 10,887 patients in 2011 dinners—it’s not a to 17,667 in 2015, or 62 percent. recipe for regular During my visit I was subjected to a series of tests and exami- nations that, if I’d needed to schedule and attend them individu- exercise and a ally, would easily have taken two months to complete. (Hearing exams aren’t usually atop my to-do list.) More than any par- good diet” ticular test, one-stop shopping is the selling point: Captains of 56 industry can simply block out a couple of days in their calen- heads the executive compensation division at WorldatWork, dar and get all their poking and prodding in at once. “Think a human resources industry group. about the kinds of lives many of these executives lead,” says Some companies make an annual habit of sending entire Dr. Stephanie Hines, the program’s director. “They travel all employee categories, such as executive vice presidents, together the time, they’re out at business dinners—it’s not a recipe for at the same time; others send individuals after they’re hired. regular exercise and a good diet. In many cases, patients are Executive health programs share test results with employers coming to us knowing they’re not taking care of themselves. or other individuals only if the executives authorize them to, Their visit here is a way to help get back on track.” which most do. One common workaround is to have a provider These programs have become standard fare at leading inform an employer simply if the employee passed or failed. A U.S. hospitals. You can participate in them not only at Mayo, failing grade could be grounds for dismissal. but also at the Cleveland Clinic, Massachusetts General in Boston, Johns Hopkins in Baltimore, the UCLA Medical To say the Mayo Clinic dominates Rochester is an under- Center, and many other major institutions. Some of them statement: It employs 35,000 people in a city of 111,000. The even have satellite locations in such executive-friendly desti- roughly 350-acre campus includes not only the expected nations as Jacksonville, Fla., and Scottsdale, Ariz. With their medical buildings, but also 10 hotels ranging from budget high fees and generally healthy patients, the programs are options to the luxury Towers at Kahler Grand, the top floor a profit center. of the 95-year-old Kahler Grand Hotel, across the street In many cases, companies are footing the bill, but their from Mayo’s main entrance. All of this—as well as various Executive Thursday Order 7:10 a.m. 7:45 8:15 9:20 10 11 A sample two- day schedule for Executive Medical Executive Executive Treadmill Cardiologist participants in blood and history review physical electrocardiogram stress test consultation the Mayo Clinic urine tests program Health Etc.

restaurants and shopping centers—is connected by a system an ophthalmologist, a physical therapist—pretty much all of underground walkways and above- ground skyways. Once the “ists.” I hung my coat in my hotel room, I wouldn’t have to put it To this list of experts, Mayo has added two professionals on again until I left for the airport—a boon in a city that gets whose titles didn’t exist a couple of years ago: a genetic coun- 4 feet of snow a year. selor and a genetic pharmacist. Mayo will do a full-genome Executive Health patients, whose appointments typically sequencing for about $10,000, but the hospital is currently start at 7:30 a.m., first go to a dedicated floor in one of the hos- evaluating a new test that will bring the price down to about pital’s main buildings. The waiting room was significantly nicer $1,000, putting genetic screening within reach for many more than the one in my family doctor’s office, with warm wood people. For $3,000, researchers could also describe how more tones, comfortable chairs, and soft lighting. Other amenities than 250 medications interact with my body at the genetic level. needed an update: The only reading materials were copies That price is also falling fast; sometime this year, the hospital of Farm & Ranch Living, Family Circle, and a magazine called expects it to drop to $300. Reminisce (which seemed a bit too on-the-nose at a place where one could learn one’s days were numbered). The Muzak in the Given that there are only so many Fortune 500 CEOs in this room included versions of I Believe I Can Fly and The Way We country, do the rest of us plebes have a use for this? There’s Were. Hospital’s gonna hospital, I guess. no data that breaks down these programs’ customer base, so The clinic sees its fair share of famous people—patients have it’s hard to say how many nonexecutives take advantage, but included the Dalai Lama and members of the House of Saud — $5,000 isn’t too steep for a group far larger than corporate titans so it’s institutionally discreet. Patients get a small device that to pay—especially if a company covers the cost. This was the flashes and vibrates (like the ones at Cheesecake Factory) when case with Robert Hollingsworth. The now retired senior vice the doctor is ready. He simply walks over to a nurse and intro- president and general manager of a New York-based technology duces himself. company had no reason to be concerned about his health. But The day begins with a review of personal and family his company’s life insurer did. It requested that Hollingsworth, medical history conducted by a nurse in an examination now 68, undergo an executive health exam to qualify for what room, followed by a gown change and a visit from the physi- he describes as a “not insubstantial” benefit that would be paid cian who manages a given executive’s file. My doctor, Wayne to his wife and employer if he died. “It was remarkable, getting Feyereisn, resembled a combination of Michael Douglas and all that information in one session,” says Hollingsworth, who Donald Rumsfeld, which I found reassuring. After some dis- took his physical in the Austin area in 2011. “They tested for cussion about my visit, he gave me the same physical I get things no one had ever tested for before,” such as the presence 57 each year. Then it was time for my next appointment. of nicotine and cocaine. Hollingsworth chose not to share his Dr. Feyereisn wouldn’t be accompanying me on each stop records with his employer—only that he’d passed. along my journey. Finding my way was made easier by an app I Was my time at the clinic worth $5,000? I got checked downloaded when I arrived that kept an updated list of appoint- for the Ashkenazi breast cancer markers, BRCA-1, 2, and 3 ments and helped me navigate campus maps. The app was also (I was negative), which is a test I wouldn’t have undergone useful when I was not at the clinic: I could communicate with at a standard physical. But the convenience of it all—and the the medical staff, and all my medical records were viewable, too. calming psychological effect of knowing you’re under the When I completed the program, I could e-mail those records to watchful eye of a Mayo Clinic physician, who one assumes my doctor at home. is a really, really good physician—has a value that’s hard to The rest of the day consisted of a series of short walks quantify. By the end of my visit, I felt reassured by the care I and visits with various medical personnel. I took a treadmill received and was certainly aware of the steps I needed to take stress test that was both revealing and embarrassing; I sat to further ensure the good health I’ve enjoyed. The cardiol- in a soundproof room, listening for extremely faint tones, ogist I met with, Ray Squires, described my body as “decon- to test my hearing; I had a chest X-ray and an EKG. Thanks ditioned,” which was wonderfully diplomatic of him. To get to almost 5,800 years of Judaism coursing through me, the into shape—and make sure any future visits to Rochester are latter entailed a chest shaving, so the leads could adhere reli- solely voluntary—is going to require more than two days.

ILLUSTRATIONS BY TIM LAHAN TIM BY ILLUSTRATIONS ably to my body. I met with a cardiologist, a dermatologist, Dammit.

Friday

12:45 p.m. 2:20 3:30 4:05 10 a.m. 11:30 12:30 p.m.

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women speak up, as she did, they’re judged more negatively than men. Women who negotiate the way men do are considered too pushy. So throughout the book, Krawcheck scatters tips on how to successfully leverage feminine traits. In a chapter titled “The Obligatory Ask-for-the-Raise and How-to-Negotiate Chapter (With a Twist),” she suggests that women pretend during salary negotiations that they’re at a PTA meeting. Research shows that women perform better when they’re fighting on behalf of someone else, such as their kids. Her approach makes sense, but does it work? Here, Krawcheck runs into some trouble. She argues that companies resis- tant to women-friendly policies and practices will fail—but they haven’t, even as inhospitality remains the norm. The pay gap persists. The U.S. Equal Employment Opportunity Commission got almost 13,000 complaints of sexual harassment in 2015, a number that’s held steady since 2011. Women enter corporate America at THE IMPOSSIBLE near-parity with men but occupy only 19 percent of C-suite positions, according to a recent survey by McKinsey and CLIMB LeanIn.org, Sandberg’s nonprofit. In 59 another recent survey, by MWW Public Relations and Wakefield Research, three- Sallie Krawcheck says that for women to get ahead, they quarters of respondents said they believe might have to write their own rules. By Rebecca Greenfield women are worse at delivering financial returns for companies. The opposite is true: Numerous studies say that organi- anifestoes for working women, in black stilettos. Krawcheck gets how zations with female managers perform much like working women difficult it is for women to break into the better on average than those led by men. themselves, are often held to executive class. She worked her way up Whatever Krawcheck’s hopes, women an impossibly high standard. in the banking industry, only to be let tend to get penalized no matter how they Sheryl Sandberg’s Lean In go from C-suite jobs at Citigroup and act on their way to the top. Those who get was a best-seller, but critics— Merrill Lynch. Reflecting on her tenure there are often set up for failure, tapped M male and female—tore it apart at Citigroup, which ended to lead only in moments because it asked women alone about nine years ago, she of crisis, when the odds to fix their broken work environment. says she believes gender DURING SALARY of succeeding are slim The criticism is valid; Sandberg has played a major role in the to none, a phenomenon since admitted that it would be hard for tensions she experienced. NEGOTIATIONS, known as the glass cliff. a single mother to follow her advice. And The final straw, Krawcheck PRETEND YOU’RE Ultimately, Krawcheck yet male-authored advice books hardly writes, came when she argues, there may be no get torn apart for failing to address inter- made an unpopular sug- AT A PTA MEETING way for women to work sectionality, privilege, and structural gestion that she believed within the system and win, racism and sexism along with tips on was in the company’s best no matter how often they how to climb the corporate ladder. interest: reimbursing some Citigroup cus- transform perceived liabilities into assets. Sallie Krawcheck wants us to know, tomers for losses they’d suffered in the Her most useful—and radical—advice even before we open Own It: The Power early days of the 2008 financial crisis. comes in chapters that urge women to of Women at Work (Crown Business, Given how she frames her experi- opt out. In “Literally Own It: Start Your $27), that she excels in the face of such ences, you wouldn’t expect Krawcheck Own Thing,” she encourages women to impossible standards—in heels, no less. to write that “being a woman in the busi- start businesses. When that happens, The cover features Krawcheck, the co- ness world is not a liability; it’s power.” “there’s no playing by the boys’ club founder and chief executive officer of The liability, she says, manifests primar- rules,” she writes. “No asking permis- Ellevest, an online investment service ily when women try to affect a mascu- sion.” Since the system isn’t working for

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starters who will make nonwork Surf Office, Gran Canaria hours fun for the whole squad. Come if … you have Cohorts have hiked volcanoes, dreams of jumping gone cliff jumping, and taken into a passion project Muay Thai boxing classes. One in a romantic setting. guest on a Thailand excursion To further promote organized an event at Challenge creativity, the company Phangan, a water-based hosts monthly salons obstacle course that’s American at Manhattan’s Soho Ninja Warrior hard. House (free for members; Etc.

Come if … you want a taste of the nomadic lifestyle or are already location-independent and want to park yourself somewhere. But if you’ve got a big deadline looming, this might not be the place to meet it, given the potential for distraction. Cost: From $1,090 for a 10-day retreat, includes accommodations, co-working space, and some meals; nomadhouse.io Outsite Refuga, Ko Pha Ngan, Thailand No time or budget to travel to $75 otherwise) on topics including and daily workshops, guests discuss Thailand? Try California. Outsite, culture, business, and world affairs. professional challenges, brainstorm, which founder Emmanuel Guisset Cost: $450 annually, plus the cost of and problem-solve. “You have deep calls “a timeshare for millennials,” rooms, which start at $70 per night; talks over dinner. You’re with people runs homes in Venice Beach, Santa secondhouse.club all the time,” Madsen says. “That’s Cruz, and San Diego, as well as near how we like it.” Playa Jaco on the western coast of SecondHouse, near Mattituck, N.Y. Cost: $1,600 to $1,950 for a week, Costa Rica and in Rincón, Puerto includes accommodations, meals, and Rico. In addition to dedicated co- in-country travel; refuga.com working facilities, you can ride bikes, play beach volleyball, soak in hot tubs, cook barbecue, and sip organic coffee (houses come stocked). Subscribers Nomad House stay at one or multiple homes each The emphasis of these 10- to 20-day month; businesses can book an entire 61 rotating retreats in locales such as house for a retreat. Pura Vida, Costa Rica; Medellín, Colombia; and Budapest is on Come if … you have to be in the office finding yourself while building only part time, you’re a freelancer, connections with others in the digital or your coffee shop is feeling staid. nomad community (aka those lucky people who can work on freelance Refuga projects wherever they want). The Themed programs include a women’s programs stress yoga, meditation, and or a luxury workation in Morocco, a immersion in nature. mountain workation near Barcelona, and a food lovers’ workation in Italy. At the last one, groups of 15 to 20 entrepreneurs stay on a sustainable farm in Umbria and eat homegrown meals featuring olive oil and wine produced on site. Travelers on the luxury getaway stay at a villa outside the coastal city of Essaouira (no extra charge for the views of wandering Outsite, San Diego camels). Every home—the company If you sign up for a $50-per-month says it scouts more than 200 in each membership, you get perks such location to find the ideal one—includes as free weekly meals, discounted a large work area. But you can also room rates, and the free use of take your laptop to the pool, which all surfboards. You don’t have to make abodes have as well. that commitment, though; rates are available for nonmembers who want Come if … you’re a small business to scope out homes first. owner looking to network with others. Cost: From $65 per day, $300 per week, The trips are “intense,” says company or $900 per month for nonmembers, founder Nikolaj Astrup Madsen. includes accommodations only; Nomad House, Bali FROM LEFT: COURTESY DIGITALOUTPOSTS; COURTESY SURF OFFICE; COURTESY SECONDHOUSE; COURTESY REFUGA; REFUGA; COURTESY SECONDHOUSE; COURTESY SURF OFFICE; COURTESY DIGITALOUTPOSTS; COURTESY LEFT: FROM OUTSITE COURTESY HOUSE; NOMAD COURTESY At communal lunches and dinners outsite.com Etc. Food BIG MAC ATTACK McDonald’s is betting that three is better than one. By Claire Suddath

ike most 50-year- 860-calorie monstrosity about 1 ½ times as (It comes only months after the death at olds, the Big big as the 540-calorie original, will likely age 98 of the sandwich’s inventor, Penn- Mac is starting serve as a novelty item, ordered by the sylvania franchisee Jim Delligatti, who to show its age: incredibly hungry or the unashamed. had his stroke of genius in 1967.) The That toasted “This is a smart idea, because cus- company test-marketed different sizes and sesame seed tomers keep saying they want more flavors—“We’re still working on a sriracha L bun and secret choices, especially in portion size,” version,” says Mike Haracz, the chef who sauce can’t hide says Bonnie Riggs, a restaurant indus- spearheaded the overhaul—before sending the fact that Mickey D’s still try analyst with market researcher NPD cooking instructions to all 14,300 U.S. uses frozen patties. Today’s Group. And since traffic is expected to locations. “We tried to make it as easy as fast-food consumers trend remain unchanged this year at all restau- possible,” he says. “The Mac Jr. uses our toward better burgers with rants, McDonald’s will need to siphon off quarter-pounder bun.” The Grand Mac fresher beef and a wider customers from its competitors to grow. requires a grander bun. variety of toppings. Last With this campaign, the chain is doubling McDonald’s used to mail franchisees year an internal company down on a classic offering instead of trying paper instructions for each new item memo revealed that only to lure people in with new concoctions. to ensure uniformity—a Big Mac should 20 percent of millen- “If this works, it’ll have a lot of implica- taste the same in Maine as it does in New nials had even tried a tions for what McDonald’s may try in the Mexico. But this time it partnered with Big Mac. McDonald’s future,” Riggs says. San Francisco’s Inkling, which created decided it was time Unlike other chains, such as Taco Bell, a mobile training guide for line cooks for a makeover. whose Doritos Locos Taco did $1 billion in with language options and instructional On Jan. 18 the 2012, its first year, McDonald’s has strug- videos. The software, accessible on desk- company unveiled two gled to draw crowds with its creations. tops and tablets, will provide McDonald’s new-look Big Macs, the Burgers account for almost 20 percent of with real-time data on which locations are limited-edition Mac Jr. the restaurant chain’s sales, but it’s been using the materials, says Matt MacInnis, and Grand Mac, to decades since there was any ground- Inkling’s chief executive officer. “They’ll accompany the origi- breaking innovation. In 2013 the company know which franchisees are making the nal. All three versions pulled its Angus burger off the menu. burgers properly and which ones are just hold to the traditional People weren’t willing to buy it for $5 when winging it.” frozen patties and classic they could get an “original” burger off the Still, it’s going to be difficult for sauce. The difference is Dollar Menu instead. Sandwich wraps, McDonald’s to woo younger customers size: The Mac Jr. lacks its which were supposed to attract younger by changing something they haven’t been middle bun (!), has only customers, didn’t, and last year they were interested in trying. Millennials prefer one patty, and has fewer cal- pulled as well. McDonald’s most recent seemingly healthier burgers, the kind ories (460) than a turkey win, adding all-day breakfast in 2015, only made at chains such as In-N-Out and sandwich from Panera extends the hours that diners can order an Shake Shack. McDonald’s is experiment- Bread; the Grand Mac, an Egg McMuffin—a sandwich invented in 1971. ing with fresh meat; last year it removed “When people go to a particular restau- artificial preservatives and additives from rant chain, they are going for what the res- breakfast items and chicken nuggets, but taurant specializes in,” Riggs says. That’s that’s not enough to ensure it’ll continue especially true for McDonald’s, whose to have billions and billions to serve. Golden Arches make people instantly sal- Luckily for the company, millennials ivate for a burger and fries. are charmed by nostalgia plays. A recent The Big Mac’s revival has been a McDonald’s ad campaign showed children year in the from the 1970s sharing McNuggets with making. modern kids. If the company banks on throwback appeal when new Big Mac ads start airing in February—perhaps using the old jingle highlighting “two all-beef patties, special sauce, lettuce, cheese”— it could persuade a new generation to try the salty, calorie-laden, iconic fast-food

favorite their parents eat. FOJO BERTO BY ILLUSTRATION What I Wear to Work Etc.

What do you do? Meltwater helps companies around Tell me about your blazer. I picked out the fabric myself. I was the world monitor walking around the Fashion District one and analyze media day and found the store, Beckenstein, about themselves, which is pretty well-known in the competitors, and area for men’s suiting fabric. I took it to My.Suit to get it custom-made. their industries. I’m a partner overseeing Nice! Why custom? the New York office’s MY.SUIT ALTON LANE I like to have things sales team of about that not too many people have. Right out 75 people. of college, I played pro soccer on a couple United Soccer League teams, which is the Are you mostly in the league just below Major office, then? League Soccer, so I A lot of my time is spent with have broad shoulders. my team developing sales It’s easier for me to get and leadership skills, but I’m jackets this way. also out and about in the city meeting with clients.

HUGO BOSS Does that athletic build affect the shirt you wear, too? Yeah. I get a tight fit that How does that affect isn’t baggy or ballooning the way you dress? over my pants. 63 Well, if we’re out meeting clients, I’ll put on a suit and tie, but in the office we like to ROLEX have fun, so I’ll lose the tie or wear a dress shirt and nice pants.

What’s the story behind your bag? I wanted a laptop ANDREW bag, and so many options were bulky. This one’s HERMAN got a thin profile. 33, area director, Meltwater, New York That's a great watch. I picked it up in Venice when I was with my mom last summer. It’s SANTONI a special purchase, because she had never been to Italy, so we were doing the tourist thing. Now I’ll always SANTONI remember that when I wear it. HAPPY SOCKS MY.SUIT PHOTOGRAPH BY CHRISTOPHER LEAMAN FOR BLOOMBERG BUSINESSWEEK BLOOMBERG LEAMAN FOR CHRISTOPHER BY PHOTOGRAPH Interview by Jason Chen Etc. How Didt Here I Get ? LAURENT POTDEVIN Chief executive officer, Lululemon Athletica April, June, and August, by Bloomberg L.P. Periodicals postage postage Periodicals L.P. Bloomberg by and August, April, June,

“The day I walked Education At Essec, 1991 in, I knew that I would never be an engineer—I wanted Unit4, Blvd., DHL Global Mail, 355 Admiral to Canadian addresses undeliverable

Lycée International in the Title registered reserved. All rights L.P. Bloomberg 2017 Copyright RT0001. 9898 to be around people de Ferney-Voltaire, ance Center at [email protected]. PRINTED IN THE U.S.A. CPPAP NUMBER 0414N68830 CPPAP PRINTED IN THE U.S.A. [email protected]. at ance Center and traveling.” Ferney-Voltaire, France,

As a 13-month-old in class of 1984 changes Send address NY 10022. POSTMASTER: York, New Avenue, sinessweek, 731 Lexington Geneva Ecole Polytechnique Fédérale de Lausanne, “It was a luxury-brands management “At the time, you had to go to the French Switzerland, class of 1990 program sponsored by LVMH. When I army for 12 months, but there was a Essec Business School, presented my thesis on how to manage the loophole if you found a company that Paris, class of 1991 labor pool at Louis Vuitton stores, the CEO would send you to a foreign market. So was in the room, and he’s like, ‘Why don’t I asked Louis Vuitton. HR said no, so I you just come and work for us?’ ” went to the CEO, and he said yes. They sent me to be the right arm of the head of Work “I showed up at Jake manufacturing for a facility outside L.A. Experience Then, unfortunately, he had a stroke, so I Burton’s hotel the first 64 got promoted. I barely spoke English.” time we met. I was 1990–92 wearing a Dior suit “Glorified intern,” mergers and acquisitions, with cuff links, and he LVMH was out of the shower,

1992–95 wrapped in a towel, Director of North American operations for because he had been Louis Vuitton, LVMH mountain biking. And

1995–2005 he said, ‘Well, we’re not in January, one week except Published weekly, 4508 S Issue no. (ISSN 0007-7135) 2017 January 23 – 29, 900) (USPS 080 Vice president for operations, president, off to a great start.’ ” In Carlsbad, Calif., at a Louis Vuitton chief operating officer, sales meeting, 1993 Burton Snowboards

“Before Toms, for me, social 2005–10 Bloomberg Businessweek Bloomberg Mississauga, ON L5T 2N1. E-mail: bwkcustserv@cdsfulﬁllment.com. QST#1008327064. Registered for GST as Bloomberg L.P. GST #12829 GST L.P. as Bloomberg GST for Registered QST#1008327064. Mississauga, ON L5T 2N1. E-mail: bwkcustserv@cdsfulﬁllment.com. Clear Permissions: Copyright Educational or e-mail: [email protected]. 800 298-9867 Sales: Call Single Copy Office. Patent U.S. CEO, Burton Snowboards Bu Offices: Bloomberg Advertising and Editorial, Circulation, Executive, additional mailing offices. and at N.Y., York, New paid at Return Number 41989020. Mail Agreement Publication Canada Post IA 50037-0528. Boone, 37528, Box P.O. Businessweek, Bloomberg to impact was going to a 2011–13 black-tie dinner or auction President, Toms and writing a check.” Surfing in 2014– Bali, 2010 Present CEO, Lululemon Athletica “When I got the call to come,

At a half-marathon everybody told me not to. Because of “You don’t always need to have the right answer. Always have the right question.” with a Lululemon the stumbles, the brand had become 3. colleague, Vancouver, 2016 a little defensive. Yet I never lost any of my excitement about the potential. We’ve got a men’s business that’s growing, and in December we Life Lessons opened two stores in Shanghai be a global citizen.”

and one in Beijing.” n a , n te , lis 1. “Embedding social impact in your business model is the way of the future. It creates eff ortless loyalty and incredible brand strength.” 2. “Stay curious Courtesy subject (6)