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PHOTOGRAPH BY MICHELE SIBILONI FOR BLOOMBERG BUSINESSWEEK

Ive been down to

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Apple supercycle has reserved five
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p42 p62 p79
 Cover
Trail
May 16 May 22, 2016
How the cover gets made

Domestic Cover
Opening Remarks Why Larry Summers is taking on the Fed 12
Cover is on our current economic
Bloomberg View Venezuelas meddling military Time for e-cigarette ads to butt out 16 state. Janet Yellen is quietly
optimistic that were bouncing back.
Global Economics Larry Summers thinks were
on a path to catastrophe.
Banks are blocking war-zone charities 18
Whos right?
Saudi Arabias new energy minister plans to keep the oil owing 20
Beijing confronts a looming debt disaster 20 Theres no way to predict the future,
but the story points to some
Panama hates the Panama Papers, but it still has a bit of a thing for the shell company business 22
concrete examples that back
Larrys point of view.
Companies/Industries
The Takata recall just doubled in size. Getting your replacement air bag may take years 27 Has he made an efort to warn us?

Brazilian businesses crave resolution on the ouster of Dilma Roussef 28 Hes a vocal critic. And hes
Germany develops a case of Tesla-phobia 29 constantly making his argument on
social media and at conferences
Charges of intellectual-property theft blossomin the ower biz 30 around the world.
Briefs: Amazon takes aim at YouTube; Staples backs away from its $6.3 billion bid for Oice Depot 32
And he also got passed up
Politics/Policy for her job, right?

If international trade caused your layof and youre lucky, theres help 35 Yes.
Will Silicon Valley heavyweights line up behind Hillary? 36
I see whats happening here.
The UAW is determined to get into an Ivy League school 37
Revenge of the panhandlers 38

Technology
8 Apple prepares for a second stab at streaming music 41
It looks like the decade-long smartphone party is over 42
Phones that unlock with a ngerprint let cops do an end run around encryption 43
Accountants at Facebook and Amazon factor in all those employee stock grants 44
Innovation: Inatable expansion modules for the International Space Station 45

Markets/Personal Finance
Bond yields are low, stock valuations are high, and nest eggs arent going to go as far 47
Assisted living in Manhattan, for those who can swing $20,000 a month 48 International Cover

DOMESTIC COVER AND COVER TRAIL: SUMMERS: ANDREW HARRER/BLOOMBERG; YELLEN: COURTESY FEDERAL RESERVE

The right to sue your bank may soon be restored 49 I think a photo of the U.S. Federal
When couples divorce, they can split the house, but what about the labradoodle? 50 Reserve chair and the man who
almost got her job might not be a big
Charlie Rose talks to ne art auctioneer Simon de Pury 54
draw for people outside the U.S.
Focus On/Mid-Market Strongly disagree.
Whats light, crunchy, and saw its sales quadruple in the last two years? SkinnyPop 57
How many foreign central bankers
Business Talent Group brings consultant fees down to size 58 can you identify?
Vroom refurbishes and guarantees the cars for sale on its site 59
I feel like you asked me that
Features expecting that I wouldnt know any,
and rather than play your sick game,
Hawaiian Punch-Up Millionaires are suing billionaires over beach chairs on the Big Island 62 Im going to retain my dignity by
silently walking away
Theres an Oil Bust? Pioneer is doggedly drilling new wells in West Texas 68 and designing another cover.

Guns for Hire How Uganda became the world leader in mercenaries 72

Etc.
Are cognitive enhancers the new breakfast of champions? 79
Design: Seventies-inspired oice furniture is very of-the-moment 82
Technology: One reporter, one week of living by Googles auto e-mail generator 83
Beauty: The best products for your face this summer 84
The Critic: Money Monster picks up where The Wolf of Wall Street and The Big Short left of 86
What I Wear to Work: Sandra Reshef pared down to 125 pairs of shoes, but shes still the Queen of Clearance 87
How Did I Get Here? Restaurateur and head Top Chef judge Tom Colicchio didnt last long as an ice cream scooper 88
 Index
People/Companies

A QRS Takata (7312:JP)

Temer, Michel
27
28
Adele
ADP (ADP)
41
58 68
A Pioneer
Qualcomm (QCOM)
Reeves, Natalie
42
50
Tesla Motors (TSLA)
Texas Instruments (TXN)
29, 36
42
Airbnb 12 Reichert, David 35 Thiel, Peter 36
rig
Alcoa (AA) 35 Reshef, Sandra 87 Thomas, Clarence 38
Al-Falih, Khalid 20 Reznor, Trent 41 ToniAnn Grande 50
Al-Naimi, Ali 20 Rio Bravo Investimentos 28 Toyota (TM) 27, 29
Amazon.com (AMZN) 32, 44 Robert W. Baird 70 Trump, Donald 35, 36, 38
Amoco (BP) 70 Roberts, George 64 TRW Automotive Holdings 27
Amplify Snack Brands 57 Roberts, Julia 86 Twitter (TWTR) 36, 44
Andreessen Horowitz 36, 80 Rogers, Ian 41
Andreessen, Marc
Angies Boom Chicka Pop 57
36 Romney, Mitt
Rosekind, Mark
36
27 UVW
Annies Homegrown 57 Roussef, Dilma 28 Uber Technologies 12
Apache (APA) 70 Royal Dutch Shell (RDS/A) UBS Securities (UBS) 20
Apple (AAPL) 29, 41, 42, 43 32, 70 Vanguard 48
Arco (TSO) 70 S&P Global Ratings (MHFI) 20 Varela, Juan Carlos 22
Audi (NSU:GR) 29 Sack, Mike 64 Virgin Group 36
Autoliv (ALV) 27 Samsung (005930:KS) 42, 43 Volvo Cars (175:HK) 29
Aviate Global 42 Samuel Goldwyn Films 32
Samuelsson, Hkan 29

B Sandberg, Sheryl
Sanders, Bernie
36
35, 36
Ball Horticultural 30 Sanford C. Bernstein (AB) 44
Bank of China
Bankhaus Metzler
20
29
Concho Resources (CXO)
Cond Nast Entertainment
70
32
G Log Commercial
Properties (MRVE3:BZ) 28
Saudi Aramco
Saul, John
20
64
Barbosa, Nelson 28 ConocoPhillips (COP) 32 Gap (GPS) 32 LVMH (MC:FP) 41 Schultz, Howard 64
Becker, Craig 37 Cook, Tim 41 Gavekal Dragonomics 20 Schwab, Charles 64
Beepi
Berg, Pierre
59
54
Cooper, Matthew
Cordray, Richard
50
49
General Mills (GIS)
General Motors (GM)
57
27, 29 M Sheield, Bryan
Sheield, Scott
70
70 22
Juan Carlos
Bernanke, Ben 12 Crafted Hospitality 88 GoDaddy (GDDY) 64 Maduro, Nicols 16 Shift Technologies 59
Varela
Beyonc 41 Cramer, Jim 86 Gokey, Tim 58 Marks, Howard 64 Simmons, Gail 88
BGC Partners (BGCP) 41 Crowdpac 36 Google (GOOG) 32, 80, 83 Martinelli, Ricardo 22 Simes, Fernando 28
Bigelow Aerospace 45 CrownQuest Operating 70 Gore, Al 36 Matzner, Eric 80 Sothebys (BID) 54 Vroom 59
Bigelow, Robert 45 Cue, Eddy 41 Greenlight Capital 70 Mayer, Marissa 80 SpaceX 45 Walmart Stores (WMT) 64
Bilyk, Paulo 28 Griin, Ken 64 Mazda (7261:JP) 27 Spalding, Tom 70 Walt Disney (DIS) 32, 64
BlackBerry (BBRY)
Bloch, Allon
42
59 D Groupon (GRPN)
Gunn, Anna
80
86
McKinsey
Meheula, William
48, 58
64
Spotify
Standard Chartered (STAN:LN)
41 Walton, Rob
Welltower (HCN)
64
48
10 BMO Capital Markets 48 Daicel (4202:JP) 27 Mercedes-Benz (DAI:GR) 29 18 West, Dominic 86

PHOTOGRAPH BY BEN SKLAR FOR BLOOMBERG BUSINESSWEEK: CLINTON: MELINA MARA/THE WASHINGTON POST/GETTY IMAGES; VARELA: KIYOSHI OTA/BLOOMBERG
BMW (BMW)
BNP Paribas (BNP:FP)
27, 29
18
Davis, Joslin
Dell, Michael
50
64 H Meyer, Danny 88
Miller, Jody Greenstone 58
Staples (SPLS)
Starbucks (SBUX)
32
64
West, Kanye 41
Westhof Vertriebsgesellschaft
Boston Consulting Group 58 De Pury, Simon 54 Heartland Dental 58 Mitsubishi (7261:JP) 27 Sterling-Rice Group 57 30
Boundless Nutrition 57 DeRosa, Thomas 48 Hines 48 Morgan & Morgan 22 Stiglitz, Joseph 22 WeWork 80
Boyle, Tim 64 Diamond Foods 57 Hofman, Jefrey 45 Morningstar (MORN) 48 Strategy Analytics 42 Woo, Geofrey 80
Brandt, Michael 80 Diamondback Energy (FANG) Home Depot (HD) 30 Mossack Fonseca 22 Subaru (7270:JP) 27 Wrigley, Julie Ann 64
Broadridge Financial 70 Honda (HMC) 27 Motorola (0992) 42 Summers, Lawrence 12, 48
Solutions (BR)
Brown, Sherrod
58
35
Diatec
Dorsey & Whitney
35
18
HowStufWorks
HP (HPQ)
32
36
MSD Capital
Musk, Elon
64
29, 36
Swift, Taylor 41
XYZ
Broxon, Mark
Budweiser (BUD)
30
38
Draghi, Mario
Drake
12
41
HSBC Holdings (HSBC)
Hualalai Resorts
18
64 T Xi Jinping
Yahoo! (YHOO)
20
80
Bufett Ellliott, Bertie 64 Drillinginfo 70 N TA Associates 57 Yellen, Janet 12
Bufett, Warren
Bush, George W.
44
35, 37
Durbin, Dick 12
I Nasser, Amin
NatWest (RBS)
20
18
Takada, Shigehisa 27 Zynga(ZNGA) 80

Bush, Jeb
Business Talent Group
36
58
E IBK Securities
IBM (IBM)
42
58
Netix (NFLX)
Nike (NKE)
44
42
Easterbrook, Frank 38 IDC 43
Nissan (7201:JP) 27
C EBay (EBAY) 32 Iger, Robert 32
Nootrobox 80 How to Contact
Edmunds.com 29 Industrial and Commercial
CarMax (KMX) 59 Einhorn, David 70 Bank of China 20
Nootroo 80 Bloomberg Businessweek
Carney, Mark 18 Emirates NBD (EMIRATES:UH) Insight Investment 48
Carvana 59
Ennis, Tom
20
57
Intel (INTC)
Inventure Foods
36, 44
57
O Editorial 212 617-8120 Ad Sales 212 617-2900
Subscriptions 800 635-1200
Oaktree Capital Management
Euromonitor International 57 Iovine, Jimmy 41 Address 731 Lexington Ave., New York, NY 10022
35
Hillary
Evensky & Katz/Foldes
Financial 48
IRI
Ive, Jony
57
41
Obama, Barack 12, 35, 36
64
E-mail bwreader@bloomberg.net
Clinton Exane BNP Paribas 29
Oberto Brands 57 Fax 212 617-9065 Subscription Service
Oice Depot (ODP) 32 PO Box 37528, Boone, IA 50037-0528
ExxonMobil (XOM)
Eztec Empreendimentos e
70
J Oi (OIBR) 28 E-mail bwkcustserv@cdsfulllment.com
Participaes (ETC3:BZ) 28 Oracle (ORCL) 36
JAB Holdings 32
OConnell, Jack 86
Reprints/Permissions 800 290-5460 x100 or
Janus Capital Group 44
businessweekreprints@theygsgroup.com
F Jawbone
JPMorgan Chase (JPM)
80
12 P Letters to the Editor can be sent by e-mail, fax,
Facebook (FB) 36, 43, 44 JSL (JSLG3:BZ) 28
Favreau, Jon 88 Paes, Eduardo 22 or regular mail. They should include address,
Pandora (P) 41 phone number(s), and e-mail address if available.
FedEx (FDX)
Fiat Chrysler
32
K Parsley Energy (PE) 70 Connections with the subject of the letter should
Chevron (CVX) 70 Automobiles (FCAU) 27 Kajima Corp. (1812:JP) 64 Parsons, Bob 64
be disclosed, and we reserve the right to edit for
China Minsheng Fiorina, Carly 36 KKR (KKR) 64 Paul, Rand 36
PayPal (PYPL) 36
sense, style, and space.
Banking (1988:HK) 20 Firestein, Les 64 Krispy Kreme
Cisco Systems (CSCO) 36 Fischer, Stanley 12 Doughnuts (KKD) 32 PepsiCo (PEP) 57
Petrobras 28
Corrections & Clarications
Citadel 64 Fitch Ratings 20
Hedge Fund Managers Lose Their Swagger
Citigroup (C)
Clinton, Bill
20
12, 35, 37
Fitzgerald, Patrick
Flex
64
42
L Pickens, T. Boone
Pincus, Mark
70
80 (Markets/Finance, May 9-May 15, 2016) said that a
Clinton, Hillary 35, 36 Ford (F) 27 Lagasse, Emeril 88 Pioneer Natural $100,000 investment in the Standard & Poors
Clooney, George 86 Foster, Jodie 86 Lakshmi, Padma 88 Resources (PXD) 70 500-stock index in February 1997 would be worth
CLSA (600030:CH) 20 Fox (FOXA) 37 Laplanche, Renaud 32 Plant21 30
$6 million today, and an investment with Elliott
Colicchio, Tom 88 Frampton, Susan 64 LendingClub (LC) 32 Popcorn Indiana 57
Columbia Sportswear (COLM) Frank, Barney 35 LG (066570:KS) 43 Porsche (VOW:GR) 29 Management would be worth $14 million. The two
64 Frankel, Bethenny 57 LinkedIn (LNKD) 44 Proven Winners 30 investments would be worth approximately that if
Conagra Foods(CAG) 57 Fugazza, Antnio Emlio 28 Loeb & Loeb 87 Prudential Financial(PRU) 48 the start date were February 1977.
POWER TO CHANGE
YOUR WORLD
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 Opening Crazy things are happening in the world
economy. In Europe and Japan, interest
rates have turned negative, something
Remarks long thought impossible. In the U.S.,
workers productivity is improving at the
feeblest ive-year rate since 1982. China
is a confusing welter of slumping growth
and asset bubbles.
The Through it all, Federal Reserve Chair
Janet Yellen practices the central bankers
art of draining the drama from any sit-
Curse of uation. She insists that conditions are
returning to normal, albeit slowly. Her
favored approach, data dependence,
is nonpredictive and noncommittal, like
The Big inding your way in the dark by pointing
a lashlight at your toes.
Lawrence Summers, the Harvard
Bad Rut
By Peter Coy
economist who almost got Yellens job,
has no patience for such patience. Since
losing out to Yellen in 2013, hes been
jetting around the worldfrom Santiago
to St. Louis to Florence,
Italyto argue that the world
economy is in much worse
12
These are weird times.
Growth is weak. Interest
rates are negative.
Is there a way out?
shape than central bankers understand.
Focusing on monetary policy alone, he
says, theyre doomed to fall short of reviv-
ing growth. They need to reach out to the
governments they work for, he argues,
and insist on strong iscal stimulus in the
form of infrastructure spending and the
like. As an intellectual brawler from way
back, hes in his element.
The jurys still out on Yellen vs.
Summers. Boring does not equal wrong,
and provocative does not equal right. If
the U.S. economy heals nicely over the
next few years under business as usual,
Yellens incrementalism will look smart.
But the longer things stay weird, the more
Summers appears to be onto something.
My sense is that if Larrys hypothesis
is true, its a total game changer. It will
afect how we think about macroeconomic
policy for the next several decades, says
Gauti Eggertsson, an Iceland native who
worked in the Federal Reserve System
for eight years and is now a macro-
economic theorist at Brown University.
In November, after Summers presented
his ideas at the Peterson Institute for
International Economics, its president,
Adam Posen, himself a former policy-
maker at the Bank of England, blogged
that all of us in the profession have a lot
of work to do to respond to the disturb-
ing questions Summers raised.
For economic policymakers, the most
disturbing question is why global growth
remains paltry and uneven. The annual
growth rate of gross domestic product
in the U.S. in the January-March quarter
was just 0.5 percent. The euro zone was
stronger than the U.S., at 2.2 percent;
Japan, which has been lipping in and
out of recessions for a quarter century,
shrank 1.1 percent. Delation once seemed
to be a strictly Japanese problemnow
its a worldwide threat. Pessimism about
growth prospects is relected in low fore-
casts for long-term interest rates. The
annual yield on German 10-year notes is
only 0.13 percent.
It wasnt obvious in the summer of
2013, when President Obama was choos-
ing between Yellen and Summers, that
Summers would turn out to have such
out-of-the-box ideas. Obama said that
when it comes down to their basic phi-
losophy on the future of the Fed, the dif-
ferences between the candidates were
so small you couldnt slide a paper
between them, according to Democratic
Senator Dick Durbin of Illinois, who
attended a meeting with the president.
Both were highly credentialedshe as
a longtime Fed oicial who was a labor
economist at the University of California
at Berkeleys Haas School of Business; he
as Treasury secretary under Bill Clinton,
former Harvard University president,
and former head of Obamas National
Economic Council. If anything, Yellen
seemed more likely to be an activist Fed
chair and would probably be more com-
mitted to keeping stimulus in place until
the economy was deinitely recovered,
Michael Feroli, chief U.S. economist at
JPMorgan Chase, said at the time.
But in November 2013, after Yellen
was chosen but before she replaced
Ben Bernanke as chair, Summers went
to the International Monetary Fund in
Washington and raised the specter of
secular stagnation, a term coined in
the Great Depression by Harvard econ-
omist Alvin Hansen, who lamented sick
recoveries which die in their infancy, and
depressions which feed on themselves
and leave a hard and seemingly immov-
able form of unemployment. Secular is
econospeak for long-lasting, as opposed to
cyclical. Hansens warnings about secular
stagnation seemed to be disproved when
U.S. growth accelerated in World War II
and then remained strong after the war
stimulus ended.
For Summers, bringing the idea of
secular stagnation back into the academic
debate was like putting on a moldy old
coat from Grandpas attic. But revive it he
did. Now, this may all be madness, and I
may not have this right at all, he told the
IMF audience, before coming around to
saying, we may well need, in the years
ahead, to think about how we manage an
economy in which the zero nominal inter-
est rate is a chronic and systemic inhibitor
of economic activity, holding our econo-
mies back below their potential.
In other words, Summers claimed
world economies could be so imbalanced
that even zero interest rates would be too
highand for many years, not just briely
as economists had believed. The speech lit
up the Twitterverse and drew heavy news
coverage. Journalists attention has waned
a bit, but Summers has kept developing
the concept on his blog, in his Financial
Times columns, in speeches, and in papers
written with other economists, includ-
ing Browns Eggertsson, whos translated
Summerss thinking into the formal lan-
guage of general-equilibrium economics.
The real world is helping Summerss case.
The longer stagnation lasts, the more it
looks secular rather than just cyclical.
Ive come to a growing conviction that
the theory is right, he says.
To be clear, Summers is challenging
much more than when and how much
the Fed should raise interest rates. True,
he criticized it for voting in December to
lift the federal funds rate by a quarter of
a percentage point after seven years at
just more than zero. But thats an ordi-
nary argument over how high to set the
monetary thermostat.
Summerss deeper argument is that
world growth is stuck in a rut because
theres a chronic shortage of demand
for goods and services and a concomi-
tant excess of desired savings. The U.S.
and other industrialized nations tend to
save more as their populations age, he
says. Meanwhile, growing inequality puts
a bigger share of the worlds income in
the pockets of rich people; they cant
spend everything they make, so they
save it. The investment that would ordi-
narily soak up those savings is falling
short. Thats partly because the new
economy is asset-lite: Companies such
as Uber and Airbnb prosper by exploit-
ing assets (cars and houses) that already
exist. Software, which is pure informa-
tion and doesnt require the construction
of factories, accounts for a bigger share
of the economy. Slow growth in output
and productivity reduces investment as
executives lose faith in the payof from
capital spending.
Exhibit No. 1 in Summerss case:
Interest rates have been trending down
for 30 years, even after taking into
account the decline in inflation. The
interest rate, like any price, reflects
supply and demand. Its fallen because
the demand for loans is weak and the
supply of loans from savers, who have
extra cash to deploy, is strong. It used to
be thought that interest rates couldnt go
below zero, but the Bank of Japan and the
European Central Bank, among others,
are so desperate to kindle growth that
theyve pushed some rates below what
used to be called the zero lower bound
into negative territory.
Despite opposing the Feds December
hike, Summers continues to worry that an
extended period of ultralow and even neg-
ative rates will cause bubbles in assets like
stocks and housing, as desperate inves-
tors chase after higher returns. He says
iscal policy needs to play a much bigger
role than it has. How? On the investment
side, he favors government spending to ix
Americas dilapidated roads and bridges,
combat global warming, and improve
educationbig, expensive projects that
would provide value while soaking up
excess savings. A favorite line: The
United States right now has the lowest
infrastructure investment rate that it
has had since the second world war. On
the savings side, he favors, among other
Summers, using a term
coined during the Great
Depression, warns of
secular stagnation
things, changing the tax code to get more
money into the hands of lower-income
and middle-class families whod spend
rather than hoard it.
This, of course, sounds a lot like the
agenda Obama has been pushing unsuc-
cessfully for the past eight years. To
me, it looks like an opinion masquerad-
ing as a theory, Arnold Kling, a former
Fed economist, wrote on his blog in
2014. Congress shows no interest in any
measure that smells like iscal stimulus
especially now, with lawmakers hiding
under their desks until after the election.
Summers responds that his prescription
is separable from his diagnosis; conserva-
tives might prefer to ix the problem with,
say, export promotion, the elimination
of wasteful regulations, and big tax cuts
to induce companies to build factories.
Summers has been getting more of
a hearing from central bankers around
the world. His message to them: Think
bigger. The Fed traditionally restricts
itself to managing the business cycle 13
luctuations of output around a supposed
long-term upward trend. Summers ques-
tions the very existence of a business
cycle, an inherently optimistic concept
implying that what goes down must come
up. When output declines, his research
shows, it never quite gets back to its orig-
inal trajectory. Productive capacity sufers
lasting damage, in part because laid-of
workers lose skills. That makes it imper-
ative to avoid a recession whenever pos-
sible. Yet Summers says the odds of a U.S.
recession in the next three years are sig-
niicantly better than 50-50.
Lately, hes added the idea that
secular stagnation is infectious, spread-
ing between countries by trade and invest-
ment lows. A stagnant country can try
to cure its unemployment problem by
pushing down the value of its currency
and running a big trade surplus; that
worsens unemployment in its trading part-
ners, which sufer trade deicits, according
to recent work by Eggertsson, Summers,
and others. Beggar-thy-neighbor trade
theory, in other words, is alive and well.
Summers argues that central bankers
should stop focusing on the business
cycle, stop jealously guarding their
independence, and work with other
institutions to solve the deep prob-
lems that have gotten the economy into
 Opening Remarks
this condition. Central banks like to
sayWell, yeah, productivity growths to use the term secular stagnation are
a problem. Thats not our problem,
though. Inequalitys a problem. Thats relative to investment, very low rates, and
not our problem, though, Summers
said in a question-and-answer session
after his Peterson talk. I would suggest
that no major central banker in the world
is seriously engaged with this as an issue.
The Federal Reserve System employs
more Ph.D. economists than any other
organization in the world, so it would
seem to be an ideal place to bang out big
ideas about secular stagnation. But Fed
economists tend to focus on short-term
forecasting and the mechanics of mon-
etary policy, says Petersons Posen. Yellen
cant aford to indulge in blue-skying. Her
most important job is to move the rate-
setting Federal Open Market Committee
along by baby steps, maintaining as much
of a consensus as possible among hawks
and doves and being careful not to sur-
prise the inancial markets. If youre a
member of a central bank committee, let
alone the chair, every word gets scruti-
nized, Posen says.
On the narrow question of where rates
14 are headed, the Fed is gradually drift-
ing in Summerss direction. The median
projection by rate setters of where the
federal funds rate will eventually settle
has come down a full percentage point, to
3.25 percent, since the Fed began releas-
ing projections in 2012. But Yellen, unlike
Summers, isnt calling on Congress to amp
up stimulus. In a speech in November
at the Banque de France, she said con-
tractionary tax-and-spending policy was
hardly ideal, but gave iscal authorities
an out by saying they had to take long-
term sustainability into account.
Yellen has tiptoed around secular
stagnation, referring to the theory but
not endorsing it. Her right-hand man,
Vice Chair Stanley Fischer, who taught
Summers, Bernanke, and European
Central Bank President Mario Draghi
at MIT and once ran Israels central
bank, seems more open to the idea that
something fundamental has changed.
Speaking to academic economists in San
Francisco in January, he referred to the
secular stagnation hypothesis, force-
fully put forward by Larry Summers in a
number of papers. He agreed that inter-
est rates will likely remain low for the
policy-relevant future. He even enter-
tained one of Summerss solutions for the
savings/investment imbalance: govern-
ment spending on long-term projects. Says
Summers: Even people who dont like demand growth can itself damage the
supply side of the economyi.e., the
accepting new realities of excess saving people and machines who make stuf.
Unemployment causes workers skills
chronic demand shortfall. to atrophy; companies stop investing in
One big fact is hard to square with equipment and software.
Summerss idea that the economy sufers Strengthening demand can turn that
from a shortfall in demandnamely, the vicious circle around and gradually raise
5 percent U.S. unemployment rate. If the economys productive potential,
Americans spend a lot more, as he desires, Summers says. Far from crowding out
there might not be enough workers avail- private investment, government spend-
able to handle the demand. The result ing could induce more of it.
could be a bidding war for talent, climbing When interest rates can go negative,
wages, and unacceptably high inlation. all of the verities in economics are up for
Princetons Alan Blinder, a former grabs. Economists joke that the questions
Fed vice chairman, is one of a group of on their doctoral exams havent changed
economists who argue that economic in 50 years, but the answers have. The
stagnation emanates from weak supply, joke captures a truth, Summers says.
not weak demand. When I go to sleep He seems to relish being in the midst
at night worrying about the economy, of the upheaval. Thats the efect of
Im never worrying that Americans living backwards, the White Queen told
wont spend enough, he says. Robert Alice in Wonderland. It always makes
Gordon of Northwestern University sim- one a little giddy at irst. 
i
ilarly says growth is impeded
b a lack of innovationa
by
s
supply-side explanation.
Summers, no surprise,
h an answer to those objec-
has
t
tions. He says there may be
m
more slack in the labor market
t
than is sometimes recognized.
A
And he says the demand-
s
side and supply-side expla-
n
nations for stagnation arent
m
mutually exclusive: Weak
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 Bloomberg
View
Get the Military Out of
Venezuelas Business
The countrys generals run huge parts of the
economy. The opposition needs to focus on that
In 1993, Venezuela had fewer than 50 generals; today it has
16 more than 4,000. This kind of runaway inlation is every
bit as pernicious as the economic variety that also alicts
the country. And the military is increasingly involved and
invested in that economy.
In February, President Nicols Maduro put the generals
in charge of a new state oil-and-mining-services company,
one of almost a dozen military enterprises started under his
administration. Active or former oicers head some one-third
of Venezuelas ministries and govern about half its 23 states.
Service members have gotten big raises; preferential access to
housing, cars, and food; and promotions. Oicers have won
lucrative contracts, exploiting currency controls and subsi-
diesselling cheap gasoline to Venezuelas neighbors at enor-
mous proit, for instance.
Maduros opponents should be uniting around a coherent
plan to ix Venezuelas imploding, military-controlled economy.
Instead, the opposition is hellbent on removing the president
from power, collecting some 2 million signatures on a recall
petition. Maduro still has signiicant political support, and hell
use his control of the executive and judicial branches to frus-
trate and delay that efort, which is unlikely to succeed this
year. The oppositions credibility has already been hurt by its
rash boast that it would throw out Maduro within six months
after taking over the legislature in January. It would be far better
for the opposition to focus on winning votes for the election
in 2019, when Maduros term ends.
One way to put the military back in the box is to make clear
that misdeeds will face consequences. The U.S. is building
cases against oicers implicated in Venezuelas burgeoning
drug trade. Its also targeted a handful of oicials with asset
freezes and visa bans for engaging in political violence and acts
of public corruption. However, if the U.S. leads the charge, it
would only validate Maduros anti-Yanqui narrative. So the U.S.
To read Timothy L.
OBrien on Donald
Trump, king of debt,
and Adam Minter
on why we should get
rid of the TSA, go to
Bloombergview.com
should quietly make clear that theres plenty of room left on
the targeted sanctions list and it will publicize credible infor-
mation of corruption, criminality, and abuse.
The good news is that support for Chavismo is crumbling
both from without and within. The U.S. opening to Cuba has
erased a once-popular leftist talking point. Argentinas changed
leadership has stepped up criticism of Venezuela. And Maduro
may have one less ally if Brazils Workers Party loses power.
Venezuelans are right to hold Maduro responsible for his
economic mismanagement, which has resulted in blackouts,
two-day government workweeks, and life-threatening short-
ages of medicines. But kicking the president out of oice will
not by itself end economic hardship and political dysfunc-
tion. That will also require getting the military out of business.
Ban E-Cigarette Ads
Everywhere
Europe has done the right thing. The U.S. has
to follow suit for the sake of American teens
Within a few weeks, ads for electronic cigarettes will go dark
on European TV, radio, and websites and will disappear from
most print publications. Europes highest court has approved
new regulations on such adsin contrast with the U.S. Food and
Drug Administration, which declined on May 5 to impose the
same ban, even as it declared its authority to regulate vaping
products. Cigarette ads have been banned on U.S. TV and radio
since the Nixon administration, but e-cigarette ads are allowed
everywhereand theyre often aimed at teenagers.
This helps explain why more and more American adoles-
cents are taking up e-cigarettes. In the past four years, the
number has risen more than 900 percent, to 3 million, includ-
ing about 1 in 6 high school students.
Even experts who believe (on incomplete evidence) that
e-cigarettes may have the potential to help tobacco users quit
see the danger in allowing vapes to be promoted to young
people and other nonsmokers. While e-cigarettes dont deliver
the smoke and tar that traditional cigarettes do, their vapor
contains noxious substances such as formaldehyde, acetalde-
hyde, heavy metalsand, of course, nicotine, which impairs
brain development and causes addiction, ultimately encour-
aging new users to switch to the combustible kind.
Various studies in the U.S. have found an association between
teen use of e-cigarettes and ordinary smokes. One found that
kids who tried e-cigarettes were more likely to smoke combus-
tible cigarettes within the next year than those who didnt. That
e-cigarettes come in thousands of lavors, from cherry crush
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to pomegranate, only increases their appeal to kids.
The FDA is starting a yearslong process to evaluate the ingre-
dients in various e-cigarette brands. Its at least banning the
sale of vaping products to minors, though most states already
do that. E-cigarettes are readily available to teens online. 
 i r t c w ly t -
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m c a h t c ,
T i m c t c m
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f h h-t s h W c t t v
m f

REITLING C M
 Global
Economics
May
18
Banks are afraid to handle funds of charities operating in war zon
What we are seeing is a rational reaction to increased regulation
Frances Guy was close to rolling out a
program to feed hundreds of displaced
people in war-torn Syria last year. Guy,
the Middle East head of Christian Aid,
had secured funds and found partners.
But the charitys bank, Standard
Chartered, refused to transfer $50,000
to put the project in motion.
Christian Aid, sponsored by
41 churches in Britain and Ireland,
is one of many organizations facing
such restrictions. U.S. authorities have
levied billions of dollars in ines against
Standard Chartered, HSBC Holdings,
and BNP Paribas for violating sanc-
tions on pariah nations in recent years.
As a result, the banks have stopped
sending money to certain countries
and have even closed accounts of cus-
tomers who do aid work in perilous
places. The Charity Finance Group,
a trade association in London with
1,350 members, says 200 to 300 orga-
nizations have had their accounts can-
celed or endured long delays and
rejections of money transfers.
Some American banks are refusing
to make cash transfers for Oxfam,
the global antipoverty organization
set up in 1942 to relieve famine in
Greece. This winter, Christian Aid
said it planned to deliver blankets to
displaced people in Iraq, but by the
time the money came through, it was
almost spring. The unintended conse-
quence here is that aid is being denied
to people in desperate need of assis-
tance, says Guy, a former U.K. ambas-
sador to Yemen and Lebanon.
Banks have also closed accounts for
hundreds of money-transfer outits
that wire $582 billion a year in remit-
tances from migrant workers to their
families back home. Mark Carney,
governor of the Bank of England and
chairman of the Financial Stability
Board, has warned about the inancial
abandonment of entire countries.
The U.S. has shut charities for
funding terrorism in the past decade.
In 2009 ive leaders of the Holy
Land Foundation for Relief and
Development, once the
largest Muslim charity in
the U.S., were imprisoned
for funneling millions of
dollars to Hamas, the
Palestinian group
designated a
terrorist organi-
zation by the U.S. Department of State.
In a pending case in New York, about
200 victims of terrorist attacks in Israel PHOTO ILLUSTRATION BY BRAULIO AMADO; PHOTOS: ALAMY (1); GETTY IMAGES (2)
are suing NatWest, a unit of Royal
Bank of Scotland Group, for providing
banking services to a Palestinian
charity linked to Hamas by the U.S.
Department of the Treasury.
The Obama administrations use of
sanctions to punish Russia and Iran
has triggered an explosion of new
standards and regulations dictating
what banks can and cant do when
serving clients. Banks are taking the
safest course and simply shutting the
accounts of customers who pose even
the slightest risk. What we are seeing
is a rational reaction to increased

regulation, says
Lanier Saperstein,
a partner in New
York at Dorsey &
Whitney, a law
irm that represents
major banks.
In 2012 the U.S. Department of
Justice iled a criminal charge against
Standard Chartered for illegally moving
millions of dollars through the inancial
system on behalf of sanctioned Iranian,
Sudanese, and Libyan entities. Standard
Chartered has paid almost $1 billion to
settle cases brought by the federal gov-
ernment and New York state. HSBC
took a $1.9 billion hit in 2012 after it was
charged with permitting Mexican drug
traickers to launder hundreds of mil-
lions of dollars through its accounts and
violating sanctions laws.
The British irms now operate under
deferred-prosecution agreements,
which means they could lose their
U.S. banking licenses if
they repeat their ofenses
or fail to upgrade internal con-
trols adequately. Spokesmen for HSBC
and Standard Chartered declined
to comment.
The U.S. Treasury acknowledges
that closing the accounts of clean orga-
nizations is a problem. Its now advis-
ing lenders in Latin America and the
Caribbean on how to comply with
anti-money-laundering and sanctions
rules. The departments senior oi-
cials are also assuring U.S. and foreign
banks that the authorities wont penal-
ize them for innocent mistakes. We
know that inancial institutions, like
human beings in general, are not infal-
lible, Adam Szubin, Treasurys acting
undersecretary for terrorism and
inancial intelligence, said in a speech
to the American Bankers Association
in November.
On a March afternoon in London,
two former U.K. government minis-
ters testiied before a parliamentary
committee. Clare Short and Andrew
Mitchell, both former secretaries of
state for international development,
described a recent fact-inding trip to
The new oil minister of Fires in Canadas
Saudi Arabia is a Saudi oil region threaten
Aramco veteran 20 the economy 21
Chinese leaders sound Panamas president
the debt alarm 20 defends his countrys
honor 22
19
Turkeys border with Syria. They were
impressed by the scale of the human-
itarian efortIslamic Relief has deliv-
ered 143 million ($207 million) in aid
to 6.5 million Syrian refugees since
the outbreak of war. But Short and
Mitchell were outraged that banks
repeatedly delayed the arrival of
money earmarked for charities oper-
ating in the region.
Islamic Relief has cooperated
with the United Nations and the West
over the past 32 years. Still, HSBC
closed the charitys bank account at the
end of 2014 after a monthslong review.
The charity sought to reassure the bank
that it was doing everything possible
to ensure none of its partners in the
Middle East violated money-laundering
and terrorist-inancing rules. But with
the charity sending aid into a country
torn apart by years of civil war, there
was no way it could promise that none
of its funds would end up in the wrong
hands. You cant get cast-iron guaran-
tees in a war zone, Islamic Relief U.K.
Director Imran Madden says.
For the ield-kitchen project, Guy
assured Standard Chartered that
Christian Aid would track the
 Global Economics
money. But the bank couldnt get
comfortable with the charity sending
money into Syria. Moreover, Christian
Aid planned to rely on hawala, a
centuries-old system of moving cash
around the Muslim world that oper-
ates outside formal banking channels.
Under hawala, someone in London
who wants to send money to a rel-
ative in Syria visits a local broker,
hands over the cash, and, in return,
receives a code. The relative uses this
code to collect the funds at the other
end, and the two brokers settle at
some later date.
Charities use hawala because its
often the only way of getting cash into
a country that doesnt have a function-
ing banking system. But since Sept. 11,
U.S. authorities have targeted some
hawala networks for helping terrorists
move money. They are not prepared
to take any risk inside Syria, says Guy,
who had to ditch the ield-kitchen
project. Thats their right. Its just
disappointing. Gavin Finch and
Edward Robinson
The bottom line Charities such as Oxfam working
20 in war zones are having trouble transferring money:
Banks dont want to fund terrorists accidentally.
Energy
Saudi Arabia Gets a
New Oil Czar
Khalid al-Falih, ex-CEO of Saudi
Aramco, becomes the oil minister
The appointment could signal
more of the same for Saudi policy
Saudi Arabias new oil minister, Khalid
al-Falih, landed his job on May 7
in a major housecleaning by King
Salman and his son Deputy Crown
Prince Mohammed bin Salman.
Al-Falih, whos also chairman of the
board of directorss at state pro
pro-
ducer Saudi Aram mco (a job hell
hold on to), says hell main-
tain the policies o
of his pre-
decessor, Ali al-N
Naimi,
who is in his 80s.. If
the market consid-
ers the appointmment
as signal-
Al-Falih
ing more
Saudis Still Prevail
Crude oil production at months
end, barrels per day Record
high
Saudi Arabia
$119
$48
U.S. Brent crude
price per barrel
4/2012 4/2016
DATA: U.S. DEPARTMENT OF ENERGY; BLOOMBERG
of the same for Saudi policy, that
could allow prices to continue follow-
ing their gradual trend upward, says
Edward Bell, a commodity analyst at
Dubai bank Emirates NBD.
Saudi Aramco stands ready to meet
demand from customers this year as
global consumption rises by 1.2 million
barrels a day, Chief Executive Oicer
Amin Nasser told reporters at company
headquarters on May 10. Nasser suc-
ceeded al-Falih last May. OPECs Saudi-
led production increase will probably
force 700,000 barrels a day of high-cost,
non-OPEC crude of the market in 2016,
mainly U.S. shale oil and Canadian oil
produced from tar sands, says the Paris-
based International Energy Agency.
Saudi policy has helped send prices
more than 60 percent higher since
January, to above $45 recently.
Al-Falih was drafted to head the
health ministry last year. The min-
istry was in need of restructuring.
Yet on trips to the U.S. and the
World Economic Forum in Davos,
Switzerland, al-Falih was asked to
expound more on stability in the oil
markets than on improving domestic
medical services. Tawiq al-Rabiah,
former commerce and industry minis-
ter, replaced al-Falih as health minister.
Educated as an engineer at Texas
A&M, al-Falih joined Aramco in 1979,
where he mapped out the companys
strategy for expanding the natural
gas supply, which
whi was needed for
power genera ation and industrial
expansion. As CEO, a job he
assumed inn 2009, he presided
over Arammcos push into petro-
chemicalls. People who have
worked with al-Falih say
hes haands-on, with a sharp
p of operational and
grasp
strattegic details.
He will probably preside over the
announced Saudi Aramco initial public
ofering. The IPO is essential to the
12m
deputy crown princes plan to build
up the inancial resources needed to
10m
wean the country of oil eventually.
Defending Saudi oil policy means
8m al-Falih will face opposition when he
represents his country for the irst time
6m at the OPEC meeting on June 2. The
Iranians refused to honor a production
4m freeze that Saudi Arabia and Russia
proposed, and the Venezuelans are in
such poor inancial shape they need a
price of almost $100 a barrel to stabi-
lize their economy.
With the Iranians intent on produc-
ing lat out, Saudi Arabia cant aford
to hang back. Al-Falih wont bend to
the desire of OPEC members such as
Venezuela, Ecuador, and Algeria to cap
output in a bid to raise prices much
higher, says Ed Morse, Citigroups
global head of commodities research.
Saudi Arabia, he says, will look at the
national interest in producing to gain
markets and market share.
Al-Falihs full title is minister
of energy, industry, and mineral
resources. Hell have to analyze pro-
posals to break up the national power
utility to bring in more private com-
panies and boost competition, an
issue al-Naimi didnt have to deal with.
Anthony DiPaola, Nayla Razzouk,
and Wael Mahdi, with Javier Blas and
Deema Almashabi
The bottom line Khalid al-Falih, Saudi Arabias new
oil minister, pledges oil production will stay high, as
the kingdom expands market share.
Lenders
China Decides Debt
Can Be Dangerous
FROM LEFT: HAMAD I MOHAMMED/REUTERS; DARRYL DYCK/BLOOMBERG
Xi wants growth of 6.5 percent,
and that requires more lending
Institutions always find new
ways to get around the rules
The Chinese Communist Party is
now oicially worried about mount-
ing debt. A tree cannot grow up to
the skyhigh leverage will deinitely
lead to high risks, said a front-page
commentary in the Peoples Daily
The Fire on
May 6

400k Acres burned

since May 1

430 Number
of firefighters

21

Disasters Infernos Scorch the Tar Sands

Fires tore through Fort McMurray in the heart of Canadas oil country, in Alberta province. Although downtown was
mostly spared, 2,400 buildings in the outer neighborhoods were lost. The blaze shut down 1 million barrels of daily
oil production. Depending on how long these oil sands projects remain oline, that lost output could lower economic
growth in Canada this year. Matthew Philips
 Global Economics

Credit in China allow weak/nonviable irms to keep

going, warned the International
Borrowing as a percentage of GDP Lending, by source, as a percentage of GDP Monetary Fund in an April report.
Chinas leaders seem intent on
Corporate* 2008 102% Bank 2008 108% avoiding signiicant job losses before
2015 165% 2015 141% a crucial Communist Party Congress
next year. They know unemploy-
18% Growing, but 48%
Household still well below Bonds ment would rise if weak companies
41% the U.S. 63% couldnt borrow. So corporate debt
will probably keep on rising and could
Central 16% Shadow 18% be 10 percentage points higher by
Because China
government 22% Mainly bonds banking 35%
issued by banks,
borrows very little yearend, predicts Gavekals Chen.
abroad, a credit Chinas low rate of external bor-
such as China
28% 4% shock is unlikely
Bank Development Foreign rowing, capital controls, and state
19% Bank, that fund borrowing 8%
state projects
ownership of the banks make it
less vulnerable to a sudden loss of
*INCLUDES LOCAL GOVERNMENT DEBT. DATA: BLOOMBERG INTELLIGENCE
credit, says Louis Kuijs, head of Asia
Economics at Oxford Economics in
on May 9. The author of the losses could amount to as much as Hong Kong. People are still happy
commentary was identiied as an 9.1 trillion yuan ($1.4 trillion), or to put their money in the banks, he
authoritative person, usually code for 13.5 percent of GDP, Cheung estimates. says. And liquidity drying up is what
the top leadership. Any mishandling During the crisis at the turn of the creates a inancial crisis.
will lead to systemic inancial risks, century, China created four asset Instead, China risks falling into
negative economic growth, or even management companies to take on a pattern of chronic low growth,
have households savings You are stuck long bad debt from the four giant much as Japan did starting in 1990,
evaporate. Thats deadly. term with slower state banks. There now are as ever more credit is required to
Liberal lending has been growth. You end up 22 local AMCs, says Chen fuel a slowing economy. In China last
with a lot of zombie
a part of the economy for companies holding Long, China economist at year, 10 percent of new credit went
22 years. The concerns arise back the economy. research consultants Gavekal toward servicing existing debt, UBS
now because the expansion Chen Long, Dragonomics in Beijing. The Securities estimates. They may never
Gavekal
of debt is approaching criti- Dragonomics new AMCs often take on debt deleverageJapan never did, Chen
cal levels. In the years since that banks have agreed to buy says. But then you are stuck long term
China unleashed billions in back later, a dodge Chen calls with slower growth. You end up with a
loans to weather the global warehousing. That helps lot of zombie companies holding back
inancial crisis of 2008, overall banks clean up their balance the economy. Dexter Roberts
debt has grown from 164 percent of sheets in the short term and lowers
The bottom line Losses from bad loans might
gross domestic product to 247 percent the capital they must set aside to cover equal as much as 13.5 percent of Chinese GDP, yet
last year, Bloomberg Intelligence esti- the cost of soured loans. Although the policymakers prop up loss-making companies.
mates. Household and central govern- China Banking Regulatory Commission
ment debt are still manageable at has tried to crack down on warehous-
41 percent and 22 percent of the ing, institutions always ind new ways
economy, respectively, but corporate to get around the rules, Chen says.
debt, at 165 percent, is much higher Oicials have announced that banks Wealth
than in most developing countries. burdened with bad corporate debt will
At the same time, President be encouraged to swap the loans for
Fighting the Bad Rap
Xi Jinping wants to deliver economic equity, becoming shareholders of the Of the Panama Papers
growth of 6.5 percent. To hit that troubled borrowers. Regulators plan
target, the government will need to an initial debt swap valued at 1 trillion
President Varela defends the
lend to companies to keep them going. yuan, reported the English-language
countrys reputation
Many are already in rough shape. website of inancial publication Caixin,
With the steel, coal, cement, and citing an unnamed executive at China Success does not depend on
real estate industries sufering over- Development Bank. Participants irregular flows of money
capacity and falling proitability, cor- include Bank of China, Industrial
porate defaults are likely to rise, say and Commercial Bank of China, and Panama President Juan Carlos Varela
S&P Global Ratings and Fitch Ratings. China Minsheng Banking. has been doing damage control to con-
Nonperforming loans could already Bad loans will also be securitized and vince the world his country isnt an
be as high as 19 percent of loans out- sold, likely to other banks. Its unclear ofshore tax haven. Hes met oicials
standing and could rise to one-quarter, how steep the discount on the secu- in Tokyo and Washington, penned a
far higher than the oicial estimate of ritized debt will be. Debt swaps and New York Times op-ed defending his
1.67 percent, warns Francis Cheung, a securitizations are not solutions per home, created a committee includ-
strategist at brokerage CLSA. Potential se and could backire. They could ing Nobel laureate economist
 Global Economics
Joseph Stiglitz to evaluate Panamas
inancial system, and given interviews
and speeches upholding Panamas
ethical standards.
The campaign was triggered by the
leak of 11.5 million documents from
Panama law irm Mossack Fonseca
that revealed much about the way cor-
porations and individuals hide money
in ofshore companies. On May 9 the
same investigative journalism center
that released the papers provided
access to a searchable database.
Even as Varela has called for more
transparency, hes resisted pressure
from the Organisation for Economic
Co-operation and Development to
automatically share bank account
information with foreign tax author-
ities. Such measures have been
embraced, at least in principle, by
other locales such as Switzerland,
Bermuda, and the British Virgin
Islands, where Mossack Fonseca incor-
porated most of its shell companies.
Instead, Varela has said reforms crack-
ing down on money laundering were
well under way. Panamas success
24 does not depend on irregular lows of
money into our inancial system, he
told U.S. oicials including Secretary
of State John Kerry at an event in
Washington on May 3. Nonetheless, on
May 11, Panama could no longer resist
the pressure from
Panama GDP the OECD and
growth agreed, in princi-
14% ple, to automati-
cally share bank
account informa-
7% tion with foreign
tax authorities.
The Panama
0% Papers, which
2001 2015 Mossack Fonseca
says were
obtained by a hacker and then leaked
by the International Consortium of
Investigative Journalists, provide
a glimpse into decades of deals by
a major creator of ofshore com-
panies. According to a poll by local
research group Dichter & Neira,
most Panamanians fear that the
fallout from the scandal will hurt the
economy, which is already slowing
from double-digit growth. Some
Panamanian Twitter users have even
tried, and failed, to wipe the countrys
name from the scandal by rebranding
the afair as #MossackFonsecaPapers.
-1 .6%
Year-over-year drop in th
Index of Consumer Expectations. The April reading
reects a gloomy outlook for growth.
The initial reaction by Panamanians
to the papers was a nationalist outburst
that united even the worst of enemies.
Says ex-President Ricardo Martinelli, a
bitter rival of Varelas since the former
allies had a falling out: Its going to hurt
Panama. These people who are looking
to hide money, they dont want these
problems. Its an attack on Panama.
That the U.S. hasnt signed up for
the automatic exchange of banking
information rankles many of Panamas
defendersincluding the corporate
lawyers who make up the ofshore
company industry in the country.
Mossack Fonseca is among many
other irms whose partners made
big proits from the sale of shell com-
panies. Partner Ramon Fonseca was
until recently an adviser to Varela.
The law irm declined to comment.
Eduardo Morgan Jr., the senior
partner of a Panama City-based
law irm with oices in 17 jurisdic-
tions and double the workforce of
Mossack Fonseca, has been a justice
minister and an ambassador to
Washington. His father opened one of
Panamas irst irms for incorporating
ofshore companies in 1923, although
the 100 lawyers at Morgan & Morgan
now focus largely on litigation.
Morgan is an unoicial spokesman
for Panamas law irms, appearing
on local TV and talking with foreign
media. The OECD wants to govern
the world, he says sitting in his oice
in a Panama City skyscraper he owns.
(He also owns a stake in a Bahamas
bank.) The OECD says Panama has to
sign, but the U.S. didnt sign, he says.
Morgan echoes many of Varelas
arguments: Panamas removal from
the Financial Action Task Forces
Digits
gray list shows money
laundering is largely
a thing of the past (the Task
Force is an international body that
combats money laundering, and
its list names the uncooperative
nations); know your client rules
have forced Panama irms to boost
due diligence; Panama fares better
than Japan, Germany, and the U.S. in
the watchdog Tax Justice Networks
ranking of inancial transparency.
Morgan often refers to a book on
his desk by Australian academic
J.C. Sharman, The Money Laundry:
Regulating Criminal Finance in the Global
Economy. In an experiment, the author
found it easier to form a shell company
in the U.S. and other developed
countries without proof of identity than
in emerging markets such as Panama.
Panama is just one of many in the
business of creating ofshore com-
panies, Morgan says. And Mossack
Fonseca isnt the only irm with shell
companies linked to politicians. A
search in Panamas public registry
shows two ofshore entities with ties to
relations of Eduardo Paes, the mayor
of Rio de Janeiro. The shell companies,
at which family members are directors,
werent part of the Mossack Fonseca
leak. Paes says his father set up the
companiesand has always paid his
taxes in full. The registered agent of
DATA: BLOOMBERG; UNIVERSITY OF MICHIGAN
these businesses? Morgan & Morgan
in Panama City. The irm declined to
comment. Blake Schmidt
The bottom line Panama protests being smeared
by the Panama Papers even as it tries to defend its
ofshore company industry.
Edited by Christopher Power
Bloomberg.com
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 Companies/
Brazilian business in a Kicking up dirt over
holding pattern 28 a new breed of flower
30

Industries The new Tesla

spooking the
Autobahn 29
Briefs: A freeze on
Arctic drilling; Amazon
vs. YouTube 32

May 16 May 22, 2016

When National Highway Traic Safety

The
Administration chief Mark Rosekind
announced on May 4 that the size
of the largest auto recall in U.S.
history was about to double, he also
revealed that this safety action hits
close to home. Like tens of millions of

Longest
American cars, his is equipped with
a potentially deadly Takata air bag,
one that wont be ixed anytime soon
because parts arent available. The
vehicle is parked in his driveway. I
tell my wife and kids the same thing
were telling everyone else: For all

Recall
the frustration, make sure youre
safe, he says.
Frustration may be an understate-
ment. Millions of owners of 17 difer-
ent car brands are likely to be in the
same boat as the industrys top reg-
ulator: learning their personal vehi-
cles could actually kill them should
an unstable air bag inlator explode
in their faces, then told to wait their
turnperhaps for yearsuntil replace- 27
ment parts are available.
The situation is particularly galling
to many owners who had assumed that
the slow drip of information regard-
ing problems with Takata bags over
much of the past decade meant the
problem
bl was being
b i g

3 ,800
63 ,000
addressed. Id heard about
the recall on Honda Accords and
such, which started, like, back in 08,
says an exasperated Carter Fawcett,
whose 2012 Acura TL is on a 300-
vehicle waiting list at a dealership in
Salt Lake City. Only one customer has
completed the repairs there so far, he
was told. I thought for sure they had
igured it all out and werent selling
defective air bags after earlier recalls,
he says. Its really stupid.
There have been other high-
ILLUSTRATION BY 731

The Takata air bag recall hits 64 million vehicles. Its not over yet proile recalls over the years, such
as General Motors faulty ignition
I thought for sure they had gured it all out. Its really stupid switches in 2014 and Toyotas sudden-
acceleration woes in 2010. But
 Companies/Industries
Takata Ford
2008-19 1981
Exploding air bags Parking gear slippage
64m* 21m 7.9m 6.7m 5.9m 5.8m
Plus 17 automakers
theres never been an auto safety
scandal that unfolded as slowly, delib-
erately, and then seemingly geomet-
rically as this one. Rosekind says that
a large percentage of the U.S. vehicle
population need to be replacedcars
equipped with about 67 million inla-
tors. But even that understates the sit-
uations magnitude. Takaki Nakanishi,
a Tokyo-based auto analyst for
Jeferies, igures that Japan and other
nations are likely to follow the U.S.s
lead and expand their own recalls,
adding 55 million inlatorsfor a total
of 122 million called back globally.
Of the four makers of air bag
inlators worldwide, only Takata uses
an ammonium nitrate chemical com-
pound to produce a controlled explo-
28 sion to launch the bag during a crash.
The chemicals have proved to become
unstable over time, especially under
humid conditions, and 13 people have
been killed in the U.S. and Malaysia
after their Takata bags unintention-
ally deployed, sending shrapnel into
drivers or passengers.
Replacing the bags has been slow
going because the design of a bag is
unique to each car model. That means
producers of replacement bags must
tool up to manufacture scores of difer-
ent inlators suited to the exact conig-
urations of various steering columns
and dashboards.
In a May 4 statement in response
to NHTSA expanding the recall,
Takata said it wasnt aware of any rup-
tures in the inlators involved in this
latest recall, either in the real world
or in the test lab, nor was it aware
of any new data or scientiic analy-
sis that suggested substantial risk
for vehicle owners. It nevertheless
agreed to accept and support the
The biggest auto recall
ever has been slowed by
an inability to get enough
replacement parts
Top Auto
Recalls
Ford General Motors
1996 1971
Ignition switch res Engine mounts
DATA: NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION; *VEHICLE TOTALS ARENT FINAL; NHTSA ESTIMATE OF RECALLED
INFLATORS BECAUSE SOME CARS HAVE MORE THAN ONE AFFECTED AIR BAG. INFLATOR ESTIMATE IS 64 MILLION TO 69 MILLION
expansion to help restore public coni-
dence. Our actions demonstrate our
total commitment to safety and our
intention to be part of the solution,
Chief Executive Oicer Shigehisa
Takada said in the statement.
The mess started with a recall of
just 3,940 Honda Civics and Accords
in 2008. Three years later, the action
was still conined to drivers-side
bags on fewer than 3 million Honda-
produced vehicles. In 2014 the auto-
maker recalled 2.8 million vehicles and
then, for the irst time, added 988,440
cars and trucks to ix passenger-side
bags. That was the irst time Honda
and Takata suggested that climate
could be a factor, with the recall being
concentrated in high-humidity states
along the Gulf Coast. It then became
a multiple-automaker problem, with
Toyota, Nissan, BMW, Chrysler,
Ford, Mazda, Mitsubishi, and
Subaru joining in.
Subsequently, NHTSA opened a
defect investigation in June 2014, and
a congressional investigation started
in October. Takata executives pub-
licly apologized at a Senate hearing in
November. Still, the company resisted
NHTSAs calls to go even further. So
on May 19, 2015, NHTSA announced
a national recall, along with a legal
order to enforce the agreement. The
next day, so many panicked consumers
tried to log on to check their vehicles
that they crashed the governments
auto recall website.
NHTSA took over management of
the recall last November, enlisting the
three other air bag suppliersAutoliv,
ZF TRW Automotive Holdings, and
Daicelto help make replacement
inlators. As of April 22, automakers
had repaired 8.2 million of the irst
28.8 million recalled, about 28 percent
of then-afected vehicles. And that
was after theyd been at it for a couple
of years. Now, with the recall more
than doubling, NHTSA hopes to com-
plete the replacements by the end of
the decade.
General Motors General Motors
2014 1981
Ignition switch Control arm
In the meantime, some dealers are
ofering customers loaner cars. NHTSA
chief Rosekind couldnt get one, even
though his agency looked into the
possibility of ordering automakers to
ofer loaners to all afected American
owners. The government, NHTSA
learned, didnt have the authority.
If we could have done it, we would
have, Rosekind says. That would have
made things a little simpler for worried
vehicle owners. But with the Takata air
bag debacle, nothing has been easy.
Jef Plungis, with Melissa Mittelman
The bottom line U.S. regulators have more than
doubled the number of Takata air bags to be
recalled. The work wont be nished until late 2019.
Investment
Corporate Brazil Wants
To Breathe Again
The impeachment crisis has
put of key business decisions
It becomes clear that she has no
solution to present to us
The drawn-out political drama over
the ouster of President Dilma Roussef
of Brazil has sent local stocks reeling
FROM LEFT: EVARISTO SA/GETTY IMAGES; PHOTO ILLUSTRATION BY 731; GETTY IMAGES (2)
and recovering again and again. On
May 9, investors, whod already fac-
tored in a transition period under
Vice President Michel Temer, were
spooked when the impeachment
process was briely put into doubt
by a legislative maneuver. After that
was ironed out, the march toward
Roussef s trial and likely removal
from oice pressed on, and stocks and
the Brazilian currency rallied.
With political gridlock paralyzing
the nations capital since last year,
corporate Brazil has been living with
uncertaintyand thats been bad for
business. Although executives have
been reluctant to take sides publicly

in the debate over the charges against
Roussef (using state-run banks to
cover up a budget gap, an alleged
breach of a iscal responsibility law),
theyve bemoaned the lack of clear
governmental policies. Bureaucrats
have been sitting on their hands as
Roussef s government and the coun-
trys lawmakers ran from ring to ring
in the impeachment circus. If you
hear absolutely nothing from the pres-
ident regarding what concerns us the
most, which is a year and a half of the
economy at a halt, it becomes clear
that she has no solution to present to
us, says Antnio Emlio Fugazza, chief
inancial oicer at homebuilder Eztec
Empreendimentos e Participaes.
At the top of the corporate list of
concerns are tax and labor reforms
that executives say will help them hire
and invest more. There are also more
speciic measures that afect indus-
tries from telecom to auto manufactur-
ing. Oi, the struggling phone carrier,
has been waiting for months for an
overhaul in regulation that would free
it from investing in outdated, money-
losing ixed phone lines. The proposal
has been stuck between the communi-
cations ministry and Anatel, the indus-
trys governing body, which says it
needs more study.
Automakers saw car sales fall about
28 percent for the irst four months
of 2016 from a year earlier, on top of
a 27 percent full-year drop in 2015.
Theyve been waiting since last year for
the government to sign a plan to give
consumers incentives such as rebates
to upgrade their vehicles.
If Temer does step into a caretaker
president role, his long experience in
Braslia should ensure he has the clout
to quickly address the crisis of eco-
nomic growth, according to Antnio
Temer
Delim Netto, a former inance minis-
ter and longtime economic adviser to
top Brazilian politicians. The vice pres-
ident is expected to enact more busi-
ness-friendly policies than Roussef,
whose Workers Party has resisted mea-
sures that could sacriice protections for
labor. Temer is likely to replace current
Finance Minister Nelson Barbosa,
the third such change in the post in
18 months. The people that are coming
in know what needs to be done, and
they know it needs to be done quickly,
says Paulo Bilyk, chief investment
oicer at Rio Bravo Investimentos.
Srgio Fischer, chief execu- Galvao, and Cristiane Lucchesi
tive oicer of Log Commercial
Properties, a real estate company
based in Belo Horizonte, says there
are indications that business will pick
up once Temer steps in. Im already
feeling it, he says. Weve been
getting requests, big ones, from com-
panies who are already considering a
better scenario in the future.
Once her impeachment trial begins,
Roussef must temporarily step down.
The Senate has almost six months
to make a inal ruling. If a two-thirds
majority votes against her, Temer
would continue as president until 2018.
For now, Temer says he wants to
use his interim mandate to ease rules
on government procurement and give
the private sector a bigger role in the
oil industry. His plans to eliminate a
third of ministries are being scaled
back, and tax increases have been
ruled out for the time being, accord-
ing to two Temer aides, who asked not
to be identiied because the discus-
sions arent public.
Brazil will eventually need to deal
with longer-term structural issues. Its
corporate tax rate is 34 percent, among
the highest in the world. And its labor
laws are notori-
ously restrictive,
with enforced
working hour
limits and a
30 percent
extra payment
for vaca-
Roussef
tion time. It
stiles any entre-
preneurship,
says Fernando
Simes, CEO
of JSL, a cargo
transportation
Companies/
and logistics
company. It ends
up hurting the worker
himself, since you think twice
about hiring anybody.
Temer has other challenges. Hes
almost as unpopular with the masses
as Roussef, and the scandal thats
sinking her administration over
Petrobras, the national oil company,
has ensnared some of his allies. If his
reforms are seen as harmful to the
poor, he may provoke demonstrations
and protests. Fabiola Moura, Gerson
Freitas Jr., Anna Edgerton, Arnaldo
The bottom line Companies have been stalled as
the Roussef impeachment paralyzes the Brazilian
government and important reforms.
Autos
Why Tesla Scares
German Carmakers
29
Its $35,000 Model 3 could lure
luxury car shoppers
The innovation hat is going to
move to a new place
Audi, BMW, Mercedes-Benz, and
Porsche have long dominated the
worlds premium automotive ranks,
making Germany home to some of the
industrys most proitable car brands.
But Tesla Motors, whose Model 3
electric car enticed 325,000 would-
be buyers to put down $1,000 depos-
its during the week of its debut in
April, threatens them in a way that
Toyotas Lexus never did. While the
Model 3s stats200 miles on a single
charge,$35,000 starting pricealign
it with General Motors midmarket
Chevrolet Bolt, Tesla Chief Executive
Oicer Elon Musk has said his most
afordable car to date should be
thought of as competing with luxury
mainstays such as BMWs 3 Series or
the Audi A4.
Car shopping data suggest theres
more to Musks claim than just
bravado. Tesla buyers shop German
luxury brands more than any other
car lines before making purchase
decisions, according to automotive
researcher Edmunds.com. Almost
 Companies/Industries

High-End Overlap Model 3 in late 2017. Technologywise, sufered at the hands of a U.S. lower
Share of Tesla shoppers in March who also things will probably move back to the breeder and marketer in a recent trade-
looked at these brands U.S. to an extent after Europe was the mark and patent infringement lawsuit.
center of premium carmak- Westhoff developed a flower called
BMW 27.6% ing for the past 30 years, says Candy Bouquet, a magenta-and-yellow
Toyota 23.2% Volvos Samuelsson. variety that looks like a small petunia.
Audi 20% Thats in part why Porsche said In a lawsuit filed on May 4 in federal
Honda 19.3% in December that within ive years district court in Pittsburgh, Westhoff
Mercedes-Benz 19.2% it will build its Mission E, a fast- claims California-based distributor
Ford 17.2% charging, four-door luxe sports car Proven Winners copied the variety,
Lexus 16.3% that will target Teslas Model S sedan. then interfered with Westhoffs sales
Chevrolet 16% Audi plans to build its electric E-tron efforts, derailing a deal to sell the
Nissan 12.4%
Quattro SUV as a direct rival to Teslas flower to Home Depot, the worlds
Porsche 11.6% Model X SUV. And Mercedes is plan- largest home-improvement chain.
Subaru 11% ning four EVs to take on Tesla. In the process, Westhoff alleges that
Mazda 10.6% Tesla doesnt have to sell huge Proven Winners maligned the German
Acura 10.4% numbers of the Model 3 to begin hurting breeders reputation.
Hyundai 10% both demandand proitability Candy Bouquet is a variety of the
Volkswagen 9.6% of traditional luxury brands. Thats South American plant called calibra-
Volvo 8.5% because until the German marques choa, informally known as million
Kia 8.5% launch their competing EVs, they may bells or little petunia because of
Cadillac 8.3% have to cut prices to avoid losing market its resemblance to the better-known
German
Jeep 7.6% luxury cars share to Tesla or trim production to annual. The plant is gaining in popular-
Infiniti 7.5% match lower demand. ity, with $44.6 million in sales in 2014
Land Rover 7.5% Competition from the Model 3 might in the U.S. for calibrachoa, compared
Jaguar 7% prompt German carmakers to drop with $29 million in 2009, according to
Dodge 5.9% some prices as much as 10 percent to U.S. Department of Agriculture figures.
Buick 4.9% defend their U.S. market share, says The flowers are considered easy to
Lincoln 4.7% Stuart Pearson, an analyst at Exane BNP grow, come in a variety of colors, and
30
DATA: EDMUNDS.COM
Paribas. Tesla is aiming the Model 3 produce blooms from spring to fall.
at those looking to spend roughly Proven Flowers and other plants
30 percent consider BMW, and $40,000 on a car, and thats the core Winners th ppear in nature cant
p
Holy Moly
about 20 percent look at Audi and target market for BMW and Mercedes pat nted. Instead,
Mercedes models, while 12 percent basically, he says. The fact is they co panies develop
shop Porsche, says Edmunds. dont really have an answer to the ieties through graft-
Compare that with the fewer than Model 3 until the next decade. g or budding and
6 percent of Tesla buyers who con- David Welch and Elisabeth Behrmann oobtain patents under
sider a Dodge, and its clear German tthe 1930 Plant Patent
The bottom line Teslas Model 3 could draw sales
brands are most vulnerable to cus- from German luxury carmakers bread-and-butter t for ones that
tomer defections as Tesla grows. vehicles, prompting price cuts. produce asexually,
Executives at rival carmakers pri- out seeds.
vately squawk about Teslas poor track re than 375 patents
record of manufacturing delays and ve been issued for
persistent inancial losses. Yet they alibrachoa variet-
cant ignore that Musks products are Gardening ies, according to
exciting consumer passions in a way data compiled by
that incumbent automakers havent for
A Fight Over loomberg. Westhof
decades. The innovation hat is going Petunia Look-alikes has 28 of those, includ-
to move to a new place, says Hkan Westhofs
ing the Wescacandy
Samuelsson, CEO of Volvo Cars. The Candy patent for Candy Bouquet
A German breeder says a U.S. Bouquet
decisive factor is whats happening issued last December.
distributor stole its bloom
inside peoples heads, says Jrgen After unveiling Candy Bouquet
Pieper, an analyst at Bankhaus Metzler. People are not gardening the at Home Depots vendor show in
Many see in Tesla the innovation way they used to February 2014, Westhoff claims the
theyre missing from the Germans. retailers reps expressed interest in
The Tesla advances and the threat The lower industry is about beauty being the exclusive seller of the flower
COURTESY TRIED & TRUE

of Apple entering the car business
have led German brands to show lots
of electric concept vehicles recently.
But these cars are years away, while
Tesla plans to start delivering the
and fragrance. Its also illed with
intellectual-property theft, back-
biting, and deceit. Thats what
German plant breeder Westhof
Vertriebsgesellschaft claims it has
in North America. According to the
complaint, Westhoff says Proven
Winners, having seen the flower at the
same trade show, tried to trademark the
name Candy Bouquet. The application,
As an entrepreneur, I want to deal with
entrepreneurial people who understand my
needs First Republic does just that.
A J AY ROYA N
Co-Founder and Managing General Partner
Mithril Capital Management

(855) 886-4824 or visit www.irstrepublic.com New York Stock Exchange Symbol: FRC
Member FDIC and Equal Housing Lender
 Companies/Industries

filed in September 2014, was initially

Briefs By Karen Weise

rejected and then abandoned, accord-
ing to U.S. Patent and Trademark Office
documents. Then, the lawsuit claims,
Proven
P Wi
Winn ners developed its own

Arctic Freeze variety, Holy y Moly, working with a U.S.

breeder named Plant21, and told
several ggrowers and Home Depot
that Wessthoffs version was a knock-
off. Prov ven Winners threatened
r Royal Dutch Shell, ConocoPhillips, and o other to take action against anyone
oil giants have abandoned more than $2.5 billion
b growing g Candy Bouquet, the lawsuit
says, cuttting off potential suppliers.
in Arctic drilling leases. They initially boughht the Westh hoff seeks compensa-
claims at U.S. government auctions, betting the th JAB Holdings plans tion for the alleged patent and
region would hold the next big oil discovery. The Doughnuts private in a trademark infringement, as well
to take Krispy Kreme

$1.35 billion deal. JAB

as unspecified damages for the
sharp decline in oil prices combined with the has been buying up lost business. Its also asking
high cost of working in the area have made their as Stumptown Cofee for a court order to stop Proven
cofee holdings, such

Roasters and Keurig.

Winners from further infringing
prospects unprofitable. Amazon.com will its patent and making false state-
let people post videos to its website and earn money from ments about Candy Bouquet.
Proven Winners was started two
advertising, royalties, and other sources, pitting it against decades ago by three growers who
Googles YouTube. Amazon has long let authors self-publish wanted to create a national brand name
for plants. Through Executive Director
e-books. Partners for the video service include Cond Nast Mark Broxon, the company declined to
Entertainment, HowStuffWorks, and Samuel Goldwyn Films. comment on the lawsuit. Home Depot,
which is not a party to the lawsuit, also
32
Staples called off its proposed $6.3 billion acquisition declined to comment.
Home Depot and its rivals have
of Office Depot after a federal judge said uniting the two big- become increasingly important to the
Number of FedEx gest U.S. office suppliers would garden supply industrys breeders,
Oice locations where growers, and distributors. The big-box
consumers can drop hurt competition for business retailers have squeezed out mom and

1.6k
of items theyre selling
on EBay. Under a new customers. In blocking the deal, pop garden stores, and theres been
agreement, the online
marketplace and the U.S. District Judge Emmet Sulli- consolidation among distributors and
breeders as well. Annuals such as the
logistics provider will
share a commission on van handed a victory to the Fed- calibrachoa, petunia, and begonia are
each sale.
eral Trade Commission, which the moneymakers for garden sales,
although growth has started to slow
argued that the merged company would result in higher in recent years, says Marvin Miller,
manager of Ball
prices for companies buying supplies in bulk. Shares market-research Horticultural in West Chicago, Ill.,
in Gap plunged 13 percent on May 10 after the retailer CEO a global gardening company not
involved in the lawsuit. With fewer,
posted disappointing same-store sales, a Wisdom
bigger companies and slower sales,
FROM TOP: PETER POWER/GETTY IMAGES; CHRIS GOODNEY/BLOOMBERG

sign that a long-promised comeback hasnt there could be more flower fights.
People are not gardening the way
materialized. H Renaud Laplanche, hey used to, Miller says. The players
th
CEO of LendingClub, resigned from the re
ealize that when they want to grow,
hey have to do it at the expense of
th
online lender after an internal review found We still a competitor. Susan Decker and
think that
abuses tied to the sale of loans and a fail- the subscription Matthew Townsend
M
channel mo odel is
ure to disclose his personal interest in an going to dominate The bottom line Consolidation in the garden
the marketplace for industry could lead to more legal disputes over the
investment fund. The U.S. Securities and certainly the next rights to ower variety patents.
five years.
Exchange Commissions enforcement unit Robert Iger,
Walt Disney, on a Edited by James E. Ellis and
is reviewing the matter. May 10 earnings call Dimitra Kessenides
Bloomberg.com
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 Politics/
Is Silicon Valley Go ahead and begits
learning to love Hillary your First Amendment
Clinton? 36 right 38

Policy United Auto Workers

makes room for
philosophers 37

May 16 May 22, 2016

The Arkwright Advanced Coating plant

How Do You Solve in Fiskeville, R.I., let go 32 people in

February 2015 after its Italian owner,
Diatec, moved some operations to fac-

Kevins Problem?
tories in Europe. When managers broke
the news, there was a silver lining.
After discovering a federal program
called Trade Adjustment Assistance
(TAA) online, the local union presi-
dent applied to the U.S. Department of
Labor. The plant opened up its books,
and the government certiied the job
cuts as trade-related, which meant
workers could apply for TAA relief.
That was good news for Kevin
Tetreault, 41, who worked on the
plants coating machines, big as bas-
ketball courts. Hes getting government
grants to pay for an associates degree.
When hes inished, hell be certiied to
install and repair heating, ventilation,
and air-conditioning systems. Tetreault
now competes with his son to see who
gets the best grades, but the decision
to go back to school rather than take a 35
lower-paying job wasnt easy. To be
honest with you, he says, I debated I
think until the last week before we had
to sign of on everything.
Tetreault was luckier than most
workers in his position. TAA is a
small program. In 2014, according to
the Labor Department, 20.4 million
American workers lost their jobs. Of
those, 63,000 were eligible for TAA,
which ofers either retraining grants or
small wage subsidies to make up the dif-
ference for those who take lower-paying
work after their jobs vanish overseas.
When TAA was last reauthorized, in
June 2015, Congress approved a budget
of just $450 million annually until 2021.
Politicians often say the U.S. should
retrain manufacturing workers who
lose their jobs to foreign competitors.
But TAA is all that Washingtons ofered.
As the volume of trade has grown, espe-
cially with China, the programs short-
comings have become clear. Its vastly
inadequate and improperly designed,
says Matthew Slaughter, a trade econ-
omist and dean of the Tuck School of
YOON S. BYUN/BLOOMBERG

Congress has a (small) program for people affected by trade
Workers may need a little help getting back on their feet
Business at Dartmouth.
Introduced in 1962 as a complement
to the Kennedy Round of tarif cuts,
TAA was reduced dramatically under
President Reagan. Until the 1990s,

Politics/Policy
not much assistance was nec-
essary. The U.S. was trading
with other developed coun-
tries, where wages and labor
regulations were roughly equiv-
alent and job losses because of
trade were actually less than economic
models had predicted. Politicians
in both parties were eager to pass
trade deals. Respectable opinion
was rooting for trade not to have any
negative efects of any serious size,
says Barney Frank, a Massachusetts
Democrat who served in the House
from 1980 to 2012.
That changed with the signing of the
North American Free Trade Agreement
in 1993, under President Clinton.
Nafta was the irst trade agreement
we signed with a low-wage country,
says Robert Lawrence, a professor of
international trade and investment
at Harvards Kennedy School. Then,
in 2001, China became a member of
the World Trade Organization, vastly
increasing the competitive pressure on
low-wage U.S. manufacturing workers.
It is very diferent from the kind of
36 trade competition you get when you
have similar wages, Lawrence says.
Economists have only recently begun
to understand how trade with low-wage
countries afects workers in wealthy
ones. In a 2013 paper for the American
Economic Review, economists David
Autor, David Dorn, and Gordon Hanson
found that in regions most afected
by trade, the majority of federal assis-
tance comes from increased Medicaid,
Medicare, and Social Security disabil-
ity payments. Transfers from TAA, they
wrote, are negligible.
Kara Reynolds and John Palatucci
of American University looked at data
from the Labor Department in 2008;
they found evidence that TAA helped
workers ind jobs after training, but the
Help for Workers Hit by Trade
TAA funding
Congress expanded
the program as part of
the 2009 stimulus
FY 1984 FY 2014
DATA: U.S. DEPARTMENT OF LABOR
To be honest with
you, I debated I
think until the last
week before we
had to sign of on
everything. new jobs paid less. When
Kevin Tetreault,
whos going to industries move overseas,
school on a TAA Reynolds says, pockets of
grant workers in the same geo-
graphic region tend to be
put out of work. As a result,
the efects of trade-related job losses
ripple through local economiesa
problem TAA isnt designed to ix.
TAA also does nothing for workers
whose jobs evaporate for reasons other
than trade. Until the late 1990s, one of
the best-selling products at the plant
where Tetreault worked was clear
acetate pages for overhead projectors.
Those have become obsolete. So while
foreign competition played a role
Diatec sent Tetreaults work to its plants
in Germany and Switzerlandthe brutal
forward march of technology did, too.
In 2007, Slaughter and Lawrence
contributed to a proposal to broaden
TAA. Their goal was to expand wage
insurance and retraining assistance
for workers afected by technologi-
cal change and other factors as well as
trade. The cost: $22 billion. What we
really need is a broader adjustment
system, Lawrence says. Slaughter, who
was then on President George W. Bushs
Council of Economic Advisers, invited
Frank to Dartmouth to talk about
it. Then, in 2008, the inancial crisis
struck, and both Frank and Slaughter
had other things to worry about.
Democrats have lately been more
concerned with setting limits on
the terms of major trade deals, such
as President Obamas Trans-Paciic
Partnership, than on increasing
funding for TAA and other assistance
programs for U.S. workers who lose
out. Even the very best TAA program
cannot make up for bad trade policy,
says Ohio Democratic Senator Sherrod
Brown. He helped push last years
reauthorization through the Senate.
This year, the conservative Heritage
Foundation argued that TAA should
be cut altogether. Some Republicans,
$2b however, see it as a valuable part of
trade policy. There is no question
that trade is a big net positive for
America, says Washington Republican
$1b Representative David Reichert, who
sponsored the 2015 TAA extension in
the House. But some workers may
need a little help getting back on
$0 their feet. He points to his own state:
In February the Labor Department
approved TAA requests for aluminum
workers let go after Alcoa idled two
smelters in Washington, a move the
company attributed to competition
from producers in other countries.
Presidential candidates have talked
about tradeBernie Sanders wants
less of it, Hillary Clinton says shell
seek tougher terms, and Donald
Trump promises better deals. They
want to train young people for the
jobs of the future, but they arent
talking about how to help those
whove already lost their jobs.
Congress hasnt indicated any plan
to consider changing or expanding
TAA. I dont mean to be the skunk in
the garden party, says Slaughter, but
I see nothing. Addressing the efects
of trade requires experimentation with
various approaches at the state level,
compromise at the national level,
and plenty of time, Slaughter says.
Instead, politicians are ofering up the
specter of increased barriers and trade
wars, he says: Thats really scary.
Brendan Greeley
The bottom line Congress has authorized
$450 million annually for workers hurt by free trade,
but economists say new approaches are needed.
Election 2016
#NeverTrump and
Bernie Bros for Hillary
Tech execs have cash, but Hillary
needs their social networks, too
Obviously there are a lot of
business relationships there
In 2012 venture capitalist Marc
Andreessen publicly abandoned the
Democratic Party, announcing that
hed back Republican Mitt Romney.
I turned 40 last year, and so I igured
it was time to make the switch, he
said in an interview with CNBC. He
SHAHAR AZRAN/GETTY IMAGES; ILLUSTRATION BY 731
gave $100,000 to a super PAC sup-
porting Romney. But on May 3, after
Donald Trump became the pre-
sumptive Republican nominee,
Andreessen sent a brief tweet indicat-
ing that this year he plans to throw
his support behind Democrat Hillary
Clinton: #ImWithHer.
Clinton needs public support
from people like Andreessen, who

Clinton with
Sandberg in
2013 at a New
York City gala
co-founded the early Web browsing
company Netscape and remains a hero
to many in the industry, more than
she needs their campaign contribu-
tions. Andreessen was a pretty strong
signal, says Joe Trippi, a Democratic
political consultant who pioneered the
use of technology to reach voters as
Howard Deans campaign manager in
2004. You could see a lot of unanim-
ity and support for Hillary. (A spokes-
woman for Andreessens venture
capital irm, Andreessen Horowitz,
declined an interview request.
Bloomberg LP, which owns Bloomberg
Businessweek, is an investor in the irm.)
Recruiting high-proile supporters
helps candidates attract donors and
volunteers in those leaders social net-
worksfrom colleagues and employees
to startup founders eager for entre to
closed events at executives homes. As
a fundraiser, it was really helpful to me
saying, X person is hosting this, says
Autumn Sample Kurtz, who worked
as the regional inance director in
Northern California for Barack Obamas
campaign in the 2012 election and spe-
cialized in major donor relations.
Obviously there are a lot of business
relationships there. And so as inter-
ested as people are in meeting a certain
candidate, I think they are oftentimes
more likely to contribute funds not
only to meet that person, but also kind
of like, I need to throw so-and-so a
favor and support their fundraiser.
Clinton struggled to win backing in
Silicon Valley in the 2008 campaign
as newly minted startup millionaires
locked to Obama. Since then, shes
worked to cultivate support there.
Clinton traveled to Facebook and
Twitter headquarters in 2014 and
spoke at a 2015 conference for women
in technology. Shes won over Tesla
Motors and PayPal co-founder Elon
Musk and Facebook Chief Operating
Oicer Sheryl Sandberg, both of
whom have donated to her campaign;
Sandberg was one of many to contrib-
ute the day Clinton announced her
candidacy in April 2015, according to
Federal Election Commission records.
Im very supportive of Clinton,
Sandberg said at the time at a San
Francisco conference hosted by Virgin
Group. Ive said before Id like to see
her as president, and Id like to see
more women presidents all over the
world. The Clinton campaign didnt
respond to a request for comment.
This year, Bernie Sanders has
raised more than Clinton among
people in the tech industry, accord-
ing to Crowdpac, a startup that
tracks money in politics. Many of
Sanderss donations have come from
small donors. Trumps victory in
the Republican race may draw some
Sanders supporters to Clintons side,
says Donnie Fowler, a lecturer at
the University of San Francisco who
worked as national ield director for
Al Gores 2000 presidential cam-
paign. While Clinton has not proven
the darling of the online techie donor
crowd when the choice is Bernie vs.
Hillary, he says, things are gonna
change when its Hillary vs. Donald.
Trump has attracted some high-
proile supporters such as Facebook
board member Peter Thiel. Trumps
campaign included Thiel, a longtime
Republican donor, on its delegate slate
for Californias June 7 primary. Thiel,
who helped found PayPal with Musk,
previously supported former HP Chief
Executive Oicer Carly Fiorinas pres-
idential run, giving a super PAC sup-
porting her a $2 million donation
before she dropped out of the GOP
race in February.
Republicans outraised Democrats
Politics/Policy
at Cisco Systems, Intel, and Oracle
in 2015, according to Federal Election
Commission records. Sensing an
opportunity, Rand Paul opened a
campaign oice in San Francisco.
Jeb Bush drove around in an Uber
and starred in a Vine putting on a
hoodie, the de facto uniform of Silicon
Valley programmers.
Some say Trumps reliance on
social media to promote and amplify
his candidacy might inspire the tech
world to work against him. People in
Silicon Valley who work at the com-
panies Trump uses as a platform may
say, This is not the way we envi-
sioned social media being usedto
divide people, says Larry Gerston,
a professor emeritus of politics at
San Jose State University. The dif-
ference in opponent has suddenly
made someone who was kind of
boring and predictable and laboring
in 2008 now as somebody who, gosh,
at least her feet are on the ground.
Tim Higgins, with Eric Newcomer
The bottom line Political fundraisers say the
support of big-name Silicon Valley executives may
help Clinton attract smaller donors there.
37
Labor
The Ivy League
Rejects the UAW
Grad students who teach and do
research want higher pay
The university would completely
fall apart without that labor force
Last semester, Paul Katz, a third-
year Columbia doctoral student
whos working toward a Ph.D. in
20th century Latin American history,
was assigned to help teach and grade
an undergraduate course on ancient
Greece. He hadnt studied Greek
history since high school, and he
 Quoted
Theyre so impresse
with what our country ill
become that they deci ed
to do this before the fa .
Donald Trump in a May 11 Fox & Friends interview, where he was asked whether
his campaign had influenced Budweisers decision to rebrand its beer America
took time away from his own disser-
tation work to prepare for the class.
Its reasonable to view that as a work
assignment that Id been given, not to
pretend that this is about my develop-
ment as a scholar and teacher, Katz
says. Hes joined other Columbia grad-
uate students in petitioning the federal
government for the right to unionize as
they seek higher pay and other conces-
sions, including better health beneits,
38 for the teaching and research they do
while pursuing their degrees.
The National Labor Relations Board
is expected to rule sometime this
summer. Katz and his co-workers
have petitioned to join the United
Auto Workers. The AFL-CIO has also
weighed in on their behalf. Theyre
providing a service and receiving com-
pensation, says AFL-CIO general
counsel Craig Becker, who served on
the NLRB during President Obamas
irst term. Its up to them to decide
whether, even though theyre also stu-
dents, they think they would beneit
from collective bargaining.
Columbia, which opposes grad
student unionization, has won support
from all seven of its fellow Ivy League
schools, along with Stanford and MIT.
The schools joined together in February
to ile an amicus brief warning that
collective bargaining would threaten
faculty authority over educational
decisions involving undergraduates
as well as teaching assistants. This is
viewed as a fundamental issue of aca-
demic freedom, says attorney Joseph
Ambash, who wrote the Ivies brief.
In its own iling, Columbia com-
pared its graduate assistants to student
interns at Fox Searchlight Pictures:
A federal court last year ruled the
at Cornells School of Industrial and
interns dont have to be paid minimum
wage if it can be determined that they
beneit more than the company does
from their time on the job. The ben-
eits they receive far outweigh any
advantage the University receives
from student-performed teaching or
research, Columbias attorneys wrote.
[T]he university exercises control
for entirely pedagogical purposes.
Columbia declined to comment further.
Unionization among graduate stu-
dents at public universities has been
widespread for decades because those
student workers are treated as gov-
ernment employees. In 2000 the
NLRB, then dominated by President
Clintons appointees, ruled in favor
of letting graduate students unionize
at New York University, the irst such
victory at a private institution. That
precedent was overturned in 2004,
under President George W. Bush, when
the NLRB rejected a unionization push
at Brown. Being a graduate assistant
working toward a degree is not a rela-
tionship thats primarily economic. Its
primarily academic, says former NLRB
member Ronald Meisburg, who was
part of the majority that voted in favor
of blocking unionization at Brown.
After that decision, NYU ceased to
recognize its graduate students union.
Students iled a fresh unionization peti-
tion in 2010 to the NLRB, which sig-
naled it might be open to undoing
the Bush-era ruling and returning to
the precedent set under Clinton. In
2013, NYU allowed the UAW to estab-
lish a union that covered most of the
students the UAW had asked to rep-
resent. We felt there was a middle
ground, NYU Executive Vice President
Bob Berne said at the time. We felt
th t both the union and the university
learrned from the irst experience.
at helped fuel student unionization
eforts at other prominent universities.
The merican Federation of Teachers
is org nizing at Cornell. The university
anno ced on April 13 that its opened
h student representatives about
reco ing a union. The university
would completely fall apart without that
labor force, says Kate Bronfenbrenner,
director of labor education research
Labor Relations. Graduate assistants
at Yale have announced their support
for the hospitality union Unite Here,
which represents the schools clerical
and service staf.
In addition to Columbia, the UAW is
organizing at Manhattans New School
and at Harvard, where it announced on
April 28 that its won majority support
from teaching and research assistants.
I dont think any powerful institu-
tion wants to concede power or voice
to anybody, says Felix Owusu, a irst-
THIS PAGE: JONES KNOWLES RITCHIE NEW YORK. OPPOSITE PAGE, FROM TOP TO BOTTOM: CHRIS TIERNEY/SUN PHOTO; GABE SOUZA/GETTY IMAGES; M. SPENCER GREEN/AP PHOTO
year Harvard doctoral student in public
policy. The administration at Harvard,
I guess its not surprising that theyre
not an exception. Josh Eidelson
The bottom line Unions are targeting the wealthiest
universities in the U.S. to win higher pay and
benefits for graduate students who teach.
Civil Rights
Brother, We Can Ask
You to Spare a Dime
A Supreme Court move bolsters
the rights of panhandlers
You cannot declare a downtown
zone a no-free-speech zone
Don Norton and his wife, Karen
DATA: U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Otterson, have been arrested about
50 times while panhandling in down-
town Springield, Ill., over the past eight
years. In 2013 they sued Springield for
infringing on their First Amendment
rights to freedom of speech. The city
had passed an ordinance prohibiting
verbal requests for money in the citys
historic district, just a short walk from
Abraham Lincolns home, tomb, and
presidential library. A federal appeals
court took Norton and Ottersons

side and overturned the ban, and
in February the U.S. Supreme Court
refused to hear the citys appeal. I kind
of feel privileged that I was able to help
people have the right to do this, says
Norton, 55, who carries a cardboard
sign asking for help.
His victory came thanks to a 2015
ruling by the Supreme Court in which
the justices agreed with the arguments
of Arizona pastor Clyde Reed, who
wanted to put up signs directing people
to Sunday services at his church. He
challenged a local ordinance that put
strict time limits on signs providing
directions. Writing for the court, Justice
Clarence Thomas said the law treated
directional signs diferently from other
displays, such as those for political can-
didates. Under previous Supreme Court
rulings, restrictions on speciic types
of speech were considered valid only if
they were narrowly tailored to serve a
compelling state interest.
Lower courts have taken
Thomass reasoning to mean that
anti-panhandling ordinances
unfairly suppress certain kinds
of speech. Theyve overturned
anti-begging ordinances as well
as others outlawing ballot-box
selies and robocalls for polit-
ical campaigns. Any law dis-
tinguishing one kind of speech
from another by reference to its
meaning now requires a com-
pelling justiication, Frank
Easterbrook, a federal appeals
court judge, wrote in the
Springield case.
Bans in Worcester and Lowell,
Mass., have been overturned
by lower courts, as have others in
Grand Junction, Colo., and Portland,
Maine. Similar ordinances are being
challenged in New Hampshire and
Oklahoma. Other states and municipal-
ities have since decided not to enforce
their laws because the Supreme
Court refused to hear Springields
appeal. You cannot declare a down-
town zone a no-free-speech zone,
says Ken Paulson, president of the
First Amendment Center at Vanderbilt
University in Nashville. You cannot
ban free speech, and so-called panhan-
dling is free speech.
Advocates for the poor say anti-
begging ordinances criminalize
poverty and overlook the root prob-
lems of mental illness, drug addiction,
Politics/Policy
Seen, But Not Heard and homelessness that can lead to
Homelessness in cities that have panhandling. The answer is not to
enacted panhandling restrictions deploy the criminal justice system
to arrest people but to assure there
are suicient resources to resolve
the problem, says Maria Foscarinis,
founder and executive director of the
Washington-based nonproit National
Law Center on Homelessness &
Poverty, which advocates for policies
that prevent and reduce homelessness.
The popularity of panhandling bans
jumped at the begin- Nationally,
ning of the decade. homelessness
is down
The number of
11%
Lowell, Mass.
cities with blanket
bans increased
21%
Increase in homeless
25 percent from 2011 since 2010
to 2014, according to a 2015 report from
the Law Center. Springield enacted
population since 2010
its ordinance in 2007. Steven Rahn,
Springields attorney, says the city was
simply trying to protect merchants eco-
nomic interests. We dont think
the Supreme Court ever intended
to go with quite that broad of a
ruling, he says.
Merchants would like there to
be a respectful coexistence, says 39
Lisa Clemmons Stott, executive
director of Downtown Springield,
a nonproit that promotes cul-
tural and economic development.
You cant have people urinat-
ing in doorways and panhan-
dling customers who are eating
Portland, Maine
lunch outside. Garret Mofett,
who leads daily tours of the area
16% dressed as Ward Hill Lamon,
Lincolns friend and personal
bodyguard, agrees: I dont call it
panhandling. I call it harassment.
Norton agrees that aggressive pan-
handling poses a nuisance. He seeks
donations by holding a sign, not ver-
bally asking for money. Mark Weinberg,
a Chicago civil rights lawyer who rep-
resented Norton and Otterson, says
theres no compelling economic inter-
est that justiies squelching free speech.
Whats going on in Springield is
broadly representative of cities around
the country, he says. For Girl Scout
Cookies, its yes. For panhandlers, its
no. Tim Jones, with Greg Stohr
Chicago
The bottom line Cities that want to crack down on
9%
panhandling find courts siding with beggars after
the Supreme Court expanded rights to free speech.
Edited by Allison Hofman
Bloomberg.com
 HEALTH CARE
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 Technology
Facing a slowdown, Amazon and Facebook
smartphone suppliers raise the bar on
try to diversify 42 stock compensation 44

We have a warrant for Innovation: Inflatable

your fingerprint! 43 stations extend
astronauts space 45

May 16 May 22, 2016

Untangling Apple Music

41

Inside and out, the companys well-nanced streaming service has been a bit of a mess
When it comes to software, Apple performs with less elegance
At Apples annual developers At this years conference, Apple will Music, the streaming service it bought
conference last June, Chief Executive begin the marketing blitz for a vastly two years ago. An Apple spokesman
Oicer Tim Cook unveiled Apple diferent version of the streaming declined to comment for this story.
Music, a $10-a-month streaming service, say three people familiar with Cook is counting on services like
service meant to compete with the its development. Better integration Apple Music for good news as slowing
likes of Spotify and Pandora. Since with iTunes downloads; deeper online- iPhone sales batter the companys
then, Apple Music has received tepid radio playlists; an interface people stock. But such services, from Apple
reviews and achieved only a roughly might actually like. Apple has been Maps to iCloud to Siri, havent been
ILLUSTRATION BY 731

1 percent adoption rate among active slow to adapt to the shift from music its strong suit. When it comes to
Apple devices. Several of the exec- downloads to streaming, and this software, Apple performs with less
utives brought in to steer the music reset could signal an acknowledgment elegance. Apple Music is under-
strategy are gone. that its stumbled in integrating Beats whelming, says Colin Gillis, an

Technology
analyst at brokerage
BGC Partners. The stream-
ing service has racked up
13 million subscribers in the
past yearmore than a third
of Spotifys eight-year total
and an enviable igure for
most companies. There are,
however, about 1 billion active Apple
devices out there. They have sub-
scribers because of their platform,
Gillis says. If you have that kind of
subscriber base, you should have mil-
lions of subscribers.
Apple bet big on Beats, a company
helmed by entertainment industry vet-
erans including Jimmy Iovine. Beats
cost $3 billion, at least three or four
times the size of a typical big Apple
deal. The idea was that Iovines team
would blend its music-business experi-
ence with Apples technological exper-
tise. Instead, the two camps have
clashed, and Apple is still struggling to
unify its streaming and download busi-
nesses into a cohesive music strategy,
say the people familiar with the matter.
When the Beats team joined Apple,
42 iTunes was in decline. Iovine and his
colleagues recommended that the
company de-emphasize downloads
and plow money into a Beats-derived
service instead. Apple executives
agreed, even scrapping the inter-
national rollout of an iTunes radio
service just hours before its intended
announcement. Employees whod been
working on the project for more than
a year were told it would be rolled into
what would become Apple Music.
The reviews for Music were mixed.
Critics praised the depth of the catalog
but trashed its confusing interface.
The apps design is cluttered with
too much information and diicult to
navigate, wrote CNET. Apple content
head Robert Kondrk and Nine Inch
Nails frontman Trent Reznor are over-
seeing the redesign. Design chief Jony
Ives team has also provided input,
along with Iovine and longtime Apple
services exec Eddy Cue.
The bigger challenge may be Apples
fear of cannibalizing its valuable down-
load business. Annual revenue from
iTunes album and song purchases
has held steady at almost $3.5 billion,
close to triple the revenue from Apples
streaming subscriptions, say two people
familiar with the companys inances.
So Apple feels less urgency when Music
is included in the streaming bans, selec-
tive or otherwise, that have become a
common feature of album releases from
the biggest musicians. You couldnt
hear Beyoncs Lemonade on Music
when the album dropped. Same for
Kanyes The Life of Pablo (though the
team tried to get it) and Adeles 25.
Music producer Iovine is leading the
efort to improve those results. He got
the exclusive on Drakes latest album,
Views. When Taylor Swift bashed Music
last year for not compensating artists
enough, Iovine negotiated the truce
that put her in the companys ads, say
two people familiar with the deal.
Several current and former staf-
ers say product development has been
harmed by a complicated leadership
structure. Iovine is Musics top execu-
tive, and Reznor has a strong inluence
on the look of the application, but
Kondrk largely runs the 1,000-member
teams day-to-day operations from
Los Angeles, while Cue provides over-
sight from Cupertino. More than on ,
Iovine has conducted parallel negoti -
tions with artists managers and lab s,
unbeknownst to other Apple agents
pursuing the same deal, say two
people familiar with the matter.
Likewise, many Beats veterans h
found it tough to cope with the labori-
ous approval process, which requi
a vice president such as Kondrk to s n
of on almost everything. In August,,
former Beats CEO Ian Rogers left
Apple for luxury giant LVMH. Other
departures have included Beats
product head, chief designer, vice
president for engineering, and senior
visual designer, some of whom left
within a few months of the acquisition
despite the deals incentives to stay for
at least a year. The stafers who quit
either declined to comment or didnt
respond to interview requests.
Rogerss departure was particu-
larly troubling for many on the Music
team. A skateboarder who got his
start in tech by building a website for
the Beastie Boys, he struck a delicate
balance between artist and engineer.
Rogers (far left) in 2013
with Beats executive Luke
Wood, Reznor, Iovine, and
Beats co-founder Dr. Dre
In a display of afection for Steve
Jobs, he has a tattoo of the NeXT
logo on his leg. After heading
Beats, his responsibilities at
Apple were reduced to oversee-
ing Beats 1 radio and editorial
content such as playlists.
Of course, organizational
tension can be healthy, and acquisi-
tions often result in departures. An
Apple executive close to the culture
clash says the combustion was an
intentional efort to create some-
thing groundbreaking. Whatever the
company has to show for it at this
years developers conference in June,
Musics evolution is far from over,
says Russ Crupnick, an analyst with
researcher MusicWatch. I dont think
its gotten to a full gallop yet. Its
early. Alex Webb, Lucas Shaw, and
Adam Satariano
The bottom line Apple is planning a sweeping
redesign of its year-old, lackluster streaming
music service.
Mobile
Smartphone Makers
or a u h S ell
vice and parts makers look to
diversify wi cars an ap
You couldnt help but wonder
how long the party could go
After almost a decade of turbocharged
FROM LEFT: STEPHANIE DIANI/REDUX; ILLUSTRATION BY 731
sales, the $423 billion smartphone
industry can no longer count on con-
sumers to upgrade every two years.
Warning signs of a sputtering market
spilled into the open at the end of April,
when Apple announced its irst quar-
terly sales decline in 13 years, and
research company Strategy Analytics
reported the irst drop in quarterly
smartphone shipments, by 3 percent.
You couldnt help but wonder how

long the party could go, says Wharton
management professor David Hsu.
The industry says smartphone
sales could revive, given that people
will eventually need to replace their
phones and most consumers will need
new ones to enjoy the beneits of high-
speed data; only 16 percent of smart-
phones can tap into these fast LTE
connections. But dont bet on a come-
back, says Neil Campling, an analyst
at Aviate Global, who expects smart-
phone makers to start squeezing
component producers to shore up
margins. The end of the Apple super-
cycle is upon us, he says.
As the market matures, phone-
makers and their suppliers have reason
to worry about the kind of yearslong
decline facing the PC industry. This
time, there isnt an obvious successor
in consumer electronics. Developers
are hard at work on virtual-reality
headsets, driverless cars, and the grab
bag of connected gadgets and software
known as the Internet of Things (IoT).
Yet it may be years before these tech-
nologies enter the mainstream.
Sales at Qualcomm, the leading
mobile chipmaker, fell 19 percent
last quarter from the year before, to
$5.5 billion. The company has been
delving into drones, cars, and Internet-
connected appliancesso-called adja-
cent businesses it predicts will generate
more than $2.5 billion in sales this year.
Those growth prospects, however,
make up just 11 percent of the com-
panys total expected revenue. That
explains in part why Qualcomm has
lost 26 percent of its market value in the
past year, compared with a 3 percent
decline for the IT sector as a whole.
Apple is trying to ofset declining
iPhone sales with revenue from ser-
vices such as the App Store, iCloud,
andas you may have readApple
Smartphones Stumble
80%
Growth turned
negative for the first
time 60%
40%
DATA: STRATEGY ANALYTICS
20%
0%
Q1 2011 Q1 2016
Quoted
It was absolutely bias. We
were doing it subjectively. It
just depends on who the
curator is and what time of day.
A former editor of Facebooks trending news highlights, in a May 9 Gizmodo
report alleging the staf buried right-wing stories. Facebook denies the charge.
Music. Proit margins are fatter in
these businesses, and revenue from
them grew 20 percent in the latest
quarter. Still, services account for just
12 percent of sales at Apple, where
shares have fallen 27 percent in the
past 12 months.
Apple, too, is exploring the automo-
bile industry. Automated-driving fea-
tures and advanced entertainment
and information systems are creating
opportunities to sell components and
software now commonplace in smart-
phones. Still, an Apple car is probably
years away, and some analysts wonder
whether it will hit the streets at all.
Samsung reported solid sales of
the Galaxy S7 in its latest earnings, but
its looking beyond the smartphone
as investors worry whether they can
expect another hit soon. The linger-
ing market question about what could
replace smartphones has not been
fully addressed, says Lee Seung Woo,
an analyst at IBK Securities. Samsung
is selling VR gadgets and pushing hard
into the Internet of Things, building
Web-connected kitchens and cloud
services to manage them.
Flex, a longtime assembler of smart-
phones for the likes of BlackBerry and
Motorola, is among the companies
branching out the furthest. Along with
car components, medical devices, and
Fitbits, Flex has started making clothes
and custom sneakers for Nike.
Its hard to imagine one single
thing replacing the smartphone, says
Neil Mawston, an analyst at Strategy
Analytics. His company estimates that
by 2020 there will be 5 billion Internet
of Things devices in use, compared
with 4 billion smartphones. But most
IoT devices will cost $1 or $2 and wont
need replacing for 5 to 10 years. So
Technology
A day later, the Senate
Commerce Committee
sent Mark Zuckerberg
a letter asking for
details on the selection
of trending topics
companies must dabble widelyin
drones, consumer robots, wearables,
smart homes, cars, and elsewhere.
That cocktail is the next big wave
beyond phones, rather than one big
new segment, Mawston says.
In the short term, even aggressive
diversiication wont necessarily
protect smartphone suppliers. Texas
Instruments irst-quarter revenue fell
4.5 percent despite growing demand for
components from makers of cars, indus-
trial equipment, and phone networks. 43
According to a Bloomberg supply-chain
analysis, TIs biggest customer is Apple.
Ian King and Adam Satariano
The bottom line With smartphone shipments
falling for the first time, theres more urgency
behind suppliers diversification eforts.
Biometrics
An Encryption Fight
At Your Fingertips
Law enforcement can open a
print-locked phone with a warrant
Magistrate judges could be the
last line of defense
The FBIs feud with Apple over access
to Syed Farooks iPhone might never
have happened if the San Bernardino,
Calif., shooter had been carrying a 5S
or newer. For the 250 million phones
sold around the world with inger-
print authentication since 2013, law
enforcement may be able to compel
suspects to press their ingers to the
devices and unlock them.
With minimal litigation on the
 Technology
books in the U.S., police
and prosecutors require
only a judges blessing on
a warrant for a suspects
ingerprints. So far
theyve used the power
sparingly. But as the
number of ingerprint
scanners in hip pockets
grows, district attorneys
across the country say the
technology is poised to
become a major engine of
evidence-gathering. It is likely
to be just a matter of time till
this does become a primary gateway
to accessing phones, says Micheal
OConnor, an Alameda County assistant
district attorney in Oakland, Calif.
If a person has enabled Apples
Touch ID, her ingerprint will unlock
the phone for 48 hours after locking
before the device requires a PIN.
Systems on newish Samsung and LG
phones work similarly. Los Angeles
and Oakland are among the cities
that have already granted or received
warrants for the use of a inger to
44 unlock a phone. The next step may be
a lawsuit that determines whether a
ingerprint is of-limits.
Legal scholars say law enforce-
ment is likely to win that ight. Two
years ago, authorities contended
that a locked iPhone 5S belonging to
David Baust, a paramedic in Virginia
Beach, Va., might contain video evi-
dence of him in bed strangling his
girlfriend, according to a court iling.
Bausts lawyers argued that unlock-
ing the phone would violate his Fifth
Amendment right to avoid incrim-
inating himself. A state judge ruled
that demanding Baust type in his pass
code would entail a mental process
leading to self-incrimination, but
that asking for his ingerprint was
more like drawing a blood sample
and therefore OK.
Although the Virginia decision isnt
binding on other judges, its only a
matter of time before a higher court
weighs in and sets a precedent, says
Rahul Gupta, a senior deputy district
attorney in Orange County, Calif. He,
too, is betting on police and prosecu-
tors. Its just the same old evidence,
blood or a mouth swab, being used in a
diferent way, he says.
Fingerprint-scanning phones will
become the majority within about two
years, estimates researcher
IDC. As the pile of warrant
requests grows, the pres-
sure will be on magis-
trate judges to draw a
line between genuine
seizures and ishing
expeditions, says
Leslie Harris, a lec-
turer at the University
of California at
Berkeleys School of
Information. They
could be the last line of
defense, says Harris, whos
also president of the Harris Strategy
Group, a think tank that advocates
for privacy rights. And they often get
calls in the dead of night that force
them to make immediate decisions. Its
not an ideal situation.
The ingerprint lock systems, as they
stand, though, arent foolproof skeleton
keys for law enforcement. When the
phone is switched of and restarted, it
requires a pass code. And it wont take
long for criminals to learn that the little
scanner on the home button isnt their
friend. Kartikay Mehrotra
The bottom line Fingerprint locks, which will be
the norm in two years, give law enforcement an
end run around smartphone encryption.
Earnings
Amazon and Facebook
Now Mind the GAAP
At a moment of strength, a switch
to less favorable accounting
Theres no better time to change
your behavior
For more than a decade, many of the
largest technology companies have
danced around the cost of paying
workers, releasing proit numbers that
dont account for the heaps of stock
they dole out. Instead of conforming to
the U.S. standards known as Generally
Accepted Accounting Principles
(GAAP), which include equity-based pay
costs, roughly four in ive of the 70 tech
companies in the S&P 500 index use
handpicked proit measures that make
their earnings look better, according to
data compiled by Bloomberg for their
latest iscal years. The non-GAAP mea-
sures raised the businesses collective
earnings 23 percent, to $239 billion.
In their latest quarterly earnings
reports, Amazon.com and Facebook
stopped eliding their stock-based com-
pensation, joining exceptions such as
Netlix and Intel. We view it as a real
expense, Facebook Chief Financial
Oicer David Wehner said on his
April 27 earnings call. Unlike in previ-
ous reports, the CFO focused on GAAP
numbers and said
Equity Pays he would do the
Slice of Profits same on future
calls. A day later,
EBay 17% Amazon reported
Alphabet 26% stock-based pay
Alibaba 38% for its diferent
Facebook 46% businesses for the
LinkedIn 75% irst time.
Yahoo! 80% During the irst
Amazon 91%
dot-com boom,
Twitter 247%
fast-growing tech
startups argued
that the option grants they were
handing employees were too dif-
icult to reliably value for the pur-
poses of quarterly reports. Thats still
the default position in an era when
most equity grants come in the form
of restricted stock with a straightfor-
ward vesting schedule. The result:
Some serious money is factored out
of the bottom-line reporting. The
average public U.S. company has a
price-earnings ratio of 17meaning its
stock price is 17 times greater than its
estimated 2016 earnings per share
or 18, when you count stock com-
pensation, according to Sanford C.
Bernstein. Facebooks p-es are 35 and
50; Amazons are 63 and 122.
So why make the change now? If
you can act from a position of strength,
which Amazon and Facebook clearly
are, theres no better time to change
your behavior, says Denny Fish, a
portfolio manager at investment irm
Janus Capital Group. Facebook just
reported one of its best quarters, and
Amazon nearly doubled analysts
already bullish proit estimates. They
look more responsible, and it makes
them accountable for how they issue
stock for compensation, says Fish.
While investors rarely punish the
industry for its creative account-
ing, Facebooks and Amazons shifts
also follow mounting criticism about
overuse of non-GAAP numbers. In
 Technology

his latest shareholder letter, Warren

Bufett called the omission of pay
the most egregious example of
non-GAAP accounting. James
Innovation
Schnurr, chief accountant for the U.S.
Securities and Exchange Commission,
said in a March speech that executives
and directors should challenge use of
Inflatable Space Station
the non-GAAP numbers. Form and function Innovator Robert Bigelow
An investor in Facebook and Amazon The Bigelow Expandable Activity Module, Age 72
says both companies have privately or BEAM, is a 565-cubic-foot addition to the
Founder and chief
International Space Station designed to test
acknowledged changing their account- expandable-space-station tech. It was carried executive oicer of Bigelow
ing for competitive advantage as well aloft by a SpaceX Dragon cargo ship in April. Aerospace, a 130-employee
company in North Las Vegas
as to soothe shareholders. A looser
accounting approach made strug-
gling companies look inancially stron- 1. Origin Expandable
ger than they really are and better able habitat technology
to compete for top talent. Twitter began as part of
Launch Bigelows NASAs TransHab
trades at about 36 times its estimated expandable station modules program. After the
12-month proit, but add in equity are made of as many as program was canceled
30 layers of high-strength in 2000, Bigelow, a
compensation and the company is fabric, including Kevlar. They hotelier, began working
expected to lose money. Its stock- take up 127 cubic feet when to commercialize
based pay last year was more than compressed for launch. the technology.
twice its non-GAAP proit, according
to Bernstein research. (Twitter didnt
respond to an e-mail seeking comment.)
Fish cited LinkedIn as a company
that should keep a tighter rein on its
equity grants. Analysts estimate the 2.
45
business-focused social network will
make $591 million in 2017, or a loss of Inate Once in orbit,
$36 million when stock-based compen- the modules ll with
air from onboard tanks
sation and other costs are included, to expand to their
according to data compiled by intended size. The
Bloomberg. LinkedIn cut growth fore- fabric resists impacts
from micrometeoroids
casts earlier this year, drawing more and debris more 5' 10''
attention to long-term compensation efectively than standard
costs. When fundamentals deterio- aluminum designs.
rate relative to high-growth expecta-
FROM LEFT: ILLUSTRATION BY 731 (3); NASA (2). DATA: SANFORD C. BERNSTEIN RESEARCH, COMPILED BY BLOOMBERG

tions and stock-based comp is high as Funding Bigelow says hes

invested about $290 million in
well, companies can be doubly penal- his company. NASA contracted
ized, Fish says. LinkedIns stock price with him to develop BEAM for
is down 45 percent this year, while $17.8 million.
Facebooks is up 12 percent.
LinkedIn spokesman Hani Durzy Customers Bigelow
says that while the company doesnt Aerospace is in talks
plan to change its reporting practices, with NASA to add a
Price Bigelow 12,000-cubic-foot
its trying to reduce stock-based pay to plans to charge commercial module
10 percent of revenue from 17 percent. $25 million for to the ISS and with
Equity grants arent going away, two to three individual nations
months use of and corporations
though. Says Durzy: Talent is critical each third to lease more free-
in this industry, and we want to make of a module. ying modules.
sure that were balancing the trade-ofs
appropriately. Alistair Barr, with Next Steps
Sarah Frier Astronauts will inate BEAM in late May for a two-year test. Bigelow plans
to launch a pair of commercial modules in 2020. Given the nite storage
The bottom line Prots for most public companies
dont shift much when accounting for stock plans. in a rocket, you get a lot more living space with an inatable, says Jefrey
Tech companies are diferent. Hofman, a former NASA astronaut and professor of aeronautics and
astronautics at MIT. And in a collision with space debris, he says, an inatable
Edited by Jef Muskus could actually be more survivable. Michael Belore
Bloomberg.com
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 Markets/
Movin on up to Banks may not be able The 401(k) income
deluxe senior living in to bank on arbitration gap 52
Manhattan 48 49

Personal Finance She gets the house,

he gets the carwho
gets the dog? 50
Charlie Rose talks with
art-market expert
Simon de Pury 54

May 16 May 22, 2016

Expectation 47

Reality
GETTY IMAGES (2)

With bond yields low and stock valuations high, future returns may be smaller than you think
The markets arent going to bail you out if you havent saved enough
 Markets/Personal Finance
How low can you go?
Thats the question for investors
as the era of near-zero short-term
interest rates stretches into its eighth
year, throwing into doubt long-held
assumptions about the returns they
can expect from their savings. In the
U.S., 10-year Treasuriesa mainstay
for those looking for a safe yieldpay
just 1.75 percent a year. Elsewhere in
the developed world, about $7.9 tril-
lion in government bonds will efec-
tively pay a negative yield if theyre
held to maturity.
Stocks are much less predictable,
but theres reason to lower expecta-
tion for equity returns as well. Perhaps
in part because the returns available
from bonds are so low, investors have
pushed up the valuations of equities
in the years since the crash in 2008.
Heres one simple measure: Stocks
on the S&P 500 trade at an average
price of 19 times earnings, up from
about 10 times in early 2009 when the
current bull market began.
Right now, things look pretty bleak
for the next 10 years, says David
48 Blanchett, whos head of retirement
research at Morningstar. This may
come as an especially rude shock to
investors in the U.S., where stocks have
earned an annualized average of about
10 percent over the long term. The
U.S. has had a higher return for a bal-
anced portfolio for the last 115 years
than almost any other country in the
world, he says. Weve had it really proits, and an expanding price-
good for a long time.
Assuming a lower baseline for invest-
ment returns has consequences for a
range of inancial planning decisions,
including how much to save, how
much to withdraw in retirement, and
where to invest.
Bill McNabb, chief executive oicer
at mutual fund giant Vanguard, says
bondsincluding higher-yielding cor-
porate debtare likely to average
2 percent to 3 percent over the coming
decade. A combined global and U.S.
stock portfolio might earn about
7 percent. Over the next 10 years, the
markets arent going to bail you out if
you havent saved enough, he says.
If so, lower returns will have the
most immediate impact on people who
are in or near retirement. Financial
planners often cite an old rule of
thumb that retirees can set annual
spending at 4 percent of the value of
Paltry Payout
Market value of
global government
bonds by yield
$2t
More 1% to 2% Zero Less than
than 2% to 1% zero
their nest egg, then raise the dollar
amount each year with inlation.
Today, a 3.5 percent initial withdrawal
might be more realistic, says planner
Harold Evensky of Evensky & Katz/
Foldes Financial. For a retiree with
$2 million, switching from 4 percent to
3.5 percent means a $10,000 reduction
in yearly income. Evensky says some
retirees will likely instead respond by
allocating more of their portfolios to
stocks to reach for higher returns.
At the other end of the spectrum, for
people turning 30, delated returns will
mean theyll have to work seven years
longer or save almost twice as much to
end up with the same nest egg as those
born roughly a generation ago, accord-
ing to an April report by McKinsey. The
prior generation enjoyed what the con-
sulting irm calls a golden era of high
returns based on declining inlation
and interest rates, swelling corporate
earnings ratio for stocks. Now inlation
and rates can hardly get lower, and the
other factors seem unlikely to recur.
Blanchett says some of the best strat-
egies to boost returns from here on
might be behavioral. Make the most
of tax-advantaged savings programs
such as 401(k)s and individual retire-
ment accounts and pay close attention
to the fees you pay on investments.
Minimizing debt could help, too. What
you save on interest by paying of a
loan may beat the returns youll get
from stocks and bonds, says Blanchett.
Not everyone in the market is ready
to accept the idea of low returns.
The fact that people are unrealistic
is actually creating risky behavior in
the way that they are putting money
to work, said David Hunt, head of
Prudential Financials asset manage-
ment unit, in a Bloomberg Television
interview in May. That risky behavior
may create streaks of high returns as
investors keep plowing money into
$8t hot corners of the marketbut when-
ever that happens, bubbles tend to
$6t inlate and burst.
Economist and former Treasury
$4t Secretary Lawrence Summers has
argued that the world may be in a
prolonged period of secular stagna-
tion, characterized by slow growth,
$0 low interest rates, and periodic asset
bubbles and crashes (page 12). Even if
thats too sweeping a claim, it seems
that the Federal Reserve and its coun-
terparts around the world dont
expect a quick return to normal.
There clearly isnt any great appe-
tite among the central banking com-
munity to raise rates materially,
says Adrian Grey, head of active man-
agement at London-based Insight
Investment. People need to get their
heads around that this could be here
for a while. Margaret Collins and
Rich Miller
The bottom line Todays skimpy bond yields
suggest that it makes sense to prepare for lower
long-term returns on savings.
Retirement
Building Assisted
Living for the 1 Percent
A place for aging Manhattanites
if they can pay $20,000 a month
It became a passion for me to
find a site on this island
Its no accident
that Manhattans
newest senior-
living facility
will rise just blocks away
from the gilded co-ops of
Park Avenue. The residents
of those buildings might call
the place home someday.
Welltower, a real estate investment
trust that invests in senior housing, is
pushing into New York City. Last month
DATA: COMPILED BY BLOOMBERG
it joined with luxury developer Hines to
buy a site at 56th Street and Lexington
Avenue, and its planning a tower to
accommodate wealthy Manhattanites.
It will include both assisted living and
memory-care services, which are in
 You take someone
whos lived at 88th
and Park their
entire life, and you
all of a sudden say,
short supply in the Im moving you to
New Canaan,
borough. Conn.You will kill
You take someone that person.
whos lived at 88th and Thomas DeRosa
Park their entire life, and
you all of a sudden say,
Im moving you to New
Canaan, Conn., because thats
the closest assisted-living facility I can
get you intothat is unacceptable, says
Thomas DeRosa, chief executive oicer
of Welltower. You will kill that person.
A slowdown in the citys luxury con-
dominium marketwhich has dom-
inated building and pushed up land
values in recent yearsgave Toledo-
based Welltower an opening to enter
Manhattan. The company and Hines
together paid $115 million for the site,
where they plan to erect a 15-story
building. The concept theyre plan-
ning is a little bit unproven, says
John Kim, an analyst covering real
estate investment trusts with BMO
Capital Markets in New York.
Like anything built in Manhattan
in an era of record land prices and
soaring construction costs, the price
of living at the eventual tower will
be steep. Monthly rent at the facility,
which will cover the costs of a room,
caregiving, and food, is likely to top
$20,000, DeRosa says. Health insur-
ance doesnt cover it, which means
residents will be paying out of pocket.
High as that price is, DeRosa says,
it is competitive with the combined
expense of hiring full-time caregivers
at home and the costs of maintaining a
residence in Manhattan.
There are other assisted-living
facilities in Manhattan, but building
a ground-up project now, at a time
when many New York builders are
struggling to make their developments
proitable, presents some risk, says
BMO Capitals Kim: Theres going to
be a little bit of a learning curve on
the demand side to see if residents are
willing to pay those kinds of prices.
Welltower owns about 1,500 senior-
housing and medical-oice properties
across the U.S., the U.K., and Canada.
It started looking for a foothold in
Manhattan as part of a strategy of
building in markets that are tough
for competitors to break into. The
ILLUSTRATION BY 731
company joined with Houston-based
Hines, which also is building a luxury
condo tower next to the Museum
of Modern Art that has a penthouse
listed at more than $70 million.
The joint venture spent about
six months looking for a site to
buy in Manhattan, a search that
included a failed bid for a lot on
the Upper West Side. Their main
requirement was a good loca-
tion. It became a passion for me to
ind a site on this islandand not on
93rd and First, says DeRosa, a native
New Yorker, referring to a less expen-
sive corner of the Upper East Side.
Oshrat Carmiel
The bottom line An owner of assisted-living
facilities looks to get in on New York Citys luxury
housing boom.
Consumer Finance
Suing Your Bank Could
Soon Be Easier
A proposed rule will bring back
the class-action lawyers
Arbitration is just not doing
anything for consumers
Have you ever been charged a fee on
your bank account that you thought
was unfair? Or not gotten the cash
rebate you expected on a credit card
purchase? Or seen the rate on a short-
term loan shoot up for reasons you
didnt understand?
You might have a case to make, you
might notbut either way, it may be
hard to get that case heard in court.
Customer agreements for credit
cards, bank accounts, payday loans,
and other inancial products often
include terms that require disputes to
go through private arbitration. Thats
about to change if a U.S. regulator
has its way.
The Consumer Financial Protection
Bureau proposed a rule on May 5
that would restore the right for
people to join together in class-
action lawsuits when they feel theyve
been wronged by a inancial insti-
tution. Many banks and inancial
companies avoid accountability by
putting arbitration clauses in their
contracts that block groups of their
customers from suing them, the
agencys director, Richard Cordray,
said in a statement.
Markets/Personal Finance
Consumer advocates say class
actions are an essential tool to help
the public win relief and to hold
companies accountable for bad
behavior. Industry groups argue that
curbing arbitration clauses will result
in more frivolous lawsuits and higher
legal costs that banks will ultimately
pass on to consumers.
Theres only one winner coming
out of this rule: the plaintifs class
action bar, says Alan Kaplinsky, head
of the consumer inance practice at
Ballard Spahr, whos represented
banks and played a role in the rise of
using arbitration clauses in contracts.
About half of outstanding credit
card loans were subject to arbitration
clauses in 2013, the CFPB found in a
study released last year. Few consum-
ers bring, or even consider, individual
actions against their inancial service
provider in court or in arbitration, the
study said. In arbitration, individuals
must square of on their own against
the company they believe wronged
them, instead of sharing resources
and building a case with others in a
class action. 49
The whole point of these arbi-
tration clauses
in consumer
53% inance is to kill
the claims, says
Deepak Gupta, a
lawyer at Gupta
Wessler who
Share of outstanding previously worked
credit card loans at the CFPB.
subject to arbitration The proof is
clauses
in the pudding.
Arbitration is just
not doing anything for consumers.
The regulators proposal would
cover new agreements for products
such as credit cards, auto loans, and
credit reports. There will be a public
comment period for 90 days before
the regulator issues a inal rule.
The soonest it will likely take efect
is mid-2017, since companies will have
210 days to comply with the require-
ments. Companies will still be able
to include arbitration clauses in
contracts, but they must state that
they cant be used to stop individual
consumers from joining a class-action
case. Lawsuits challenging the rule
are expected.
The arbitration rule is one of the
biggest initiatives the CFPB has
 Markets/Personal Finance
undertaken since the bureau was
created in 2010 as part of the Dodd-
Frank Act. Its one of several ways the
Obama administration is seeking to
make it easier to sue inancial institu-
tions. The U.S. Department of Labor
released new standards last month
aiming to protect savers from conlicted
investment advice, which includes the
right to bring class actions.
While the CFPBs proposal would
afect only inancial agreements, it
could have a broader impact on all
sorts of contracts that feature arbi-
tration provisions, such as employ-
ment agreements, according to Mike
Calhoun, president of the Center for
Responsible Lending. This will have
a very signiicant impact, he says.
This could set a precedent for leg-
islation or other actions that would
put these protections in place.
Elizabeth Dexheimer
The bottom line The nancial industry says
forcing disputes into arbitration keeps costs down.
The CFPB thinks lawsuits hold banks accountable.
50
Divorce
Who Gets the Dog? Its
An Expensive Question
The law calls pets property, but
thats not how couples see them
You hate your exI get thatbut
your pet doesnt
Rudy is a 9-year-old German short-
haired pointer with a regal personality
and loving owners who are divorced.
The humans in his life agreed to a
shared-custody arrangement.
Every two weeks, Rudy travels
between their two homes in
western Massachusetts.
It was an informal deal,
worked out with no help
from a divorce court.
During the breakup,
Christina Trinchero and
her ex-husband had brought
up the subject of Rudy with their
lawyers. Both of them said, Sorry,
we cant help you with that. You
have to igure it out on your own,
she recalls.
At a time when Americans are
increasingly delaying having children,
who gets the pet can sometimes be
one of the most emotional questions
raised by a divorce. Yet courts have
little to say on the issue.
Traditionally, the law sees pets as
property, no diferent from a couch
or a houseplant. The average dog or
cat has a market value of zeroand
can cost thousands of dollars to feed,
walk, and keep healthyso it would
seem to have little legal priority. But
emotional attachment can turn a
beloved pet into a valuable bargaining
chip in divorce negotiations.
Natalie Reeves, a New York-based
divorce lawyer at the ToniAnn Grande
irm and an expert on animal law,
says she has seen people use their
animals in this way. In bitter divorces,
she says, you take whatever another
person loves the most and try to use
that against them. That might mean
demanding the cat, even if the animal
is more attached to your ex.
Judges have a lot of discretion in
how they divide property in a divorce.
Pet lovers can strengthen a claim by
proving they used their own money
earned before the marriageto buy
the pet or pay for its veterinary bills,
Reeves says.
Increasingly, some judges will con-
sider other factors when splitting
up pet-owning couples, such as the
best interests of the pets or the fami-
lies that love them. In a 2013 divorce,
a New York judge agreed to hold a
rare hearing on a couples ight over amount of time and care it takes, says
a dog. Although Joey the miniature
dachshund is not a human being and
cannot be treated as such, he is decid-
edly more than a piece of property,
Judge Matthew Cooper wrote. The
ruling was one of the
irst times a court had
ever explained reasons
for considering pets as
more than property,
making it inluential
m t
even though
Its not your
fault Judge Cooper
is a lower court judge. The couple
eventually settled their dispute over
Joey out of court.
Judges, including Cooper, have
so far rejected the idea of ordering
joint custody arrangements for pets.
Couples can hire lawyers to negotiate
a private contract, separate from their
divorce, to settle questions of custody.
In practice, Reeves warns, theres no
guarantee any court will take these
agreements seriously. These deals
can also be expensive to negotiate
and enforce. Although people are
very emotionally attached to animals,
in the vast majority of cases they
cant aford to ight over them, says
Joslin Davis, a family lawyer based
in Winston-Salem, N.C., who is pres-
ident of the American Academy of
Matrimonial Lawyers.
Debra Vey Voda-Hamilton, a
former divorce lawyer, now special-
izes in resolving pet disputes outside
court. Agreements reached through
mediation can be very detailed.
Owners might be required to use
groomers or dog walkers to transfer
pets between homes, ensuring exes
dont have to see or interact with each
other. Voda-Hamilton tells her clients:
You hate your exI get thatbut your
pet doesnt.
Dog owners sometimes scale back
custody demands when they think
through the implications of owning
the pet while single. They want the
dog, but they dont recognize the
Voda-Hamilton.
Rudys divorced owners didnt
go that far. When its time for the
shorthaired pointer to switch homes,
they just text or call each other. It
works, Trinchero says, because both
she and her ex-husband recognize
Rudy as their shared responsibil-
ity, even if its pretty much the only
connection they still have. Trinchero
takes Rudy for long walks; her ex
t
takes the dog out pheasant hunting.
Hes a member of our family, she
ILLUSTRATION BY 731 USING GETTY IMAGES (2)
s
says. We knew the dog was impor-
t
tant, and we would make it work no
matter what. Ben Steverman
The bottom line Divorce law doesnt say much
about pets, often leaving couples in a breakup to
s
sort out disputes on their own.
Edited by Pat Regnier
Bloomberg.com
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 Markets/Personal Finance

The State of the 401(k)

A Limited Reach
A recent report from the Government Accountability Office
describes two Americas gearing up for retirement. Among the top
half of earners, the option to save in a tax-advantaged 401(k) or
similar program at work is commonplace. Lower earners are less
likely to be offered a plan or to contribute to one if they are. The
report also calculates the effect that low pay and limited access
to retirement plans will have on those workers decades from now.
Ben Steverman
Wh r f cus
Among top earners,
r l nt ss Working households by income quartile only 4 percent have
With access to a 401(k) or similar plan at work a retirement plan but
Not participating in a plan dont contribute to it
c mm m nt
n hi h r
24%
35% 36%
x ct t ns 78% 59%
53%
71%
80%
t y u?

Lowest earners Second-lowest Second-highest Highest

c sy uv
Among working households with accounts,
Another federal survey found the median balance for whites is
nly r mt f
W r h n 17%
of low-income workers expect to
$58,800 compared with
never retire, vs. 12 percent
n w
t
r
m r
riv n of all workers
$16,400 for blacks

EARNINGS PROJECTIONS IN 2015 DOLLARS. DATA: U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Average estimated monthly earnings from retirement accounts
Based on projected retirement savings for a cohort born in 1997

These households will earn

at least $108,000 per year
during their careers
Dr v n t m r

t n c m
NN ES Lowest earners Second-lowest Second-highest Highest

EI NCE $560 $1,550 $3,370 $6,380

IN I T N UC S
 We see you reaching places
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We see opportunity when others dont. Our innovative nancial solutions combined
with relentless focus take performance to a whole new level. And for you, that
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Athene 2016
 Charlie Rose talks to... What happens to the market in tough
economic times?
The last two periods of real
readjustment were in 1990 and 2008.

Simon de Pury
The boom in the late 80s had been
fueled by Japanese collectors. In May
1990, world records were beaten for
Dr. Gachet by Van Gogh at Christies for
$82 million. Then in June, all Japanese
The renowned auctioneer and art expert describes the markets buyers had withdrawn from the market.
Its by 96, 97 that it really gathers
recent swings and his philosophy of what to bid on steam again. In 08, its the opposite. It
stopped in October 2008, but then in
March 2009, there
How much speculation is going on? In other was the Pierre
words, people buying pieces they love but would Berg auction,
Tell me about the art market today easily get rid of for the right ofer? which was the most
There are, of course, as many motivations for successful auction,
and where you see it headed. at the time, ever to
collecting as there are collectors. And some are
A lot of owners of top works have interested by the speculative aspect of it all. But take place.
decided to hold back. This season even the most serious collectors have never seen
there are far less really top-end works a single collector who would show you a work and
say, Listen, I bought this for $1 million and now
on the market. These last few years, its only worth $200,000. So even those who buy
literally from 2009 up to the end of out of passion for art as their prime motivation
last year, prices kept climbing. If you take contentment when they see that what theyve
spent money on has been a good investment.
did own something truly exceptional,
you were tempted to feel Maybe now
is the moment I should put it on the
market. So the volume in the auctions
is considerably lower than it was. But Whats happening at
the sales that have taken place so far Sothebys, which you left
have been very solid. in 1997?
A number of specialists who
have spent many years there
have recently left. There has
always been some mobility,
with people moving on,
54 ofering an opportunity for
the junior staf to move up
one or two notches. Whats
maybe unusual, in terms of
what has happened recently,
is the number of seasoned
specialists who did leave.
I think that some of these
Ive never seen a good specialists will go to other
houses. Some will become
collection made by someone art dealers.

just buying bargains

What are the lessons

Youve seen many auctions take place.
Ofer us advice, a maxim.
Ive seen people who are brilliant
businesspeople but who, when they
approach art, only want to buy bargains. And
Ive never seen a good collection
made by someone just buying
bargains. Often Ive seen people
who felt they had overpaid, but
for something really exceptional.
In the end, it was that work which
increased the most in value over
time. Quality is essential.
youve learned from a
lifetime in art?
You have to keep looking. Its
essential to always visit all
And isnt it easier to see quality when you know the exhibitions, the art fairs,
the lifes work of an artist? the auction previews, the
Every artist had some good days and some less
good days. So you know what are the best works. biennials. You have to stay in
But when you buy the work of a young artist, you it. You have to stay current.
dont know how hes going to hold up. You dont You cant suddenly say, OK,
know how active he will be, how he will grow. So
you take a bet, its a kind of gut instinct. I was and take a step back. In any
excited to see this week that one of my all-time case, you dont want to take
favorite artists, Mark Bradford, has been selling a step back because its too
very well. When we rst sold a work by him, we
decided to put him straightaway into the evening enjoyable. You cant ever see
sale. The rst time a work of his sold at auction, it too much art.
STEVE MACK/GETTY IMAGES

made $180,000 or in that range. This week, weve

seen prices in excess of $3 million for him.

Watch Charlie Rose on Bloomberg TV Weeknights at 6 p.m. and 9 p.m. ET

Speakers include: June 13-14
San Francisco

d d
Bill Maris g w d
CEO / GV

Andy Rubin Request an invitation

ground bloomberglive.com/tech

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Conference
2016
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 Fo
Mi
May 16 May 22, 2016
SkinnyPop, with just three ingredients, is overshadowing higher-calorie, avored rivals
It went from being an indulgent treat to being an everyday snack that isnt bad for you
Popcorn is one of the worlds oldest
snacks: Archaeologists have unearthed
roasted maize cobs in excavations of
prehistoric settlements in Peru. In the
U.S., where popcorn has been sold
PHOTO ILLUSTRATION BY 731; PHOTO: GETTY IMAGES
commercially for almost 200 years, the
movie theater and ballpark staple is
having a renaissance. Thats because
Americans are noshing moreand
more often. They want food thats con-
venient, simple, and healthy. Annual
sales of ready-to-eat popcornmeaning
already poppedhave exploded since
2011, almost doubling to $1.1 billion. The
growth has been powered by Amplify
Snack Brands SkinnyPop, which has
just three ingredientspopcorn, sun-
lower oil, and saltand about 150 cal-
ories per ounce. Consumers love the
simplicity of popcorn says Tom Ennis,
Amplifys chief executive oicer. They
want to know what theyre eating.
SkinnyPop hit the market in 2010, the
creation of a pair of Chicago entrepre-
neurs whod previously sold gourmet
caramel- and cheese-flavored popcorn.
Annual sales climbed to $44 million
within three years, drawing the atten-
tion of TA Associates, which paid
$320 million for a majority stake in the
You can put that army
of consultants on
furlough 58
On Vrooms virtual
car lot, theres no
pressure 59
57
business in 2014. The private equity
firm hired Ennis, whod run the beef
jerky company Oberto Brands, to lead
the business, which reincorporated as
Amplify. The Austin-based company
went public in August of last year in a
$270 million IPO.
The stock offering came just days
before the onset of market turbu-
lence thats dissuaded a number of
consumer-products companies from
going public. Shares of Amplify hit a
low of $9.43 on Jan. 11; theyve bounced
back more than 25 percent but are still
below their IPO price of $18.
 n/Mid-Market
les of the companys flagship
po t, which account for almost
all f i s revenue, have surged
0 percent during the
st t o years to finish
$176.9 million,
according to data from
market researcher
IRI. Euromonitor
Inte
e l ranks SkinnyPop fourth
in the ve ll popcorn marketwhich
includes Orville Redenbachers from
Conagra Foods and Pop Secret from
Diamond Foodsand No. 2 in the
faster-growing ready-to-eat segment,
where it trails only Smartfood, the long-
time leader produced by PepsiCos
Frito-Lay, the worlds largest snack
company. SkinnyPop and Smartfood
are profiting as consumers move away
from microwave popcorn, which now
trails the ready-to-eat variety.
After acquiring SkinnyPop, Amplify
ramped up marketing and increased
distribution with retailers looking
to boost their healthy salty-snack
offerings. Ennis also credits the
brands success to new cooking tech-
58 niques and packaging innovations
that help precooked popcorn stay
fresh on store shelves. It doesnt hurt
that the name SkinnyPop implies its
a diet food without explicitly saying
so. Popcorn got cleaned up, says
Kara Nielsen, a culinary-trend analyst
for Sterling-Rice Group, a branding
company. Consumers were craving
an alternative to giant tubes of fluo-
rescent popcorn flavored with fake
butter and sweet, tooth-rotting
caramel corn. It went from being an
indulgent treat to being an everyday
snack that isnt bad for you, she says.
Popcorns still a relatively small
No Nukes
U.S. popcorn sales
Microwave Ready-to-eat
2010
piece of the U.S. salty-snack market, Ennis says he isnt overly concerned
dwarfed by sales of potato and torti- about the growing number of compet-
lla chips and nuts, according to data itors. Angies Boom Chicka Pop and
from Euromonitor. Overall, popcorn Popcorn Indiana, two rivals battling
sales were about $2.9 billion Consumers love for clean-popcorn consumers,
last year, compared with a the simplicity of had a combined $107.7 million
combined $15.3 billion for tor- popcorn. They in sales last year, while
want to know what
tilla and potato chips. But theyre eating. Amplifys were $183.9 million.
popcorns been the fastest- CEO Tom Ennis, The Texas company also has a
growing salty snack each of Amplify Snack big head start on late-arriving
Brands
the past three years, leading food giants who might try to
more companies to focus on jump into the market. The
the category. Conagra, which land grab is over, Ennis says.
makes two of the largest microwave Amplify is expanding beyond
brands, joined forces with reality-TV popcorn. On May 2, it announced
star Bethenny Frankel in 2014 on a an agreement to buy Boundless
SkinnyGirl brand, in a direct pitch at Nutrition, an Austin company that
weight-conscious female consumers. makes snack bars and cookies and
Annies Homegrown, an organic label had sales of about $7 million last year.
owned by General Mills thats best Amplify also has its eyes on a bigger
known for its macaroni and cheese, piece of the salty-snack market, and
released a popcorn earlier this year; its once again gunning for Frito-
and Inventure Foods, the makers Lay. The company started distribut-
of Boulder Canyon potato chips, ing its Paqui (rhymes with hockey)
recently debuted Real Thin Pop. Steve tortilla chips across the U.S. this year.
Sklar, who runs the snack division at The gluten-free, non-GMO chips are
Inventure, says his companys popcorn flavored with organic cheddar cheese.
has less fat than SkinnyPop. Real Thin Ennis calls it a better-for-you Dorito.
Pop varieties are cooked in olive, Craig Giammona
coconut, and avocado oil. Anybody
The bottom line Sales of Amplify Snack Brands
can do a different flavor, he says, but SkinnyPop have grown 300 percent in the past two
not everybody has the technology to years, propelling it to No. 4 in the popcorn market.
use different oils.
One reason competition is heating
up is that SkinnyPop has demonstrated
that consumers will pay a premium for
SkinnyPop becomes
clean popcorn. At Services
Walmart.com, a
the No. 2 ready-
to-eat brand, after 12-pack of 4.4-oz.
When One Consultant
Smartfood
bags of SkinnyPop Is Better Than a Dozen
costs about $50, while a carton with
twenty-five 1-oz. boxes of Cracker Jack,
Business Talent Groups experts
Conagras long-popular caramel corn,
dont carry expensive overhead
can be had for $15.88.
I didnt need a big team of in the
corner working by itself
$1.2b When Mark Greenstein, executive
vice president for strategic initiatives
93%
Increase in ready-
at Heartland Dental, sought consult-
ing help earlier this year, he didnt
call his former employer McKinsey.
to-eat popcorn sales
since 2010 He turned instead to Business
$0.6b T e roup, which matches com-
nies iith experienced but less
34%
Rise in average unit
costl
I need
ependent consultants.
ded one top person who
could work side by side
price of ready-to
popcorn since 20100 ith my managers,
0 Greenstein, whose
2015 DATA: IR
RI pany, based in Eingham,

Ill., provides administrative services
including payroll, accounting, and
IT to 750 dental practices, not a team
of senior and junior consultants
that could cost several hundred
thousand dollars a week.
Midsize companies such as
Heartland, which has about $1.1 billion
in annual revenue, often require con-
sulting helpon everything from
digital marketing to expanding over-
seasbut they dont want the teams
that big consulting irms often assign
or the hefty expense of hiring them.
Many are turning to companies like Los
Angeles-based BTG, which allow them
to choose from a range of independent
consultants, typically for about one-
third to one-half what a Big Three con-
sulting irm would charge.
Founded nine years ago, BTG con-
tracts 5,000 consultants and profes-
sionals around the world. Most have
MBAs and years of experience working
or consulting in various industries.
When a client needs
help, BTG assesses the
scope of the project and
ofers a choice of a few
potential consultants
with suitable back-
Miller
grounds. Most proj-
ects require a single
person or a small team.
And because theyre
self-employed, BTGs
consultants dont come
with the overhead costs
of those employed by a
large company. Clients
hire only the person or
people they need for
the time they want, and
we provide access to talent that can
be hard for midsize companies to get,
says BTGs co-founder and chief execu-
tive oicer, Jody Greenstone Miller.
More than one-quarter of BTGs
clients are businesses with revenue of
$1 billion or lessand that shares been
steadily growing. We market mostly
to big companies, but midsize irms
are inding us, either through word
of mouth or through the investment
community, Miller says. BTG gets a
CHRIS GOODNEY/BLOOMBERG
cut of each project fee; revenue has
grown 50 percent annually for the past
ive years and is on track to surpass
$40 million in 2016, she says.
Heartlands Greenstein told BTG
he needed a senior consultant who
understood the administrative
outsourcing his company handles.
He also sought someone whod work
closely with his ive-person staf and
help them broaden their problem-
solving skills. Im a huge fan of tant through BTG to help him reshape
McKinsey and the work they do, but I
didnt need a big team of in the corner
working by itself or the overhead costs
that go with hiring them, Greenstein
says. With BTGs model, when we
need an extra day or two to think things
through or to clean up data, we can
aford to take that time.
The consultant he hired through
BTG, Christian Frank, was, like
Greenstein, a former McKinsey
employee, and had experience in
health-care and administrative out-
sourcing. Hed also been an executive
at IBM and at ADP, a provider of admin-
istrative services to global companies,
and hed run his own startup.
Heartland is already acting on Franks
recommendations. With smaller
clients, youre much
closer to the ultimate
decision-makers than
at large corporations,
the consultant says.
Sometimes every-
one agrees with an idea
youve helped formu-
late, and then, instead
of being sent through
seven diferent man-
agement layers for
approval, its put into
action the next week.
Frank is now starting
a second consulting
project at the company
aimed at lowering costs
and improving quality in operations.
Other midsize companies use both
traditional consulting irms and BTG.
At Broadridge Financial Solutions,
which has $3 billion in annual revenue
and provides investor communica-
tions and technology to inancial insti-
tutions, Chief Operating Oicer Tim
Gokey hired consultants from big com-
panies including Boston Consulting
Group to carry out due diligence
on acquisitions, plot strategy, and
handle projects that require a lot of
data analysis. They could get a lot
done quickly, didnt need his supervi-
sion, and also had access to extensive
research from their irms, he says.
Gokey taps BTG for projects
Focus On/Mid-Market
requiring a single consultant who can
help him and his managers map a
strategy. Six years ago, soon after he
arrived at Broadridge, based in Lake
Success, N.Y., Gokey hired a consul-
marketing. He liked the consultants
work so much, after six months he
hired her as his full-time chief market-
ing oicer. BTGs extensive network is
cost-efective, Gokey says, and some-
times we can even recruit from it.
Carol Hymowitz
The bottom line With 5,000 consultants on tap,
Business Talent Group has seen revenue grow
50 percent annually for the past five years.
E-Commerce
Elbowing Out the
Used-Car Salesman
On Vrooms website, theres no
haggling and shipping is free
We have to make sure the car 59
is amazing
About a year ago, violent storms hit the
Houston area. When the loodwaters
receded, Vroom, an online seller of
used cars, discovered it had lost more
than 100 vehicles, equal to about
$3 million in sales. It was a reminder
that the two-year-old Web startup faces
some of the same challenges as a brick-
and-mortar retailer.
Vroom is one of several companies
seeking to consolidate the frag-
mented used-car market. But unlike
rivals Beepi, Shift Technologies,
and Carvana, which mostly connect
buyers and sellers via online market-
places, New York-based Vroom buys all
of its cars, then refurbishes and guar-
antees themmuch the way a tradi-
tional dealer does.
Allon Bloch, the former venture
capitalist who runs Vroom, says many
Americans who are happy snapping
up a $10 shirt online remain leery
about going there to buy a car, typi-
cally the second-biggest purchase after
a home. If a consumer spends tens
of thousands of dollars on a car that
theyll use for many hours every week
and may own for years, we have to
make sure the car is amazing both
 Focus On/Mid-Market

mechanically and cosmetically, says

Bloch, who was a partner at venture
capital irm Greylock Partners.
Traditional chains such as CarMax At its Houston
have helped improve the used-car facility, Vroom
preps a Ford
buying experience. But many con- Mustang for sale
sumers still dread walking onto a deal-
ers lot. Vroom and other used-car
e-tailers say they remove the hassle
and hard sell. All ofer haggle-free
pricing, free delivery, and returns
within a limited period.
Americans buy 40 million pre-
owned vehicles a year, yet CarMax,
one of the largest players, has just
2 percent of the market. With plenty
of room to grow, Vroom has raised
more than $250 million in equity and
debt from investors including General
Catalyst Partners, Catterton, and John
Elway, the former quarterback whos
now general manager of the Denver
Broncos, the 2015 Super Bowl champi-
ons. In 2015 investors poured more than
$900 million into used-car e-tailers glob-
ally, almost double the amount from the
prior year, according to CB Insights.
Vroom is betting it can win over con-
60 sumers by combining traditional dealer-
ship service with the robust selection
online shoppers have come to expect.
The company specializes in accident-
free, low-mileage cars. Its hard to ind
anything on its website manufactured
before 2013. There are more than 35
brandsincluding, recently, an Aston
Martin and a few Teslas.
Vroom developed its own logistics

software to keep tabs on its inventory
of as many as 4,000 vehicles. Bloch says
the program helps the companys facil- loaded onto which truck to be delivered
ities in Dallas and Houston, where vehi- where. The company farms out half the
cles are inspected and prepped for sale, deliveries, but in the next 12 months,
work as smoothly Bloch plans to bring the whole opera-
Sales of certified as a factory assem- tion in-house, so Vroom can move to
pre-owned vehicles bly line. Buyers 24-hour delivery. Of course, that means
700k get a 90-day war- buying trucks, hiring drivers, and
ranty, seven days to adding facilities, including one opening
return the car for this year in Indianapolis.
550k a full refund, and Because its ixed costs are higher
one year of road- than most e-tailers and its prices are
side assistance. cheaper than those ofered by tradi-
400k Bloch says his tional dealers, Vroom will need to move
1Q 11 1Q 16 prices are 8 percent a lot of metal very eiciently to make
lower on average money. The company says it sold tens of
than those of other dealers. After thousands of cars last year, generating
clicking Buy, a customer typically about $900 million in revenue. Getting
receives her car in less than a week. the cars out the door quickly is key,
Vrooms two facilities process a few because their value depreciates every
hundred cars a day, using algorithms day they sit unsold. The longer it takes,
to igure out which vehicles should be says Bloomberg Intelligence analyst
COURTESY MIKE WELCH/TEXAS DIRECT AUTO/VROOM; DATA: CRAIN COMMUNICATIONS AUTOMOTIVE NEWS, AUTODATA
Kevin Tynan, the less Vroom makes and
the less cash it has to buy more inven-
tory or build out operations. Bloch
declined to specify a timeline to proit-
ability, saying the company is focused
on investing in growth.
In April, another lood hit Houston.
At 6 a.m. on a Monday morning, about
two dozen Vroom employees braved
the rains to move vehicles to higher
ground. To identify the most high-risk
cars and their locations, the workers
consulted newly tweaked software.
This time, Vroom lost only about a
dozen vehicles. Jing Cao
The bottom line Unlike rival marketplaces for used
cars, Vroom buys and inspects all of the vehicles it
lists for sale on its website.
Edited by Cristina Lindblad
Bloomberg.com
 When it comes to
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The
Worlds
Smallest
Ukelele
63

Its playing
for the mere
millionaires
being humiliated
by billionaires
in paradise

By
Robert Kolker
 Once upon a time, thousands of years
ago, a surging mass of magma beneath
the Pacific Ocean burst through the
earths crust and began burping out a
stream of lava, irst underwater, then
above, to form land. As the tectonic plate
shifted, the eruption created a string of
four islandsall of which are pretty nice,
but the largest, known today as Hawaiis
Big Island, is as close to paradise as any
human might deserve. On the beaches,
the temperature hardly ever roams above
the mid-80sF or below 70. Its the tropics,
yet its seldom muggy. And rain, when it
comes, is like an afterthoughtthe gentlest
of reminders of how achingly wonderful
the island is the rest of the time. This way to the
But even in paradise, lobby at the Four
some spots are better
$33.7b Seasons. Below,
than others. The islands northwest shore ground zero for the
is a gold coast made remote and exclu- Rockpoint Group, bowed out in 2014,
$3b loved the familial recent struggles
sive by a border of long, lat ields of vol- Rob Walton of the Walmart Stores aloha spirit everyone talked about. Now,
canic rock. Laurance Rockefeller opened family bought a minority stake. The he was being told no.
the Mauna Kea Beach Hotel there in 1965. most prominent homeowners include As his wife started to cast about for a
Then came the Hapuna, the Mauna Lani, Citadel founder Ken Griin, Starbucks patch of grass on which to set up camp,
the Orchid, and the Waikoloa. In his inal Chief Executive Oicer Howard Schultz, the executives mind looded. This was
years, Steve Jobs often hid out in Kona brokerage pioneer Charles Schwab, Hualalai, not South Beach. This wasnt
Village, a rustic, low-i, Bali Hai-style KKRs George Roberts, Oaktree Capital supposed to happen in paradise.
hideaway best reached by
private plane. Nearby is
$5.6b Management co-founder Bruce Karsh, He pulled out his phone, took a
G oDaddy founder B ob Parsons, picture, and texted it to the manage-
Kukio, a quiet homeowners commu- Columbia Sportswear CEO Tim Boyle, ment. They apologized right away. They
nity where KKRs Paul Hazen, Sutter Hill and Warren Bufetts sister Bertie. (Each were all too familiar with the problem.
64 Ventures David Anderson, and Silver of their places was purchased for or is
Lake Partners David Roux became neigh- currently appraised at $17 million to Les Firestein is a Hollywood
bors. And last to be built, nestled between $23 million.) But no one who frequents $5.9b screenwriter who had brought
Kukio and Kona Village, came the
place that in many ways would out-
$4.6b Hualalai upstages the loca- his family to Hualalai as hotel
tion. The shore has a shallow guests for years. Its extravagant, but they
class them all. shelf stretching out almost a half-mile, deliver, he says. You know youre going
Hualalai, developed in 1996 by Japans making a friendly swim with a team of to have a perfect time. Last summer a
Kajima Corp., is a pristine, manicured dolphins an almost daily possibility. friend who owned a home there ofered
865 acres on which are tucked a $1,000- And while some resorts to the north are him free use of his place for a week.
a-night (for starters) Four Seasons hotel caught in a wind tunnel between two vol- Firestein said yes. Then he quickly learned
and a residential community of more canoes, Hualalai is in a calmer pocket. Its that if he wanted to do anything at the
than 300 homes and condominiums. like the clouds part for the place. resort beyond hanging out at his friends
The homeowners are served by their It was here, in the middle of all that, house, he had to pay daily unaccompa-
own private Hualalai Resort Club, and that one sunny day about ive years ago a nied guest fees$150 for adults and $75
can also make use of the hotels phenom- senior executive at a company you would each for his two children. The fee gave
enal amenities. All in all, Hualalai has deinitely recognize wandered with his Firestein pause, but only briely. Right
the scale to sustain two championship- wife over to the Palm Grove Tranquility of the top, were paying $450 a day, he
caliber golf courses, seven bustling res- Poolthe one with a bar in the middle says. But then again, youre like, Oh, its
taurants, ive main swimming pools, and you can paddle up toand saw that all the Four Seasons. Well suck it up.
a snorkeling-friendly lagoon frequented the chaises longues were occupied on Firestein then learned that even after
by a spotted eagle ray and 4,000 other the pool deck. Then he walked a few paying the fee, his family wasnt entitled
Net worth fish. The spa has an feet to the beach and saw that the to the same access as hotel guests. It
apothecary with com- chairs there were taken, too. This man was like there were two systems of privi-
$17.6b poundable herbal rem- had been coming to Hualalai for years, lege operating at the same time, he says.
edies and supplements made on-site. irst renting homes, then buying a four- He wasnt permitted to reserve a table at
Along the links, golfers stop at comfort bedroom house. He had done every- any of the restaurants between 5:30 p.m.
stations stocked with complimentary thing possible to be in a situation where and 8 p.m. He had to show a guest ID
candy bars and bourbon. Poolside atten- the answer to every question would be card everywherelike, Show me your
dants ofer chilled towels, sunglass clean- yes. He had plunked down a $200,000 papers, he says, still annoyed.
ing, and Evian spritz service. initiation fee and $40,000 a year in It was poolside that he particularly felt
Michael Dell liked Hualalai so much dues to join the Hualalai Resort Club. the caste system at work. Youd go to a
that in 2006 he bought the whole His three children had practically grown pool and order what you want, he says.
thinghotel, resort, everything except up at Hualalai, made friends there, and And then, when you make the mistake
the private homes. When his partner, came back whenever they could. They of sitting in the wrong seat, a Hualalai
 brownshirt basically comes over and says,
You cant sit there. And there was liter-
ally no one else near the pool because it
was kind of drizzling. It was just bizarre.
Firestein writes dialogue for a living.
Standing by the empty chaises longues,
PREVIOUS SPREAD: PHOTO ILLUSTRATION BY 731; SOURCE: SUSAN SEUBERT (1) GETTY IMAGES (2); THIS PAGE: COURTESY CHRISTOPHER ZYDA (2); ALL OTHER IMAGES IN THIS
he didnt hold back. I said to them, You
know, this is weirdly like Jim Crow. Youre
telling us we can eat here and not here,
and theres no one else around? almost a decade. In October he tried to
He didnt stay the full week. Another
family the Firesteins had rendez-
voused with therevisitors, he notes
pointedly, from South Africaalso left
I dont want
early.
to exaggerate,
Firestein says,
but it really is
an apartheid
experience.
He didnt know it at the time, but he
was encountering a new policy enacted
by Hualalai Resorts, Dells management
company on the ground. It has three
prongs: First is the complex schedule of
steep resort access fees based on the time
of year and the relationship of the guest
ARTICLE: DON RIDDLE/COURTESY THE FOUR SEASONS
to the homeowner (sons and daughters
are OK; nieces and nephews, friends,
and renters have to pay). Next theres
a status hierarchy for making dinner
reservations at any of the restaurants.
Finally theres the rule governing the
use of the chaises longues by the pools,
which the Firesteins encountered at its
most cognitively dissonant moment,
on a deserted pool deck in the rain.
The word no was getting an awful
lot of use. And it was said to people
who werent accustomed to hearing it.
People who have invested millions of
dollars being homeownersbasically
our needs are not as important as the
hotel guests, says Mike Greenfeld,
owner of a Hollywood postproduction
company and a Hualalai homeowner for
reserve spots for some friends at a luau
in December, a peak period. (Frankly, if
youve been to one, youve been to them
all, he says, but they wanted to go.)
It was the earliest recommended time
to reserve, but he was told the luau was
full. That was bull----, Greenfeld says.
They were just holding space for hotel
guests. He called and complained, the
hotel relented, and when his group got to
the luau, there was plenty of room. It was
clear what had happened: The friends
werent immediate family, so they were
in a lower caste.
Tension over the policy boiled over
in August, when three executives from
Hualalai Resorts convened a special
meeting of the Hualalai Homeowners
Association to announce the resort was
increasing the peak-period unaccompa-
nied guest fee to $250 and expanding the
periods to several months of the year.
The steep fee, they said, was meant to
make it harder for people to rent out
their homessomething they argued was
happening more and more frequently
and clogging up the hotels amenities.
A family of four is staring down the gun
barrel of $1,000 a day before you ever
pay for anything else, like rent, says
Taber Anderson, a longtime homeowner.
With a surcharge like that, why would
anyone rent a place at all?
The goal, the executives said, was
to protect what they called Hualalais
experience of exclusivity, according
to those who attended. No one in the
room disputed that exclusivity deserved
to be protected. But no one in manage-
ment seemed to
care that some
homeowners,
those who rent
their places for
several months
out of the year,
could lose tens
or even hundreds
of thousands of
dollars in annual
rental income
or that every-
ones resale values
might plummet
once prospec-
tive buyers learn
about the extra
charge for anyone who rents. Days after
the meeting, Sandra Holstead, a home-
owner since 2004, told a Hualalai exec-
utive she might be able to ind at least a
few people willing to pay the $250 fee. 65
Maybe the fees would have to be higher
then, she says the executive replied.
This could end in only one place:
court. In October, Christopher Zyda,
a Hualalai homeowner, iled a lawsuit,
which he hopes to make a class-action
suit, against the Hualalai
owners, including Dells family
oice, MSD Capital, and the
Four Seasons. He and a group
of about 75 Hualalai homeown-
ers who openly support the
suit say theyve been bait-and-
switchedthey were promised
they could use their homes
and the hotels amenities freely
and without any guest fees,
then the rules changed.
The resort has essentially
responded that the homeown-
ers might want to check the
ine print of their homeowner
agreements. Management
can raise guest fees. It can
set up a metaphorical velvet
rope, cutting off access. It
can alienate the homeowners
who use their places for cash
low. And if it means certain
homeowners have to sell their
places to wealthier buyers
who arent put off by
those fees, so be it.

The Beach Tree, one
of seven restaurants
at the resort
This may sound like a battle of the
1 percent vs. the .001 percent over a
bunch of beach chairs, says Zyda, who
decries the resorts Gestapo
tactics. But there are very
real contract issues at hand. Ive heard
homeowners say the agenda is to drive
all the homeowners out.
66
Im a rule-follower type of person, and not allowed to do. None of this crazi-
Zyda says, shouting over the buzz of his
groundskeepers weed whacker. Were
sitting in the backyard of his ive-bedroom
spread at Hualalai, sipping water and
looking out on the ninth green of the
resorts Jack Nicklaus
golf course. I dont try
to make trouble.
A 54-year-old finan-
cial adviser, Zyda discov-
ered Hualalai 16 years ago
while on vacation from
his former job as treasurer of Amazon.
com. He loved it so much that he used
some of his stock options to buy a devel-
opment lot. Like others who support his
lawsuit, he remembers being told by his
real estate agent that one of the great
things about buying at Hualalai was the
money he could make renting out his
home when he wasnt there, with no
restrictions or fees. Since then, Zyda has
changed career tracks and moved, and
he and his husband, Michael Wieland,
finished building their home only in
early 2015. By then, he says, many of the
things that had made being a homeowner
at Hualalai so special were well on their
way to being rolled back, all in the name
of crowd control.
He shows me the latest two-page
schedule of guest fee rules, featuring an
exhaustively detailed table designating
diferent types of guests (club members,
immediate family, extended family,
escorted guests, accompanied guests,
unaccompanied guests) and different
times of year (peak, peak of peak). In court papers, and to me, the home-
Its like a complicated, ever-changing
video game, he says. I cant keep up with
the rule changes and what Im allowed
ness existed when I purchased in 2000.
The dispute is, naturally, about money.
But its about so much else, too. Its about
power, or the loss of it. Its about feeling
jilted. Many of the homeowners sup-
ported the resort from the beginning,
putting down roots on what had been
lava fields. Now that
the hotel guests matter
more, the homeowners
are forced to watch as
their ex parades new
companions in front
of them.
More than anything,
perhaps, its about
humiliation. These are
wealthy people unac-
customed to being put
in their place by someone even wealthier.
We r e s m a r t ,
were mature, we
run hedge funds,
says Karen Witesman, who bought her
Hualalai condo in 2013. And then Dell and
this group are telling us what to do. And
it goes against the grain of who we are.
Were so big and so wealthy, and were still
working with that little contract.
When discussing the possibility of
a lawsuit, the homeowners knew they
had a problem. How could they
ight an ownership agreement
theyd all signed that in several
places explicitly allows the resort
to charge whatever guest fees it
wants? The answer came from
their attorney, Terrance Revere,
who crafted a suit thats an
unfair competition case rather
than a contract case. By setting
up such steep resort access
fees for guests and renters, he
argued, Hualalai was essen-
tially trying to edge out compe-
tition for renters. For proof, he
said, look no further than when,
in 2014, Dells group made the
Four Seasons the manager not
only of the hotel but of the entire
resortthe equivalent of placing
the fox in direct supervision of
the henhouse. Who benefits
when the Four Seasons-managed
resort raises renters fees? The
Four Seasons-managed hotel, of
course. If too many warm bodies at the
resort are a problem there, Revere says,
why arent they imposing the same fees
on hotel guests?
owners who support the lawsuit accuse
the ownership of a hidden agendaalmost
a conspiracy. They wonder if the fallof
from the 2008 crash, the need for emer-
gency repairs after a 2011 tsunami, and an
ill-fated investment that Dell made next
door in Kona Village (still not reopened
after the tsunami all but lattened it) kept
him from expanding Hualalais amenities
fast enough to keep pace with its growing
popularity. They have no access to the
resorts inances.
But the big tell,
they believe,
was that in 2013,
Bloomberg
reported that
D e l l s g r o u p
restructured
a $176 million
loan. Apparently
seeking more
cash, the resort
plans to develop more than 100 more
homes on the property; it has the legal
right to build even more. The only way
that density can work, it seems, would
be to discourage the homeowners from
using their places so often. Could that be
the entire reason for the crackdown on
renters and house guests? If that were so
and only a lawsuit could shake loose the
truthit would mean that the homeown-
ers were nothing but scapegoats for what
Zyga claims is the resorts deeper inan-
cial problem.
 The lawyer representing the defen-
dant group denies everything about this
hidden-agenda agenda, as well as the
unfair competition argument. To prove
unfair competition, they have to prove
the policy was made in bad faith, says
attorney William Meheula. Thats going
to be hard for them to prove, given the
club documents they signed. And these
are sophisticated people.
One of the things weve always believed
is trying to protect and preserve the
experience for members and guests
here, says Patrick Fitzgerald, president
of Hualalai Resorts, whos managed the
property since before the Dell group
bought it. On a perfect sunny afternoon
like any other, he takes me on a tour past
the lagoon, the Tranquility Pool, the lots
scheduled for development. He readily
acknowledges that the policies have a
way of correcting an imbalance in the
renter market. People told me, This
is kind of easy for someone who other-
wise would not stay at the hotel. As an
example, if Im paying $1,600 a night to
rent a three-bedroom unit, and it costs
$1,000 a night for a hotel room, the eco-
nomics are very simple.
Still, says Fitzgerald, a tall, athletic-
looking man originally from Queens,
N.Y., the fees werent meant so much
to knock out competition as to create a
little congestion pricing. The hotel has
always been full at Christmas, he says.
But then it got to where you couldnt
get a reservation for dinner at seven
oclock. Renters are great people. But
we have to make sure we protect our
hierarchy of the Hualalai experience for
our residents, members, and guests.
To prove that most homeowners
approve of the new fee schedule,
Fitzgerald lined up a meeting with three
members of the Hualalai Members
Advisory Board, a group of homeown-
ers brought in by management to consult
on such matters as the guest fees. The
next dayalso sunny, also perfectthree
board members await me in the sheltered
porch of the Hualalai Trading Company,
the resorts general store, which sells
heated malasadas, an addictive, sugar-
coated fried-dough confection popular
from Hawaiis days of sugarcane planta- island, he tends to cook. If hes hosting
tions. All three homeowners love the new friends, he makes sure to go with them
rules. All three cant stand renters. everywhere. All I keep thinking to
The pool had been a major myself is, there is someone in the chain
problem, says Mike Sack, who bought of command at the hotel who just does
in 2004 with his partner, suspense nov- not have a clue about marketing, he
elist John Saul. Ive been down to the says. I worked at the Walt Disney Co.
pool, and someone has reserved ive for 10 years before I went to Amazon.
chaises, and thats a problem for me. You have 300 homeowners who are
It had gotten more and more wealthy who are at this place and think
abusive, says Julie Wrigley, the widow its special. They all know other people
of gum magnate William Wrigley III. Shes who are potential purchasers here. And
bright-eyed, with a short brunette sweep all of our friends possibly stay at the Four
hairdo. Since the $250 policy went into Seasons from time to time. Why would
efect, she says, theres been less crowd- you want to alienate that group of poten-
ing. Its been the irst time that that has tial customers?
worked. Same thing for the restaurants. Its unclear how likely Zydas suit is to
And getting a spa appointment. be granted class-action statusor even if
Somebody did a down-and-dirty the judge will buy into the unfair compe-
analysis of what we pay as owners tition argument. Meanwhile, the efects of
here vs. the $250 renters are charged, the lawsuit on the market are uncertain.
says Susan Frampton, whose husband, Sales were strong in the irst quarter: eight
Harry, is a major developer of ski resorts residences and three development lots.
in Vail, Colo., and elsewhere. And every But by many accounts, the rental market
day of the year, whether were here or has all but evaporated. One homeowner,
not, I pay $128.50. So how come renters, Carol Meyer, says her home generated a
with no payback into the system, no ulti- half-million dollars in rental income in
mate responsibility for depreciation, 2014 and 2015. This year she cant get
were getting in free? Something had to anyone to rent.
be done. The Hualalai management is putting
Theyve all heard the argument that on a brave face. Some of the members
the fees are going to destroy property feel like, Wow, have you lost some of your
values. When the lawsuit gets settled, aloha spirit? Fitzgerald says. And our 67
Wrigley says, theyll sell their houses. perspective is, we dont think we have.
Besides, resale value matters only to Unfortunately, we
certain people. This place isnt right
for everybody and doesnt need to be had to make some
all things to all people, she says.
a priorities. And
Wrigley socializes with Dell and you may not take
Walton. The Waltons are best friends
W
of ours, she says. Once in a while well
o that as aloha. But you
ask a question, and Rob will say, You
a know, it was just a business decision that
know, were not the managing investor.
k was important for the sustainability of the
But the nice thing is, they are long-term
B resort going forward.
investors
n and long-term thinkers. She If theres any common ground, its that
has less kind words for Zyda. While he
h everyone believes Hualalai is special
owned property here since 2001, hed
o too special to be destroyed. Zyda says
not lived amongst us. He doesnt know hes open to resolving the case without
us. Its kind of hard to start a lawsuit just more bad blood. He pauses to do a little
after your home is done. mental math. Wed have to value the
Zydas hardly a lone wolf, I say. He loss of market value, because we cant
has more than 70 potential co-plaintifs. rent the house anymore, he says. He has
No ones sued before, Sack says trouble settling on an answer. If they
dryly. want Michael and me to not rent, he
I ask the group: What would you say if inally says, Ill entertain the ofer. As
I were a homeowner sitting on this porch, long as were adequately compensated.
and I said these new fees make it impos- He wants to get back the aloha spirit. But
sible for me to aford living here? it wont come cheap.
Wrigley answers. Please, she says.
There are so many opportunities up and
down this coast to own that have a policy
that might be more friendly. But its not
why some of us bought here.
Zyda doesnt go to the Hualalai res-
taurants anymore. When hes on the
 How the Most Boring CEO
In the Business Lucked Into
The Best Position* in the Biggest
Oil Patch in U.S. History
By Bryan Gruley and Joe Carroll
Photographs by Ben Sklar

68
 BARRELS, GIVE OR TAKE!
Pioneer Natural Resources
CEO Scott Sheield

THATS 10 BILLION 69
 n the fall of 2011, Tom Spalding, a slim geologist with salt-
I and-pepper hair, stood before the board of directors of
Pioneer Natural Resources, an oil and gas exploration
company, to make a presentation unlike any hed made
in his 14 years there.
Using two latscreens in Pioneers suburban Dallas board-
room, Spalding, the companys vice president for geoscience,
walked directors through the results of months of research.
He and his team had explored for undiscovered oil in hori-
zontal shales deep within the Permian Basin, a vast rock for-
mation beneath West Texas. They had analyzed seismic data
and core samples of 7,000 company wells as well as informa-
tion on decades-old wells archived at the University of Texas.
When we irst did it, we couldnt believe it, Spalding recalls.
We had to go back to check our measurements.
He showed the board a schematic of 13 slabs stacked one
atop another like something out of a Frank Gehry sketchbook.
Almost every tier was splashed in bright red, signifying the
presence of crude. Crucially, there was scant evidence of the
saltwater zones that often
dot such diagrams and can
spell doom. It was all oil.
Pioneers chief execu-
tive oicer, Scott Sheield,
watched with anticipation.
Hed been drilling vertical
wells in the Permian since
1979 with only modest
success. After hearing his
geologist, he ordered the
drilling of two horizontal
70 test wells.
Those wells cost four
times what a vertical did but
wound up spewing seven
times the crude. Sheield
called for more horizontals.
He had the money to invest Outside Midland, Texas
because hed sold of seem-
ingly sexier oil projects and avoided borrowing while other
independent drillers were wagering yet again that oil prices
would forever climb.
By 2015, Sheield had stopped drilling new vertical wells
altogether and diverted almost all of Pioneers efort and
money into the Permians shale. All of which helps explain
how Pioneera $26 billion company with less than one-tenth
of ExxonMobils market value, almost no oil ields beyond
Texas, and the same boring CEO for more than 30 yearsis
now showing the world how to thrive amid the worst oil bust
since the 1980s.
As crude prices have fallen about 60 percent since their
most recent peak, in June 2014, investors have seen $1 tril-
lion in value vanish. More than 40 oil-related companies have
sought bankruptcy protection, and more ilings are expected.
Lenders are setting aside billions of dollars to cover losses. But
over the last seven calendar years, Pioneers stock has risen an
average of 34 percent annually, more than 10 times the rate of
Exxon and Shell. In 2016 its shares are up 29 percent.
Everybody looks good when prices are high, says Michelle
Foss, chief energy economist at the University of Texas at
Austins Bureau of Economic Geology. Not very many com-
panies look good when prices are lower.
Pioneer has a huge presence in the Permian, with the rights
to 800,000 acres and more than 20,000 drilling sites that could
hold as much as 10 billion barrels of crude. Sheield estimates
the Permian shales in total could hold 75 billion barrels, second
only to Saudi Arabias gargantuan Ghawar ield. Pioneers good
fortune is the result of a bunch of little, long-ago bets that
added up to a big one. Sheield bought most of the companys
Permian drilling acreage in the 80s and 90s, when the worlds
oil giants were bolting West Texas for ofshore and foreign plays.
Sheield kept it because it was low-risk and reliable. He had
no idea those parcels one day would reside in what might be
the biggest oil ind in U.S. history.
Scott Sheffield personifies Pioneer just as he defies the
stereotype of the Texas wildcatter. A 63-year-old with bushy
reddish-gray eyebrows and a hint of his native Texas accent,
hes cautious and publicity-shythe antithesis of the late natural
gas fracker Aubrey McClendon.
Sheield attended high school in Iran, where his father
worked for Arco. Sheield was a petroleum engineer at Amoco
in 1979 when his then father-in-law, Joe Parsley, hired him
at Parker & Parsley, a small
independent producer in
Midland, Texas, in the heart
of the Permian Basin.
The Permian was once
the mother lode of U.S.
crude production. First
drilled in the 1920s, it
endowed Texas with a
sway over global energy
markets unmatched until
the rise of the Organization
of the Petroleum Exporting
Countries. Parker & Parsley
focused on a part of the basin
named for Abner Spraberry,
who owned farmland where
oil was discovered in the
1940s. Sheffield made it
his mission to know the
Spraberry backward and forward, he says. Eventually he could
rattle of the daily production rate of every Parker & Parsley well.
The wells were unspectacular but consistent producers that
promised to last for decades. Parsley lectured his son-in-law on
the value of hanging on to such dependable assets.
Parker & Parsleys co-founders sold their company in 1985
to a real estate concern. Sheield was named president of its
Parker & Parsley subsidiary. The major U.S. energy compa-
nies were shedding domestic assets to invest overseas. The
middling Spraberry wasnt economical for the big guys, but it
was ine for Sheield. He started buying drilling leases from
Mobil, Exxon, and others.
Parker & Parsley broke away from its parent in the late 1980s
and went public in 1991. Sheield kept buying the Spraberry
even as Wall Street yawned and experts proclaimed the Permian
to be old news. It had no sizzle, Sheield says. Thats what
analysts and investors told me. But he viewed those acres as
an annuity that would keep producing as the company tried
riskier ventures. He looked at it as kind of the breadbasket,
says Tim Dunn, then a top Sheield lieutenant and now CEO
of CrownQuest Operating. He went against the grain and used
it as a platform.
In 1997, Parker & Parsley merged with Mesa, the company
founded by T. Boone Pickens and later restructured by inves-
tor Richard Rainwater. The new company, Pioneer, moved to

the Dallas suburb of Irving. Suddenly, Sheield had a big gas
ield in Kansas and $1.6 billion in debt, ive times what he had
before. Not long after, oil prices crashed. Pioneer lost almost
$1.7 billion from 1997 to 1999. After iring 300 employees,
Sheield vowed never to let Pioneer get so leveraged again.
Over the next decade, the company embarked on drilling
adventures in Tunisia, South Africa, Argentina, Canada, and
the Gulf of Mexico. By 2011 it was unwinding all of them, partly
because of heightened political risk overseas. It was Texas (and
a small stake in Colorado) or nothing.
At the time, crude was lowing from North Dakotas Bakken
ield and gas from Pennsylvanias Marcellus formation out of
wells bored sideways, then fracturedor frackedby blasting
in water and sand to prop open cracks and let hydrocarbons
out. Pioneer began to have some success drilling horizontally
in a South Texas formation known as Eagle Ford. The company
had plenty more places to drill to the northwest in the Permian.
Only then were drillers realizing fracking could work there, too.
Chevron revived its dormant Permian portfolio. Independents
came, as well, including Apache, Diamondback Energy, Concho
Resources, and Parsley Energy, named for Joe Parsley. Its run
by Sheields son, Bryan Sheield.
Pioneers advantage was a rich trove of data it had compiled
on those Permian acres stretching back to the days of Parker
& Parsley: logs from its own and others wells, warehouses of
cylindrical drilling cores, and a database of raw numbers on rock
porosity, density, and low rates. Plumbing that information,
Pioneers geoscientists could assemble a 3D subterranean map
of how oil and gas lowed in the Permian. We basically make
treasure maps and put an X on where to drill, Spalding says.
Its a sunny March afternoon on a dusty plain 30 miles north
of Midland. A brisk wind scatters tumbleweed and snaps the
yellow caution tape snaked around a Pioneer rig drilling a
fresh Spraberry well. The rig towers over ranchland owned by
the Scharbauer family and leased by Sheield in the late 80s.
In a control room 40 feet up, Executive Vice President
J.D. Hall peers over the shoulder of a young man using a joystick
and a bank of monitors to help maneuver a drill bit through
dense rock 2 miles underground.
Youre looking for the sweet spot, says Hall, a bespec-
tacled petroleum engineer in jeans, work boots, and a white
Pioneer hard hat. Then you gotta stay in it.
Pioneers geologists have determined that this bore needs
to twistor, as Hall puts it, porpoisethrough an oval of
rock 50 feet across and 30 feet from top to bottom. Once its
done, the rig will be shifted 45 feet to drill a second well, then
moved over for a third. The three are expected ultimately to
produce a million barrels each.
Fracking has continued to evolve. Drillers are now extend-
ing bores laterally as far as 10,000 feet. This enables the instal-
lation of more stagesas many as 35 on a single boreat
which the rock is fractured, or stimulated, in the jargon.
In efect, drillers build a series of miniature wells along the
horizontal bore, each draining out petroleum. Depending
on the peculiar geology of the rock, producers also vary the
types and amounts of sand and water used and how hard its
pumped in. Pioneer in particular has focused on spacing sep-
arate bores close enough laterally that between them they
create complex fracture networks that yield more oil and gas.
If the bores are too far apart, they can leave hydrocarbons
behind; too close and they can interfere with one another,
reducing the low. Theres no one way to do it, says Allen
Gilmer, CEO of Drillinginfo, an Austin oil and gas analytics
WE BASICALLY MAKE TREASURE MAPS
irm. The diference between a good frack
job and a bad frack job might be 50 percent
of production.
At the three-well drilling pad on the
Scharbauer lease near Midland, the bores will
do their porpoising 650 to 800 feet apart.
Pioneer will apply what it learns from seismic
testing and production results to the next site
nearby, expanding or shrinking the distance
between bores. Then it will keep spreading the
knowledge incrementally across its 20,000-plus
Permian drilling sites.
Pioneer spends, on average, about $8 million
to complete a well. In a March investor presen-
tation, the company said its cost to drill and
frack each 12-inch length of a well dropped
30 percent in the past year, to $905. At the
same time, production from those wells
jumped more than 50 percent. The cost
declines are expected to slow, but Pioneer
last month lifted its 2016 target for produc-
tion growth without any spending increase.
Such eiciencies have made it possible for the
company to amass cash with crude prices as
low as $35 a barrel. Pioneers cash reserves
rose to $1.61 billion in the irst quarter of this
year, up from $383 million a year earlier.
The company, meanwhile, is spending a lot
of money now in the belief that oil prices will
soon rise. Not everyone thinks it will pay of.
Criticizing shale drillers at the Sohn Investment
Conference a year ago, David Einhorn singled
out Pioneer, in which he has a short position,
as the Mother-Fracker. Einhorn, president
of Greenlight Capital, argued that Pioneer
lost $12 for every barrel it developed over the
previous nine years. Thats like using $50 bills
to counterfeit $20s, he said. Pioneers shares
fell almost 2 percent that day. Then the market
reconsideredthe share price has nearly recov-
ered even as oil plunged from $63 a barrel
to as low as $26. Pioneers stock for the past
year has outperformed its peers by more than
50 percent.
Daniel Katzenberg, a senior analyst at
Robert W. Baird, says investors arent worried
about proits as much as production. Quarter
after quarter, the output of Pioneers new hor-
izontal wells has exceeded expectations, and
thats why the stock price keeps rising. What
the market sees is that theyre sitting on one
of the most attractive and economic resource
plays in the world, says Katzenberg. Pioneer
is tasked with proving their acreage is as good
as the hype.
Sheield doesnt get out to West Texas that
often. But he has brought Pioneer home, and
he bristles a little at the suggestion that hes just
lucky to have those acres. He invokes Parsley,
who died in October at the age of 86. You
shouldnt sell long-life assets, he says. The
best decision we ever made was never to sell
the foundation of the company. 
w rl l a i u ld

Men in Kampala check their paperworkvisas, contracts, yellow fever vaccination

documents, and flight ticketsbefore shipping out to Iraq with Saracen International
 How Uganda became the
diersBy David Gauvey Herbert Photographs by Michele Sibiloni
 Uganda, in East Africa, is home to 37 million people and one
of the poorest countries in the world. Its perhaps best known
for the dictator Idi Amin, who came to power in 1971 and mur-
dered 300,000 of his countrymen during an eight-year reign.
Although the country borders tumultuous South Sudan and
the Democratic Republic of the Congo (DRC), Uganda today
is an island of relative political stability. The economy hums.
Shopping malls bloom around the capital. Its people, to gener-
alize, are deeply religious, family-oriented, and averse to pro-
fanity. Winston Churchill dubbed Uganda the Pearl of Africa
in part for its friendly people.
Its also one of the leading providers of mercenariesor
private military contractors, as the security industry prefers
to call them. They are at once everywhere and nowhere. On
TV, a company called Middle East Consultants runs advertise-
ments looking for able-bodied young men to send to Dubai.
Talk to taxi drivers as you bump along dirt roads in the capital,
Kampala, and each has a friend or cousin or neighbor who
raves about the fortune hes made guarding some embassy or
joining the war in Iraq. But oicial numbers and interviews
with the kind of multinational companies that go to countries
such as Uganda to ind soldiers are hard to come by.
In Iraq, Ugandans protect U.S. diplomats in Baghdad
and Basra. They also guard businessmen and aid workers in
Afghanistan and Somalia. They patrol government installa-
tions in Qatar and will likely stand watch when the country
hosts the 2022 FIFA World Cup. Some recruits have drilled at
an elite counterterrorism training center in Jordan funded by
the Pentagon. Others are sent abroad with virtually no training
74
If you want 100
at all, just a requirement that they stand at least 5-foot-7.
A decade ago, after con men began running employment
frauds on mercenary hopefuls, the Ministry of Gender, Labour,
and Social Development created the External Employment Unit,
an agency meant to track men leaving to serve abroad. Milton
Downtown Kampala
Turyasiima, a ministry oicer, runs the unit from a cluttered
oice in a dimly lit, bureaucratic warren in central Kampala.
Asked detailed questions about the business, Turyasiima
demands a written request for igures but then never responds.
He does provide a list of the countrys 43 licensed recruiters.
List in hand, I go of to ind some. One of my irst stops is
Saracen Uganda, the local ailiate of the South African secu-
rity company Saracen International. The parent company was
founded by veterans of Executive Outcomes, a private military
contractor whose March 1995 assault on a guerrilla insurgency
in Sierra Leone inspired the movie Blood Diamond. Saracens
Ugandan ofshoot was criticized in a 2002 United Nations
Security Council report for training rebel paramilitary forces
in the DRC. One of the companys founders is General Salim
Saleh, the half-brother of Ugandas president, Yoweri Museveni.
A boda bodaa motorcycle taxiferries me to Saracens
sprawling compound in the neighborhood of Kansanga. Down
a dirt alleyway and through a heavy metal gate, the grounds
host an incongruous mlange of verdant greenery, retroitted
troop transports, wrecked SUVs, job applicants, and rile-toting
guards. Six people are waiting to speak with a recruiter, hoping
to score one of Saracens roughly 3,000 domestic jobs guarding
banks and malls in Uganda, or one of its more lucrative posts
in Somalia and Iraq, where Saracen is sending mercenaries.
In the visitors log, under purpose of visit, recent guests
have scrawled SOC, SOC, SOC. A security contractor
based in Minden, Nev., SOC has held a share of a multibillion-
dollar contract to guard U.S. diplomats around the world since
2010. Its website shows on a world map that SOC is active in
Africa. Where, exactly, it doesnt say. Spokesmen for SOC and
the other global security companies mentioned in this story
declined to comment.
From the lobby, I spy a middle-aged white man working in a
back room. He makes brief eye contact and then retreats around
a corner. When I inally sit down with Jefrey
Mugisha, a Saracen project manager, he tells
me that SOC maintains several employees at
Saracens compound, led by the man who
slipped away, whom Mugisha refers to as
Mr. George. Saracen, he says, supplies SOC
with more than 500 guards in Iraq, each of
whom earns about $900 a month.
Armed guards are Ugandas top export.
Mercenary remittances surpassed cofee
exports in 2009, according to the Ministry
of Gender, Labour, and Social Development.
Interpols Kampala bureau conducts
roughly 1,000 background checks on
Ugandans heading abroad for security
jobs every month, just to make sure we
are not sending foreign fighters, says
Asan Kasingye, Interpols local chief. (By
foreign ighters, he means international
Islamic State recruits.) That igure doesnt
count the guards working in countries
that dont require checks nor guards who
secure bogus credentials, fail to renew their

Outside Middle East Consultants, where people come every
day to apply for jobs abroad and check for vacancies
people in a day
Interpol-issued permits, or are illegally traicked. A conserva-
tive estimate is 20,000 Ugandan mercenaries working abroad
right now, according to Interpol igures and industry insiders.
Its diicult to determine how many Ugandans have been
killed working as mercenaries, as this isnt a record maintained
by any authority. There have certainly been deaths; I was
told of four anecdotally on my visit. In March 2016, the U.S.
Department of Labor reported that 1,635 civilian contractors
had died in Iraq since the start of the conlict. The same report
counted 142 deaths since September 2001 among four large con-
tractors, including SOCall of whom have recruited heavily in
Uganda. However, the report doesnt detail the nationalities
of these casualties nor where they died.
Some of the local companies are now quite large. Askar
Security Services was the irst recruiter to supply Western con-
tractors during the Iraq War, inding thousands of guards to
defend watchtowers and protect convoys. The company, owned
by Kellen Kayonga, the sister-in-law of President Museveni, has
its headquarters in a massive, gated compound. On the wall in
the lobby is a framed photograph of Vice President Joe Biden
inspecting Askar guards in Iraq.
Other outits are more modest. Two Niles Public Relations
Agency occupies a shabby, two-room oice hidden in a swelter-
ing shopping mall. Business stops when Abdulrazak Hussein,
the managing director, goes to the storefront mosque next
door to pray. When he returns, hes happy to chat. As a ceiling
fan groans overhead, the recruiter prints out a tidy spread-
sheet of his 16 contracts to date; one of them is for 500 guards
working for Hemaya Security Services, a state-owned company
in Qatar, with hundredsperhaps
thousands, he hintedmore on
order when the country hosts
the World Cup. A poster behind
the receptionist warns appli-
cants that salaries will be paid
in local currencies, not coveted
U.S. dollars.
Ugandans are influential
in the business on other con-
tinents, too. Sisto Andama, a
nephew of Amin, was early to
the guard trade. After politi-
cally connected rivals undercut
his business in 2006 and engi-
neered his arrest the following
year, Andama led the country.
He now lives in Maryland,
where hes the director of
African operations for Beowulf
Worldwide, a security subcon-
tractor based in Valparaiso, Ind.
He handles 750 men, mostly in
Afghanistan, and hundreds of
contractors working for the U.S.
Department of Defenses Africa
Command across the continent.
Since the hiring boom began during the Iraq War, Ugandan
newspapers have made much of the fortunes being made.
75
Returning guards use earnings to buy land, build homes, and
start small businesses. Thousands of young mensome army
veterans but also civilians, from janitors and taxi drivers to
unemployed university gradsswamp recruitment oices with
their credentials stufed in brown paper envelopes.
As Islamic State loses ground, Ugandan subcontractors hope
to send men to Iraq to protect diplomats, patrol nongovernmen-
tal organization compounds, and guard oil ields. Crumbling
security situations in South Sudan and Libya look promising,
too. U.S. government contracts are the real payday, though.
Wherever the Pentagon next marshals a shadow army of secu-
rity contractors, an overwhelming number of those hired guns
will likely be recruited from the trash-strewn streets of Kampala.
During the Iraq War, Secretary of Defense Donald Rumsfeld
sought to marry his light-footprint invasion strategy with free-
market principles. Contractors scrambled to recruit thousands of
bodies to fulill lucrative Pentagon security contracts. The indus-
try had been growing since the mid-90s, but what happened in
Iraq was so extreme, says Deborah Avant, the director of the
Sie Cheou-Kang Center for International Security & Diplomacy
at the University of Denver. All of a sudden everybody needed
these people. It was this enormous surge of demand.
Uganda was a good place to ind soldiers. The pro-American
government voiced no qualms about its citizens working in
Iraq. In addition to speaking English, most of its population is
Christian, minimizing the threat, real or imagined, of guards
aligning with insurgents. There was precedent, too:
Ugandan soldiers, known as askaris, had served in the

Kings African Riles, ighting for the British Empire in both world
wars. Best of all, from the point of view of recruiters, Ugandans
would accept dangerous assignments for not much money. Army
veterans gladly worked for $1,000 a month at a time when the
average salary at home was less than $300 a year.
It wasnt a job for the faint of heart. Bajun Mavalwalla, a
former U.S. Army captain, spent a year at Camp Victory in Iraq,
which was protected by Ugandans. The guards inspecting vehi-
cles for bombs were IED sponges, he says, and their low pay
I can get them
76
and mistreatment were despicable.
In 2004, SOC was looking for men to send to Iraq, and it
approached Askar Securitys Kayonga. In Uganda, her employ-
ees were essentially mall cops. To enter the lucrative but dan-
gerous new war market, she turned to Andama, a former army
captain, to recruit and train a guard force.
With Andama rounding up men, Kayonga reached out to
Moses Matsiko Baryamujura, a member of her tribe. Matsiko was
a young freelance journalist moonlighting as a security guard
with Kayonga to make extra cash. Although he had no military
experience, Kayonga persuaded SOC to hire him in the irst wave
of Ugandans it sent to Iraq. She hoped a fellow tribesman would
be her eyes and ears on the ground.
Ugandan guards quickly became known in the security indus-
try for being cheap and relatively reliable. They became a pre-
ferred endpoint in a supply chain of people that began at the
Pentagon. EOD Technologies, an ordnance-disposal company
based in Lenoir City, Tenn., that diversiied into guard work
and later merged with another company to form Sterling Global
Operations, won $813 million in contracts in Iraq and Afghanistan
through 2015. In January 2006 the company signed an agreement
with Beowulf Worldwide, which in turn contracted with Askar
Security. (In April, Sterling changed its name to Janus Global
Operations.) Thats how the likes of Matsiko and other inexperi-
enced men ended up performing critical tasks in Americas wars.
Ex-guards are everywhere in Kampala. Some drive cabs or run
shops bankrolled with Iraq windfalls. Cornelius Tukahebwa was
a hotel janitor when a local guard company recruited him. He
received two months of training with an AK-47 at a parade ground
near Kampalas Bahai temple and then shipped out. After four
years in Iraq, he returned to Uganda, bought a car and land, built
People who apply
for jobs at Middle a house, and started a tour company. With
East Consultants
have their blood his newfound wealth, Tukahebwa has won
tested before the chairmanship of a local soccer club and
applying, before an invitation from the ruling NRM party
leaving Uganda,
and again when to stand for a political seat. He was shot
they reach their during a ireight while guarding a Kuwait-
destination bound convoy, and the massive scar on his
left shin dissuades him from reenlisting,
but hes happy to activate a phone tree for
any recruiter who asks. If you want 100 people in a day, I can
get them, he says.
Many ex-guards are looking for more work, having either
squandered their paydays or entered the industry late in the
wars, after salaries had dipped. David Tumwesigye completed
two tours in Iraq from 2008 to 2013, earning from $400 to $800
a month. When I meet him at a downtown cafe, he shows me his
weathered passport and a certiicate from the King Abdullah II
Special Operations Training Center, a state-of-the-art counter-
terrorism facility in Jordan where he drilled in 2011 with a contin-
gent of Saracen guards. Last summer, Tumwesigye was running
around Kampala applying for a new overseas post. He was later
hired by Round Of International, a local Ugandan recruiter,
and deployed to Somalia, where hes now part of a 300-strong
contingent of Ugandans guarding the United Arab Emirates
Embassy in Mogadishu.
After returning from Iraq, former journalist Matsiko started
his own recruiting company. He landed his irst business during
the Iraq War with Sabre International, a company founded by
Thomas Frank McDonald, a veteran of the British Special Forces
and megacontractor Aegis Defence Services. Matsiko says he
irst agreed to supply 300 guards for a monthly commission of
$100 per guard. After medical checks, training, and overhead,
he netted $120,000 a year, a fortune in Uganda. In 2009 the New
Vision newspaper placed him on its new money class list with
an estimated net worth of $5 million. He operates Pinnacle Group
and Watertight Services.
Finding Matsiko is diicult. E-mails and calls go unanswered.
Angelo Izama, a friend and prominent journalist, rings him up.
Kasingye, Ugandas Interpol chief, in his oice
 Applicants
queue for
fingerprinting
at Interpol,
where they
obtain the
certificate of
good conduct
that will allow
them to pursue
a job abroad
with a security
company
Matsikos voice crackles over the speakerphone with promises
to meet. I wait days with no word. I visit Pinnacles compound,
hoping to catch him. Inside the heavy metal gate, theres a hive
of activityjob seekers, uniformed guards, SUVsbut no Matsiko.
He rarely clocks in, a sentry tells me. Try the golf course.
As I search for Matsiko, I hear increasingly fantastical stories
from local reporters: Hes careful about what he eats for fear of
being poisoned by business rivals; his genitals were blown of
in an Iraqi ambush. When he inally relents and we meet at the
upscale Serena Hotel, Colonel Kurtz hes not. Dressed in a blue
gingham shirt, he apologizes, in between lirting with a wait-
ress, for giving me the runaround. I used to be a journalist,
he says. So when I hear a journalist is looking for me, I want
to get away as far as possible.
In Iraq, he says, he killed three or four insurgents and was shot
four times in the arm and back. His arm is indeed scarred, but the
precise details of the incident are impossible to verify. Business is
good, he tells me, though it was better during the occupation of
Iraq. Matsiko has 300 guards there and in Afghanistana igure
corroborated by the Ministry of Genders External Employment
Unitand several hundred more in Burundi, the DRC, and the
UAE. In Uganda itself he has 400 guardsin rumpled blue
fatigues, they patrol the hotel where we meet, the country club
where I eat, the banks where I withdraw cash, and the guest-
house where I sleep. He protects the United Nations compounds
in Kampala and Entebbe, too.
In the U.S., the debate over armed contractors continues in the
same bureaucratic circles that irst touted them. The Pentagon
likes mercenaries because they can be scaled up and demobilized
quickly. The nonproit Project on Government Oversight, however,
argues that federal employees are often cheaper than contractors.
Sean McFate, an ex-paratrooper, former military contractor,
and author of The Modern Mercenary, says the contractor boom
isnt an aberration but rather a return to medieval norms, when
contract warfare was standard. Contractors are here to stay, he
says. Whether mercenaries are next deployed to combat Islamic 77
State or on battleields yet unknown, he adds, they are part of
the national security tool kit.
Ugandan guards graduated from the Iraq War with mixed
grades. In 2009 the security company Triple Canopy, based
in Reston, Va., allegedly falsiied scorecards after all 330 of its
Ugandan guards at the Al Asad Air Base failed a basic marks-
manship test, according to a whistle-blower lawsuit. The case
is before the U.S. Supreme Court.
But Ugandans appear likely to continue guarding American
diplomats in Iraq and elsewhere. On Feb. 12 the State Department
awarded the next phase of its ive-year, $10.2 billion Worldwide
Protective Services contract to shield diplomatic personnel,
guard embassy buildings, and operate a leet of aircraft and
armored vehicles. Among the seven winning companies, at least
iveSOC, Triple Canopy, Sterling Global Operations, GardaWorld
Government Services, and Aegis Defence Servicesrecruit or
have previously recruited in Uganda.
Operation Inherent Resolve, the Pentagons anti-Islamic State
initiative, employed 7,773 contractors in the second quarter
of 2016, up from 5,000 in the irst quarter of 2015. If national
armies and their proxies defeat Islamic State, returning dip-
lomats, investors, NGO workers, and others will need protec-
tion, much as they did after Saddam Husseins government fell
a decade ago. Contractors will ill the gap.
Matsiko and the others are ready to supply the bodies.
Andama has 3,000 ex-guards on a waitlist for overseas posts.
Matsiko stays in regular contact with a local association for
returned guards so he can scale up quickly.
Until then, the two men enjoy the spoils of war. Matsiko plays
golf three days a week, favors 18-year-old Scotch, and recently
served as a judge for the Miss Uganda beauty pageant. Andama
leads a quieter existence in suburban Maryland. His son has
taken up football. 
Recapture the freedom you had in your youth. But without your youth. Or your hair.

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Many investors, particularly those nearing
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investment-grade municipal bonds can be
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Potential Regular Predictable Income
Municipal bonds typically pay interest
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on a regular, predictable income stream.
Because most bonds have call options, which
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Income from municipal bonds is not subject
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2016 Hennion and Walsh. Securities offered through Hennion & Walsh Inc. Member of FINRA, SIPC. Investing in bonds involves risk including possible loss of principal. Income
may be subject to state, local or federal alternative minimum tax. When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. *Source: Moodys Investor
Service, March 7, 2012 U.S. Municipal Bond Defaults and Recoveries. 19702011. Past performance is not guarantee of future results.
 AUTOMATING
E-MAIL YOUR SUPER SUMMER SKIN THAT
70S OFFICE
FINANCIAL DISASTER
FLICKS

How
about
One Go Cube
has 50mg of cafeine,
equivalent to about half
a cup of cofee, along with
folic acid, vitamins B6
a
nice
and B12, and the amino
acid L-theanine,
which boosts the efects
of cafeine

c uofb e
c offe e
n ?
 Etc. Productivity
ts 8 a.m. on a recent Wednesday in San Francisco, and
Yan Zhu, a 24-year-old blue-haired software engineer,
sits at a communal table in a Thai-Italian restaurant
munching on a stick of butter. Shes too hungry to wait
for food; she hasnt eaten in 36 hours. This is my irst
time fasting, and I was feeling faint, so I brought some
butter from home, Zhu says. Her friend Ayumi Yu (pink
hair, 27) explains theyre on a ketogenic diet, which
requires eating mostly fat and almost no carbohydrates.
Ive been on it for a month and feel amazing, she says.
Take how you feel and imagine feeling twice as good.
Danny Friday, a 23-year-old startup founder, emerges from the
bathroom. Hes just done a urine test to check his ketosis levels,
which indicate how the body is metabolizing fat. Im shocked,
he says, dismayed. My body is barely in ketosis.
All three, along with about 25 other people, are here to take
part in a weekly break fast. The hosts, Geofrey Woo and Michael
Brandt, are the 27-year-old co-founders of Nootrobox, a startup
that sells nootropics, or pills intended to enhance memory,
cognition, and mental stamina. Although fasting is not neces-
sarily part of a nootropic regimen, the widely accepted health-
boosting efects of periodic starvation make it a natural it for
people who think a monthly pill subscription service can make
them more perfect humans. Well do a 36-hour or 60-hour fast
every week, says Woo, Nootroboxs chief executive oicer. Its
hard at irst, but we found a lot of beneit to our lucidity and
clarity of mind. The companys online fasting forum, WeFast,
has about 600 members.
80 Nootroboxs mission is to improve the way we function on a
daily basis. In the oice of the future, people will get to work,
sit down, and pop a pill to help them focus better, says Brandt,
Nootroboxs chief operating oicer. When that future will arrive
is unclear. But if oice drones are already willing to give up their
lunch break to slurp Soylent, whats to say they wouldnt like to
beneit from other eiciencies? Many already bend the truth
with their doctors to score Adderall. Nootrobox is just target-
ing the vast pool of upwardly mobile professionals who want
an edge but may not be ready to commit to prescription drugs,
Woo says. Perhaps this is why he and Brandt have been able to
persuade some heavy hitters in Silicon Valley to invest in their
vision, including Yahoo! CEO Marissa Mayer, Zynga Executive
Chairman Mark Pincus, and venture capital irm Andreessen
Horowitz, which led a $2 million funding round that closed in
October. (Bloomberg LP, which owns Bloomberg Businessweek,
is an investor in Andreessen Horowitz.) Woo says only that
Nootrobox, with its thousands of monthly subscribers, is a
multimillion dollar business, but he declines to elaborate.
For two fasting workaholics, Woo and Brandt look healthy.
The friends and roommates met as undergrads at Stanford,
where they majored in computer science and bonded by trading
self-improvement tips. After college, Woo founded a location-
tracking company that Groupon later acquired; Brandt joined
then-Google COO Mayers elite associate product manager
program. In 2014 they got into the nootropics business. Friends
were playing around with Adderall and smart drugs, Woo says.
Some were even ordering nootropic powders online and mixing
their own concoctions. They literally have a drug scale and are
weighing out, like, 50 milligrams of powder in their kitchens
its messy, he says. We realized that if people are willing to go
through this much trouble, this much sketchiness to tap this
resource, there must be something there.
Brandt and Woo read studies and began experimenting with
nootropic powders available online. Some had unexpected
side efects. I tried noopept, a Russian Alzheimers therapeu-
tic, Woo says. The drug made him alertbut it also altered his
sensory perception. I remember walking to the BART, the public
transit system in San Francisco, and the lowers on the side of the
road, dafodils, looked really bright. In the end, the co-founders
decided not to sell a product that triggered mild hallucinations
and, instead, to work with supplements approved by the U.S.
Food and Drug Administration. You cant make a business
selling illegal, gray-area stuf, Woo says.
Nootroboxs oice, in a corner of a WeWork co-working space
in the SoMa neighborhood, is covered in slogans such as Hustle
Harder. The companys products, formulated using a combina-
tion of peer-reviewed studies and bro science, are
as prevalent as iMacs. Theres Rise ($44 for 60 pills),
which touts a ratio of compounds shown in studies
to improve memory; Sprint ($36 for 30), packed
with B vitamins, cafeine, the cafeine-enhancing PREVIOUS PAGE: PHOTOGRAPH BY WILL ANDERSON FOR BLOOMBERG BUSINESSWEEK
amino acid L-theanine, and inositol, which miti-
gates panic attacks; and Yawn ($36 for 30), which makes it easier
to sleep after a day of downing the other two. Go Cubes are essen-
tially gummy versions of Sprint. Two cubes have 100mg of caf-
feine, equivalent to about a cup of cofeeexcept with cofee,
you have no idea how much cafeine youre getting, Woo says,
explaining that levels vary by bean and brewer. His Twitter wall-
paper reads, Cofee Is Dead. Long Live Go Cubes.
The pills are intended to be stacked, a term taken from
bodybuilding that means pairing synergistic substances to
achieve a desired outcome. All eight employees, including three
M.D.-Ph.D. candidates, stack the pills and Cubes daily, even while
fasting. I cant imagine going back to life without nootropics,
Brandt says. Its like, OK, go to work without your laptopwhy
would you do that? Go to work without taking nootropics? Whats

the advantage of that?
Nootrobox has no
shortage of competi-
tors, detractors, or both.
Theyre just selling sugary
cafeine cubes, says Eric
Matzner, 28, the founder
of Nootroo, also based
in San Francisco. Unlike
Nootroboxs products,
Nootroos pills contain
a type of piracetam, the
compound for which
the term nootropic
was coined in the 1970s.
Although not approved
by the FDA, piracetam
has been used in other
countries to improve
focus and treat diseases
like Alzheimers. Purists
maintain that only pirace-
tam and a handful of other
substances qualify as nootropics, but the term is now commonly the NYU Langone Medical Center. She also wonders if taking
used to describe almost any cognitive enhancerfrom cafeine cafeine in pill form eliminates the beneicial efects of drinking
to ADHD and wakefulness drugs such as Adderall and Modainil, cofee, which studies say can help ward of dementia. Cofee
NOOTROBOX TEAM: PHOTOGRAPH BY AMY HARRITY FOR BLOOMBERG BUSINESSWEEK
Etc.
Founders Brandt and
Woo (far right) with
Nootrobox staf r e s e a r c h p i l l s ,
which Matzner
assures me have been tested for
purity. After swallowing a yel-
lowish capsule, I feel no diferent
than usual. The lowers on the
side of the road look no brighter.
Writing this story isnt any easier.
On another day, I test a couple
of Nootroboxs products. Like
Nootroo, Rise is mild, but maybe
thats because both require sus-
tained use for their efects to be
felt, according to the companies.
I test Nootroboxs Sprint with a
colleague on yet a diferent day,
and it gives us a jolt. Something
is deinitely happening,
we agree, sitting upright
at our desks, typing man-
ically. A few hours later,
I feel depleted. Woo says
that everyone has difer-
ent experiences, but any
cafeine crash from Sprint,
anecdotally, is much less
harsh than with a typical
cafeinated product. Go
Cubes gave me a kick, 81
but I prefer cappuccino. I
might take them on a hike
Product: Rise Product: Sprint Product: Yawn
Price: $44/60 pills Price: $36/30 pills Price: $36/30 pills or on a reporting trip to the
Dosage: Two pills per day Dosage: One pill as needed Dosage: One pill as needed middle of nowhere.
Ingredients (in each) Ingredients and claims: Ingredients and claims:
and claims*: 20mg vitamin B6, which 1.5mg melatonin, a Nutrients in both com-
300mg Bacopa monnieri, an improves cognition neurohormone that controls panies formulations may
herb shown to sharpen 60mcg B12, a vitamin shown the bodys sleep cycle
mental acuity to forestall mental decline 200mg magnesium citrate, be useful, but taking too
a compound that reduces
300mg Rhodiola rosea, a 200mg L-theanine, which
stress
many of the pills could
mountain ower known to boosts the efects of cafeine
improve attention and 185mg glucuronolactone, 450mg glycine, an amino have adverse effects on
acid thats been shown to
reduce fatigue a detoxifying agent
improve sleep quality
heart health and hydration
300mg a-GPC, a compound 185mg inositol, which
found in the brain that reduces anxiety 100mg L-theanine levels, says Lisa Mosconi,
supports short-term memory 100mg cafeine director of the Nutrition
and Brain Fitness Lab at

respectively, which are more potent than Nootroboxs oferings. comes from berries, and the berries of any plant are incredibly
To sell piracetam in the U.S., Matzner labels his gold-colored rich in antioxidants, she says. The problem with supplements
jars with the disclaimer intended for use in neuroscience is they often focus on just one, or a few, ingredients but lose the
research only. He says he has almost 1,000 subscribers who synergy that comes with eating the actual food.
pay $55 a month. In addition to Nootroos pills, Matzner says he Nootrobox is working with Maastricht University in the
downs as many as 40 supplements per day, which he believes Netherlands to test the beneits of Sprint vs. pure cafeine on
will improve his brain and extend his life span: I take them what Woo describes as a battery of psychometrics (reac-
before even getting out of bed in the morning. He pulls out tion time, short-term memory, etc.). In mid-April, Nootrobox
a laptop emblazoned with stickers of two large gold pills and announced its exploring a partnership with personal-electronics
begins lipping through links to studies. This is stuf you cant company Jawbone to make an app for wearables that will let
get from just eating food, he says. One is from the skin of a users igure out how nootropics afect measurements such as
pineapple, one is from the stomach of a silkworm. To demon- heart rate. For Woo, each step the company takes is in service
strate the fruits of his experimentation, Matzner performs an of ensuring the future relevance of mankind. What we want
impromptu speed-typing test on his laptop. He can hit 150 words to unlock is the next-level thinking that makes us human, he
per minute; 40 is about average. says. In a way, its almost arming humanity against artiicial
On a Monday back in New York, I try Nootroos neuroscience intelligence and robots. 
*Not all of Nootroboxs ingredients have undergone peer-reviewed testing
 Etc.
82
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 Technology Etc.

*~*my week on googles smart reply*~*

Sam Grobart May 12 (1 minute ago)
tests the companys new auto e-mail generator
Dear friends, family, and colleagues,

I need to explain myself. For the past week, I may have seemed short, or even
a bit odd, over e-mail. Its not you, its me. Actually, its not me, its Google.
Recently, the company added Smart Reply to its desktop Inbox service, which
sorts e-mails into relevant batches for you. When you get certain messages,
Google ofers up prewritten answers. You click on one of three suggestions,
hit Send, and youre done.
I decided to use Smart Replyand only Smart Replyfor a week. It meant
surrendering my voice to Googles, which was sometimes an odd t. Dad, when
you told me you were having an angiogram, you may have found my
response of Good luck! a bit brusque for the occasion. On the other
hand, when I agreed with you, Emily, by writing, Thats what I thought!
it was what I thought. It was also what Google suggested.
Smart Reply may seem like an insignicant shortcut, but it marks the
start of our robot overlords reign. The responses Google generates
arent randomnor are they the product of a simple rules-based equa-
tion in which a search for certain words generates a corresponding
reply. How do I know this? I e-mailed the company and asked to talk to
someone (on the phone, so I could be sure it was a human) about how 83
it works. The human was Greg Corrado, senior research scientist at
Google Brain, whose department developed the feature, at rst just for Inboxs mobile app. It learns
by example, he told me. It learns to mimic behavior that we demonstrate for it.
Smart Reply understands the content of the message youve received, as well as its tone. When
I replied to friends and family, my canned responses often had a cheery exclamation point (Great!
Cant wait!). When I replied to someone less familiar, Smart Reply was more
sober: That sounds good. Thank you.
On some level, Ive betrayed you. You took the time to write, and all I did
was roll my mouse around. Fortunately, none of you seemed to detect the
outsourcing of our correspondence, though Im not sure what that says
about your ability to pass a Turing test. Alyssa, after I said that lunch Sounds
great! you suggested some dates. Unfortunately, Smart Reply countered with
Great! Does 6:30 p.m. work? (Googles still working out some kinks.) Even
though I like the idea of Spanish-inuenced meal times, 6:30 was beyond
PHOTOGRAPHS BY CAROLINE TOMPKINS FOR BLOOMBERG BUSINESSWEEK; GETTY IMAGES (2)

my Iberian aspirations. I handled that one manually.

But people, I must confess: When appropriate, Im going to keep using
lunchdate.png
Smart Reply, mostly because the Google man is right. A lot of e-mail
is not something you should put a lot of thought into, Corrado said.
Putting eiciency into those messages so you can get that time back
to put into e-mails you actually need to put thought intoor, better yet,
do something other than write e-mailssounded good to us. Indeed.
That sounds good. Thank you.

Love,
Sam
Sam Grobart

Reply hey, did you get

that e-mail?
Thats what I thought. Youre the best! That sounds good. Thank you. yo, you there?
Sam 12:14 p.m.

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85
 Etc.
Clooney as
Lee Gates in
Money Monster
NIGHTMARE ON
86
WALL STREET
Money Monster continues where movies
like The Wolf of Wall Street and The Big Short
left of. By David Walters
ollywood reached its maximum
H
natural disaster potential
roughly t wo decades ago,
sending down a hail of movies
about megastorms (Twister),
supervolcanoes (Dantes Peak),
and earthbound asteroids
(Deep Impact, Armageddon).
Although the industry still peddles in
weird weather (Sharknado 4), studios
seem to have turned their attention to a
new type of scary moviethe unnatural
disaster lick, which derives its shocks
not from acts of God but from acts of
bankers. Films in this category include
Margin Call (2011), Too Big to Fail (2011),
The Wolf of Wall Street (2013), The Big
Short (2015), and now Money Monster,
which moves the nascent genre into its
adolescent, formulaic phase.
Directed by two-time Oscar winner
Jodie Fosterwhose most recent behind-
the-camera credits include episodes of
Netlixs House of Cards and Orange Is the
The Critic
New BlackMoney Monster (in theaters
on May 13) presents a familiar antihero
in Lee Gates (George Clooney), a bom-
bastic Jim Cramer-esque television host.
The self-proclaimed wizard of Wall
Street, hes a mouthpiece who
inluences the market with smug
claims that certain stocks are
safer than a savings account.
But when one of Gatess
sure things, Ibis Clear
Capital, bottoms out over-
night, losing $800 million
CLOONEY PLAYS
because of whats dubi- A JIM CRAMER-
ously desc ribed as a
computer glitch, Gates
ESQUE MARKET
is taken hostage on-air by INFLUENCER
24-year-old deliveryman
Kyle Budwell (British actor
Jack OConnell, chewing on a Brooklyn
accent here to mixed efect). Patty Fenn
( Julia Roberts), Gatess longtime pro-
ducer, becomes a de facto crisis nego-
tiator, keeping Gates engaged with
Budwell, whos lost his life savings
to the bum investment, while fever-
ishly tracking Walt Camby (Dominic
West), Ibiss mysteriously absent chief
executive oicer.
As the noose tightens on Gates and
the crooked Camby, Money Monster
manages to squeeze out a bit of gallows
humor: At one point, the TV host appeals
to his audience to buy Ibis shares in an
attempt to reverse the damage and save
him (Whats a life worth to you? he
pleads, staring into the camera). On cue,
the stock price springs to lifeticking in
the wrong direction. In one standard
movie gambit, the New York City Police
Department patches Budwells pregnant
girlfriend through to the broadcast to
persuade him to surrender; she instead
reveals that he cries during sex and
should probably do everyone a favor
and just kill himself.
Like The Big Short, Money Monster
occasionally veers deep into the weeds
of inancial jargonquantitative ana-
lytics, dark pools, high-frequency
tradingbut the ilmmakers wisely opt
to embrace the broad audience appeal of
a frenetic conspiracy thriller, beginning
under the hot lights of a claustrophobic
TV studio, spilling onto the streets of
Manhattans Financial District, and
culminating in a high-stakes confron-
tation between Budwell and Camby.
Reminiscent of the sympathetic hostage
takers played by Al Pacino in Dog Day
Afternoon and Denzel Washington in
John Q, Budwell lives out many a Bernie
supporters revenge fantasy against a
rigged system. As the character reminds
his captives, I might be the one with the
gun here, but Im not the real criminal.
Studios will gladly wring the inancial
corruption sponge as they have with
biblical loods and ire raining from
the sky, tweaking the details as
necessary. (Consider this
summers Equity, starring
Breaking Bads Anna Gunn,
which has been described
COURTESY CTMG. CRAMER: BRAD BARKET/GETTY IMAGES
as the irst female-driven
film about Wall Street.)
They like how the math
adds up, so they gotta
keep rewriting the equa-
tion, Budwell says of
the big banks anything-goes manner
of keeping the odds and dollar signs
forever in their favor. Count Hollywood
in. Greed is good, after all. We learned
that at the movies. 
 What I Wear to Work
SANDRA
RESHEF
54, legal assistant,
Loeb & Loeb, New York
What do you do?
I work for two partners
and two associates.
One partner is in trusts
and estates, and the
others in nonproits.
CHARLOTTE RUSSE
Whats your look?
Classic. People tell
me that Im always
put together and
elegant.
JC PENNEY
PHOTOGRAPH BY CHRISTOPHER LEAMAN FOR BLOOMBERG BUSINESSWEEK
Are you a shopper?
My size hasnt changed
in 25 years, so I tend
to not get rid of a lot.
Ive always lived on
a budget. My friends
call me the Queen
of Clearance.
Was this dress a
bargain ind?
I bought it while
shopping with my
daughter years ago.
I may have paid $15.
Etc.
How do you
ind deals?
I have a good eye,
and Ive never been
hung up on labels.
If I see an item that
looks good on me,
Ill pick it up.
PARK LANE
Where did you get your
style sense?
My dad was an illustrator,
and I grew up in a house
illed with art and color.
I think it helped me see
what works well together.
87
What cuts do you prefer?
I have to be wary that Im
not dressing too young.
I can still get away with
wearing something body-
hugging or a skirt above
the kneethings that are
sometimes put away
for a woman in her 50s.
How many pairs of
shoes do you own?
I used to have 200, but
now Im down to 125.
I moved to a two-
bedroom apartment, so
I have to be creative
with storage. My closet is
fully color-coordinated,
so I can ind things.
Interview by Arianne Cohen
 Etc. How Did I et Here?

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TOM COLICCHIO
Owner, Crafted Hospitality; head judge, Top Chef
Nowadays
I was hired to scoop ice cream I wouldve been
Education diagnosed with ADD.
and do the cash register
You know, IQ says
at a swim club, and within a one thing, grades say
week I was doing all the Elizabeth High School, something else.
Elizabeth, N.J.,
shor
short-order cooking for $275 class of 1980
awweek under the table. As a freshman
in high school
Work
Experience

I worked in restaurants
In the kitchen 198082 all over the Eastern Seaboard.
of his apartment in Busboy, prep cook, Who can keep track?
East Orange, N.J., Evelyns Seafood,
during his early 20s Elizabeth
I usually leave this With Meyer,
1984 one of my rsum. late 90s
It was a four-star Night chef, Hilton
Secaucus Hotel,
restaurant. I was New Jersey
88 still planning on
culinary school, 198586
Line cook, sous chef,
but once I was Quilted Girafe, New York
promoted from line
cook to sous 198788
Line cook, co-chef,
chef, that was it. 40 Main Street,
Milburn, N.J.

They did a lot of the 1988

Line cook, Htel de
same things I did, but in France, Auch, France
France you learn why. 199093
Executive chef,
Mondrian, New York Danny Meyer and I
19942006
went to Italy for a week,
Co-owner and executive and I said, If we can travel
chef, Gramercy Tavern
together, we can work
2001
Present
together. So we opened
Owner and chef, Craft Gramercy Tavern.
2002
Present
Owner and chef,
ople happy. What else is there?

Crafted Hospitality

2006 In early July, were opening

Judging on Top Chef in 2014 with (from left) Jon Favreau, Present
Padma Lakshmi, Emeril Lagasse, and Gail Simmons Head judge and executive a restaurant called Fowler & Wells,
our irst in New York in six years.
Courtesy subject (3). Getty Images (4)

producer, Top Chef

It will feature modern American
Its not so diferent from my regular cuisine with nods to the classic
job, which is to give young cooks honest Life Lessons technique of turn-of-the-century
feedback about their work. New York City.
pe

ke
1. Change quickly. You typically dont get a second chance. 2. Be your own farm team. If you dont provide opportunities to grow, people leave. 3. Ma
 A N D I N N O V AT O R S .
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