January 6 — January 12, 2014 | businessweek.

com

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 ENRICHING THE LIVES OF CHILDREN

Samsung and h.h. gregg have teamed up with Drew Brees and the Brees Dream Foundation
to secure the future of our children. With funds raised by Samsung Hope for Children and
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 “The road gets sealed today, then dug up tomorrow.
They put down asphalt and then in a week rip
it up all over again. It would be funny, if it wasn’t
happening with our money”
p38

3
photograph by alexander gronsky for bloomberg businessweek

“People with a lot of

“It’s a money prefer to have “My stepfather
high-profit, a classic car in the said I was good
garage than money in
low-risk crime” the bank” for nothing”
p52 p68
p20
 Cover
Trail

January 6 — January 12, 2014

How the cover gets made

① “What’s a symbol of Russia?”

Opening Remarks why a free market is the fairest way to pay college athletes 8 “A bear.”
“Great, let’s do a bear on skis with a
Bloomberg View Mexico must keep at reform • Don’t take sides in Turkey’s power struggle 10 hockey jersey, a suitcase full of
money, gold medals on his neck, and
maybe lighting a cigar ... with the
Global Economics Olympic torch.”

Brazilian President Rousseff’s focus on erasing poverty may bode well for her at the polls 13

Agricultural reforms in Japan could force some farmers out of business 14

Luring workers back to rural areas 15

Small factories are among the victims of the Syrian civil war 16

Correlations: High taxes and growth aren’t mutually exclusive 17

Companies/Industries
Farm animals are being dosed with antibiotics more than ever 18

Counterfeiting money is so old hat. Now the crooks roll out fake vintage cars 20

For $1.5 million, you can get a night of TED Talks customized for your company 21

Briefs: Hollywood’s happy holidays 22

② “this actually
Politics/Policy turned out well.”
“We should try
What will happen when lawmakers don’t renew emergency jobless benefits? Hint: It’s not pretty 24 something less
cartoonish and
Buying a house just got a little harder 25
more serious.”
John Boehner’s had it up to here with the Tea Party 26

4 A Bill: Making colleges pay if too many students default on debt 27

Technology
cover: illustration by david parkins; cover trail: illustrations: david parkins; photos: alexander gronsky (2); maxim shemetov/reuters

A cheap and endlessly expanding cell phone network: Wi-Fi 28 ③ “It’s a bit flat.”

Now families can have their own cloud server 29

Giving companies a closer look at who’s watching their online videos 30

Innovation: A self-pumping fuel station 31

④ “Color helps,
but it’s still not as
Markets/Finance good as the bear.”

Traders may have used chat rooms to rig the $5.3 trillion foreign exchange market 32

Iranian stocks have soared since the country elected a new president friendlier to the West 33

Boomers with measly savings are in for tougher times in old age than their parents 35

Bid/Ask: Cessna owner Textron buys Beechcraft 36

⑤ “The bear is clearly
the better cover.”
Features “We should alter it
so it looks like
Putin’s Olympic Fiasco The waste and corruption behind Sochi’s $51 billion price tag 38 it’s preparing to
defend itself.”
Get Lucky How SAC Capital founder Steven Cohen evaded criminal charges 46

Meet the Rhino Robbers The mysterious Irish clan behind a rash of horn heists 52

Etc.
The duo atop Thinkmodo turns viral video pranks into successful online ads 59

Fashion: Textured coats, trousers, and sweaters make for smart office layers 62

The Rant: Don’t work out with your co-workers—and not just because of the showers 64

Organization: Go offline with chic agendas that help you remember appointments better 65

The Critic: As Downton Abbey marches toward modernity, the women take charge 66

What I Wear to Work: The owner of a concierge service swaps heels for cowboy boots 67

How Did I Get Here? Restaurateur Wolfgang Puck stakes out the Middle East 68
 Index
People/Companies

52
Rhino
Racket P Stevens, Dan
Streep, Meryl
66
68
Papyrus 65 Stroygazmontazh 40
Parsian Oil & Gas
Development
Percelay, James
33
60
T
Petróleo Brasileiro (PETR3:BZ) TargetCast tcm 60
36 Telstra (TLS:AU) 30
Peña Nieto, Enrique 10 Textron (TXT) 36
Phillips 66 (PSX) 36 Thinkmodo 60
Physique 57 64 Thomson Reuters (TRI) 32
Popcorn, Indiana 60 TIM Participações (TIMP3:BZ)
Populous 40 28
Porsche (VOW:GR) 20 Time Warner (TWX) 28
Potanin, Vladimir 40 Total (TOT) 16
PricewaterhouseCoopers 64 Transuzhstroy 40
Puck, Wolfgang 68 Turquoise Partners 33
PulteGroup (PHM) 22 TUV Rheinland 20
Putin, Vladimir 40 20th Century Fox (NWSA) 60
Tyson Foods (TSN) 18
R
Rabii, Ramin 33
U
Reed, Jack 27 UBS (UBS) 32
Reid, John 54 Univision 30
Republic Wireless 28
Revlon (REV)
Rotenberg, Arkady
22
40
V
Rotenberg, Boris 40 Vanguard Natural
Rothenberg, Randall 60 Resources (VNR) 36
Rouhani, Hassan 33 Vaughn, Vince 60
Rousseff, Dilma 13 Verizon Wireless 28
Royal Bank of Scotland (RBS) Vnesheconombank 40
32
Royal Dutch Shell (RDS/A) 33,
36 W
Ruby Tuesday (RT) 22 Wal-Mart Stores (WMT) 60
Warner Bros. (TWX) 60
S Warren, Elizabeth
Western Digital (WDC)
27
29
S.C. Johnson & Son 16 Wetzel, Deborah 13
6
A C G Kozak, Dmitry
Krivicka, Michael
40
60
SAC Capital Advisors
Sandberg, Sheryl
48
21
White, Kate
Whole Foods (WFM)
66
60
ABC News (DIS) 60 Cain, Susan 21 Gates, Bill 21 Sapling Foundation 21 Wolfgang Puck Catering 68
Abe, Shinzo
Ahmadinejad, Mahmoud 33
14 Calipari, John
Carlsberg
8
36
Gazprom (GAZP:RU)
Goldman Sachs (GS)
40
32, 64 L Scientific Protein Labs
Scratch Wireless
36
28
Wolford, Elizabeth 26

Al-Assad, Bashar 16 Carmichael, Laura 66 Google (GOOG) 29, 30, 60 Lauer, Matt 60 Seagate Technology (STX) 29
Alfa Romeo (F:IM) 20 CBS Films (CBS) 60 Grace, Edward 54 Lepe, Belsasar 30 Shenzhen Hepalink
AMC Networks (AMCX) 60 China Mobile (CHL) 28 Graves, Curtis 54 Lepe, Bismarck 30 Pharmaceutical (002399:CH)
American Express (AXP) 30 Chongqing Beer Group Assets Gülen, Fethullah 10 Lloyds Banking Group (LYG) 32 36
Anthropologie (URBN) 67 Management 36 Louis Vuitton (LVMHF) 65 Shuanghui International
Apollo Tyres (APTY:IN)
Apple (AAPL)
22
29, 48
Cisco Systems (CSCO) 28, 29
Citigroup (C) 32
H Luczo, Stephen 29
Lula da Silva, Luiz Inácio 13
Holdings
Siemens (SIE:GR)
18
40
Aptilo Networks 28 Claffey, Cyril 54 Hajarnavis, Hitesh 60 Silva, Marina 13
AT&T (T) 28 Hansen, Julia Baker 67 Silva, Tiago Falcão 13
CNN (TWX)
Cohen, Steven
60
48 HeadBlade 60 M Sirios Capital Management 48 27
B Comcast (CMCSA)
Comedy Central (VIA)
28, 30
30
Henkel (HEN:GR)
Hertz Global Holdings (HTZ)
16
Marsh & McLennan (MMC) 35
SK Most
Slaughter, Louise
40
18
Elizabeth
Warren
Martoma, Mathew 48
Bain 64 Cooper Tire & Rubber (CTB) 22 Smith, Maggie 66
Baker, Brad 31 Hewlett-Packard (HPQ) 48 McCrory, Pat 24 Smythson 65
22
X
Bank of America (BAC) 48 Holding Horses 67 McDonald’s (MCD) 18 Sony (SNE) 29, 60
Corcoran, Eugene 54 Medvedev, Dmitry 40
Bank Saderat Iran 33 Hooley, Jay 21 SoulCycle 64
Crocs (CROX) 36 Mercedes-Benz (DAI:GR) 20
Barclays (BCS) 32 Husky 31 South by North Strategies 24 Xpanxion 15
CrossFit 64 Meyers, Seth 60
Barry’s Bootcamp 64 Sprint (S) 28
Basic Element 40
D I MG (600104:CH)
Microsoft (MSFT)
20
48, 64
Standard Chartered (STAN:LN)
32
Y
IBM (IBM) 48 Millennium Bank 40 State Street (STT) 21, 32 Yakunin, Vladimir 40
D.R. Horton (DHI) 22
Intel (INTC) 21 Milligan, Stephen 29 Steinberg, Michael 48 Yildiz Holdings 36
Dell (DELL) 30, 48
Interros 40 Moleskine 65 Stella & Dot 67 Yum! Brands (YUM) 18
DeMet 36
Morales, Natalie 60
Deripaska, Oleg 40
Deutsche Bank (DB) 32 J Morgan Carper 67
FROM TOP: DAVID CRAUSBY/ALAMY; ANDREW HARRER/BLOOMBERG (2)

Morgan Stanley MUFG

Dish Network (DISH) 60 How to Contact
26 Dockery, Michelle
Durbin, Dick
66
27
Jaguar Land Rover
Johnson, Jeh
20
26
JPMorgan Chase (JPM) 24, 32
Securities (MS)
Morken, David
14
28 Bloomberg Businessweek
John Moth 67
Boehner Just Business 67 Editorial 212-617-8120 Ad Sales 212-617-2900
Batista, Eike 13
E N Subscriptions 800-635-1200
Bayraktar, Erdoğan 10 Eli Lilly (LLY) 18 Address 731 Lexington Ave., New York, NY 10022
Erdoğan, Recep Tayyip 10 NetApp (NTAP) 48
Beechcraft 36
Netflix (NFLX) 29
E-mail bwreader@bloomberg.net
ESPN (DIS) 30
Berkshire Hathaway (BRK/A)
Neuberger Berman 48 Fax 212-617-9065 Subscription Service
36 Eurek, Paul 15
ExxonMobil (XOM) 33 Newton, Cam 8 PO Box 37528, Boone, IA 50037-0528
Bharara, Preet 48
Bilalov, Akhmed 40 Nicol, Lesley 66 E-mail bwkcustserv@cdsfulfillment.com
Blackstone Group (BX)
Boehner, John
36
26
F 20
Nokia (NOK) 28 Reprints/Permissions 800-290-5460 x100 or
businessweekreprints@theygsgroup.com
Bonhams
Bonneville, Hugh
20
66
Falcão Silva, Tiago
Fellowes, Julian
13
66
Jaguar
Land Rover
O Letters to the Editor can be sent by e-mail, fax,
Boston Consulting Group 21 FilmDistrict 60 O2 (TEF:SM) 28
or regular mail. They should include address, phone
Brightcove (BCOV)
BT (BT/A:LN)
30
28
Fleming, Paul
Flywheel
54
64 K Oakley (LUX:IM)
O’Bannon, Ed
60
8
number(s), and e-mail address if available.
Bucher, Tim 29 Fox Sports (FOX) 30 Kate Spade (FNP) 65 Oil & Natural Gas (ONGC:IN) Connections with the subject of the letter should
Burberry (BBRYF) 67 Free Mobile (ILD:FP) 28 KDDI (9433:JP) 28 36 be disclosed, and we reserve the right to edit for
Burger King (BKW) 18 Fuelmatics 31 Knapp, Sean 30 Ooyala 30 sense, style, and space.
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 With the college football bowl season
ending and the national champion-
ship game upon us, it’s time to say
goodbye to the much maligned Bowl
Championship Series and to welcome its
eagerly anticipated successor: the College
Football Playoff.

The
The new system will be better in almost
every conceivable way. Regular-season
games will matter more. In addition to

Case For
the title game, we’ll be given two high-
stakes semifinals. The national champion
will truly be the national champion. And

Higher
let’s not forget about the money. More
games mean more revenue—a lot more
revenue—for the schools and the NCAA.

Earning
The playoff series will generate on the
order of $480 million a year, compared
with a meager $170 million for the BCS.
Everybody wins! Or, almost every-
By Jonathan Mahler body. The athletes who are going to
make college football more popular and
lucrative than it has ever been won’t earn
a penny more than they did under the
BCS system.
As a culture, we abhor price fixing and
artificially suppressed wages. Yet for many
years we have accepted them as a given
when it comes to college sports, never
questioning the NCAA’s policy against
paying athletes, even as the schools that
effectively employ them are making mil-
8 lions off their talents.
The edifice of this system is finally crum-
bling. An antitrust lawsuit filed in 2009 by
a former University of California at Los
Angeles basketball player, Ed O’Bannon,
who didn’t appreciate the NCAA using
his image in video games and not sharing Some might include no-transfer clauses;
the profits, is working its way through the others might include retention or gradu-
courts, shattering a lot of myths along the ation bonuses. Once the NCAA monopoly
way. We are learning to think twice when has been broken, the various conferences
an NCAA “scandal” breaks and to redi- would be free to write rules for their
rect our outrage at the rules rather than respective members. Some conferences
the rule breakers. Why exactly is it wrong might even experiment with salary caps
for a college football player to get paid for and see how the market reacts. As long
signing autographs? Or for a prospective as they weren’t colluding to fix prices—
college athlete to pay a “street agent” to as they are doing now—the market would
help him get into the right program? Isn’t find an equilibrium.
that precisely what high-priced college It’s easy to imagine the doom-saying
admissions consultants do? that would follow. In fact, it would prob-
It’s all but inevitable that athletes will ably closely resemble the doom-saying
start getting paid—the only questions that accompanied Major League Baseball’s
are how and how much. In recent years, efforts to prevent the arrival of free agency
we’ve seen a lot of ideas floated, from in the 1970s. If players were permitted to
illustration by 731; source texture: Getty imaGes (2)

How much do college
athletes deserve for the
enormous windfalls they
generate? It’s time to let the
free market decide
the introduction of small stipends to the
creation of a tightly regulated intercolle-
giate system with strict salary caps. But
there’s another possibility: The best plan
might very well be no plan at all. Or, if you
prefer, it’s a plan called the free market.
How would such a system work?
Colleges could simply bid for the services
of high school recruits. Contracts could be
negotiated individually, like the contracts
for coaches and athletic administrators.
test the open market for their services, the
MLB warned, “professional baseball would
simply cease to exist.” Not quite. Four
decades later, major league baseball gen-
erates about $8 billion in revenue a year.
In resisting the idea of paying college
athletes, the NCAA often argues that
most universities are already trapped
in an expensive arms race for coaches
and athletic facilities. Many universities
claim they lose money on big-time sports.

Think of how much greater the financial
burden would be if colleges had to get into
unchecked bidding wars for quarterbacks
and point guards, too.
There are gaping holes in this argu-
ment. In one of the filings in the O’Bannon
case, the plaintiffs detail how schools use
accounting tricks to obscure the profitabil-
ity of their football and basketball pro-
grams. Hundreds of thousands of U.S.
businesses figure out how much to pay
workers without going broke; more to the
point, college presidents seem perfectly
capable of running institutions with 9- or
even 10-figure budgets. They can handle
market competition when it comes to
recruiting engineering professors, but
they’re somehow incapable of making
rational decisions when the recruits in
question are athletes? If the NCAA is
right and its members really are broke,
the market rate for athletes isn’t likely to
rise very much. But then that makes you
wonder why they are fighting so hard to
prevent that outcome in the first place.
If a free market system were intro-
duced at the collegiate level, wouldn’t
the biggest, richest athletic departments
simply buy all of the best college ath-
letes? The reality is that they already do.
Only instead of attracting athletes with
cash, schools lure them with big-name
coaches, five-star players-only dormito-
ries, and state-of-the-art athletic facilities.
(How many high school football stars who
are recruited by the University of Alabama
choose the University of Nevada instead?)
The schools that can—and want to—
spend the money on sports are already
doing it. They’re just not spending it on
talent. By preventing athletes from getting
paid, all we’re really doing is transferring
money from young men—the majority of
whom are neither white nor wealthy—to
coaches, athletic directors, architects, and
construction companies.
Fixed stipends might help remedy this
imbalance, but a system unconstrained
by price would go much further toward
offering a solution. If there were no artifi-
cial limits on spending, star talent would
invariably become very expensive, which
would discourage schools from stockpil-
ing coveted recruits. Instead, the best ath-
letes would be distributed more evenly
throughout the various schools and
Some colleges might drop
football or basketball, but
most would opt for a level of
talent that fits their budget
conferences. The free market would also
allow schools to build in academic incen-
tives, such as financial bonuses for ath-
letes who graduate on time—or even come
back and finish their degrees after their
NFL or NBA careers.
The bottom line is that once we got past
the collective freakout, we would start
evolving toward a more rational, fairer
system. We can’t say exactly what form
it would take; that’s the nature of the free
market. Economist and collegiate-sport
free marketeer Andy Schwarz has sug-
gested some possibilities: Maybe the
University of Kentucky’s John Calipari
would abandon “one and done” and start
offering basketball recruits a bigger payday
if they stayed at the school for their sopho-
more season. Maybe the next Cam Newton,
whose father reportedly offered his son’s
services to Mississippi State University
for $180,000 under the table (which he
denied), will actually get $180,000—above
the table. Or maybe he’ll get $90,000, and
the school will set aside another $90,000
to help it meet its Title IX requirements to 9
fund nonrevenue-generating sports. If the
competition gets too intense, the NCAA
might ask college athletes to form a union
and collectively bargain for nationwide
salary caps, which, of course, we effectively
have now—except the cap will be fairly bar-
gained between professional teams and
players rather than imposed from above.
Some schools might decide to drop
football or basketball. More would likely
opt for a level of talent that better fits their
budget. Would this affect anyone’s alle-
giance to his or her alma mater? I don’t
see why. What’s more, the quality of the
overall product would be higher. College
football and basketball wouldn’t simply
limp along; they would almost certainly
become even more popular.
Before long, we would realize that
college sports’ transition to capitalism was
actually just the process of our economy
absorbing a class of Americans who were
being denied access to a market (and not
just any market; a market that they them-
selves created). In a generation, it would
come as a shock to remember that our
nation once allowed a private cartel to
dictate the terms of a public policy that
prevented young men from capitalizing on
what may have been the four best earn-
ings years of their lives. <BW>
Mahler is a Bloomberg View columnist.
 View
Mexico’s Reformer
Needs to Press On
Despite disappointing early results,
Peña Nieto’s changes are far-reaching
Spare a thought for Mexico’s President Enrique Peña Nieto.
After engineering an ambitious reformist pact among the coun-
10 try’s three major political parties, he whirled through his first
year in office rewriting laws on everything from energy to tele-
vision and education to elections. Yet Mexico’s economic per-
formance in 2013 was disappointing, and its businesses and
foreign investors aren’t exactly exuberant. It’s enough to damp
a reformer’s spirits.
Several factors have dulled the immediate effects of Peña
Nieto’s reforms. Mexico has faced a year of financial uncer-
tainty, held hostage to the U.S. Federal Reserve’s decision-
making on when to cut monetary stimulus. The peso is the
most actively traded emerging-market currency, and foreign-
ers own 35 percent of the country’s government securities, so
Mexico is unusually sensitive to shifts in global capital flows.
Higher taxes levied as part of the government’s fiscal reforms
have clouded the short-term outlook for growth. And further
changes to laws and regulations will be needed to put Peña
Nieto’s groundbreaking changes into effect.
During the coming year, the reforms will start to be noticed
—especially in the energy sector, which could attract as much
as $20 billion in additional foreign direct investment by 2015.
To reap the full potential, though, the government needs to
maintain its reformist zeal and press on.
First, Peña Nieto needs to bring more Mexicans into the formal
economy. The country has more than twice as many “informal”
nonsalaried workers as the formal salaried kind. This lowers pro-
ductivity because gray-market companies tend to be less efficient.
It also narrows the tax base, requiring those who pay taxes to pay
more. What’s needed is unified social insurance—financed in a
way that doesn’t give informal labor an advantage.
Although Mexico’s fiscal reforms will reduce its reliance
on oil taxes and increase tax revenue, the country will still
collect proportionately less in taxes than any other developed
nation. But Mexico has the lowest life expectancy in the Organ-
isation for Economic Co-operation and Development, spotty
To read Albert L. Hunt
on Obama in 2014
and Stephen L. Carter’s
New Year’s wishes for
Hollywood, go to
bloomberg.com/view
health-care services, and an uneven educational system.
Peña Nieto has sought to turn the news media’s Mexico nar-
rative away from drugs and violence and toward jobs, invest-
ment, and progress. Yet kidnappings and extortions are on the
rise. The country’s police forces and criminal justice system
are underfunded and corrupt. There’s a culture of impunity:
Only 2 percent of crimes lead to convictions. In some states,
vigilante groups are filling the vacuum.
Legal reform needs the kind of national commitment and
political savvy that yielded the advances of Peña Nieto’s first
year in office. The next presidential election isn’t due until
2018. Between now and then, Mexico’s radical new president
needs to keep at it.
Don’t Take Sides in
Turkey’s Power Struggle
The prime minister bears responsibility
for resolving a crisis of his own making
The hope that Turkey might provide a model for modernizing
Muslim countries—combining Islam, democracy, and market
economics—is being tested. A bitter quarrel between Prime Min-
ister Recep Tayyip Erdoğan and his former allies continues to
escalate. Financial markets are running scared, punishing the
country’s stocks and currency. The fight doesn’t just threaten
Erdoğan’s government; it also calls into question vital Turkish
institutions, including the rule of law.
Corruption investigations implicating ministers in Erdoğan’s
government provoked the new crisis. It’s widely believed that
many prosecutors and investigators are followers of Fethullah
Gülen, an Islamic teacher, and that their charges are politically
motivated. So far the probes have forced Erdoğan to accept the
resignations of three cabinet ministers and remove a fourth in a
broader cabinet reshuffle. Now prosecutors are trying to launch
a new inquiry into an organization run by Erdoğan’s family. After
resigning on Christmas Day, former Environment and Urban Plan-
ning Minister Erdoğan Bayraktar said the prime minister person-
ally approved deals under investigation and should quit.
Erdoğan needs to make clear the corruption cases will be
properly investigated and answered. To make that credible, he
should admit to his own role in politicizing the courts and judi-
ciary, then embark on genuine reform. He should also call early
parliamentary elections. His Justice and Development Party
would most likely return to power, though with a smaller ma-
jority that might oblige him to share power. He should declare
his willingness to do that.
The U.S. and European Union should mostly stand aside,
illustration by bloomberg view
lest they feed Erdoğan’s conspiracy theories. But the EU would
do well to recognize that the 2009 decision to block negotia-
tions for Turkey’s entry into the union, especially in the area of
justice, freedom, and security, was a mistake. That error should
be put right, encouraging Turkey to meet the EU’s judicial and
law enforcement standards, which would help build confidence
in its institutions. <BW>
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January 6 — January 12, 2014
Rousseff’s
Reelection Calculus
▶Brazil’s
▶ president has prioritized social programs over the economy
▶“Unless
▶ a new, much better candidate comes along, I’ll vote for Dilma again”
Brazil’s once-richest man, Eike Batista,
is watching his empire crumble. The
São Paulo stock exchange has plunged
almost 16 percent this year, wiping out
billions in investor wealth. Yet Luzia
Souza is doing better than ever.
The mother of two is one of 22 million
Brazilians who have emerged from
extreme poverty during President
Dilma Rousseff ’s three years in office.
Under the auspices of a resettlement
program financed by the govern-
ment and the World Bank, Souza, 29,
moved from a shack surrounded by
open sewage and prone to flooding to
a house with running water on the out-
skirts of Teresina, the capital of Piaui
state in northeast Brazil.
Voters like Souza may help Rousseff
helvio romero/dpa/ap photo
win reelection in October, even though
the economy has grown at half the
pace it did under her predecessor
and inflation has exceeded the official
target throughout her tenure. While
investors fret about Brazil’s widening
budget deficit, there’s little question
that Rousseff ’s expansion of social pro-
grams has shored up support among
her political base. “Everything is
getting more expensive, but certainly
I’m doing better than two or three
years ago,” says Souza, who receives
134 reais ($57) a month in cash aid
from the government and got a 2,500-
real low-interest federal loan in 2013 to
open a clothing store. “Unless a new,
much better candidate comes along, I’ll
vote for Dilma again.”
Rousseff is tantalizingly close to
making good on her 2010 campaign
pledge to eradicate extreme poverty.
The government’s most recent pop-
ulation survey, due early in 2014, is
expected to show that the share of
the population with incomes lower
than 70 reais a month, the Social
Development Ministry’s definition
of extreme poverty, has fallen below
3 percent—a level the World Bank con-
siders equivalent to eradication.
Luring young talent Syria’s factories move
back to small towns 14 elsewhere—or shut
down 16
Abe’s reforms threaten Correlations: High
Japan’s micro farms 15 corporate taxes and
growth can mix 17
13
Since taking office on Jan. 1, 2011,
Rousseff has broadened many of the
social programs created by her pre-
decessor and mentor, Luiz Inácio Lula
da Silva, and added new ones. She has
increased spending on professional
training, child care, and low-cost loans.
More than 6,000 doctors, most of them
Cuban, have been deployed to bolster
health services in the countryside and
other underserved areas. A public
housing drive that has built 1.4 million
homes since 2009 has an additional
1.6 million under construction.
The centerpiece of the government’s
war on poverty is Bolsa Familia, a
10-year-old program that gives poor
families a cash payment of at least
70 reais per month if they keep their
children healthy and in school. Under
Rousseff, the number of households
enrolled in Bolsa Familia has grown by
1 million, to 13.8 million—equal to about
one-quarter of the Brazilian population.
And by early 2014, the government
 Global Economics
Extreme Poverty in Brazil
12%
the world bank
considers 3%
8% equivalent to
eradication
4%
0%
2002
*estimate; data: social development ministry
expects to add 700,000 families,
according to Tiago Falcão Silva, the offi-
cial who leads the Brazil Without Misery
program in the Social Development
Ministry. “We created mechanisms
to overcome extreme poverty from
a monetary standpoint,” says Silva.
“Other, often more challenging tasks
remain—you can’t provide health care
and education with a debit card.”
Thanks to efforts such as these,
Brazil was the only country in the
group known as the BRICS, which also
includes Russia, India, China, and South
14 Africa, to achieve a reduction in inequal-
ity in the decade through 2009. The
Gini coefficient, a statistical measure
of income distribution, fell 5.08 points
in Brazil during that period, while in
Russia and China it increased 2.62 points
and 2.86 points, respectively, according
to World Bank data.
Those gains have come at a cost.
Lula, and now Rousseff, made “a very
deliberate policy choice” to focus
on inequality rather than tackling
Brazil’s complex tax code, poor infra-
structure, and other obstacles to eco-
nomic growth, says Deborah Wetzel,
the World Bank director for Brazil. As
a result, Brazil’s economy has proved
less resilient in the face of the global
slowdown. Gross domestic product
expanded 1.9 percent a year during
Rousseff ’s first two years in office, less
than half the 4 percent annual average
during Lula’s two terms. Economists
surveyed by the central bank estimate
growth reached 2.3 percent in 2013.
“Growth has been more volatile, but
the progress in reducing inequality has
just been amazing,” says Wetzel.
The president’s strategy may pay off
in October. Rousseff ’s approval rating
was 52 percent among those who
earned less than 1,356 reais per month
and zero among those with more
than 33,900 reais in monthly income,
according to a late November survey
by Datafolha, a São Paulo polling
firm. The poll also showed that if
the presidential election had been
held then, Rousseff would have won
42 percent of the vote, compared
with 26 percent for her closest rival,
former Environment Minister Marina
Silva. “Recipients of social welfare
overwhelmingly support the Rousseff
administration,” says Mauro Paulino,
executive director at Datafolha. “It’s
2013* enough votes to make the difference in
an election.”
At a community center in a gritty
neighborhood in Teresina, local youth
receive academic tutoring, participate
in cultural activities, and have access
to computers and the Internet, all par-
tially financed by the Rousseff admin-
istration. Across the street at a public
nursery, toddlers dig into a free lunch.
Public health agents regularly check on
children’s vaccinations, weight, and per-
sonal hygiene. “When I went to school,
some kids were too hungry to study,”
says Katia Maria Viera, head of the
nursery school. “Today I don’t have a
single case of malnutrition.”
Not all Teresina residents are fans of
Rousseff ’s policies. Afonso Noronha, a
farm equipment salesman, complains
that shoddy infrastructure and high
labor costs are strangling business. Says
Noronha: “If she did as much to help
create wealth as she does to distribute
it, this country would be doing better.”
�Raymond Colitt
The bottom line president rousseff’s success
in eradicating extreme poverty bodes well for
her reelection this year.
Agriculture
Japan’s Micro Farms
Face Extinction
▶ Abe sets policies to spur
consolidation and boost efficiency
▶ The “system is so unproductive that
it’s hurting the nation as a whole”
Takashi Nakajima makes $100,000 a
year growing lettuce on 12 acres in
Japan’s Nagano prefecture. The 35-year-
old third-generation farmer employs
Chinese laborers to pick his crop and
takes four months off in the winter to
indulge his passion for speed skating.
Now his way of life is endangered
because of reforms set in motion by
Prime Minister Shinzo Abe’s govern-
ment. “They want to streamline Japan’s
farming business,” Nakajima says.
“Small farmers won’t be able to survive,
and the community will die.”
Government payments accounted
for 56 percent of total earnings for
Japanese agriculture last year, behind
only Norway and Switzerland, accord-
ing to the Organisation for Economic
Co-operation and Development. Abe
plans to cut subsidies to rice farmers,
which total 161 billion yen ($1.6 billion) a
year. He also wants to reduce the triple-
digit import tariffs that apply to wheat,
sugar, beef, pork, and dairy products.
The goal is to force thousands of
hand-tended farms such as Nakajima’s to
consolidate, boosting yields and lower-
ing the cost of food. According to OECD
estimates, Japanese farmers command
prices that are twice the world average.
“The current system is so unproductive
that it’s hurting the nation as a whole,”
says Robert Feldman, head of Japan eco-
nomic research at Morgan Stanley MUFG
Securities. “Changing the agricultural
laws is a good way to promote the con-
version of land to more efficient use.”
Japan’s proliferation of small farms
is a legacy of the country’s postwar
U.S. occupation, which diminished
the power of the land-owning class
by distributing plots to the tenant
farmers who tilled about one-third of
the nation’s fields and rice paddies. As
Japan’s industries boomed, villagers
quit the fields and went to work in fac-
tories. Stringent regulations governing
the transfer of arable land have pre-
vented a new generation of farmers
from taking their place. A 2010 survey
by the Ministry of Agriculture, Forestry
and Fisheries showed that almost 9 out
of 10 farmers were over 50.
“Agriculture is the most difficult sector
to reform,” said Abe during a Dec. 6
interview in Tokyo, a day after parlia-
ment passed a bill designed to reduce
the amount of idle land by allowing
farmers to lease out parcels. The law
will “enable farmland to be consolidated
and taken over by those who are really
motivated,” Abe said. In late November
the government approved a plan to
masaaki iwamoto/bloomberg
end a four-decade policy of paying rice
farmers to reduce their production in
order to support prices. The subsidy will
be halved effective April 2014 and abol-
ished by Mar. 31, 2019.
Agriculture’s share of gross domestic

Share of food
consumed in Japan
that is grown there:
40%
Japanese farmers
command prices up to
2x
the world average
Agriculture’s share of
gross domestic product:
1%
in 2011; 9% in 1960
product is now less than 1 percent,
down from 9 percent in 1960, accord-
ing to government data. Yet farmers
still wield considerable political influ-
ence through the Japan Agricultural
Cooperatives group. The JA, as it’s
commonly known, finances and
insures farms, supplies them with
equipment and fertilizer, and buys
their produce. With almost 10 million
members, the organization is also
Japan’s largest political lobby.
While the ruling Liberal Democratic
Party has historically relied on the JA
for support, Abe has antagonized the
group with his decision to join negotia-
tions for the Trans-Pacific Partnership,
a free-trade area encompassing 12 coun-
tries. The JA has collected 12 million sig-
natures on a petition opposing the talks.
Although the Abe administration has
argued that liberalized trade will help
reinvigorate farms, government fore-
casters project that joining the TPP may
result in an initial decline of about 3 tril-
lion yen in output from agriculture, for-
estry, and fisheries, as local producers
adjust to an influx of foreign imports.
Nobuhiro Suzuki, a professor at the
University of Tokyo’s department of
global agricultural sciences, is less confi-
dent that farmers will be able to rebound
from the shock. “It’s a fairy tale to think
Japan can compete with the U.S. or
Australia on products where land area
determines competitiveness,” he says.
For a small farmer like Nakajima,
Abe’s policies are likely to translate into
more competition, from both farmers
,
0
1 545
abroad and local rice growers switching
to higher-value vegetable crops as their
subsidies dry up. “I’m worried about
TPP,” Nakajima says. “Our lettuce is
good, and when it comes to freshness,
foreign products won’t be able to match
us. But I sometimes wonder whether
people see the difference.” �Chikako
Mogi and Masaaki Iwamoto
The bottom line as part of a drive to reform
agriculture, abe is slashing the $1.6 billion a
year in subsidies rice growers collect.
Labor
Home Is Where
The Jobs Are
▶ Rural communities work with
business to stop the brain drain
▶ “Businesses move away because
there aren’t enough people”
Wallace Harwood worked for almost
five years as an information systems
manager for an energy company in
Nebraska, commuting 90 miles a day
between his home in Kearney and
his office in Lexington. By 2011 he’d
found little opportunity for job growth
and was thinking about leaving the
state when he heard about a job with
Xpanxion, an Atlanta-based custom
software developer that has three
offices in Nebraska, including two in
Takashi
Nakajima
occupation:
Farmer
age:
35
income from farming:
$100,000/year
land holdings:
12 acres
off-season hobby:
Japanese imports Speed skating
of lettuce:
tons in 2012, up
from 3,458 in 2003
Harwood’s hometown. In April 2012, he
started a job as an automation engineer.
“It completely changed the game for
me,” says Harwood, 34. “I’m bringing
in a good salary without the two-hour
commute and with all of the benefits 15
that you get from rural Nebraska.”
Harwood’s job is one of about 100
created in Nebraska over the past six
years as part of Xpanxion’s plan to hire
skilled workers in the state’s smaller
cities and towns. The effort, says
Xpanxion Chief Executive Officer Paul
Eurek, a native Nebraskan, cuts labor
costs while bringing jobs and people
back to areas where the population is
stagnant or falling.
Decades of migration out of
Midwestern farming states and man-
ufacturing areas in the Northeast
have left many communities with fast-
aging populations and depleted talent.
Population decreases can have long-
term economic consequences, says
Mark Mather, associate vice pres-
ident of U.S. programs with the
Population Reference Bureau, a think
tank in Washington. The communi-
ties “get caught in a downward spiral,
because businesses move away because
there aren’t enough people,” he says.
Recruiting businesses into these areas is
difficult if the labor market isn’t strong,
says John Cromartie, a geographer from
the U.S. Department of Agriculture.
Eurek, who left the state in 1983 in
search of a technology job after gradu-
ating from the University of Nebraska,
is hoping to reverse the trend. “I
 Global Economics
had a feeling that if I got back to
Nebraska I could really start generat-
ing some interest within the technol-
ogy sector,” he says. He returned to
the state in 2007 to open Xpanxion’s
first Kearney office. Since then, he
says, what he calls a “rural sourcing”
model—to outsource work from urban
to rural areas—has gained momentum.
The company has established a
program with the Center for Rural
Research and Development at the
University of Nebraska at Kearney and
with the university’s alumni associa-
tion to recruit graduates. “We want to
inform individu-
Nebraska’s Rural als who left a place
Population like Nebraska that
these types of
900k
jobs are available
in rural America,
490k where before they
might not have
been,” Eurek says.
0 The program,
1930 2010 called the Rural
data: U.s. censUs
Sourcing Project,
is one of several efforts around the
country—from student loan repay-
16 ment programs to tax deductions—to
spur economic growth by attracting
more people and jobs. In upstate New
York, the Niagara Falls Community
Development Department hopes to
draw residents back by auctioning off
vacant city-owned houses, some for
less than $3,000. The first three homes
were sold in September, with another
auction planned for February, accord-
ing to community development director
Seth Piccirillo. The city hopes to sell an
additional 10 to 20 houses in 2014. “We
are trying to find any way to make living
here, staying here, and buying and ren-
ovating a home as financially feasible as
possible,” says Piccirillo.
Kansas is trying to attract out-of-
staters and its own residents in metro-
politan areas to rural areas by offering
student loan reimbursements of up to
$15,000. Also, out-of-staters who move to
any of its designated “rural opportunity
zones”—those with shrinking or stagnant
populations—can have their state income
taxes waived for up to five years.
Because of the loan repayment
option, Patrick and Amber Patterson,
both 25, returned to their hometown
of Phillipsburg, Kan., after graduat-
ing from Fort Hays State University in
Hays, Kan. They’d expected to stay in a
bigger city where higher salaries would
have helped them pay off their student
debt. The couple, who have two chil-
dren, also find it easier to manage other
costs. “When it comes to day care, that
is cheaper, and we know a lot of people
around the town if we need a baby
sitter,” Patrick says.
This spring, Nebraska’a jobs program
will expand to include additional busi-
nesses, says Shawn Kaskie, director
of the Center for Rural Research and
Development. Like Xpanxion, the com-
panies will post jobs to a database to
recruit alums.
“Addressing the brain drain revital-
izes small towns,” Kaskie says. And, says
Eurek, it gives younger Nebraskans a
choice he didn’t have: “We are offering
the students at least an opportunity to
stay here.” �Jeanna Smialek
The bottom line rural and manufacturing
towns hope to promote economic growth by
attracting younger workers.
Industry
Syria’s Small Factories
Struggle to Survive
▶ Many have closed or relocated
outside the country
▶ “The longer the conflict drags on,
the harder it will be”
Syria’s civil war has claimed both of
Saeed Nahhas’s businesses. In early
2013, government shells aimed at
rebels destroyed a workshop manufac-
turing machines that produce packag-
ing materials. Four months later rebels
The remains
of a factory on
the outskirts of
Aleppo, Syria
“I’m looking
forward to 2014
to start making looted another
a bit of profit.” that made plastic
—Razek bags and zippers.
Mamarbachi, Nahhas, by then
owner of two living in Turkey,
Syrian factories
decided to set up
a new packaging
workshop there
while waiting for
the violence to end at home. “It’s a
tragedy,” he says. “And the longer the
conflict drags on, the harder it will be
for people to return and set up their
businesses again.”
The conflict in Syria, which has
claimed the lives of 125,000 people, has
crippled the small factories that helped
power what was a $60 billion economy
before the war. More than half of the
country’s manufacturing output has
been lost since the uprising against
President Bashar al-Assad began in
March 2011, according to an October
report that the Syrian Center for Policy
Research prepared for the United
Nations. Fuad Lahham, who coordi-
nates a UN program to rehabilitate
Syria’s industry, estimates that damage
to the economy tops 330 billion Syrian
pounds ($2.4 billion). Since many of
the country’s factories are inaccessi-
ble to government investigators, the
reality is probably worse, he says.
Before the war, industry contrib-
uted 23 percent of Syria’s gross domes-
tic product and employed 16 percent
of its labor force, according to the CIA
World Factbook. The sector, composed
primarily of privately owned facto-
ries that employed dozens rather than
hundreds or thousands of employees,
has been among the hardest hit by the
war. Syria has experienced “massive
 Global Economics

deindustrialization as a result of busi-

ness closure and bankruptcy, capital
flight, looting, and destruction,” with
manufacturing output shrinking more
Correlations by mark glassman

than 70 percent between 2010 and

the first quarter of 2013, according to
the Syrian Center for Policy Research
report. Some factories have relocated
Taxes and Growth
to Turkey or Egypt, others have moved
their operations to pockets of Syria The conventional wisdom on corporate taxes is that the lower they are,
that have been largely spared from the the more companies can invest and stimulate the economy. That’s not
violence, says Lahham. how it worked in 2012. Among the 34 countries in the Organisation for
Razek Mamarbachi has been deter-
mined to keep his two factories open Economic Co-operation and Development, the average corporate tax
and his 140 workers employed, even rate had little bearing on economic growth.
though he’s not making a profit. One
of his warehouses was shelled in early GDP per capita growth

2013 but sustained only minor damage. Average

0% 4%
A plant 17 miles northeast of Damascus 2%
corporate
6% 8%

that manufactures lube oil under a Norway

tax rate
paid
licensing agreement with France’s Chile
Total closed intermittently between Estonia
January and April. Mamarbachi’s other Mexico
factory, in Drousha on the road to Poland
the Golan Heights, produces cleaning New Zealand
products for Germany’s Henkel and Switzerland
On average,
insecticides for S.C. Johnson & Son. In Japan
companies paid

43.1
U.S.
2013 it was shuttered from February to
Australia
April because of fighting. Mamarbachi Korea
knows he’s fared better than many Israel 17
percent of their
other business owners. “It’s sheer Turkey profits in taxes
luck,” he says. Now his eye is on the Slovak Republic
recovery that he’s hoping peace talks Austria
scheduled to begin in Switzerland on Sweden
Jan. 22 will bring. “I’m looking forward Canada
to 2014 to start making a bit of profit,” Iceland
he says. Germany
If there is a cease-fire, Syria will Denmark
U.K.
need a skilled labor force to rebuild its
Ireland
economy. Many workers, though, have
Belgium
fled the country. Nahhas, the work- Czech Republic
shop owner who left for Turkey, says Finland
he recently hired two Syrian expatri- France
ates. One lost his technology company Spain
France and the next
and works as an accountant for $600 Slovenia six highest-taxing
a month. Another, whose pharma- Hungary countries are all in the
ceutical distribution company was greece’s gdp Luxembourg European Union
shrank 4 percent
destroyed, is making $1,200 a month from 2011
Italy
doing administrative and account- to 2012 Portugal
Netherlands
ing work. Both men are still support-
Greece
ing families in Syria. Despite their
lower wages in Turkey, it’s still more 0% 20% 40% 60% 80%
money than they could make in Syria Average corporate tax prep time
today. Says Nahhas: “They’re willing Time to pay up
South America 618 hours
to do anything to survive.” �Donna
Africa 320
Abu-Nasr the time a company South American
spent preparing its Central Asia and Eastern Europe 256 companies spent about
The bottom line manufacturing in syria has taxes varied widely half their tax prep time on
around the world in Asia Pacific 232
contracted by more than 70 percent since the compliance for value-
civil war began. 2012 Central America and the Caribbean 217 added taxes and only about
North America 213 a quarter on corporate
income taxes
sana/reUters

Europe 179
Edited by Cristina Lindblad, Dimitra
Kessenides, and Matthew Philips Middle East 159
Businessweek.com/global-economics
graphic by bloomberg bUsinessweek. data: oecd, pricewaterhoUsecoopers, world bank
 January 6 — January 12, 2014

Superbugs:
From Farm
18

To Table?

Data: ims HealtH, animal HealtH institute (2001-07), anD FDa (2009-11); compileD By peW HealtH
From leFt: pigs: Daniel acker/BloomBerg; sausages: mike DaBell/getty images;
▶Voluntary
▶ curbs haven’t stopped the rise in antibiotics given to animals
▶“We
▶ are going to be able to continue the same practices and call them something different”
A delegation of public-health advocates become heavier. The company’s plan company’s program allowed. “It’s time
filed into the suburban Chicago head- was supposed to address concerns that for McDonald’s to update their policy,”
quarters of McDonald’s last January to persistent use of such drugs on animals Steven Roach of the Keep Antibiotics
deliver a tough message: A decade after might increase the resistance of danger- Working coalition recalls telling
the fast-food giant’s groundbreaking ous microbes to antibiotics. Such bugs company officials.
promise to reduce medically important could then be transmitted to humans So far, McDonald’s hasn’t announced
antibiotics fed to the animals it buys, who ate the meat. But the McDonald’s any major changes to its animal anti-
the policy had glaring loopholes and policy was easy to sidestep, the health biotics rules, but a much more impor-
was having a questionable impact. advocates told company officials: tant player in the food world has: the
Many farmers and food companies Livestock producers or farmers could U.S. Food and Drug Administration.
were using antibiotics not for their continue to give millions of healthy The agency in December announced
medicinal properties, but because animals antibiotics for the purpose of its own industry guidance to combat
they also make animals grow faster or preventing disease—an exception the the growing use of medically important

antibiotics in farm animals, and its plan
strongly resembles the 2003 McDonald’s
program. Both prohibit the drugs from
being used to speed animals’ growth
and call for veterinarians to oversee the
dispensing of antibiotics for approved
uses, such as disease prevention and
treatment. And both would allow live-
stock raisers to continue giving antibiot-
ics to healthy animals. That has critics
worrying that the FDA’s new guidance
will suffer from the same weaknesses
as the restaurant company’s pledge.
“We are going to be able to continue
the same practices and call them some-
thing different,” says Sasha Lyutse, a
policy analyst at the Natural Resources
Defense Council. “These routine pre-
vention uses are where the rubber hits
the road. Unless you close those loop-
holes, you are not going to see any
material changes in practices.”
Several animal pharmaceutical
companies say that they don’t antici-
pate much fallout from the FDA guide-
lines and that the volume of antibiotics
affected will be relatively small. “Will it
have an impact? Yes. It’s not a material
or significant impact,” says Michael
McCarty, a spokesman for Elanco, the
animal health division of Eli Lilly.
The FDA defends its approach, which
urges pharmaceutical companies to
voluntarily stop marketing the drugs’
ability to promote growth on labels and
to require veterinary prescriptions. “I
don’t begrudge people who are skepti-
cal,” says Michael Taylor, FDA deputy
commissioner for foods and veterinary
medicine, citing decades of debate and
inaction on the issue. Still, he says the
agency’s efforts will get results. “We
are going from a few companies doing
things voluntarily to fundamentally
shifting public policy so there will be
fewer approved uses and much tighter
control over the uses that remain.”
McDonald’s declined to discuss the
effects of its antibiotics policy. Becca
Hary, a McDonald’s spokeswoman,
said in an e-mail, “We will continue to
look to physicians, suppliers, animal
welfare experts, veterinarians, and
engage with various stakeholders on
this topic. We also look to the FDA for
guidance as this conversation evolves,
and we will review our policy as neces-
sary to remain consistent with available
scientific information.”
The antibiotic era in animal agricul-
ture began in 1946, when research-
ers from the University of Wisconsin
noted that chickens fed an antibiotic
grew faster. Scientists still can’t agree
why that happens. From 1960 to 1970,
the use of antibiotics in animal feeds
increased sixfold, according to the pre-
decessor of today’s U.S. Government
Accountability Office. In 1972 a task
force for the FDA warned that feeding
animals low doses of antibiotics could
incubate antibiotic-resistant bacteria
in their bodies—and that the microbes
could be passed along to humans.
During the next four decades, the
livestock and pharmaceutical indus-
tries successfully opposed most efforts
to regulate antibiotics in farm animals,
arguing that little correlation could
be drawn between antibiotics used in
agriculture and resistant infections in
humans. Experts from the World Health
Organization and the U.S. Centers for
Disease Control and Prevention say that
routine feeding of antibiotics to healthy
animals plays at least some unquanti-
fied role in causing resistant infections
in humans. Two million people each
year in the U.S. contract an antibiotic-
resistant infection, and 23,000 of them
die, according to the CDC.
Hard data on antibiotic use in live-
stock is scarce, but the numbers that are
available, though imprecise, suggest the
sales are going up. The Johns Hopkins
Center for a Livable Future estimates
that antibiotics in livestock account for
80 percent of all such drugs sold. The
FDA and animal-pharmaceutical indus-
try groups disagree with that figure but
can’t provide a better one. The FDA,
which only recently began compiling
Pounds of antibiotics sold
For food animals
For human use
2001 2011
That vintage Jaguar Briefs: Hollywood
you bought? It’s a defies box office
fake 20 gravity 22
The TED Talk coming
to your company 21
sales data for antimicrobials, which
include antibiotics, found that U.S.
sales of food-animal antimicrobials
climbed 4 percent from 2009 to 2011, to
29.9 million pounds. Sales to livestock
and poultry producers of tetracyclines, a
class of antibiotics important for treating
infections in humans, grew 22 percent
during that period. At the same time,
annual American production of cattle
and swine remained unchanged, at
about 72 billion pounds, and poultry pro-
duction rose 4 percent, according to the
U.S. Department of
Agriculture.
23k k
The Animal
Health Institute,
which represents
animal pharmaceu-
tical companies,
Number of deaths tracked sales data
annually in the U.S. prior to the FDA’s
caused by antibiotic- data gathering
resistant infections
efforts, reporting
antibiotics sales of
17.8 million pounds in 1998, 23.7 million 19
pounds in 2000, and 27.8 million
pounds in 2007. The institute now dis-
avows its 1998 numbers, which were
reported in academic papers, saying
they can’t locate data prior to 2000.
Regardless of the numbers, the
issue of antibiotics in meat has reso-
nated with many consumers. In 2003,
McDonald’s vowed to lean on suppliers
to reduce the amount of antibiotics fed
to their animals. The company would
require most of its chicken suppliers to
eliminate antibiotics used for growth
promotion and give preference to pork
and beef suppliers that did the same.
While McDonald’s requires its vendors
to keep track of antibiotic use, the
company declined to disclose that data.
Several McDonald’s competitors,
including Burger King and Yum!
Brands, operator of the Taco Bell and
30m KFC chains, established similar poli-
cies. “We have very high standards and
strict guidelines for our suppliers, and
they must comply with all relevant FDA
and USDA regulations,” says Virginia
15m Ferguson, a Yum! Brands spokeswoman
who wouldn’t comment on the impact
of the company’s antibiotics policy.
Burger King didn’t respond to inquiries
about its program.
0 Smithfield Foods, the nation’s
largest hog producer, also vowed
 Companies/Industries
in 2002 to prohibit use of medically
important antibiotics solely for growth
promotion. Yet in 2013 its use of the
drugs per pound of pork produced
reached a four-year high, according to
data the company publishes. Smithfield,
which was acquired in September
by China’s largest pork producer,
Shuanghui International Holdings, is
“refreshing” its antibiotics policy and
says its usage varies each year based on
weather, illnesses, and other factors,
says spokeswoman Keira Lombardo.
Tyson Foods announced in 2007 that
it would sell fresh chicken from birds
raised without using antibiotics. The
pledge was backed with a marketing
campaign featuring the tag line “Chicken
your family deserves, raised without
antibiotics.” But U.S. regulators with-
drew their approval for the claim a few
months later because Tyson continued
to list ionophores, classified as an antibi-
otic by the FDA, as a feed ingredient. The
company disputed that ionophores were
antibiotics and noted that they weren’t
used in human medicine anyway.
Meanwhile, Tyson was also inject-
ing eggs with a vaccine that contained
20 an antibiotic. The company argued
that this didn’t count, because “raised
without antibiotics” didn’t include
the days before a chick hatches. “Our
‘raised without antibiotics’ initiative,
which was suspended in 2008, was
ahead of its time,” says Gary Mickelson,
a Tyson spokesman, who blamed gov-
ernment confusion over labeling
requirements for the flap. “It essentially
provided what FDA is requesting today.” I find up to five fakes a year.”
Representative Louise Slaughter, a
Democrat from New York, has intro-
duced legislation that would prohibit the
use of antibiotics in livestock, except
to treat sick animals. Slaughter says
Find an antique gearbox, then
construct a car around it using
reproduction parts
leave a newer car
frame outdoors to give it
the aged, rusted look
of a vintage auto
stamp it with the identification
number of an authentic car that
was destroyed years earlier
the FDA’s voluntary guidance has no
enforcement mechanism and no way
to keep tabs on progress. “It’s based on
hope,” she says. “And we don’t have any
evidence to support that wish.”
�Ben Elgin and Andrew Martin
The bottom line animal producers’ purchases
of tetracyclines, antibiotics used by humans,
grew 22 percent from 2009 to 2011.
Autos
When a Bogus Odometer
Is Only the Start
▶ Soaring prices for vintage cars are
drawing counterfeiters
▶ “In today’s world, it is possible to
replicate everything”
In the 1930s, British sports car maker
MG manufactured exactly 33 of its
vaunted K3 open-top race cars . But if
you want to buy one today, there are
more than 100 to choose from. No, the
defunct manufacturer didn’t restart
production. The tripling of the K3 fleet
is part of the booming trade in fake
antique autos as soaring prices for
classic cars spur sophisticated counter-
feits. “In the 1990s, I would find one
faked car every five years,” says Norbert
Schroeder, who verifies classic cars at
TUV Rheinland, a Cologne (Germany)-
based technical testing company. “Now
Fueling the jump in the number of
bogus rides is heated demand from
well-heeled collectors. Auction values
for vintage cars have risen more
Faking It
101
than sevenfold over the past
Find old screws and washers
to join reproduction parts
decade, according to Historica Selecta,
a consulting company that special-
izes in vintage autos. In 2011, British
auction house Bonhams sold a 1955
Aston Martin DB2/4 for £230,000
($380,000). That was more than four
times the price the same car sold for—
in unchanged condition—in 2003, says
James Knight, director of the auction
house’s motoring department.
Bonhams, which says sales of classic
cars now exceed $1 billion annually,
in July 2013 sold a 1954 Mercedes-Benz
F1 race car for a world record price of
£19.6 million. And at a Dec. 1 auction
it sold dozens of pricey vintage autos,
including a 1964 Porsche 904 GTS
racing coupe for £1.15 million, a 1959
Aston Martin DB4GT Sports Saloon for
£1.57 million, and a 1956 Jaguar D-Type
“Shortnose” for £2.58 million. “People
with a lot of money prefer to have a
classic car in the garage than money in
the bank,” says Adolfo Orsi, president
of Historica Selecta.
That’s one reason criminals are
going to unprecedented lengths to grab
a piece of the action. Sophisticated
forgers have been known to buy old
screws and washers and leave repro-
duced frames out in fields to weather.
“When there is a lot of money, there are
fakes,” Orsi explains. “In today’s world,
it is possible to replicate everything.”
Bernhard Kaluza, vice presi-
dent of international antique auto
club Fédération Internationale des
Véhicules Anciens (FIVA), says counter-
feiters even bought an old movie
theater in France to get the worn
antique leather from the seats. “The
people faking cars are not a few lone
wolves,” says TUV’s Schroeder, who’s
traveled as far as California to authenti-
cate cars, evaluating welded joints and
install well-worn, From leFt: car: sHaun FincH/alamy; Data: Historica selecta; illustration By 731
aged leather salvaged from
antique theater seats
remove the roof from
a less-expensive
classic sedan to make
it look like a rare racing
model from the same
manufacturer
cut a vintage car chassis in two,
then use each half to make a
separate “antique” vehicle

chemically testing
Auction sales the metal to deter-
of classic cars mine its age. “It’s
$800m organized crime,
because it’s expen-
sive to build such
$400m cars and you need
a good infrastruc-
ture to do it.”
$0 Christian Jenny,
1994 2013 retired chief infor-
mation officer of
Zurich Insurance Group, spent five
years proving his rare 1952 Jaguar
C-Type racer was authentic after
another car came on the market claim-
ing the same identification number.
The owner of 13 vintage Jaguars
consulted many experts, includ-
ing Norman Dewis, chief test engi-
neer for the British luxury brand for
more than 30 years. With the car
valued at about $2.5 million, a lot
was at stake. “It might be a problem
if you tried to sell the car years
later,” Jenny says. Verifying it was “a
precautionary measure.”
Authenticaton can require sleuth-
ing. Simon Kidston, a classic-car consul-
tant in Geneva, was once offered an Alfa
Romeo Giulia TZ racer from the 1960s
by a seller who claimed to have dis-
covered it in a scrap yard in Italy. After
consulting numerous sources, Kidston
eventually discovered a photo of a car
with the same identification number
that was involved in a fiery crash at the
annual Sebring 12-hour endurance race
in 1964. The driver barely escaped. “It
was clear there could be nothing left
of the original car,” says Kidston, who
rejected the offer.
Many frauds are more subtle, like
taking an authentic vintage Porsche 911
and turning it into a high-performance
racing version, which could quadru-
ple the car’s value. Other scammers
take authentic parts and build a vehicle
around them, making the line between
refurbished and forged murky. “There
are plenty of adapted cars,” says
Bonhams’s Knight. “Fake has another
meaning: It’s trying to deceive.”
The extent of classic-car fraud is dif-
ficult to track because few victims
come forward. Still, to prevent the
threat of counterfeits from discrediting
the whole market, FIVA has proposed
issuing a standardized verification doc-
ument for each antique car, Kaluza
says, to improve transparency and help
keep buyers from getting duped. “The
whole problem of faked classic cars is
being treated warily” because people
in the market “don’t want to ruin the
good mood,” Schroeder says. “I want
to speak out on this before the whole
thing blows up.” �Leon Mangasarian
and Patrick Winters
The bottom line selling vintage cars
has become a $1 billion-a-year business.
counterfeiters have taken notice.
Management
The TEDification of
Corporate America
▶ The gabfest, long a Silicon Valley
favorite, hosts talks for companies
▶ “It really is an exercise in brand
storytelling”
Last November, State Street introduced
a new team-building exercise: The
financial-services company hosted its
own TED event, modeled on the con-
ference series that promises “riveting
talks by remarkable people.” While TED
speakers have included big names such
as Bill Gates and Sheryl Sandberg, State
Street drew upon its own pool of about
30,000 employees. “We had people
from all geographies and all levels of the
company,” says Hannah Grove, State
Street’s chief marketing officer, who
came up with the idea.
Run by the nonprofit Sapling
Foundation, TED started out in 1984
as a one-off event. Its mission: to help
spread ideas and bring together experts
in technology, entertainment, and
design. Today, TED has morphed into a
business with $34 million in assets on its
books. Tens of thousands of TED Talks
have been given—all of them carefully
rehearsed, choreographed, and formu-
lated for maximum emotional impact,
and all of them shorter than 18 minutes.
Talks available online have been viewed
more than 1.5 billion times.
Grove, a TED Talks fan, suspected
that TEDifying State Street might help
Companies/Industries
the Boston-based company market its
brand, as well as promote employee
bonding and the cross-pollination of
ideas. In 2012 she proposed a partner-
ship to TED, which recently started a
professional development arm, the TED
Institute. TED last summer launched
pilot programs to curate corporate
TED events with State Street, Boston
Consulting Group, and Intel. “It really
is an exercise in brand storytelling,” says
Ronda Carnegie, TED’s head of global
partnerships. “It makes you realize that
corporations are made up of people.”
Seeking speakers, each company
asked, “Do you have a TED Talk in you?
If you do, send us your ideas,” Carnegie
says. State Street held an open call;
Intel and BCG asked only certain indi-
viduals to submit proposals. From each
group, TED experts culled one to two
dozen people who were then paired
with TED coaches for an intense six-
week training program. Topics ran the
gamut from the personal to the pro-
fessional. A senior partner at BCG was
chosen to speak about what doctors
can learn from one another. An Intel
manager addressed the challenge of
being agile in an “un-agile” workplace. 21
Joe Kowan, a graphic designer at State
Street, told the story of how he over-
came stage fright by making up a silly
song. Kowan’s TED coach helped him
draft and revise his talk, which Kowan
says he rehearsed at least 100 times.
On the day of the TED@StateStreet
event, about 350 employees met at
Boston’s Revere Hotel, where the stage
had been set to look like a real TED
conference. The company’s chief exec-
utive officer, Jay Hooley, sat in the front
row. “I felt this overwhelming support
from everyone,” Kowan recalls. “It
leveled the playing field in a way I
wasn’t expecting.”
In 2014, TED will offer its services to
more businesses. “We ask [companies]
to make an investment of $1.5 million
in everything that we do,” Carnegie
says, referring to TED initiatives such as
TEDGlobal, a conference abroad, and
TED-Ed, its open online education plat-
form. In exchange, she says, TED offers
the “most special thing we do—which is
the value of teaching you how to give a
TED talk.” �Caroline Winter
The bottom line teD, a nonprofit conference
outfit, sponsors in-house talks at businesses
that give $1.5 million to its projects.
Edited by James E. Ellis
Businessweek.com/companies-and-industries
 Companies/Industries

Strategic advisory Briefs By kyle stock

that helps
transform your
vision into reality.
A Happy Ending
●H● A strong slate of December releases
pushed Hollywood studios to a record-
setting box office haul in 2013. Total domes-
$1,395
tic ticket sales were about $11 billion, topping
last year’s record of $10.8 billion. Attendance the cost per couple to
ring in the new year
was flat, but 3D offerings stretched the av- attimes Ruby Tuesday’s
square restaurant
erage ticket price to $8.05. Iron Man 3 was in new york.
the box office winner, with $409 million in
North American sales. Sleeper hits such
as Gravity also made 2013 a standout year. ●y ● Cooper
the French government’s 145
Tire & Rubber aban-
champagne and sparkling
wine index has bubbled to doned a long-delayed
its highest point in 20 years
after summer hailstorms in $2.5 billion buyout
northern France ravaged
vineyards. deal with India’s Apollo
115 Tyres after analysts
2004 2013
expressed concern
about how much debt the Mumbai-based company would
have taken on in the deal. Both sides have taken their claims to
Delaware courts, blaming the other for not living up to its side
of the deal. ●8● The forecast is bright for U.S. homebuilders
such as PulteGroup and D.R. Horton. An index of home prices in
20 major cities climbed 13.6 percent in October vs. a year ear-
lier, the largest 12-month gain in almost eight years. Prices have
climbed as the number of foreclosed properties continues to fall.
●q● Hertz Global Holdings adopted a poison pill to thwart a
potential takeover. Directors at the car rental
giant cited “unusual and substantial activity”
in the market for Hertz shares. The company
has gained momentum since its purchase
Data: insee national statistics oFFice oF France

barclays.com/realizations
in July of Dollar Thrifty Automotive Group.
●F● Cosmetics maker Revlon will end op-
colorado pot shops
erations in China and eliminate almost 1,000 raced to open on Jan. 1,
eager to proft from a
beauty advisers in a bid to cut costs. Sales new state law permitting
sales to anyone 21 and
in China, which account for just 2 percent of older. colorado expects
to harvest $67 million in
Revlon’s revenue, have been declining. 2014 marijuana taxes.
 What if a merger
could bring together
more than just two companies?

What if a merger could transform the way we all connect, setting a new course
for your company, now and into the future? At Barclays, our experts can help you
navigate the myriad of challenges that arise when two companies become one.
After all, ambitious plans raise complex questions. Our comprehensive strategic
advisory and financing solutions can enable you to emerge stronger today and
better positioned to succeed tomorrow. It’s what can happen when your ambition
meets our drive to help you realize it. Get macroeconomic insights daily at
barclays.com/realizations

Barclays undertakes its US securities and investment banking business in the name of its wholly-owned subsidiary Barclays Capital Inc., an SIPC and FINRA member. ©2014 Barclays Bank PLC.
All rights reserved. Barclays is a trademark of Barclays Bank PLC.

January 6 — January 12, 2014
24
Unemployment Rate, Down.
Unemployed People, Up
▶To
▶ see what could happen if Congress doesn’t restore emergency federal jobless benefits▶...
▶...▶
▶ “Just look at what’s happened in North Carolina”
When Congress reconvenes on Jan.
6, one of the first issues it will take up
is whether to renew an emergency
federal unemployment program that
expired on Dec. 28, cutting off 1.3
million jobless workers. Enacted in
2008 at the start of the recession, it
provided up to 47 weeks of benefits
for those still looking for work when
their state unemployment benefits
ran out. Senate Majority Leader Harry
Reid says he’ll try to pass a temporary
extension, but most Republicans have
gerry Broome/AP Photo
balked at the $25 billion-a-year cost. If
the program isn’t revived, the impact
could be significant—not just for the
1.3 million people losing a vital lifeline
but on the broader economy.
70,000
people in the state lose
their benefits
July 1,
2013
Protesting North
Carolina’s decision
to disqualify the
state from federal
jobless payments
How will these workers fare? One climate that allows businesses, large
place to look for answers is North and small, to put people back to work,”
Carolina. Last February, at the behest McCrory said at the time. When the
of the business community, Republican new law took effect on July 1, the
Governor Pat McCrory signed a bill maximum weekly benefit fell from $535
cutting the amount and duration to $350 and its duration fell to between
of state jobless benefits, even 12 and 20 weeks (depend-
States that provide
though North Carolina’s unem- fewer than 26 weeks ing on the state’s unem-
ployment rate ranked among the of unemployment ployment rate) from 26
highest in the country. The state payments: weeks—the standard in most
had exhausted its unemploy- missouri other states.
ment trust fund, paid for by busi- Arizona That was only half the
ness taxes, and had borrowed N. Carolina blow. Reducing state ben-
$2.5 billion from the federal gov- s. carolina efits violated the terms of
ernment to pay jobless claims. georgia the federal program—which
“We’re going to pay down that Florida is intended to supplement,
debt, make the system solvent, center on Budget not replace, state aid—so
and provide an economic workers in North Carolina
And Policy Priorities
 John Boehner takes on
the Tea Party 26

From November A Bill: Putting colleges

2012 to November
2013 the official
number of
unemployed
people in the state
fell by
101,901
Yet the number
of people who
found jobs
increased by only
6,082
So the labor force
actually
contracted by
95,009
Here’s why
Pointing
toward the
State House
in Raleigh
were also disqualified from receiving
federal benefits. In essence, the state’s
experience over the last six months is
a harbinger of what may be in store for
the rest of the country. “This doesn’t
have to be a thought experiment,
because you can just look at what’s
happened in North Carolina,” says
Aaron Chatterji, an economist at Duke
University’s Fuqua School of Business.
“The 1.3 million people losing their
benefits are going to be in the same
position as the 170,000 people here
who have lost theirs.”
At first glance, the effect appears to
be positive. North Carolina’s unem-
ployment rate dropped dramatically,
from 8.8 percent to 7.4 percent between
July and November. By comparison,
the national unemployment rate fell
by 0.6 percent over the same period.
A closer look, however, suggests that
North Carolina’s unemployment
numbers have fallen not because the
long-term jobless have found work but
because they’ve quit looking altogether.
As a result, the state no longer counts
them as unemployed.
“The decline in the unemployment
rate gives you a very limited view of
what’s going on in our labor market,”
says John Quinterno, founder of South
by North Strategies, an economic
research firm in Chapel Hill, N.C. “Year
over year, the number of employed
people in North Carolina ticked up by
6,082, while the unemployed fell by
101,901. That means the labor force con-
tracted by 95,009. So the improvement
has not necessarily been driven by more
people going to work and is actually
being driven to a large degree by people
leaving the labor force.” In October the
state’s labor force participation rate
hit a 37-year low. One benefit of unem-
ployment insurance is that “it has an
anchoring effect,” says Quinterno,
“because you have to be looking for
work” to qualify for benefits.
Though the job market hasn’t fully
recovered from the recession, many
Republicans believe extending jobless
benefits saps workers’ motivation to
seek employment or accept positions
they deem less than ideal. “I do support
unemployment benefits for the 26
weeks that they’re paid for,” Kentucky
Senator Rand Paul said on Fox News on
Dec. 8. “Beyond that, you do a disser-
vice to these workers. When you allow
people to be on unemployment insur-
ance for 99 weeks, you’re causing them
to become part of this perpetual unem-
ployed group.”
Economic research has shown that
some job seekers do become less selec-
tive about the jobs they’re willing to take
once their unemployment insurance
expires—the so-called “employment
effect.” There’s evidence this may be
occurring in North Carolina. A Dec. 20
note from JPMorgan Chase’s chief U.S.
economist, Michael Feroli, pointed out
that the state’s employment growth has
outpaced national growth since July.
Yet he also noted that labor force par-
ticipation has fallen much faster than
it has nationally. “In this case,” he con-
cluded, “it would appear both channels
are operative but the participation effect
may be more important.”
on the hook for student
loans 27
It’s hard to draw firm conclusions
from limited data. But if the expiration
of jobless benefits is prompting large
numbers of North Carolinians to give up
looking for work, it would augur poorly
for the state’s economy and the coun-
try’s, too. Working-age Americans who
can’t find gainful employment repre-
sent lost economic value and unmet
U.S. growth potential. While some may
settle for part-time work, others will try
to qualify for disability. Long stretches
of unemployment reduce the likelihood
of finding a job, as skills and connec-
tions atrophy.
As people cycle in and out of the
unemployment system this year, an
additional 3.6 million workers will
lose access to benefits if federal insur-
ance isn’t restored, according to a
December report by the White House
Council of Economic Advisers. That’s
a lot of misery and squandered eco-
nomic potential. It’s also why “the
Tar Heel test tube,” as Feroli has
dubbed it, is worth paying attention
25
to. Says Chatterji, “The statistics are so
dramatic.” �Joshua Green
The bottom line labor force participation in
north carolina hit a 37-year low in october
after the state cut jobless benefits in July.
Mortgages
It’s About to Get (a Little)
Harder to Buy a House
▶ Banks get a jump on new federal
mortgage restrictions
▶ Lenders must make a “reasonable,
good-faith” effort to vet buyers
Tough new mortgage rules from the
Consumer Financial Protection Bureau
kick in on Jan. 10. But bankers—who
fought other regulations imposed after
the financial meltdown—have volun-
tarily tightened up so much on lending
that most borrowers won’t notice much
of a difference, at least for now.
The rules, mandated by the Dodd-
Frank Wall Street Reform and Consumer
Protection Act, require lenders to make
“a reasonable, good-faith determina-
tion” that borrowers can repay their
 Politics/Policy
How Easy Is It to Get a Home Loan?
the mortgage credit Availability index
charts bank lending. A higher number
means more credit is available.
Lenders tightened up
slightly in November
as new mortgage rules
approached
9/12
dAtA: mortgAge BAnkers AssociAtion
loans. Banks gain protection against
foreclosure-related lawsuits if they
issue so-called qualified mortgages that
meet additional standards. Such loans
must be no longer than 30 years and
have fees and points of no more than
3 percent of the loan’s value. A bor-
rower’s total debt payments (including
credit cards and student loans) can’t
exceed 43 percent of pretax income.
26 Loans eligible for purchase by Fannie
Mae or Freddie Mac or for insurance
by federal agencies don’t have to meet
the debt-to-income standard until
2021, but that’s not a big loophole since
those organizations already have sepa-
rate standards.
Small-government advocacy groups,
including the Heritage Foundation,
argue that the Dodd-Frank rules
“unleash predatory regulators” and
unfairly restrict borrowers’ choices
without dealing with what they say are
the real causes of the housing bubble
and bust—loose monetary policy and
rules promoting homeownership for
low-income families. Yet banks seem
to have concluded that, at this stage,
the rules mostly block loans they
wouldn’t have made anyway. The best
evidence for that is the Mortgage Credit
Availability Index published by the
Mortgage Bankers Association. The
group says the index would have stood
at around 800 in 2007, if it had existed
then. It’s around 110 now, meaning it’s
much harder to get a mortgage than
before the crash.
With the rules approaching, banks
got a bit stricter. The association says
that in November lenders discon-
tinued or tightened “a significant
number of loan programs” for borrow-
ers with lower credit ratings and down
payments smaller than 5 percent. (Even
so, mortgage credit was easier to get
in November than in 2012 and the first
half of 2013.) Most likely to be affected
are borrowers who live in high-priced
115 areas or are stretching to buy a first
home. CoreLogic, a real estate data
110 company, calculates that 12.8 percent of
new mortgages in 2012 didn’t meet the
105 “qualified mortgage” standard.
If the rules work as intended, their
100 real effect will be invisible—preventing
a wave of easy credit in the next boom
95 economy so things don’t get out of hand
again. For most people, the bigger influ-
90 ences on housing affordability in 2014
11/13 will be jobs and interest rates. You can
still try to get a loan even if it’s not a
qualified mortgage, but it will be consid-
erably harder. Then again, if the CFPB
says that you can’t afford a house, it
might be right. �Peter Coy
The bottom line tighter lending rules will affect
a small number of borrowers—12.8 percent of
2012 mortgages would have failed the test.
Congress
No, Peace Isn’t Breaking
Out in Washington
▶ The sudden comity on Capitol Hill
is part of the war within the GOP
▶ “Frankly, I just think that they’ve
lost all credibility”
In December, Democrats and
Republicans in Congress capped off
a year of acrimony by agreeing, with
uncharacteristic civility, to a modest
$85 billion budget deal that eases the
automatic sequester cuts and avoids
another government shutdown. This
news was generally greeted as a sign
that the parties may finally be ready to
move beyond the hostility and dysfunc-
tion that has gripped Washington for
the last five years. The speed with which
the agreement came together was
surprising—and so was the Republicans’
disregard for the Tea Party opposition.
But don’t read too much into this unex-
pected outbreak of goodwill: There’s
something else going on that will play
a big role in determining whether this
fragile truce endures.
What paved the way for the budget
deal were outbursts House Speaker John
Boehner aimed at conservative groups,
including Heritage Action for America
and the Club for Growth, that have con-
sistently undermined his leadership and
set the Republican agenda. These groups
and their allies in Congress were the
ones who urged the party-damaging gov-
ernment shutdown in October and are
now encouraging Republican leaders to
threaten, once again, a national default
in the next round of budget talks unless
Democrats agree to further cuts.
Boehner is plainly fed up with the Tea
Party insurgents and their tactics. “They
are not fighting for conservative princi-
ples,” he told a meeting of Republicans
on Dec. 11, according to the New York
Times. “They are not fighting for conser-
vative policy. They are fighting to expand
their lists, raise more money, and grow
their organizations, and they are using
you to do it. It’s ridiculous.” The next day
he told reporters, “Frankly, I just think
that they’ve lost all credibility.”
Republican members, fearing these
outside groups and the voters they
claim to represent, have often aban-
doned their speaker as he tried and
failed to outmaneuver the party’s hard-
right activists. That led Boehner and
House Republicans to go along with
the ill-conceived effort to “defund”
Obamacare and the shutdown that
ensued. So Boehner’s public scold-
ing was a big deal, if only because he
was finally striking back. At least in the
short term, it had the desired effect:
Boehner allowed a vote on the budget
deal, and most Republicans joined with
Democrats in approving it.
At the same time, the Senate began
to function more normally for the first
time in years. After Democrats voted
to abolish the minority party’s right
to filibuster presidential nominees,
Republicans joined with Democrats,
sometimes in large numbers, to confirm
a list of would-be judges and administra-
tion officials—the same ones who’d been
Jim WAtson/AFP/getty imAges
held in limbo by Republican leaders
who said they were unacceptable.
Elizabeth Wolford was approved as a
federal district court judge on a 70-29
vote; Jeh Johnson became the secretary
of Homeland Security, 78-16. Once
 Nationwide, student
debt tops $1.2 trillion

the institutional pressure to filibuster

everything was removed, it turned out
that plenty of Republicans were willing
to support Obama’s nominees.
A Bill By karen Weise

It’s tempting to imbue recent events

with more significance than they
deserve. The rosy view is that Boehner
has morphed into Warren Beatty’s
Paying Off College Debt
S. 1873 Protect student Borrowers Act of 2013
truth-telling pol in Bulworth, discov-
ered unexpected reserves of strength,
and can now—having beaten back the
Tea Party—move on to bigger issues. The
Essentials
Boehner would like to overhaul immi-
gration laws and realizes he’ll need
to marginalize the right to have any
chance. Yet that’s a much riskier propo-
sition than it may appear to be, and the
budget deal is only a tentative first step.
1. As college tuition continues to rise, students are taking on
larger loans. More than 70 percent leave school in debt, and
one of every seven borrowers falls behind within three years
To pull it off, he’ll have to employ
the same strategy as the hard-line con- of graduating or dropping out. On Dec. 19, Senators Jack
servatives—but push in the opposite Average Reed (D-R.I.), Elizabeth Warren (D-Mass.), and Dick Durbin
direction. Although it’s often hard to amount: (D-Ill.) introduced the Protect Student Borrowers Act of 2013,
$29,400
discern, conservatives such as those at
which puts colleges on the hook when students can’t keep up
Heritage Action have a long-term plan to
shift the Republican Party to the right. with their loans.
They believe the party establishment,
Boehner included, has accepted the per-
manence of the welfare state and scared
Republican lawmakers out of acting
2. Depending on the share of their students that default, schools
could be fined from 5 percent to 20 percent of the amount
those students owe. Colleges can reduce their fines by de-
on their conservative beliefs by telling
them they’ll lose their seats if they do veloping “student loan management plans” that help borrow-
so. The conservatives argue that if those ers most at risk with one-on-one financial aid counseling and
members can be forced to cast tough other services. Fines collected by the Department of Educa-
votes to cut spending and reform enti-
tion would be used to fund programs that help struggling bor-
tlements and then win reelection, their
inhibition will vanish and the party will rowers and support Pell Grants.
be free to move further rightward.
Boehner and the GOP establishment
believe the party has already moved
so far right that Republicans will have
3. For-profit colleges could face the highest fines, because
on average their graduates default more often than those
at public or nonprofit schools. Colleges won’t be fined at
trouble winning national elections. The
speaker was able to exploit conserva- all if fewer than 15 percent default. Community colleges,
tives’ overreach in shutting down the gov- historically black institutions, and the rare schools where
ernment to push through a budget deal fewer than a quarter of students receive loans are exempt
that avoids another shutdown. But even
entirely. Even if this bill fails, the idea that colleges should bear
the modest spending increase enshrined
in that deal has put some incumbent some responsibility for student debt is gaining steam.
Republicans at risk—not from Democrats
Vital
Statistics
but from conservative challengers in GOP One of several student-
primaries. Boehner and his allies will loan bills that senators
Admissions offices are
have to force Republicans to cast a dif- Sponsor are teeing up ahead of
barred from rejecting
Jack reed (d-r.i.) the 2014 elections
ferent kind of tough vote—the kind that Co-sponsors
applicants they
upsets conservatives—and then hope elizabeth Warren (d-mass.)
perceive to be at risk
of defaulting
that these members survive their next dick durbin (d-ill.)
primary. Only then can he succeed in
Title Section 3 Section 4 Section 5
pushing his party back toward the center. p. 1 institutional rebates to the contracts and cooperative Financial
�Joshua Green department of education Agreements responsibility
Section 2 for defaulted loans p. 10 p. 11
The bottom line After years of yielding to pp. 2-10
Purpose, pp. 1-2
right-wing activists, Boehner is openly working
to undermine them.

Edited by Weston Kosova

Businessweek.com/politics-and-policy
1 2 3 4 5 6 7 8 9 10 11
 January 6 — January 12, 2014
28
The Biggest, Cheapest
Network of All
▶Upstarts
▶ like Republic Wireless pitch phones driven by Wi-Fi
▶“Wi-Fi
▶ is eating the world”
David Morken holds a Moto X smart-
phone out for inspection. “This,” he
says, “is a Wi-Fi device.” Morken runs
Republic Wireless, a national carrier
based in Raleigh, N.C., that offers
unlimited calls and texts for $5 per
month, $40 if you want unlimited data.
Republic keeps its prices low by avoid-
ing something most carriers see as essen-
tial: It hasn’t built a cellular network.
For customers on the road, the company
rents network capacity from Sprint. All
other Republic calls, texts, and data use
Wi-Fi, which Morken says handles about
50 percent of its calls and texts and
90 percent of its data. “Wi-Fi is eating
the world,” he says. “Why ignore the
biggest network in the world?”
Three-year-old Republic, whose
service came out of beta testing in
November, declined to release sub-
scriber numbers. A competitor offering
similar prices, two-year-old Cambridge
(Mass.)-based Scratch Wireless,
also rents capacity from Sprint. It’s
growing by invitation only. Both carri-
ers require the upfront purchase of an
Android smartphone modified to use
a customer’s home or business Wi-Fi
network for a phone call. The new-
comers provide a radical response to
a mundane fact confronting all mobile
phone carriers: After a decade in
which the big four U.S. wireless car-
riers spent tens of billions of dollars
to upgrade their networks, arguably
the fastest and largest network is the
one we’ve all been building together,
router by router.
A wireless network requires three
things. A transmitter, or “cell,” sends a
signal to a handheld device. This signal
travels over an available slice of the
electromagnetic spectrum. A hard-wired
photo illustration by alis atwell; source: alamy(7) Getty imaGes(5); illustration by 731
fiber-optic cable (“backhaul”) gets the
signal back to the Internet. Traditionally,
mobile phone companies put their
cells atop towers on dedicated land and
bought exclusive rights to a piece of the
spectrum, at great expense. The Wi-Fi
network was built on the cheap. The
cell is the consumer-grade router blink-
ing in the corner of your living room.
You don’t pay for the spectrum, because
Wi-Fi doesn’t require a license from the
Federal Communications Commission,
and you’re already paying for the back-
haul with your home Internet service.
In 2012, according to Cisco Systems,
one-third of all data traffic from smart-
phones passed through a Wi-Fi router.
Cisco expects that to rise to almost half
by 2017. The trend is more pronounced

with tablets, as more than two-thirds
already connect to the Internet exclu-
sively through Wi-Fi. That’s a problem
for big U.S. carriers, who have spent a
fortune on 4G networks to sell faster,
pricier data plans as their revenue
from voice plans tails off. Cisco’s report
showed that traffic over cell networks
didn’t grow as much as expected in 2012,
partly because mobile-device users took
a couple of minutes apiece to adjust their
settings to automatically jump to their
home and office Wi-Fi networks when
possible, avoiding the fees for exceeding
carriers’ new limits on data.
The rule of thumb is that a smart-
phone uses four gigabytes of data a
month, says Torbjörn Wård, chief exec-
utive officer of Stockholm-based net-
work-management company Aptilo
Networks. Out of that, he says, one giga-
byte travels over a cellular network, and
three gigabytes travel through Wi-Fi,
usually at home. “The question for
the carrier is, ‘How can I monetize the
three gigs?’ ” he says. “And for the con-
sumer, ‘How can I minimize the cost of
the one gig?’ ”
A country’s dominant carrier is typ-
ically too focused on its 4G cellular
network to think much about Wi-Fi.
When asked about Verizon Wireless’s
interest in Wi-Fi networking, spokes-
woman Debra Lewis said, “We are
focused on our 4G LTE.” Wård says the
carriers working to incorporate Wi-Fi
tend to be the third- or fourth-largest
in a market, those with poor spectrum
holdings. The exception is AT&T,
No. 2 in the U.S., after Verizon. “AT&T,
I have to admit, actually has been pro
Wi-Fi,” says Wård.
The Changing Economics
Of Wireless Carriers
Fees for voice
Fees for data
2003
Data compileD by bloomberG
In the U.S., AT&T is the only major
carrier offering what the industry calls
“seamless offloading.” AT&T has agree-
ments with about 32,000 hotspots at
businesses and other public places.
A customer walks into range, the
hotspot recognizes his smartphone,
and it immediately logs him on. Once
on Wi-Fi, the customer no longer pays
for data. Customers “are saving some
money, frankly,” says Mark Siegel,
an AT&T spokesman. “And also it’s a
benefit because it offloads some traffic
from our network.” China Mobile
handles 72 percent of its traffic this way,
bridging gaps in high-density cover-
age areas where cellular towers can’t
handle the volume. TIM Participações
in Brazil and O2 in the U.K. do this, too.
With its hotspots, AT&T has recog-
nized that in some places Wi-Fi isn’t just
cheaper for the smartphone holder,
it’s cheaper for the carrier. An efficient
way to improve a wireless network is to
densely pack the cells that are sending
and receiving data. For a crowded area
such as a mall, the carrier is better off
working with the property owner to
build a bunch of shorter-range Wi-Fi cells
than to site and build a massive tower
somewhere nearby. For big carriers, this
could mean billions in savings over time.
AT&T has installed 4G antennas at Sun
Life Stadium, where the Miami Dolphins
play, to strengthen its cellular signal for
voice calls. Each is paired with a Wi-Fi
router to give AT&T customers better
data access, too. AT&T’s Siegel declined
to discuss compensation for hotspots
with property owners. Wård says Aptilo
is working on four similar stadium proj-
ects. Cisco estimates that offloading will
grow to 13 percent of U.S. wireless traffic
by 2017, from 2 percent in 2012.
Claus Hetting, a former Nokia exec-
utive who advises wireless carriers on
$140b network architecture, says that else-
where in the world the shift to Wi-Fi has
prompted wired Internet service provid-
ers such as BT in the U.K., France’s Free
Mobile, and Japan’s KDDI to realize they
$70b
own an extra wireless network because
they power the Wi-Fi of every customer.
In the U.S., says Hetting, cable opera-
tors such as Time Warner and Comcast
could enter the mobile market if they
cared to. “These guys have every oppor-
$0 tunity to be disruptive,” he says. “Their
2012 potential Wi-Fi footprint is enormous.”
A big year for the Innovation: Fill ’er up
Chromebook 30 without getting out of
the car 31
Understanding who’s
watching streaming
video 30
Looking over his shoulder, Morken
at tiny Republic Wireless says he isn’t
concerned. He doesn’t need a lot
of hotspots. The Wi-Fi his custom-
ers already pay for at home and at
work will do, and he doesn’t think the
larger carriers will go as far as he has to
offer alternatives to the conventional
networks. “Carriers,” he says, “are not
born cannibals.” �Brendan Greeley
The bottom line costly conventional cell
networks can be largely replicated by existing
wi-Fi infrastructure.
File Sharing
Your Own
Private Cloud
29
▶ Seagate-backed startup Lyve Minds
brings networked storage home
▶ “The cloud is just time-share,
30 years later”
A lot of people love the efficiency of
cloud services like Dropbox, Google
Drive, and Apple’s iCloud—until
they max out on free storage space.
Then some start opening multiple
accounts, each with its own password
to remember and files that can’t be
mixed and matched. Trying to connect
to the cloud after switching from Apple
to Android products, or vice versa, can
arouse nostalgia for messy piles of paper.
Lyve Minds, a startup funded by storage
company Seagate Technology, aims to
erase the frustration with a free online
app that can turn a family’s devices into
a personal cloud capable of beaming
data almost instantly from one device to
another. “The consumer doesn’t want
to manage all this stuff,” says Lyve Minds
Chief Executive Officer Tim Bucher,
a former Apple engineering executive.
Lyve plans to unveil its app and a
 Technology
$299 2-terabyte companion hard drive
on Jan. 6 at the International Consumer
Electronics Show in Las Vegas and start
selling it at stores in April. Until mid-
December, 90-employee Lyve had
been operating in secret, using the
code name Black Pearl Systems while
it hired engineers from Apple, Google,
Netflix, and Sony. Seagate CEO Stephen
Luczo says his company plans to incor-
porate Lyve’s app in its consumer
storage products. “The cloud is just time-
share, 30 years later,” says Luczo. “With
Lyve they’re always synced, always able
to get a view of all their data, anywhere.”
As shrinking PC sales sap demand
for conventional external hard drives,
Seagate, like larger rival Western
Digital, has aggressively expanded
its cloud-storage business. Seagate
shares have risen 69 percent this
year. Luczo says the company started
funding Lyve, headquartered in a non-
descript red brick building a block east
of Seagate’s Cupertino (Calif.) campus,
in October 2012. He wouldn’t say how
much Seagate has invested, and Bucher
declined to say whether the startup has
received other funding. Seagate, with
30 58,000 employees, reported $3.9 billion
in profit on $14.3 billion in revenue for
the fiscal year ended in September. Its
consumer storage business generated
$1.6 billion in revenue.
By 2017 the average consumer will
own at least three Web-connected
mobile devices, and data traffic will be
more than 13 times higher than it was
in 2012, according to Cisco Systems pro-
jections. Liz Conner, a senior analyst
at market researcher IDC, says most
respondents in her company’s surveys
own an external hard drive that requires
a direct connection to a computer or
mobile device, but the kind of storage
Lyve is prepping “still has a way to go.”
Still, she says, “IDC does expect it to con-
tinue to gain traction.”
Western Digital CEO Stephen Milligan
says his company has expanded into
the cloud because it can’t afford to rely
on external drives. “If we were depen-
dent solely on the PC business, we’d
really be hammered,” he says. This fall,
Western Digital began selling a storage
device called MyCloud that’s similar
to Lyve’s hard drive. “I could be sitting
here accessing something on MyCloud
at home through this,” he says, point-
ing at his smartphone, “or a PC at work
or through a tablet.” It doesn’t quite
have the networked-storage capabilities
of Lyve’s app, though; MyCloud users
Hardware Year of the Chromebook
laptops running Google’s chrome os jumped to 10 percent of total
u.s. sales of pcs and tablets in the first 11 months of last year, from
almost nothing the year before. ——Shawn Hasto
40%
overall sales volume
of pcs and tablets rose
30%
by 25.4 percent,
to 14.4 million
20%
10%
0%
Desktops windows apple
laptops laptops
keep all their data in one place, meaning
that if the central hub is corrupted, the
family’s network is toast.
In a conference room on a recent
afternoon, Bucher tested Lyve’s app,
shooting photos with an iPhone that
landed seconds later on the screens
of Android tablets, TVs, cameras, and
Lyve’s storage device. For now, the
company is only charging for the home
server, but Bucher says future revenue
could come from licensing the tech-
nology to other consumer-electronics
makers. Seagate’s Luczo says the Lyve
app will help enhance Seagate-branded
drives that he hopes to sell to device
makers. “People pay for great user
experiences,” he says. �Cliff Edwards
The bottom line lyve minds, funded by
seagate, is pitching a free cloud-making app
and $299 storage device.
Software
There’s Gold in Mining
Streaming Video
▶ Ooyala sets up video services and
provides data analytics
▶ “They need to know how the video
is being consumed”
Among Christopher Widauer’s duties
as technical director of the Vienna
State Opera is to make sure specta-
tors in his 2,100 seats can clearly see
the stage as well as translations of the
libretto. He had to consider a much
bigger audience when his bosses said
they wanted to earn additional revenue
2012
2013
ipads accounted
for about 59 percent
of tablet sales
chromebooks ipads android windows
tablets tablets
Graphic by bloomberG businessweek; Data: npD Group
with Web and mobile HD simulcasts—
without the delays and hiccups that
often interrupt online videos. “We
have customers who are extremely
demanding,” Widauer says. “They
don’t want buffering. They want to
watch an opera as if they’re sitting in
the room.”
The opera house is one of more than
600 clients that have relied on soft-
ware maker Ooyala to help them set
up and manage streaming video ser-
vices. As broadcasters and other
companies seek more revenue from
programming on mobile devices as
well as PCs and smart TVs, they often
struggle to adapt their software to
run smoothly on all the devices, and
to target ads to users based on which
device they have. Mountain View
(Calif.)-based Ooyala (pronounced
ooh-YAH-lah, from the Telugu word
for cradle) is one of a handful of com-
panies that provide such back-end
services, selling subscription-based
software that helps automate online
video programming and ad delivery.
Ooyala clients include ESPN, Comedy
Central, Univision, Fox Sports, the
Washington Post, American Express,
and Dell. (Bloomberg LP, the parent of
Bloomberg Businessweek, has also used
its products.)
Ooyala software lets clients add
interactivity to ads, inviting viewers
to pick which ad they prefer to
see. Unlike its rivals, such as video
cloud company Brightcove and
illustration by chris philpot
Comcast subsidiary ThePlatform,
Ooyala provides real-time analysis of
viewing habits so that every screen is
customized based on existing personal
data, says Chief Executive Officer Jay
Fulcher. “We’ve been collecting data
 Technology
“There are plenty
for five years,” he says. of people who
“Ooyala has better analytics around
those video decisions, both in terms
of monetization and advertising, than
Innovation don’t like filling
up their cars.”
�Brad Baker,
executive vice
Brightcove,” says ABI Research analyst

Robotic Fuel Pump

president, Husky
Sam Rosen. Brightcove didn’t respond
to a request for comment; the 10-year-
old company notched an estimated
$109 million in revenue for 2013, data
Form and function Innovators
compiled by Bloomberg show. Ooyala
an automated pump that uses visual sensors to Fueling-equipment makers Fuelmatics, based
has received roughly $120 million in locate a car’s fuel door and can add gas without in sweden, and husky, based in pacific, mo.
venture capital since its 2007 founding, the driver leaving the vehicle.
including a recent $43 million round led
by Australian telecom Telstra, and won’t 1.
disclose revenue. Market researcher
IDC estimates that the $200 million Service customers drive up
subscription-software industry will be to a gas station pump, select Speed a driver
the fuel they want, and pay at inserts a credit card
a $1 billion market by 2016. their windows with their credit into the terminal, and
Founders Belsasar and Bismarck cards. the hose slides along a fueling begins within
Lepe and Sean Knapp stumbled into track to the proper position. 40 seconds.
video streaming and analytics. After
leaving Google before its initial public
offering, they started VideoMind to
develop interactive ads that compa-
nies could build directly into program-
ming. The idea was to allow viewers
to click on and buy a Dolce & Gabbana
bag while streaming an episode of Sex Hardware users
must replace their
and the City. Knapp says they gave up fuel tank cap with a
after concluding that “after 40 years $9 capless fuel filler. 31
of research into this area, we weren’t
going to solve it in six months.” Still,
the startup helped lay the ground-
work for the company’s data analysis.
Early on, they pitched their software
as a cheap alternative to client-built
systems that could cost as much as
$100 million. The Ooyala suite costs
about one-fifth that price per year, the
company says—less for packages that
lack the analytics.
For Ooyala and its rivals, the chal-
lenge is to help broadcasters and other
companies squeeze more money out 2.

of their programming online by using Teamwork the fuel

data to better target ads to consumers, door sensors came
says IDC researcher Melissa Webster. from Fuelmatics.
husky developed
“They need to know how the video is the nozzle and
being consumed—are people engaged automatic shutoff
or dropping out, and are they watching feature.

the ads we’re showing,” Webster says.

Ooyala declined to say when it will turn
a profit, but Fulcher says the Telstra
funding “allows us to keep the pedal
down.” Despite the field’s growth, he
says, “The gun has gone off in this race.”
�Cliff Edwards
The bottom line ooyala is using data analysis
to try to carve off a bigger piece of the growing
market for streaming video services.
Edited by Jeff Muskus
Businessweek.com/technology
Fueling the robot opens the
car’s fuel door with a suction-
cup arm, then inserts the fuel
nozzle, which shuts off once
the tank is full.
Next Steps
Fuelmatics and husky say they expect the pumps to receive safety certification
by yearend from independent safety researcher ul. the companies plan to
charge $50,000 per pump, not including installation. although he wouldn’t name
any potential customers, brad baker, executive vice president for husky, says the
system increases delivery speed enough that “some of the high-volume fuelers,
the kind of places that have lines, are really interested.” ——Caroline Winter
 January 6 — January 12, 2014

It’s 3:40 in the afternoon in London,

15:33:02
and computers blink red and green as
traders buy and sell billions of dollars
of currency. The pace picks up with the
approach of the “fix”—the one-minute
period beginning 30 seconds before

TRDR1: 104.99¥
4 p.m. Trades made during the fix help
determine the WM/Reuters currency
exchange rates used as benchmarks by
multinational corporations, money man-
agers, and investors around the world to

TRDR2: 105.00¥
value contracts and assets.
As they check prices and complete
deals, some traders participate in as
many as 50 online chat rooms. Messages
from salespeople and clients appear

TRDR2: ;)
on their monitors, get pushed up by
new ones, and vanish from view. Now
regulators from Bern, Switzerland, to
Washington are examining evidence
that a small group of senior traders at

TRDR1: $)
big banks had something else on their
screens: details of each other’s client
orders. Sharing that information may
have helped dealers at JPMorgan
32 Chase, Citigroup, UBS, Barclays, and
others manipulate prices to maximize
their profits, say five people with knowl-
edge of the probes who asked not to be
identified because the matter is pending.
At the center of the inquiries are

Collusion
instant-message groups with names such
as The Cartel; The Bandits’ Club; One
Team, One Dream; and The Mafia, in
which dealers exchanged information on
client orders and agreed how to trade at

In the
the fix, according to the people familiar
with the investigations.
Unlike sales of stocks and bonds,
which are regulated by government
agencies, spot foreign exchange trades—

Chat Rooms?
buying and selling for immediate deliv-
ery, not a future date—aren’t considered
investment products and aren’t subject
to specific rules. Traders are bound only
by market abuse laws prohibiting trading

_
on inside information and sharing con-
fidential data about client orders with
third parties. “This is a market where
there is no law, and people have turned
a blind eye,” says Ted Kaufman, a former
Democratic senator from Delaware, who
sponsored legislation in 2010 to shrink
the largest U.S. banks.
A lack of regulation has left the foreign
▶Investigators
▶ look for signs of cheating in the currency market exchange market vulnerable to abuse,
according to Rosa Abrantes-Metz, a pro-
▶“There
▶ is no law, and people have turned a blind eye” fessor at New York University’s Stern
School of Business. “Since the gains from

“Since the gains
from moving the
benchmark are
possibly very large,
it is very tempting
to engage in such
a behavior.”
�Rosa Abrantes-
moving the benchmark are Metz the U.S. Department of Justice
possibly very large, it is very are investigating currency
tempting to engage in such a trading.
behavior,” says Abrantes-Metz, whose At least 12 foreign exchange traders
2008 paper Libor Manipulation about the have been suspended or put on leave
London interbank offered rate helped by banks as a result of internal probes,
spark a global probe of how that bench- and 11 firms have said they were con-
mark is set. “Even a little bit of difference tacted by authorities. Government-
in price can add up to big profits.” controlled Royal Bank of Scotland
London is the world’s biggest hub for turned over transcripts of instant mes-
currency trading, accounting for about sages. Deutsche Bank says it’s coop-
41 percent of all transactions, com- erating with regulators, and UBS says
pared with 19 percent for New York and it’s taking unspecified disciplinary mea-
6 percent for Singapore, according to sures against employees. UBS, RBS,
a Bank for International Settlements Citigroup, Deutsche Bank, JPMorgan,
survey. About $5.3 trillion changes Goldman Sachs, and Lloyds Banking
hands globally every day, BIS data show, Group are banning traders from partic-
as companies convert revenue into ipating in chat rooms with employees
dollars, euros, or yen, and managers of other banks, say people at the banks.
overseeing pensions and savings buy None of the traders or their employers
and sell stock around the world. have been accused of wrongdoing.
Spot currency trading is conducted One focus of the investigation is the
in a small and close-knit community. relationship of three senior dealers who
Many of the more than a dozen traders participated in The Cartel—JPMorgan’s
and brokers interviewed for this story Richard Usher, Citigroup’s Rohan
live near each other in villages dotting Ramchandani, and Matt Gardiner, who
the Essex countryside, a short train ride worked at Barclays and then UBS—
from London’s financial district. They according to the people with knowledge
stay in touch over dinner, on weekend of the probe. Some of the traders inter-
excursions, or during rounds of golf. viewed for this story say they eagerly
“This is a market that is far more ame- sought entry to The Cartel’s chat room
nable to collusive practices than it is because of the influence it exerted.
to competitive practices,” says Andre Usher, Ramchandani, and Gardiner,
Spicer, a professor at the Cass Business along with at least two other dealers over
School in London. the years, would discuss their custom-
The data used to determine WM/ ers’ trades and agree on exactly when
Reuters rates for 160 currencies is col- they planned to execute them to maxi-
lected and distributed by World Markets, mize their chances of influencing the fix,
a unit of State Street, and Thomson two of the people say.
Reuters. Bloomberg LP, the parent of Usher was the moderator of The
Bloomberg Businessweek, competes with Cartel, according to people with knowl-
Thomson Reuters in providing news and edge of the matter, who say the chat
information, as well as currency trading room died when he quit RBS in 2010. He
systems and pricing data. Bloomberg LP revived the group with the same par-
also distributes the WM/Reuters rates on ticipants when he joined JPMorgan the
Bloomberg terminals. same year as chief currency dealer in
A story about possible exchange rate London, they say. Ramchandani is head
manipulation by Bloomberg News in of European spot trading at Citigroup.
June triggered internal probes as banks Gardiner joined Standard Chartered
began reviewing millions of instant in London as assistant chief currency
messages, e-mails, dealer. He previously worked at UBS
What’s in a and transcripts of in Zurich and was co-chief dealer with
Name phone calls. The U.K.’s Chris Ashton at Barclays in London.
Financial Conduct Usher, Ramchandani, and Gardiner
Authority (FCA), were put on leave by their employ-
The Cartel the European ers after the FCA opened its inquiry
Union, the Swiss in October, according to people with
The Bandits’ Club Competition knowledge of the matter. Ashton,
One Team, Commission, and now global head of spot trading at
One Dream
The Mafia
Housing: Once again it’s
cheaper to rent than to
buy 35
Baby boomers who
have it worse than their Bid/Ask: Blackstone
parents 35 steps into Crocs 36
Barclays, has been suspended, along
with five other spot traders at the bank
in London and New York. Ashton and
Ramchandani declined to comment.
Gardiner didn’t return messages left
on his mobile phone. Usher couldn’t
be located, and JPMorgan declined to
provide contact details for him.
Thomson Reuters says in an e-mail
that it “would lend its expertise to
support any authorities’ investiga-
tion into alleged disruptive behavior
on benchmarks.” State Street says in an
e-mail that “the WM/Reuters benchmark
service is committed to reliability and
robust operational standards. WM con-
tinually reviews recommended method-
ology and policies in order to ensure that
industry best practices are considered.”
The currency investigations are
taking place as authorities grapple with
a widening list of scandals involving
the manipulation by banks of financial
benchmark rates, including Libor and
ISDAfix, used to determine the value
of interest rate derivatives. “Some of 33
these problems developed over many
years without anybody speaking up,”
says Andrew Tyrie, chairman of Britain’s
Commission on Banking Standards and
Parliament’s Treasury Select Committee.
“This is remarkable. It suggests some-
thing very wrong with the culture at
these institutions.” �Liam Vaughan,
Gavin Finch, and Bob Ivry
The bottom line Authorities are investigating
whether traders used chat rooms to rig rates in
the $5.3 trillion foreign exchange market.
Emerging Markets
A Thaw With the West
Boosts Iranian Stocks
▶ Prices and volume rise as investors
bet on an end to sanctions
▶ “Perception changed completely
after the election”
On a recent morning in December, a
23-year-old college graduate named
Samira stands with hundreds of others
inside the stock exchange in downtown
Tehran, considering whether to invest
$600. As stock prices flash on screens

Markets/Finance
Tehran
Stock
Exchange
Ayatollah Ali Khamenei
34
above the trading floor, she says
she’s excited to buy her first shares. “I
like the feel of this—it has a buzz,” says
Samira, who declined to give her last
name for fear of reprisals for talking to
a reporter from a foreign news organi-
zation. “Anyone you speak to these days
will tell you the stock exchange is the
best place to invest right now.”
The June election of President
Hassan Rouhani to replace Mahmoud
Ahmadinejad has helped set off a stock
market boom in Iran. The Tehran Stock
Exchange’s benchmark index soared
131 percent this year through Dec. 30
to a record, beating returns posted by
93 major global equity gauges. Most
of the rally followed the election of
65-year-old Rouhani, who pledged
to reestablish Iran’s ties to the world
economy after decades of crippling
sanctions. “We are seeing a huge flow
of fresh money from individual inves-
tors to the stock market,” says Ramin
Rabii, managing director of Turquoise
Total market value of
the 314 companies on
the exchange is
$174 billion
Ayatollah Ruhollah Khomeini
Partners, an investment firm in While daily trading on the Tehran
Tehran. “Perception changed com- Stock Exchange, founded 46 years ago,
pletely after the election and as polit- equals only about 22 seconds worth
ical risk, the risk of war, and risk of of stock transactions conducted in the
more sanctions decreased.” U.S., the volume is growing. On average
In return for promising to curtail in 2013 through November, $203 million
nuclear activities, Rouhani scored of shares changed hands each day, up
$7 billion in from $83 million two years ago and
relief from sanc- $20 million in 2006, according to data
frOM lefT: KAveh KAzeMin/The new YOrK TiMes/reDux; Kelvin MA/BlOOMBerg
131 %x
tions, includ-
ing the release of
frozen assets, in
from the exchange. Iranians are pulling
out of assets that had become the con-
ventional stores of wealth in the Islamist
November. The republic—gold, dollars, and real estate—
deal triggered spec- to free up cash to invest in the stock
Tehran Stock
ulation that OPEC’s market, Rabii says.
Exchange index rise sixth-biggest crude This year’s rally follows a 55 percent
this year producer will advance in 2012 and 24 percent gain
reverse a plunge the previous year. The market value
in output that has of all companies on the exchange has
sunk the economy into recession. Oil climbed almost two-thirds in dollar
Minister Bijan Namdar Zanganeh told terms since 2011, to $174 billion. The
reporters in December that he’s seeking price-to-earnings ratio of stocks
to lure international companies includ- included in the benchmark index rose
ing ExxonMobil and Royal Dutch 34 percent this year, to 7.8, data com-
Shell once sanctions are lifted. piled by the exchange show. That

remains below the multiple of 11.8 for
the MSCI Emerging Market Index. The
biggest gainers among the 314 stocks
on the exchange include banks and oil
companies. Bank Saderat Iran, subject
to European Union sanctions since
2010, climbed as much as 142 percent
this year from its 52-week low, and
Parsian Oil & Gas Development has
surged 87 percent from its trough. Rabii
says the stock market has risen “too
much, too quickly” and that the gains
are “mostly based on sentiment rather
than fundamentals.”
Stocks still look good to Farshid, a
27-year-old who works in his father’s
construction company and also
declined to give his surname. He says
he’s enthusiastic about Rouhani’s
push to have the sanctions lifted.
Milling about the exchange on a recent
morning to check on his stocks, he says
he’s put 200 million rials ($8,110) into
the market since the election and is
eager to invest more. “I don’t have any
more cash, otherwise I would,” he says.
“I’m hopeful.” �Ladane Nasseri and
Zahra Hankir
The bottom line Average daily stock trading
climbed to $203 million in iran this year as
investors bet on better relations with the west.
Retirement
The Baby Boomer
In the Basement
▶ Lee Manchester scrimps while her
father travels the world
▶ “They’re facing a much more
challenging old age”
Eighty-seven-year-old Lew Manchester
has just returned from a three-week trip
touring Buddhist temples in Laos and
cruising the Mekong Delta in Vietnam.
His 61-year-old daughter Lee lives year-
round in the basement of a friend’s
cottage on Cape Cod. Both worked all
their lives, both saved what they could.
Yet Lew, a son of the Great Depression
and former company man, and Lee, a
baby boomer who has pursued careers
as an entrepreneur and a midlevel
manager, ended up in different eco-
nomic strata. “Timing is everything,”
says Lee, who now works at an inn, “and
my dad’s timing with jobs, real estate,
and retirement benefits was better.”
Housing The Buy/Rent Balance Shifts
for the first time since 2010, it was cheaper to rent a place to live in than
to buy one, according to nationwide third-quarter figures compiled by
Deutsche Bank. �Dave Wilson
Average rent as a percentage
of average after-tax mortgage
payments
120.7 %
Record high for the ratio in
the first quarter of 2012
Q1 2009 Q1 2011
While plenty of baby boomers, born
from 1946 to 1964, have become afflu-
ent, and many elderly across the U.S.
face financial hardship, the wealth dis-
parity of this father and daughter is
emblematic of a broad shift occur-
ring around the country. Many graying
boomers are less secure financially
and have a lower standard of living
than their aged parents. The median
net worth for U.S. households headed
by people aged 55 to 64 was almost
8 percent lower, at $143,964, than those
75 and older in 2011, according to U.S.
Census Bureau data. Boomers lost more
than other groups in the stock market
and housing bust of 2008, and in the
aftermath many also lost their jobs at a
critical point in their productive years.
That’s left many ill-prepared
to provide for themselves as they
approach old age, even as they are likely
to live longer than their parents. For
the first time in generations, the next
wave of retirees will probably be worse
off than the current elderly. More than
half of those aged 50
“Timing is
to 64 think their stan- everything, and my
dard of living in retire- dad’s timing with
ment will be somewhat jobs, real estate,
or much worse than and retirement
their parents’, accord- benefits was
ing to a 2011 survey better.”
�Lee Manchester
by the AARP Public
Policy Institute. “Baby
boomers are the first
generation without
the safety net of pensions and
other benefits their parents have,”
says Alicia Munnell, director of
Markets/Finance
120%
100%
98.4
Rising prices and higher
%
mortgage rates make
ownership more costly
than renting 80%
Q1 2013
DATA: DeuTsChe BAnK, nATiOnAl AssOCiATiOn Of reAlTOrs, reis
the Center for Retirement Research at
Boston College. “They’re facing a much
more challenging old age.”
Lee Manchester knows her later life
will be more austere than her father’s.
She made a choice early on to become
an entrepreneur rather than work for a 35
large company with benefits, as he did.
She started a commercial construction
company in 1986 with $150,000 from a
divorce settlement. She hired a dozen
employees and succeeded in landing
contracts supplying steel parts for
buildings until the construction indus-
try slumped in 1989. Bouncing back, she
became a sales manager in the airport
parking business. Still, she didn’t start
saving for retirement until her late 40s,
when her employer established a 401(k)
account. Today, her retirement savings
of $120,000 is right at the median 401(k)
balance for households headed by baby
boomers, according to 2011 data from
the Center for Retirement Research.
That will provide just $4,800 a year to
boomers when they turn 65, assuming
they take out 4 percent annually, the
top amount many financial planners
say should be withdrawn to assure
retirees don’t run out of money during
their lifetimes.
Even if boomers like Lee saved
more, they would have been hurt by a
shift to 401(k) accounts from pensions
in the 1980s. Thirty-seven percent
of the elderly in the U.S. collect pen-
sions, which provide some guaranteed
income until they die. Fewer than
10 percent of boomers do, and that
number is quickly shrinking.
 Markets/Finance

Lee worked in the airport parking

Bid/Ask By Karen weise

business until 2009 when she was laid
off from Parking Co. of America a few
months before the company filed for
bankruptcy. Although she found a
new job in 2010 paying $52,000 a year
as manager of the customer service
department at Holo-Krome, a manufac-
turer of metal fasteners, it lasted only
two years. She was laid off just as her
second marriage ended in 2012.
No longer able to afford her
four-bedroom house in West Hartford,
Conn., which she purchased for
$225,000 at the height of the housing
bubble, Lee rents it out for $1,600
a month to cover her mortgage and
taxes and hopes to hold it until prices
rise so she can recoup her investment.
She now lives in the basement of her
friend Brita Tate’s house in Wellfleet,
Mass., paying $400 a month in rent.
She found a job managing the spa
at the Crowne Pointe Historic Inn in
nearby Provincetown, where she earns
$13.50 an hour working as a combina-

$1.4b
tion hostess, receptionist, fixer of gym
equipment, and laundress.
Lew Manchester hasn’t worried about
36 money since retiring 23 years ago at 64.
Textron buys Beechcraft. Textron’s Cessna unit has struggled in Every month, in addition to his $1,750
recent years because it doesn’t build the large, long-haul planes Social Security payment, he gets two
favored by corporate buyers. Beechcraft, which came out of bank- pension checks: $1,000 from Marsh &
McLennan, the last insurance company
ruptcy in February 2013, will expand the acquirer’s reach in the
he worked for, and $783 from the mil-
less-competitive market for planes powered by propellers. itary for serving in the Army Reserve
for 20 years. He also has more than
$800,000 in savings, close to $400,000
of which he cleared from the sale of his
$1.6b
Petróleo Brasileiro offloads an offshore oil field. royal
Dutch shell and india’s Oil & natural gas now own Hartford, Conn., home in 2005, when
100 percent of the Parque das Conchas project. he and his then-ailing wife moved to an
assisted-living residence in Northern

$1.4b
Berkshire Hathaway absorbs a Phillips 66 unit. warren
California. During the next five years,
Buffett will exchange about 19 million Phillips shares to
take over its pipeline services business. while caring for his wife, who died in
2010, he was able to save more. A long-
term care policy he’d purchased years
$581m
Vanguard Natural Resources buys oil and gas assets.
The land in southwestern wyoming boosts vanguard’s earlier for $500 a month over 10 years
reserves by 80 percent. The seller wasn’t identified. paid out more than $275,000, covering
most of their living expenses, and it’s still

$338m
Shenzhen Hepalink Pharmaceutical acquires a supplier
available for him to use if he needs it.
of drug ingredients. The Chinese maker of the blood
thinner heparin gains u.s.-based scientific Protein labs. Lee has borrowed money from her
father in the past and repaid it. She
avoids dwelling on her financial difficul-
$257m
Carlsberg purchases a Chinese beermaker. The Danish
BiD/AsK illusTrATiOns BY OsCAr BOlTOn green

company was already the largest shareholder in ties during her weekly calls to him. “I
Chongqing Beer group Assets Management. know he’ll help me if I fall off the ledge,”
she says, “but he taught me to be self-

$221m
Godiva owner acquires a U.S. candy company. Turkish
sufficient.” �Carol Hymowitz
food company Yildiz holdings wants Turtles chocolate
maker DeMet for its u.s. distribution network. The bottom line with fewer pensions and an
average $120,000 in 401(k)s, many boomers

$200m
Blackstone Group invests in Crocs. The shoemaker will will have a leaner old age than their parents.
use the private equity money to increase share
repurchases to $350 million.
Edited by Eric Gelman
Businessweek.com/markets-and-finance
38
39
 he new road and railway to Krasnaya

T
Polyana, the mountain resort that will
host the ski and snowboard events of
the Sochi 2014 Winter Olympics, start in
Adler, a beachfront town that has become
a boisterous tangle of highway inter-
changes and construction sites. A newly
opened, glass-fronted train station—the
largest in Russia—sits like a sparkling
prism between the green and brown
peaks of the Caucasus Mountains and the
lapping waves of the Black Sea.
The state agency that oversaw the infrastructure project
is Russian Railways, or RZhD. The agency’s head is Vladimir
Yakunin, a close associate of Vladimir Putin. It oversees
52,000 miles of rail track, the third-largest network in the
world, and employs nearly a million people. The 31-mile Adler-
to-Krasnaya Polyana project is among its most ambitious, rem-
iniscent in its man-against-nature quality of the Baikal-Amur
Mainline railway built by the Soviet Union in the 1970s and ’80s
across the remote taiga forests of the Russian Far East. Now,
as then, grandeur and showmanship are as important as the
finished project. Putin sees the Sochi Games as a capstone to
the economic and geopolitical revival of Russia, which he has
effectively ruled for 14 years. The route connects the arenas
and Olympic Village along the Black Sea with the mountains
above. Andrey Dudnik, the deputy head of Sochi construction
for RZhD, is proud of his company’s accomplishment, given the
region’s difficult terrain and the rushed time frame for finishing
construction. “Few people believed,” he says. “But we did it.”
On a cloudless, 70-degree day this fall, I boarded a train—
newly built by Siemens and smelling of fresh upholstery—in
Adler. The train dashed along the riverbank on a curving track
40 supported by cement columns dotting the shore. We passed
into a long tunnel, lit with soft yellow light. The engineering
work was so challenging, Dudnik boasts, that in 2011 RZhD was
named Major Tunnelling Project of the Year at an international After a December snowstorm, Russian police inspect the
awards ceremony in Hong Kong. biathlon and cross-country sites in Krasnaya Polyana
Among Russians, the project is famous for a different reason:
its price tag. At $8.7 billion, it eclipses the total cost for prepara- Back in 2007, when Russia was bidding to host the 2014 Winter
tions for the last Winter Olympics in Vancouver in 2010. A report Olympics, the huge amounts it was willing to spend were a point
by opposition politicians Boris Nemtsov and Leonid Martynyuk of pride, an enticement meant to win over officials at the Inter-
calculated that the Russian state spent three times more on the national Olympic Committee. Putin traveled to Guatemala City
road than NASA did for the delivery and operation of a new to give a rare speech in English, with even a touch of French, to
generation of Mars rovers. An article in Russian Esquire esti- the assembled IOC delegates, promising to turn Sochi into “a
mated that for the sum the government spent on the road, it world-class resort” for a “new Russia” and the rest of the world.
could have been paved entirely with a centimeter-thick coating His pledge to spend $12 billion in Sochi dwarfed the bids of the
of beluga caviar. other finalists from South Korea and Austria.
The train glided to a stop at the Krasnaya Polyana station. But since then, as costs have increased, Russian officials have
The floors were buffed to the shimmery gloss of a desert mirage. grown less eager to boast about the size of the final bill. “In the begin-
The air up here was cooler; snow mottled ning, money was a reason and argument
the mountaintops ahead. Down the hill- for Russia to win the right to host the
side stood a giant banner: “Sochi is pre- Olympics,” says Igor Nikolaev, director of
paring for Olympic records!” strategic analysis at FBK, an audit and con-
At $51 billion, the Sochi Games are the $8.7b road/railway sulting firm in Moscow. “But it turned
costliest ever, surpassing the $40 billion out we spent so much that everybody
Russia
spent by China on the 2008 Summer is trying not to talk about it anymore.”
Olympics. The suicide bombings in the Dmitry Kozak, deputy prime minister
Russian city of Volgograd on Dec. 29 and in charge of Olympic preparations, has
Krasnaya
30 have heightened fears of terrorism and Polyana
argued that the $51 billion number is mis-
given a renewed focus to security con- Sochi leading. Only $6 billion of that is directly
cerns as well as questions of cost. How the Adler Olympics-related, he says; the rest has
Sochi Games grew so expensive is a tale gone to infrastructure and regional de-
of Putin-era Russia in microcosm: a story Georgia velopment the state would have carried
of ambition, hubris, and greed leading out anyway. That may be true, though it’s
to fabulous extravagance on the shores hard to imagine the Russian government
of the Black Sea. And extravagances, in building an $8.7 billion road and railway
Russia especially, come at a price. up to the mountains without the Games.
 Bent Flyvbjerg, an expert on what are called “megaprojects”
at the Saïd Business School at Oxford University, says the costs for
Olympic host nations have on average tripled from the initial bid to
the opening ceremonies. In Sochi, costs rose nearly five times. That
these Olympics should be the most expensive in history is all the
more improbable, says Allison Stewart, a colleague of Flyvbjerg’s
at Oxford, because compared with Summer Games, Winter Olym-
piads involve fewer athletes (2,500 vs. 11,000), fewer events (86 vs.
300), and fewer venues (15 vs. 40).
Putin never saw the Sochi Olympics as a mere sporting event,
or even a one-of-a-kind public-relations opportunity. Rather,
he viewed the Games as a way to rejuvenate the entire Cauca-
sus region. Once Russian officials settled on Sochi as a host city,
however, they guaranteed themselves a costly engineering chal-
lenge, since organizers didn’t have much choice as to where to
put Olympic venues. Sochi, once a place of recuperation for Soviet
workers under Stalin, sits on a narrow slope of land between the
mountains and the sea, with no wide, flat space for large stadi-
ums and arenas. The only feasible site was the Imereti Valley, a
patch of flood-prone lowlands 20 miles from the center of Sochi.
Jane Buchanan, a researcher for Human Rights Watch who has
authored several reports on Sochi in recent years, says, “At the
beginning there was very little infrastructure there, certainly
nothing close to the scale needed to host a Winter Olympics. Just
a little mountain road that dead-ended in a national park.” Russia
would have to build everything from scratch.
Construction teams encountered problems from the start.
According to Yulia Naberezhnaya, the deputy scientific secretary
of the Sochi branch of the Russian Geographic Society, there was
“no integration of the scientific approach” in building Olympic
venues and infrastructure. Instead, she said, officials thought,
“we have a lot of money, we’ll build it somehow.” According to
Naberezhnaya, state planners did not properly take into account
the underground streams that run beneath the Imereti Valley.
Recurring flooding, she says, has meant the embankment near the
Olympic Park collapsed and had to be rebuilt several times over.
In December 2009, a powerful storm hit Sochi’s new cargo port,
which had been built to accommodate shipments of construction
materials for the Olympic venues. Scientists had warned the port
was vulnerable to underwater currents and surging waves. Mil-
lions of dollars in equipment were destroyed or damaged, while
deliveries of building materials for Olympic venues were delayed
or rerouted at considerable expense.
Not that anyone was necessarily counting each ruble, or at
least not that carefully. Government officials, big construction
firms, local subcontractors—everyone knew the Sochi Games were
a matter of state prestige and of great personal importance to
Putin and his legacy. “For the state, the Olympics are something
holy,” FBK’s Nikolaev says,
which means those respon-
sible for staging the Games
“were not shy about asking
for more money.” Among
the few criminal cases
opened by police into possi-
ble corruption involving the
Olympic sites, investigators
in Sochi in June 2012 filed
charges against contractors
at two venues—the main
Fisht Olympic Stadium,
which will only be used for
the opening and closing cer-
emonies, and the bobsled
course. The suits alleged
the contractors inflated
costs by filing false or un-
justified project estimates.
The alleged losses to the state budget totaled nearly $170 million
at the stadium and $75 million at the bobsledding venue. Around
Sochi, developers and contractors pushed to have any project,
no matter how tenuous, deemed “Olympic”—such a designa-
tion would not only ensure reliable funding but also allow them
to skirt existing zoning and building regulations. One owner of
a local construction firm joked to me that every new toilet in
town was Olympic.
Putin’s vow to spare no expense provided cover for sloppiness
and mistakes in construction. When a road leading up to Krasnaya
Polyana wasn’t finished on time, for example, a helicopter had to
deliver the cement needed to build ski lifts. At the same time, the
government’s willingness to overspend encouraged organizers to
indulge their grandest, most over-the-top visions. At one point the
team responsible for the opening ceremonies decided it wanted
a closed stadium at Fisht and not the retractable roof that had
been originally planned. That left the construction team only three
months to procure a quantity of steel that would have ordinarily
taken a year to get on-site. Damon Lavelle, an architect at the British
firm Populous who worked on early plans for the venue, says it’s
no longer so much a stadium as “the world’s largest theater.” The
show for the opening ceremonies is said to include six locomo-
tives, the troika from Nikolai Gogol’s Dead Souls, and Peter the
Great commanding five ships.
Construction work was sometimes the end in itself. Alexander
Popkov, a lawyer in Sochi, told me about never-ending roadwork
in his neighborhood. “They’re digging up the road here, they’re
digging up the road there,” he said. “The road gets sealed today,
then dug up tomorrow. They put down asphalt and then in a week
rip it up all over again.” He let out a laugh, then pulled his face
tight. “It would be funny, if it wasn’t happening with our money.”
Two kinds of private business interests are involved in Sochi:
companies hired by state-owned corporations to carry out specific 41
work and those who came on as investors, taking responsibility for
various projects and putting up at least some of their own money.
Among the first group, according to the Nemtsov and Martynyuk
report and opposition magazine New Times, no one has gotten
more money from Sochi than brothers Arkady and Boris Roten-
berg, childhood friends of Putin’s from St. Petersburg who have
become wealthy industrialists over the past decade. They received
21 contracts, according to the magazine, worth around $7 billion—
more than the total cost of the Vancouver Olympics and around
14 percent of all spending for the Sochi Games.
In one such deal, state-owned energy giant Gazprom com-
missioned one of the Rotenbergs’ companies, Stroygazmontazh,
to build a 177-kilometer (110-mile) pipeline from Dzhugba
to Sochi, part of which passes under the Black Sea. The
 total contract amounted to more than
Less for More at Georgetown University. Interros, a
€4 million ($5.5 million) per kilometer. By Russia is spending $51 billion on the Sochi Games, topping company owned by metals and mining
comparison, the construction of the Nord the $40 billion China spent on the 2008 Summer Olympics tycoon Vladimir Potanin, is building
Stream pipeline running under the Baltic — which had more than three times the number of events. Rosa Khutor, which will host alpine
Sea cost an average of €3.6 million per ki- events during the Games; Potanin has
lometer—a price that by some estimates said he decided to invest while skiing
was already three times higher than the with Putin. Representatives from Basic
European average. Element, the holding company of bil-
The main contracts awarded for lionaire Oleg Deripaska that has interests
construction of the $8.7 billion road to in everything from aluminum to hydro-
Krasnaya Polyana went to two compa- power, say they couldn’t remember how
nies: Transuzhstroy and SK Most, which Deripaska decided to invest in Sochi.
before Sochi was perhaps best-known Andrey Elinson, who’s in charge of all
for winning a no-bid contract to build a of Basic Element’s Sochi projects—which
$1 billion bridge in Vladivostok in advance include the renovation of the airport and
of the Asia-Pacific Economic Cooperation Beijing 2008 Sochi 2014 building of the Olympic Village—insists
Summit 2012. The Sochi contracts were 302 events 98 events its Olympic ventures are not of “a char-
awarded without a public tender; a itable nature,” and that the company
Russian law that requires state compa-
nies to hold open tenders only came into
$132m $520m
per event per event
never expected “supernatural” profits
from its investments in Sochi.
force in 2012. Both companies appear to However the magnates and their com-
have ties with the top leadership of RZhD, including the railway panies came to the Olympic project, around 70 percent of their in-
agency’s Yakunin. Infrastructure company SK Most has a control- vestment is financed by credit from Vnesheconombank, or VEB,
ling stake in Millennium Bank, whose chairman is Oleg Toni, a vice a state development bank. “VEB is used by the government as a
president at RZhD in charge of Olympic projects. Natalia Yakunina, second budget,” says Aleksashenko, in that the state gives funds to
Yakunin’s wife, previously sat on the bank’s board. Toni is also one the bank, which then lends as it chooses. By law, the supervisory
of the co-founders of Transuzhstroy, though he says that he has no board of the bank is headed by Russia’s prime minister—who, at
financial stake in the company. the time many of the Sochi-related loans were being parceled out,
In a written statement, RZhD said it selected the general con- was Putin. VEB will provide 85 percent of the financing for the
tractors for the Krasnaya Polyana road on “a competitive basis.” skiing facility built by Interros; at the Olympic Village, a project
The chosen companies, the statement said, have been partners of Deripaska’s Basic Element, it’s providing 88 percent. “The
of RZhD for many years and “possess a strong industrial base position of the state is that VEB money is not really budget money,
and highly qualified personnel.” It says no RZhD employees but of course it is,” says Aleksashenko.
42 or their family members have any financial relationship with Even so, the Games have created friction between the Kremlin
SK Most or Transuzhstroy. and some of its billionaire allies. Investors gripe that the state
The private investors helping fund Olympic construction has continually shifted its demands and added new require-
are most likely motivated less by the pursuit of large profits ments. Potanin has complained that he was forced to spend an
than a tacit understanding that under Putin they have certain additional $500 million for work at Rosa Khutor that should have
obligations to the Kremlin and the nation at large. “They got been the state’s responsibility. At the same time, the resort has
a call with a voice saying, ‘There exists the opinion that you lost potential revenue while the facility was closed to tourists
should build this or that [project],’ ” says Sergei Aleksashenko, during Olympic test events.
a former deputy chair of Russia’s Central Bank now a fellow For its part, Basic Element has long planned to turn the
Olympic Village after the Games into
Newly built hotels in the mountains above Sochi will host spectators at alpine events luxury condominiums with beach-
front views as well as a yachting
marina. But ever-changing demands
from everyone from the Russian gov-
ernment to the IOC have pushed
the project back and raised costs,
adding what Elinson calls “addi-
tional burdens that aren’t very com-
mercially attractive.” Although Basic
Element had wanted to start selling
condo units before the Olympics,
data: bloombeRG, inteRnational olympic committee, sochi 2014

VEB prevented the company from

putting them on the market. “We are
bearing the costs of creating these
new properties, but it has not been
possible to sell them,” Elinson says.
(Basic Element expects apartment
sales to begin early this year.) The
marina, one of the centerpieces of
the whole development, has been
delayed by disputes over its financing
and the ongoing need for the cargo
port to supply materials for unfin-
ished Olympics construction.
Both Potanin’s Interros and
 A view of the freshly constructed road and railway leading to the mountain cluster of Olympic sites
Deripaska’s Basic Element have asked the Russian government
to provide tax relief over the next several years and to restruc-
ture their loans with VEB on more advantageous terms until their
Sochi projects reach profitability—if they ever do. “We’re making
a new market,” Elinson says. The opening prices at the condo-
minium development will probably surpass those for similar real
estate available in Europe. In the end, the companies are likely to
get some kind of government relief, lest any high-profile projects
in Sochi suffer public failures. Elinson insists Basic Element is
committed to its projects in Sochi, and not just through February.
“What are the Olympics?” he says. “Three days of opening, three
days of closing, and 200,000 people coming and going.”
It can be hard to determine at which point inefficient and
repeated work becomes outright theft, but there seems to have
been plenty of that in Sochi. One owner of a local construction
company told me how contractors artificially inflated costs to make
up for the kickbacks they sometimes had to pay state managers
awarding the contracts. As he puts it, both sides—the contractors
and the officials—understood the nature of the deal: The former
needed to make a profit for their business, the latter wanted to
take what they could from budget funds.
Another person in the construction business says he was offered
a contract, potentially worth millions of dollars, to lay a water line
at an Olympic site. The officials at the state body awarding the con-
tract weren’t interested in whether he had the necessary resources
for such a large job or would do quality work—the only question
was whether he was willing to pay 20 percent back to them. A third
construction boss says he was invited to carry out work on trans-
port infrastructure. As the officials offering the job spelled it out,
the contract would be worth 250 million rubles ($7.7 million) on
paper, but he would only actually receive 170 million rubles—the
officials, presumably, would pocket the difference.
Of all the examples of Olympian excess, waste, and mismanage-
ment, the most conspicuous is the ski jumping facility in Krasnaya
Polyana. On Feb. 6, 2013, with exactly one year left until the opening
of the Games, Putin visited Sochi for a personal inspection of
Olympic venues. Dressed in a black overcoat, he arrived at the
ski jump complex for a tour. The facility’s completion had been
delayed by more than two years, and cost estimates had risen from
$40 million to $265 million. Putin, clearly playing up his sense of
surprise and outrage for the television cameras, was not pleased.
He made a show of questioning Kozak, the deputy prime minister
in charge of Olympic preparations, on cost overruns. Putin’s entou-
rage shifted nervously. With icy sarcasm, he declared, “Well done!
You are doing a good job,” and then walked off.
The next day, Akhmed Bilalov, who had overseen construction
of the ski jump and was a vice president of the Russian Olympic
Committee, was fired from all his posts. The police subsequently
opened a criminal case against him for allegedly abusing his
position as head of a state-owned company. (Among other acts of
fraud, he was accused of using state money to pay nearly $100,000
for luxury travel to London during the 2012 Summer Olympics.)
He fled abroad along with his brother, briefly popping up at a
clinic in Baden-Baden, Germany, where he claimed to be receiving
treatment for mercury poisoning, and then settled in London.
Bilalov’s odyssey now looks like a cautionary tale of a greedy
businessman in over his head who also served as a convenient
scapegoat. (Bilalov has denied the charges against him.)
The location that Olympic organizers had selected for the
ski jump was a difficult one, with particularly challenging soil full
of mudstone. Underground caverns made the earth potentially
unstable, especially when saturated with water. “I saw better
places in the world, easier places,” said Matthias Kohlbecker
of Kohlbecker Architects and Engineers, who worked on early
engineering plans for the venue. Nonetheless, Kohlbecker says
he thought the ski jump project was entirely realistic. (His firm
was involved only in the design stage and not in construction.)
Several people familiar with the project told me the team
working under Bilalov didn’t carry out the necessary geologic
tests before construction began. They instead tore down trees
here and there to make a wide clearing and drilled into the fragile
soil before stabilizing it. Without deep tree roots to hold the earth
in place, the site was vulnerable to landslides. One day in the
spring of 2012, millions of tons of dirt rushed down the hillside
where the ski jump was being built. Vladimir Kimaev, a promi-
nent activist from Environmental Watch on North Caucasus, a
local NGO, visited the site a few days later. “Part of the slope
had been subsumed by the landslide, and the forest had been
knocked over,” he says. “A tractor was buried, its shovel stick-
ing out of the earth.” As a result, the project went even further
over budget. Meanwhile, a dispute arose over who bore the re-
sponsibility for building a nearby access road—Bilalov or the
state. In the end, Bilalov was saddled with the $300 million bill.
The ski jump fiasco wasn’t the first indication that the com-
bination of big money and lax oversight was leading to ineffi-
cient spending, if not abuse. The short history of Olimpstroy, the
state corporation founded in 2007 to coordinate the construction
process in Sochi, illustrates the problems with so much money
sloshing around. The company has gone through four directors.
The lights of the Olympic media center near the Black Sea coast illuminate a neighboring residential building
After each change in leadership, investigators opened criminal
cases on embezzlement and abuse of office, although none have
gone to trial. In 2009 a handful of Duma deputies proposed a law
that would have asserted parliamentary control over Olimpstroy,
conducting financial audits, studying long-term profitability, and
monitoring expenses. In the end, the Duma, controlled by the
pro-Kremlin United Russia party, rejected the proposed bill but
passed a compromise law that gave the Audit Chamber, a state ac-
counting body, responsibility for financial oversight of state cor-
porations. Its full reports, however, would not be made public.
Last year, as part of its annual accounting, the Audit
Chamber accused Olimpstroy of “unwarranted increases” in
costs at Olympic venues worth a total of 15.5 billion rubles.
Officials inside Olimpstroy, the report alleged, raised cost es-
timates based on “justifications that were either absent or pre-
sented with insufficient explanation.” Olimpstroy declined
to make its officials available for interviews, but in a written
statement said the cost of certain venues went up as the
result of “additional structural and technical decisions made”
at the request of the IOC and other stakeholders.
In recent months, Putin has expressed frustration with many
members of his own political elite who have grown too corrupt
and undisciplined. It’s received wisdom in Moscow that the state
will crack down on at least some of the more egregious cases of
fraud and abuse in Olympic construction—once the Games are
over and attention has moved on. Stephen Sestanovich, a former
U.S. ambassador-at-large to the former Soviet Union and now a
fellow at the Council on Foreign Relations, says he recently met
with a high-ranking Russian official who told him, “When all the
celebrations are over, then the prosecutors come in.”
 For some, it’s too late. One afternoon this
fall, I went to see a Russian man named Valery
Morozov, who lives outside London. For many
years, Morozov was the wealthy and successful
owner of a construction firm in Moscow, enjoy-
ing friendly ties with officials in the Kremlin and
a reliable stream of state contracts. (By his own
admission, he also wasn’t above paying a kickback
or resolving a dispute with help from the criminal
underworld, if necessary.)
In 2004 he was hired to carry out renovation
work at the State Kremlin Palace, a hulking glass
and concrete hall built in the 1960s for Commu-
nist Party congresses that now hosts concerts.
As Morozov tells it, he completed the job only to
learn that the last tranche of money owed to him
had gone to a number of other firms that he sus-
pects were linked to certain officials overseeing
the project. After complaining to his contacts at
the Office of Presidential Affairs, he was told to
sit tight and not go to the police—the state would
find lucrative work for him, he said.
That opportunity came in Sochi. The job was
to oversee reconstruction of part of a government-
owned sanitarium. There was a catch: An official
at the Office of Presidential Affairs in charge of
construction, Vladimir Leshchevsky, informed
Morozov that as part of the arrangement Morozov
was to turn over 12 percent of project funds to
him, in bags of cash. Morozov says he informed
law enforcement officers, but they told him to
wait while they thought up a plan of action.
Moving against a high-ranking and presumably well-protected over the recording device that had been tucked under his clothes.
Kremlin official was no simple maneuver. When he returned to the table, he saw that Leshchevsky had 45
After Sochi won its bid to host the Games in 2007, the sanitarium walked back into the restaurant, still holding the money. As
officially became an Olympic venue: Russian organizers named Morozov remembers, Leshchevsky said, “It’s raining, I’ve got
its “luxe” suite as IOC headquarters during the Games. As time a long ways to walk, how about I sit and have a beer.” Morozov
passed, although Morozov dutifully paid his kickbacks in regular knew instantly the operation had failed—police were supposed
increments, he was not fully cooperative. He said he refused, for to detain Leshchevsky as soon as he left the restaurant. Either
example, to inflate costs artificially or take on particular subcon- the police lacked the authority to arrest such a high-ranking
tractors pushed on him by Leshchevsky and his subordinates. official or Leshchevsky had wriggled out of the trap. Morozov was
In early 2009, Morozov heard talk that he was going to disappointed, but not shocked. “Knowing this whole system, the
be removed from the job—and maybe even “toughly,” which idea the Kremlin would give him up, let him hang, is difficult to
could mean his equipment and offices would be seized. At this, imagine,” he said. Leshchevsky has denied Morozov’s allegations.
Morozov went back to the security services and told them it was After the failed sting, Morozov started talking to the press
time to help—otherwise, he would have no choice but to file a and sharing materials from the case. Dmitry Medvedev, then
formal public complaint and raise a scandal. Police dispatched Russia’s president, ordered prosecutors to look into why the
a team of operatives to work with him, but they said they could investigation had stalled. But investigators declined to bring
open an official case only after Morozov produced hard evi- charges and the case was dropped in 2012. In December 2011,
dence of the extortion scheme. When Morozov went to London with his
Leshchevsky demanded a payment of
15 million rubles, they told Morozov to
A hisTory of oLyMpic spending wife for New Year’s. After the holiday
passed, he got a call from a contact
data: bent flyvbjeRG and allison stewaRt, univeRsity of oxfoRd

go through with it—but he would have Total sports-related costs* in Russia warning him for his safety
to put up the cash himself. Morozov ◻ winter Games ◼ summer Games not to come back. He received asylum
took out some money he and his wife $0 $5b $10b $15b in the U.K. and now lives in an unre-
were planning on using to buy his son albertville 1992 markable, barely furnished home in
a dacha. He documented the handoffs barcelona 1992 the London suburbs.
with a small camera hidden in his belt. lillehammer 1994 Before I left, Morozov cautioned me
For the last exchange, Morozov pro- atlanta 1996 against making too much of his story.
posed the two men meet at a restau- nagano 1998 If you look anywhere else in Russia,
sydney 2000
rant not far from the gates of the pres- he said, “You will see the same thing,
salt lake city 2002
idential administration in Moscow. It maybe even more.” The culture of
athens 2004
was an official sting operation: The torino 2006 informal mechanisms of control and
police put a wire in both the table and beijing 2008 the battle for influence as a proxy for
on Morozov himself. After he made vancouver 2010 personal enrichment predates the
the handoff and Leshchevsky had left, london 2012 Olympics—and even Putin. “Sochi,”
Morozov headed to the bathroom to he said, “is just what is happening in
meet up with a police agent and hand pRices in 2009 usd. Russia everywhere.” <BW>
*does not include Road, Rail, aiRpoRt, and hotel infRastRuctuRe.
 The
One
46

Who
The U.S. government
managed to shut

Got
down his hedge fund,
but SAC Capital
founder Steven
Cohen has so
far avoided the

Away
prospect of
time behind bars.
Here’s why. By
Sheelah Kolhatkar
y
 en thousand dollars an hour worth of lawyers filed its Neuberger Berman asset management group before joining
T into a courtroom in lower Manhattan on the morning SAC’s Sigma Capital Management unit in New York in Septem-
of Nov. 8. The legal team represented Steven Cohen’s ber 2006, following a vetting process that lasted six months.
hedge fund, SAC Capital Advisors, which had agreed to pay SAC was structured like a bicycle wheel, with the spokes con-
$1.2 billion to settle criminal charges that it had engaged in sisting of about 100 portfolio managers with their own teams
securities fraud. The hearing was the culmination of a long legal of analysts and traders working in competition with the other
struggle between SAC and the government that has dramatically teams. Camaraderie in SAC’s offices was low. At the center was
altered what was once one of Wall Street’s most powerful firms. Cohen, 57, the only connector between the different groups,
Eight former or current SAC employees have been charged with who would take the best ideas from each and trade on them
insider trading. Six of them have pleaded guilty; one, Mathew himself. Aside from losing money, there was nothing Cohen
Martoma, is due to go on trial on Jan. 6, and another, Michael hated more than a portfolio manager who didn’t communicate
Steinberg, was convicted on Dec. 18 of insider trading in two vigorously and often.
technology stocks. Separately, Cohen was charged in a civil case Horvath’s job was to provide
with failing to supervise his employees by the Securities and research ideas to Michael Stein-
Exchange Commission, which is seeking to bar him from the “I have a berg, who had been at SAC since
securities industry. Cohen’s company is transforming itself into 1996 and was one of its most
a much smaller operation that manages only Cohen’s money. senior portfolio managers. Stein-
SAC had fostered an unprecedented “culture of corporate cor- 2nd hand berg, 41, had attended the same
ruption,” U.S. Attorney Preet Bharara said when the criminal high school as Cohen—Great Neck
charges against the company were first unveiled. North in Long Island, N.Y.—and the
The man who was conspicuously absent from the courtroom read from two were close. Horvath tracked
that day was Cohen. After seven years of investigations, wire- companies including Dell, Apple,
taps, unearthed documents, and undercover informants, the Microsoft, IBM, Hewlett-Packard,
government had not been able to assemble enough evidence to someone and many others. He traveled
charge Cohen criminally with insider trading—though people constantly between California—
familiar with the investigation say the pursuit of the billionaire where he had an apartment in San
hedge fund founder continues. It’s becoming increas- at the
ingly apparent, however, that Cohen was just clever—
or lucky—enough to avoid the harshest penalties levied
against some of his own employees. The reasons why company”
may trace back to his actions during a few pivotal weeks
in the summer of 2008.
48
AC, at the beginning of 2008, was at its peak,
S with close to 1,200 employees and more than
$16 billion in assets. The firm had just gone
through several years of rapid expansion, moving into
areas beyond its specialty as a short-term stock-trading
shop, having launched a private equity group in 2007, a
Hong Kong office the year before, and other new funds
and divisions in the preceding years. There were lavish
holiday parties, three in-office masseuses, and the oc-
casional cigarette boat stashed outside the firm’s head-
quarters in Stamford, Conn. The collection of cars in the
parking lot was legendary: a portfolio manager’s Mer-
cedes with gullwing doors, Maseratis, Ferraris, a brown
Bentley just like Justin Bieber’s. Few at SAC could have
imagined what was to come during the next 12 months,
when the firm’s “edge” would evaporate and two portfo-
lio managers would commit acts that would have them
facing prison five years later. The year 2008 was, and
remains, SAC’s only down year, when the firm’s flag-
ship fund lost almost 28 percent.
Both Jon Horvath and Martoma had been with SAC
for more than a year. Martoma, now 39, had grown up
in Florida, graduated from Duke University, and had
an impressive collection of degrees and residencies,
including a stretch at Harvard Law School, a Stanford
MBA, and time logged at a Boston hedge fund called
Sirios Capital Management. Horvath, 44, a Swedish
native who’d been raised in Toronto, graduated from
Queen’s University in Kingston, Ont., with a degree in
Commerce. He had shaggy hair and a slightly dazed ex-
pression that made him perpetually look as if he’d been Horvath
up partying the night before. He’d worked at Lehman
Brothers in San Francisco analyzing computer stocks at

Steinberg
previous spread: simon dawson/BloomBerg; this spread, from top: Jonathan fickies/BloomBerg; shannon stapleton/reuters
Francisco and a ski share at Lake Tahoe—and New York, as well
as to conferences and company visits in places such as Boston,
Arizona, and Taiwan.
If Horvath was sure of one thing after his first year at SAC,
it was the unforgiving nature of the place. If your ideas didn’t
make money, you were out. His investment recommendations
to Steinberg had done reasonably well in the first half of 2007,
generating $7 million to $10 million dollars in profit to the Stein-
berg portfolio. But after two Bear Stearns hedge funds collapsed
that July and the market started to shudder, Horvath’s stock
picks lost most of those gains. One stock in particular, Network
Appliance, a data-storage company that Horvath had urged his
boss to buy, plunged and caused losses of $2 million. Sometime
later, after the Sigma offices on Madison Avenue had emptied
out, Horvath later testified in court, Steinberg called him over
to his desk on the trading floor.
“I can day-trade these stocks and make money by myself, I
don’t need your help to do that,” Horvath says Steinberg told
him, speaking slowly and deliberately. “What I need you to do
is go out and get me edgy, proprietary information that we can
use to make money in these stocks.” Steinberg added: “You
need to talk to your contacts at the companies, bankers, consul-
tants. And leverage your peer network to get that information.”
Horvath says he understood this to mean that he should try to
get nonpublic information they could use to make money—or
he’d lose his job. During his trial, Steinberg vigorously disputed
“We would that this conversation ever
happened.
Horvath took home
never a relative pittance of
$416,084 of compensation
in 2007, compared with
divulge data Steinberg’s $5.1 million.
He rang in the New Year
vowing to do better. He cul-
like this so tivated a relationship with
Jesse Tortora, an analyst
at a hedge fund called
please be Diamondback Capital,
whom he’d met through a
former roommate in San
discreet. Francisco. Tortora was
well connected and started
funneling him inside infor-
Thanks” mation about Dell, which,
Horvath later testified, he
passed up to Steinberg.
With the financial crisis bearing down on them,
it was getting harder and harder to make money.
On Jan. 11, 2008, Bank of America announced it was
buying Countrywide Financial, saving the mortgage
lender from bankruptcy. On Jan. 15, Steinberg sent out
an e-mail to all of the analysts in his group: “Time to
retrench,” read the subject line. “Risk avoidance is the
new maxim for us on the long side, until this market
settles out,” he wrote. “We will not own 1 share of any-
thing where we don’t have a qualitative, proprietary
edge. Please do not propose any ideas without it.”
At the time, Martoma was juggling a different set of 49
challenges as a portfolio manager focused on health-
care stocks at CR Intrinsic, an elite research-driven
unit that was walled off with glass from the rest of the
trading floor in Stamford. Known as a polite, quiet fellow
who never ran afoul of SAC’s compliance department,
Martoma had been drawn to the firm by a guarantee
that he’d take home a large chunk of the profits of his
own portfolio and a portion of the proceeds in the Cohen and
CR Intrinsic accounts, to the extent that he contributed to them.
No other hedge fund offered such a direct gateway to potential
riches. Martoma had been married for three years to Rosemary,
a physician (they eventually had three children); he had studied
biology at Duke and worked after college at the National Human
Genome Research Institute. It was only natural he’d be drawn to
stocks such as Elan and Wyeth, which, during 2008, were testing
a new potential blockbuster Alzheimer’s drug called bapineu-
zumab that seemed like it might yield a windfall.
Martoma spent the first half of 2008 aggressively pitching
Elan and Wyeth to Cohen because he expected the trial results
to be good. Not everyone agreed. That spring, dissent festered
over the investment, which was becoming a source of gossip
within the SAC offices. Two analysts in particular, David Munno
and Benjamin Slate, tried to dissuade Cohen from building such
risky exposure to two volatile drug companies. “ELN, (impor-
tant, please read) negative reads from company and other buy-
siders,” they wrote to their boss in one March 2008 e-mail. In
April, at Cohen’s urging, the analysts consulted with another
doctor who had some familiarity with the Alzheimer’s drug trial,
who also contradicted Martoma’s optimism. But Martoma felt
he had the best source. According to the government, he’d been
getting nonpublic information from an Alzheimer’s expert at
the University of Michigan named Dr. Sidney Gilman, who
was overseeing the clinical trial of the new drug. (Martoma
 pleaded not guilty to charges of insider trading. “Mathew con- Theories are swirling
tinues to fight these charges and is preparing for trial,” says his
lawyer, Richard Strassberg of Goodwin Procter.)
As the traders scrambled to not lose money during the shaky about why Martoma,
spring of 2008, a government crackdown on illegal trading was
beginning to crystallize. After 12 months of digging by the SEC,
federal prosecutors at the Southern District of New York, and who was fired in 2010,
the FBI’s securities unit, the first wiretaps were placed in the
investigation of the Galleon Group hedge fund in March 2008.
They would eventually lead won’t cooperate in the
to dozens of insider-trading
convictions (Raj Rajarat-
nam, Galleon’s co-founder, is Cohen investigation
serving an 11-year sentence).
Around the same time, a
handful of the earliest coop- she wanted to buy: Elan and
erators in the government’s Wyeth. The firm said no.
probe of the industry were (Mattox has since left SAC; a
approached, in secret, by FBI SAC spokesperson declined
agents—and all of them flipped to comment.)
and decided to cooperate. On July 17, almost two
Horvath, meanwhile, con- weeks before the final drug
tinued his exhaustive research trial results were due to be
of his tech companies, build- released, Dr. Gilman, the
ing spreadsheets and chasing overseer of the trial, received
investor-relations contacts. He a 24-page PowerPoint presen-
also continued feeding the SAC tation from the companies
trading machine with data on containing the results. They
Dell he was getting, he says, were not good. Later that after-
from Tortora, his contact noon, the government alleges,
at Diamondback Capital. In he and Martoma talked for
April, Steinberg sent an e-mail almost two hours by phone,
50 to Horvath with the subject and then again the next day.
line “Code.” In it, Steinberg On the morning of Sunday, July
said that he was going to start 20, Martoma sent a message
referring to one of his con- to Cohen saying that it was im-
tacts, a former SAC analyst portant that they speak. No
named Richard Choo Beng one, aside from Cohen and
Lee, who was often called Martoma, knows what was
“CB” by his friends, as “BC” said during the 20-minute
from then on. The timing was phone call that followed,
uncanny—the government was Martoma which Cohen conducted from
just launching its investigation, his home. The following day,
and months later, in 2009, Lee Cohen’s head trader started
would be approached by the FBI and persuaded to cooperate, pro- liquidating SAC’s Elan and Wyeth shares, ultimately selling their
viding evidence of wrongdoing involving SAC and other firms. But entire holding and then shorting millions of shares of each. On
the flipping of initials started for internal competitive reasons, to July 30, after the negative bapineuzumab results became public,
hide information from other portfolio managers at SAC. Horvath both Elan and Wyeth’s share prices dropped, yielding profits and
started referring to Tortora, the source of his Dell intelligence, as avoided losses to SAC of around $275 million, according to the gov-
“TJ” rather than “JT,” and another SAC trader began referring to ernment. Martoma earned a $9.3 million bonus that year.
Galleon as “lag” rather than “gal.” Horvath was sitting on a bombshell of his own. He learned
that Dell’s August quarter was going to be a disappointment.
lan and Wyeth announced initial results for the Alzheim- In late August, Steinberg started shorting Dell based on Hor-
E er’s drug trial on June 17. They were positive, embold- vath’s advice. By Aug. 25, three days before the company was
ening both Martoma and Cohen. By June 30, 2008, CR due to report earnings, Steinberg had amassed a short position
Intrinsic owned over $233 million worth of Elan shares and more of more than $3 million.
than $80 million of Wyeth, comprising almost 14 percent of That day, Horvath received an e-mail from steveideas@sac.com,
the fund’s holdings. Cohen also had $293 million of Wyeth and an address where analysts were supposed to send their best
$95 million of Elan in his personal portfolio. ideas so Cohen could trade on them. “Cohen Sector Position
There are signs that the investment was generating consider- Alert,” read the subject line. “Please reply with any comments
able excitement around the office. As the positions ballooned, or updates you have on the Cohen Account positions below.” The
scott eells/BloomBerg

Cohen’s personal assistant, Kate Mattox—who listened to prac-
tically every conversation her boss had every workday via the
famous Steve-cam, which broadcast Cohen’s movements across
the trading floor—asked senior management for permission to
open a personal trading account. There were only two stocks
accompanying chart showed that COHE, Cohen’s personal SAC
trading account, owned Dell. Horvath felt a pit in his stomach.
He and Steinberg were betting that Dell would go down, while
Cohen was betting it would go up.
“Steve didn’t like losing money,” Horvath said later—
something of an understatement, as Cohen was known for rages
prompted by losing trades. “You were kind of in the bad books
if you lost him money.” He forwarded the e-mail to Steinberg
with the note: “steve is long DELL…”.
Steinberg replied, “Interesting… I have not mentioned anything
to him yet. I would like to express our view to him, but we need
to properly weigh the r.r. [risk-reward] of doing so. How high is
your conviction here, scale of 1—10, 10 being maximal conviction?”
Horvath went and checked again with Tortora to see that
his source was still predicting a disappointing quarter. He also
called Dell’s investor-relations department to see what he could
glean from the company’s “body language.” Both Horvath and
Steinberg e-mailed back and forth with another SAC portfolio
manager, Gabriel Plotkin, who had an enormous, $60 million
long position in Dell and who had been “tagged” in Cohen’s
portfolio as the impetus behind his trade, which meant that he
would earn a share of Cohen’s Dell profits, if there were any.
Around 12:30 p.m. the next day, Steinberg e-mailed Plotkin and
Horvath: “I was talking to Steve about DELL earlier, and he asked
me to get the two of you to compare notes before the print, as
we are on opposite sides of this one…”. Horvath, who was in
Cabo San Lucas, Mexico, wrote back to both of them what later
became an infamous e-mail:
“I have a 2nd hand read from someone at the company—this
is 3rd quarter I have gotten this read from them and it has been
very good in the last two quarters,” he said, before enumerat-
ing Tortora’s gross margin, revenue, and earnings predictions,
which showed a sharp disappointment for Dell. “Please keep to
yourself as obviously not well known.” Steinberg added a post-
script: “Yes normally we would never divulge data like this so
please be discreet. Thanks.” To a savvy trader, what Horvath
was saying was clear: A reliable source inside Dell had tipped
him off about the earnings in advance.
What happened next represents something of a brush with
the legal abyss for Cohen. Plotkin forwarded the “2nd hand read”
e-mail to Anthony Vaccarino, another SAC portfolio manager
who had been instructed to keep Cohen informed about how
the others were trading Dell. Vaccarino forwarded the e-mail
to Cohen, who was at his house in East Hampton, N.Y. Then
Vaccarino called him on his cell phone. During the next two
hours, the government has alleged, Cohen sold his entire long
position of 500,000 Dell shares. After the earnings announce-
ment, Dell dropped 14 percent, its largest selloff in eight years.
Cohen denies that he sold the shares based on Horvath’s “2nd
hand read” e-mail, and cites the actions of Plotkin and others
as driving his decision to sell.
Later that evening, Cohen sent Steinberg a message that
read: “Nice job on dell.” Steinberg’s response was, “Thanks…
this ole dog can still hunt”.
Steinberg’s team tried to repeat their success three months
later. Lehman Brothers had gone bankrupt on Sept. 15, and Wash-
ington Mutual had been seized by regulators 10 days later, be-
coming the largest bank failure in history. In early October, the
head of the International Monetary Fund said that the global
economy was on the “brink of systemic meltdown.” As Horvath
would later put it: “The world seemed to be ending.” The SEC
choked off one of the traders’ only remaining avenues for making
money when it tightened the rules surrounding short selling after
the Lehman collapse in an effort to stabilize the plunging market.
Cohen, once again, found his trading in conflict with that of
Horvath and Steinberg, who had built a long position in Dell,
Horvath says, based on information from Tortora. On Nov. 14,
Cohen held an Instant Message chat with Steinberg:
AIM:mike72ms [Steinberg] dell rpts thrusday
AIM:cas359 [Cohen] y …
AIM:mike72ms we like it…weve been good here if u remember
AIM:cas359 call me… it’s a shame-cause I can be helpful to you
too but that;s life
AIM:mike72ms steve I have an analyst that covers this stock… he
has industry contacts… im not hiding anything from u
The exceedingly cautious Cohen replied: “I would prefer to
talkon phone”.
Steinberg, concerned that the boss was angry, recounted
the exchange to Horvath later, providing the strongest expla-
nation yet of why Cohen was not charged for his Dell trades: “I
told him not to be short and he got pissed, drilling me… who is
telling me business is ok,” Steinberg wrote, describing his con-
versation with Cohen. “I said Jon has a number of industry con-
tacts and that is what he has heard through supply datapoints
and he was not pleased…total bulls---.” In other words, Horvath
later testified, he and Steinberg had hidden from Cohen where
they were getting their information.
overnment investigators say that by the end of 2007,
G trading on inside information had permeated the
hedge fund industry, fed by expert-networking firms
which connected traders with insiders at public companies
who could leak them valuable data. But the 2008 financial
crisis threw sand on some of the government’s plans. The
market became so volatile, and so many funds lost money,
that it became pointless to try to press charges over trades
that investigators were convinced were illegal but ultimately
didn’t yield any profits, according to people connected with the
investigation. If 2008 hadn’t happened, some of them believe,
they might have actually captured their white whale—Cohen—
and many other targets.
In 2010, Martoma was terminated by SAC for failing to repli- 51
cate his success with Elan. A few months before that, he’d written
an e-mail to Cohen and some of his top executives: “SAC is a
special place to me. Having attended graduate and undergrad-
uate programs at Harvard, Stanford and Duke; founded/sold
my own healthcare company; and worked as a Director at the
largest federally funded science initiative in the last 3 decades,
I have a variety of experiences to compare against my time at
SAC,” he said. “Through it all, it’s clear to me that I am in my
element here at SAC.”
Perhaps the e-mail explains why, despite repeated invita-
tions, Martoma has so far declined to cooperate with the gov-
ernment in its investigation of Cohen, leaving Martoma with
the possibility of a long prison sentence and prompting con-
spiracy theories over what might be motivating him. Stein-
berg, a father of two small children, must wait until April to
learn what his sentence will be; although guidelines suggest
that he could get up to 85 years for the five counts on which
he was convicted, the relatively small profits of $1.4 million he
made on his trades mean that he’ll likely end up sentenced to
a handful of years. He plans to appeal his conviction.
Despite the dogged efforts of investigators, Cohen appears to
have avoided a comparably stiff punishment. Might things have
turned out differently? If Cohen had engaged with Steinberg over
instant message in November 2008, indicating some knowledge
of where his employees’ illegal edge came from; if Martoma had
told him about his alleged conversations with Dr. Gilman, which
prompted SAC’s sales of Elan and Wyeth that week in July, and
if Martoma went on to tell that to the FBI—it might be Cohen
awaiting sentencing now rather than one of his top associates.
Instead, Cohen continues to live in a 35,000-square-foot
mansion and buy and sell the high-priced art he’s become
known for. He’s been telling people that he plans to rebuild
SAC as soon as possible. <BW>
In 2012
thIeves broke
Into the MuseuM
IM rItterhaus
In offenburg,
gerMany, and
stole a horn,
part of an
epIdeMIc of
taxIderMy
larceny

53
 hen the phone rang at about deputy assistant director for law enforcement at the U.S. Fish
3 a.m. on April 18, Nigel and Wildlife Service in Washington. “By the time it gets to Asia,
Monaghan was asleep on the a single horn can easily be worth $500,000.”
floor in his office in Dublin, Although powdered rhino horn pound for pound is now worth
tangled in a sleeping bag. In his more than cocaine or heroin, the prison terms for trafficking in
job as Keeper of the National it are a fraction of those for the equivalent weight of narcotics.
Museum of Ireland’s natural The sentence for a first-time offender smuggling a kilo of heroin
history section, he was oversee- in the U.S. is a minimum of 10 years in prison; according to Grace,
ing filming of the latest episode of a first-time offender smuggling a kilo of horn would get off with
a children’s TV special, Sleepover less than a year, and more likely a fine. “It’s a high-profit, low-
Safari. Ten children, their parents, risk crime,” he says.
and a film crew were spending the The first signs of an Irish connection in the world of rhino horn
night in the museum, known locally trafficking went almost unnoticed. In January 2010 customs offi-
as the Dead Zoo, surrounded by Ireland’s cers at Ireland’s Shannon Airport confiscated eight horns from
foremost collection of taxidermy. the baggage of two passengers on a flight from Faro, Portugal.
The call was from the museum’s central security office. Four Officials weren’t even certain a crime had been committed; they
stuffed rhino heads—ones Monaghan had sent away for safekeeping had never seized a rhino horn before. No arrests were immedi-
a year earlier—had been stolen from the museum’s storage facility ately made, and the evidence was sent to Dublin Zoo for analysis.
near the airport. At 10:40 p.m., three masked men forced their way The passengers were Jeremiah and Michael O’Brien, Irish broth-
in, tied up the single guard on duty, and found the shelves where the ers who said they were traveling antique dealers who spent most
heads were kept. The trophies were heavy and awkward. Expertly of their time living in French and German RV parks. If any inter-
stuffed and mounted by big game taxidermists at the turn of the national alert was transmitted about the O’Briens, John Reid,
20th century, they were monstrous confections of skin and bone, then the Irish police force’s liaison to Europol, never received it.
plaster and timber, horsehair and straw. When Monaghan and his During the summer of 2010, however, Reid noticed something
team had come to move the largest—that of a white rhino shot unusual in the intelligence traffic reaching him from other coun-
in Sudan in 1914, with a horn more than three feet long—it had tries. Identification requests containing the same names and
taken four men just to lift it down from the museum wall. But the vehicles were coming in from Scandinavia, France, and Belgium,
burglars were undeterred, and soon they had every head in the and sometimes from different agencies in the same country, just
back of their white van. They took nothing else, and within an weeks apart.
hour they were gone. The queries shared many common elements, including a British-
Monaghan couldn’t go back to sleep. He turned on the office registered vehicle driven by a man who said he was Irish, or vice
lights, sat at his computer, and began writing a press release. It versa, who was involved in a petty scam—fraudulent contracting
seemed the Rathkeale Rovers had struck again. or selling counterfeit electrical generators or power tools. Often
54 the individual had presented a U.K. driver’s license and given a
Rhino horn is one of the world’s most valuable illegal com- vague or transient address in England; sometimes a German or
modities, part of an international trade in endangered species French policeman had written down a phonetic version of the
estimated to be worth $10 billion a year, according to Global suspect’s place of origin as “Raheele” or “Rackeel.” When ques-
Financial Integrity, a research organization that tracks under- tioned, the men were aggressive; their names were infuriatingly
ground commerce. Over the last century, rhinos have been similar; they sometimes had multiple identities; frequently every
hunted to the brink of extinction, and traffic in rhino products word they said was a lie. They proved impossible to track in police
is now regulated by the Convention on International Trade in databases. “Shadows, floating in and out,” Reid says. At the end
Endangered Species (CITES). In Asia, powdered rhino horn has of a crime report detailing the activities of one Irish suspect, the
long been a valued part of traditional medicine. It’s recently Scandinavian author broke out of formal bureaucratic language
become more prized by a new capitalist elite in Vietnam—where to add a plaintive postscript: “Is there anybody that knows how
it’s mixed with wine at parties, an emblem of conspicuous to deal with these people?” Reid decided to look into it.
consumption—and China.
Word of the fortune hidden in rhIno heads at Ireland’s natural
rhino horns spread quietly at first. hIstory MuseuM that were stolen
For years, horns mounted before In aprIl 2013
1947 were exempt from the export
regulations of CITES and could
be legally exported from Europe.
But in 2006 antique horns began
achieving unprecedented prices at
auction; over three years their cost
rose tenfold. In 2010, after a single
horn sold at British auction for a
world record £99,300 ($164,000),
European authorities announced
an export ban on antique rhino
trophies.
Ten years ago a single horn
we i g h i n g u p t o 3 0 p o u n d s
would have sold in the U.S. for a
maximum of $20,000. “Now horn
in the United States is selling any-
where from $8,000 to $20,000
a pound,” says Edward Grace,
 Across the Atlantic, Grace at the USFWS also began hearing
strange complaints about Irishmen attempting to purchase rhino
horns illegally. In July 2010 a man calling himself John Sullivan
sent a message to a taxidermist in Commerce City, Colo., claim- sInce 2011,
ing he was decorating a castle in Ireland with an African theme;
europol has
he needed rhino trophies. The taxidermist, knowing that trans- tallIed
porting rhino products from the U.S. to Ireland without a valid rhIno
certificate from the USFWS was a felony, reported the solicita- horn
tion to federal authorities. He continued the correspondence thefts
as an informant. = sIte
Over the next two months, Sullivan arranged for his “brother” across of theft

to fly to Colorado to finalize the purchase of four horns from the european
informant. “Only interested in rhino,” Sullivan wrote. “The more natIons
rhino u get us, the more money u get ur self.” On Sept. 9, 2010,
accompanied by undercover Special Agent Curtis Graves of the
USFWS, the informant met two men with thick Irish brogues,
Richard O’Brien and Michael Hegarty. O’Brien said he knew rhino rathkeale,
horn couldn’t legally leave the U.S., but they were in the antiques Ireland:
hoMe of the
business and getting the horn out of the country wouldn’t be diffi- rovers
cult: They had sea containers filled with furniture going to Britain
every few weeks. Graves told the Irishmen that his cousin had
four horns he could sell them for $8,500.
On Nov. 13, Hegarty and O’Brien returned from Ireland to make
the purchase, handing over €12,850 in cash, and were promptly
arrested. They admitted to investigators that they were buying on
behalf of Sullivan but otherwise stuck to their story: The horns
were to be decoration in an Irish castle.
Even as the federal trap was closing in Colorado, another Irish-
man was quietly shopping for rhinos in Texas: In late September,
Michael Slattery Jr. attempted to buy a stuffed rhino head from estIMated value of IllIcIt
a taxidermist in Austin. When told that the sale would be legal InternatIonal trade In…
only to a Texas resident, Slattery and his accomplices recruited
a homeless man to make the $18,000 purchase for them. Three wIldlIfe $10.0b
days after O’Brien and Hegarty were arrested in Colorado, tIMber $7.0b
Slattery arrived in New York, where he and his accomplices counterfeIt cIgarettes $2.6b
sold four horns, accompanied by falsified Endangered Species sMall arMs $1.0b
bills of sale, to a Chinese buyer in Queens for a total of $50,000. dIaMonds and geMs $0.9b
Later that day, Slattery took a plane out of the country. The rhino graphic by bloomberg businessweeK. data: europol, global financial integrity
horns were sold twice more in New York before they, too, left
the U.S.—this time for China. scheme to defraud vulnerable people, taking cash for substan-
previous spread: Karl schlessmann; this spread: courtesy mr. nigel monaghan/national museum of ireland – natural history

A few days later in Washington, Grace of the USFWS was intro- dard asphalting of driveways. Other favored scams include bur-
duced to a colleague from Europol. When Grace mentioned the glary and fraudulent white-line-painting operations, often using
peculiar case he’d been dealing with in Colorado, the colleague water-soluble paint. (“There’s a regional airport in France, as
told him it sounded familiar. soon as it rains, the runway will disappear,” says CAB detective
By the beginning of November 2010, working at Europol head- Paul Fleming.) Recently the Rovers have expanded their range
quarters in the Hague, Reid, the Irish police force’s liaison for to include Canada, Hong Kong, Russia, and the Dominican Re-
Interpol, had spent several months collecting and analyzing intel- public. In addition to paving, they trade in furniture, carpets,
ligence from across Europe. With help from detectives of Dublin’s cars, and especially antiques. Renowned for their sharp entre-
Criminal Assets Bureau, or the CAB, a multi-agency investigative preneurial instincts, they prefer cash transactions and often
unit established in part to combat organized crime in Ireland, he drive thousands of miles on short notice to do a deal.
assembled a detailed briefing on a criminal group that had come At the end of each year, the Rovers return to a small rural town
to be known as the Rathkeale Rovers. They are part of a network two hours’ drive from Dublin—Rathkeale, in County Limerick. As
of clans called the Irish Travellers, a nomadic and often secretive they gather there in November and December, the narrow streets
ethnic group that maintains its own distinct customs and language.

The Rovers have been of interest to the CAB for much of

the last decade but have proved hard to prosecute—not least
because they rarely seem to commit any crimes in Ireland. Unlike
a conventional criminal gang, set up and directed to accomplish a
single illegal enterprise, the Rathkeale Rovers operate within the
extended families of the Irish Traveller network, a tangle of rela-
tives who work together in all enterprises, both legal and illegal.
They spend most of every year on the road, living in trailers—
known as caravans in Britain and Ireland—at campsites and trailer
parks for months at a time. According to Eugene Corcoran,
head of the CAB, they originally earned their name traveling in
Britain and Europe doing road-paving work, which may some-
times be legitimate but is more often part of a long-running
 clog with BMW and Mercedes SUVs, and the clans compete to
stage the most ostentatious wedding of the season. Those who
have made the most money stand to rise in the clan hierar-
chy and like to flaunt their wealth with shows of extravagance.
“Gucci Travellers,” Fleming says. “That’s how they’re known
amongst their own.”
Richard “Kerry” O’Brien is known as the King of the Travel-
lers in Rathkeale. He’s one of the wealthiest Travellers in Ireland.
According to the CAB detectives and Eamon Dillon, the crime cor-
respondent for Dublin’s Sunday World newspaper and author of
two books about the Travellers, O’Brien has made money by im-
porting furniture from China, where he travels several times a year,
and for a while owned a factory manufacturing aluminum gutters
which other Travellers sold door to door. O’Brien, like his fellow
Rathkeale clan leader Michael “Levan” Slattery, is renowned as a
world-class expert in antiques. Over the past 20 years, the Rath-
keale Rovers have become regulars on the international auction
circuit, bidding on furniture, paintings, and other rare artifacts.
Many are said to be millionaires.
The Kerry O’Briens and Levan Slatterys are just two of the
dozens of Rathkeale clans, many of whom share the same family
name and go by nicknames so they can tell one another apart: The
Kerry O’Briens, for example, differ from the “Turkey” O’Briens,
the “Bishop” O’Briens, and the “Pa Turkey” O’Briens. The fam-
ilies are large and complicated further by a tradition of giving
fathers, sons, and cousins the same first names. It was Richard
Kerry O’Brien’s son, also named Richard, who was arrested by
the USFWS in Colorado for buying rhino horns—and, along with
his brother-in-law, Michael Hegarty, later served six months in
federal prison for smuggling; the Michael Slattery Jr. buying horns
in Texas was Michael Levan Slattery’s son. Michael and Jeremiah
O’Brien, the brothers stopped at Ireland’s Shannon Airport who
were later arrested and convicted of illegally importing eight
56 horns, are members of the Bishop O’Brien clan. The duplicate
names have made tracking them hard. “If Dan O’Brien opens a
bank account in Germany, which Dan O’Brien is it?” says Fleming.
“There’s 15 Dan O’Briens in Rathkeale.” They have one other thing
in common, says Fleming: “They’re always on the lookout for the
next commodity to make big money from.”
On Nov. 17, 2010, a few days after O’Brien and Hegarty were
arrested by the USFWS in Colorado, Reid convened a meeting in
the Hague with Europol intelligence analysts and fellow liaison
officers from a dozen member states. He explained how the rash
of crimes they had been reporting all originated with a single
criminal network of Irish Traveller families; and for the first time
he revealed their involvement in the illegal rhino horn trade. As
a result of the meeting, the Rathkeale Rovers became the target
of a pan-European investigation designated Operation Oakleaf.
Even as the police forces of 33 European countries—and
the USFWS, which soon sent agents to operational meetings at
Europol—began coordinating their efforts against the Rovers, the
gang’s quest for rhino horn intensified. In South Africa, two Rath-
kealers were caught trying to hire gunmen to poach rhinos. In
Europe they abandoned their trucks and their door-to-door frauds
to begin flying from place to place, visiting castles, stately homes,
and natural history museums. The curators of dusty trophy rooms
and taxidermy collections in every corner of the continent soon
faced an epidemic of burglaries.
On New Year’s Eve 2010, a single horn was stolen from the All
Weather Zoo in Münster; in February a complete rhino head was
torn from the wall during a break-in at an auctioneer in Britain. By
the end of summer 2011, there had been 19 more thefts or attempted
robberies from museums and collections in France, Holland,
Belgium, Germany, Italy, the Netherlands, and the U.K. An increas-
ing number of robberies were daylight smash-and-grabs: In Paris,
thieves attacked guards at the Museum of Hunting and Nature in the
Marais with tear gas before making off with a horn. “The common
denominator,” says Fleming, “was it all came back to Rathkeale.”
The evidence was scattered—a telephone intercept here, some
video footage there, a license plate. In many museums the rob-
beries were preceded by visits from men described as Irish, who
arrived asking to see rhino exhibits or other unusual items and
left after taking pictures. When the thieves were caught in the
act, they rarely turned out to be the Rathkealers themselves, but
workmen the clans employed on asphalting jobs or criminals hired
from Britain for the purpose. Few were experts. After a break-in at
Portugal’s Coimbra museum one night in April 2011, during which
two 18th century rhino horns were lifted, police isolated the traffic
logged on the nearest cell phone tower during the robbery. They
found that a call had been placed from inside the building at 1 a.m.
to a number with an area code of 086—an Irish cell phone registered
to the wife of a senior member of one of the Rathkeale clans. The
thieves apparently were calling for last-minute directions.
As the robberies continued, Operation Oakleaf began to dis-
entangle the Rathkeale network. Investigators broke down the
clan structures and affiliations and identified the two dozen most
significant figures in the rhino trafficking ring. In September 2011,
Portuguese police stopped an Australian antiques dealer, not
named by authorities, at the Lisbon airport as he and his son
prepared to board a flight to Dublin. A search of their luggage
revealed €100,000 in cash and six rhino horns, with an esti-
mated total value of more than $500,000. According to the CAB
detectives, the dealer was based in Shanghai and had been flying
into Europe as often as once a week to meet members of the Rath-
keale Rovers in France, Spain, and Portugal. Charged with smug-
gling offenses under CITES, the Australian is suspected of being
the original middleman in the clans’ trafficking ring, responsi-
ble for selling stolen and smuggled horns to customers in Asia.
Back in Ireland, Michael Kealy of Rathkeale was arrested
on a European warrant for his involvement in the daylight
robbery of a rhino horn from an auctioneer in a McDon-
ald’s parking lot in Britain, and later served three months
in prison for his part in the crime. John Quilligan, of Roches
Road in Rathkeale, was later picked up in Dublin in connec-
tion with two thefts of rhino horns in Vienna and extradited
to Austria, but released soon afterward, according to CAB
detectives. In January 2013, a series of coordinated raids across
eight European countries led to the arrests of 30 more individ-
uals with Rathkeale connections.
On Sept. 13, 2013, the climax of Operation Oakleaf, police staged
simultaneous raids on eight locations in the U.K. and Ireland. As
dawn broke, officers of the Cambridgeshire constabulary used a
crowbar and a battering ram to smash open the door of a caravan
parked at the Smithy Fen Traveller encampment in England and
arrested Richard Kerry O’Brien, the King of the Travellers himself.
O’Brien slumped on a couch in his underwear, hands cuffed behind
 his back, as the police searched the caravan. Taken in for ques- JereMIah
and MIchael o’brIen outsIde ennIs
tioning, he was later released on bail; four rhino horns were found cIrcuIt court In Ireland, where they were
during the raid. In Rathkeale, the CAB and armed Irish police seized each fIned €500
artwork and computers from O’Brien’s house.
The following day the USFWS finally caught up with Michael
Slattery Jr. at Gate 55 of Newark Liberty International Airport. Slattery
was preparing to leave for London when he was arrested by agents
from the bureau, part of an investigation into rhino horn trafficking
named Operation Crash. In November, Slattery pled guilty to a single
charge of conspiracy to violate the Lacey Act, which forbids trade
in illegally obtained wildlife. Brought before a judge in Brooklyn,
he burst into tears. He will be sentenced this month.

At first, Rathkeale seems much like any other rural town in

the lush countryside south of the River Shannon. A winding
main street with pubs and a beauty shop carries agricultural
traffic and the occasional tourist. As Detective Paul Fleming
and his partner, Detective Sergeant Cyril Claffey, turn their car
onto the loop of Roches Road, they point to the rows of modest
single-family homes lining the street. Most have been immac-
ulately refurbished with stone cladding and new windows and
porches. “Every single one of these houses, they’re all owned
by Travellers,” Fleming says. “They all have the same character-
istics: big iron gates, shutters on the windows. And you won’t
see a blade of grass anywhere.” The steel screens that cover the
windows protect the houses during their owners’ long absences;
in front of each, gardens and lawns have been paved over to
accommodate vans and SUVs and the expensive-looking cara-
vans parked outside. These are often connected to the house by
an electrical extension cable, drawing power from inside. The
taking photographs. “They expect us around here,” he says,
houses themselves are rarely lived in at all. “They stay in the
“but they get a bit touchy if we start using cameras. Last Christ-
caravan even when they’re home,” says Fleming. “The house,”
mas a whole gang of them started throwing bricks at the car.”
Claffey explains, “is a bit of a trophy.” In the wake of Operation Oakleaf, the epidemic of rhino horn
The Rovers have spent the last 20 years systematically buying
burglaries in Europe has subsided, and those taken from the 57
up Rathkeale, often arriving with suitcases full of cash and
natural history museum of Ireland’s storage facility in April 2013
offering homeowners two or three times market value. Corcoran
are among the last to have been reported stolen. (Those heads
believes the property and the cars are being used to launder the
have not been recovered, and no arrests have been made, but
proceeds of crime committed abroad. Recent estimates suggest
law enforcement officials say they have little doubt the Rovers
that the Travellers now own 80 percent of property in Rathkeale.
are responsible.) The thefts have slowed partly because museum
In a prime hilltop position in the town, opposite the parish
curators, now more aware of the horns’ value, have removed
church, is the imposing brick house owned by Richard Kerry
them from display or replaced them with resin replicas. But it’s
O’Brien; when Fleming pulls up outside, the gold-painted
mainly because the Traveller clans have already taken every-
wrought iron gates stand open, and a child’s scooter lies at the
thing they could. “They’ve exhausted the rhino horns that were
top of the driveway, in which an SUV is parked. Fleming points
available,” says Claffey.
out the adjacent land, where O’Brien has built 20 new homes
With even the stuffed animals in the Dead Zoo hunted to
he’s recently sold to other Travellers. Claffey advises against
extinction, the Rathkeale Rovers have turned to the quest for
another rare commodity. More than recover-
brItIsh polIce raIded a cottenhaM travellers ing rhino horns, the British operation that led
sIte In septeMber as part of an InvestIgatIon to the arrest of Richard Kerry O’Brien in Sep-
Into thefts froM MuseuMs and auctIon houses tember was focused on reclaiming 18 Chinese
artifacts from the Ming and Qing dynasties,
stolen in two separate museum robberies in
Britain in 2012. The objects, more than 400
years old, were valued at £20 million and
from top: liam burKe/press 22; pa wire/press association images

almost certainly stolen to order. Recently, se-

curity guards at the Chester Beatty Library at
Dublin castle reported a visitor who seemed
especially interested in its collection of
antique Chinese jade. He didn’t much resem-
ble the other whispering aesthetes examining
the library’s renowned Eastern treasures, but
he took a few pictures with his iPhone. Soon
after he left, the museum curators took the
precaution of removing every last piece of
jade from display.
“It’s rhino horns today and Chinese arti-
facts tomorrow,” Claffey says. “God knows
what it will be next week.” <BW>
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Co-Workers
At the Gym Textured Tweed write down
your schedule
Downton’s
Sad Return

Michael
Krivicka

59

James
Percelay

Gotcha!
A small firm specializing in pranks
has perfected a new model—
viral videos as advertisements
By Claire Suddath
Photographs by Jeff Brown
 Etc. Advertising

A
woman is standing on a street corner
in New York when she notices a red
baby carriage. It’s a snowy December
morning, and she can hear a faint
cry coming from the baby, who’s
wrapped in a blanket, with one tiny
hand exposed to the cold. She looks around for the stroller’s
owner. Did someone really abandon this child? The woman
peers into the carriage. Just then, the baby lunges at her. It’s a
grotesque newborn with translucent, veiny skin and coal-black
eyes that look possessed. The baby wails and
writhes around in the stroller, which starts
moving on its own. The woman screams,
pauses, screams again, then laughs. A pro-
Matt Lauer
duction assistant runs up to her with a clip- has re-created
board and offers her $10 if she’s willing to be
in a video. A few feet away, James Percelay and
three pranks
Michael Krivicka, the founders of online adver- on the
tising firm Thinkmodo, are smiling.
Percelay, 53, and Krivicka, 37, have been
today show
filming the baby carriage prank for two days.
In January it’ll be launched as a YouTube video to promote Devil’s
Due, a low-budget horror movie about a demonic pregnancy
that 20th Century Fox will release on Jan. 17. Thinkmodo’s video
shows the buildup to the prank: how Eric Fiedler, a Hollywood
special effects designer, assembled the baby, which he operates
remotely, and how effects artist Mark Rappaport hand-painted
the veins into the doll’s latex skin, which feels surprisingly real to
the touch. Thinkmodo likes to include the setup to its stunts, “so
60 audiences feel they’re in on the secret,” Percelay explains. The
way he sees it, “a prank is like a magic trick; you always want to
know how it’s done.”
The three-year-old advertising firm makes videos for companies
such as Oakley, AMC Networks, and CBS Films, and almost every
one has been watched more than a million times—many of them
more than 10 million. Thinkmodo’s last ad was a two-and-a-half-
minute promo for Sony Pictures Entertainment’s Carrie remake
that featured a woman using her telekinetic powers to freak out
coffee shop patrons. Released in October, it’s been viewed more
than 52 million times on YouTube; Google recently ranked it the
second-most-watched online ad of the year.
thinkModo’s hit parade
For years advertising agencies and the companies
that hire them have been trying to pinpoint the exact
formula that makes a video go viral online. They know
some of the components: Cute animals help, as do
babies and ridiculous pop songs. But six years after
Keyboard Cat plinked his first notes on YouTube,
finding fans on the Internet is still mostly a crapshoot.
Thinkmodo keeps placing the right bets.
Aside from a cheerful office assistant named Sam,
Thinkmodo’s founders are still its only employees.
Percelay is a former line producer for Saturday
Night Live, where he made commercial paro-
dies. In 2011 he was working on a Web series
for Warner Bros. when he saw a video Krivicka
made about a fake iPhone app called Nude It
that allowed you to see through people’s cloth-
ing. “I suddenly had this idea for an advertising
firm that only made Web videos,” he says. He
called up Krivicka, the two met for beers, and
a few months later they were working on their
first project. It was a commercial for the razor
company HeadBlade, filmed on a smartphone, in which
two twenty-something guys show off a motorcycle helmet
they’ve turned into an automatic head-shaving device.
Thinkmodo has long since upgraded from iPhone
videos; today the average price of a project is about
$750,000, on par with filming a regular television com-
mercial. That includes the production, editing, creation
of the animatronic baby or whatever other props are
needed, and the initial online campaign, which Percelay
and Krivicka oversee themselves.
The company’s videos follow a specific formula. First,
Krivicka says, you have to play on people’s emotions.
“Make it funny or scary or something that makes people
say, ‘Wow’—those are the moments in life we want to share
with someone else,” he says. Don’t show the product or
advertise the film too blatantly, or people will stop watch-
ing. When filming a prank, make it as authentic as pos-
sible while guarding against lawsuits. (Thinkmodo often
prescreens people for heart conditions and asks them to
sign a release.) “We like to invent the ‘world’s first’ some-
thing,” Percelay says. “People will always click on that.” Despite
its attention to viral marketing, Thinkmodo’s end goal isn’t to

photographS by jeff brown for bloomberg buSineSSweek; StillS courteSy of thinkmodo

get a lot of fans on YouTube. “We don’t need to be the most viral
Flying People NYC
YouTube views:
video in the history of the Internet,” Percelay says. “Our real goal
8.7 million
To promote 20th Century
Fox’s sci-fi film Chronicle,
the company hired
model airplane builders
to fly six-foot-tall
human-shaped machines
around New York
Elevator Murder
Experiment
YouTube views:
6.7 million
For FilmDistrict’s Dead Man
Down, Thinkmodo staged a
murder-in-progress
and recorded people running
away or taking pictures
is to get on TV.”
Television is still a highly
coveted marketing medium,
but because people now
watch shows online and
through DVRs, they’ve
learned to avoid commer-
cials, making it harder for
advertisers to get their
attention. But if a busi-
ness can somehow get its
message to be part of the
Zombie Experiment actual TV program—maybe
YouTube views: have its own segment on
25.6 million Good Morning America or
To protest a cable dispute with Dish get talked about on CNN—
Network, AMC asked the agency to
pretend Walking Dead zombies had been then it’s not a commercial
fired and forced to roam city streets anymore, it’s “content.” And
 Etc.

Randall Rothenberg, CEO of the Interactive

Advertising Bureau. “Paid advertising is still
the most predictable.”
Thinkmodo has also become a go-to online
marketing arm for major film studios such as
A harpoon used
20th Century Fox and Sony Pictures. Hollywood
to play darts in
their Underwater knows how to drop tens of millions of dollars
Nightclub video on big-budget films such as Anchorman 2: The
Legend Continues, but it needs help making sure
smaller films don’t get lost. “We’re a horror film
by a first-time filmmaker with an unknown cast,”
says Tyler Gillett, director of Devil’s Due, the
subject of the baby carriage prank. “Fox can’t
just plaster Vince Vaughn’s face on a billboard
for us; we have to really sell this movie.”
The firm has done a lot of ads for horror films.
There was the Carrie video, the fake murder-in-
progress scenes it staged for niche horror film
Dead Man Down (covered by ABC News, Time,
and Gawker), and the time it had demons appear
in trick mirrors used by unsuspecting hair salon
customers for The Last Exorcism Part II. This
summer more than 20 movies with budgets over
$100 million were released, and many of them
failed spectacularly. And every single one came
with a multimillion-dollar marketing campaign
that was similar to the last. “I think studios are
starting to realize that their spending is out of
control,” Percelay says, pointing out that after
this summer’s box office implosion, six mar- 61
keting executives have been fired from major
studios. Meanwhile, he and Krivicka are moving
from genre films to blockbusters. They won’t say
which ones, but a whiteboard in their office has
the names of some films behind them. Among
them are Spider-Man and Transformers 4.
After The Last Exorcism Part II video release,
Thinkmodo took the mirror to Today, where Matt
Lauer used it to scare co-host Natalie Morales
(Lauer has re-created at least three of the agency’s
stunts on air). With advertising incorporated into
in this era of a million cable channels and endless news cycles, news shows, it’s becoming more difficult to tell the two apart.
media outlets are ravenous for stuff to discuss. If a Thinkmodo Until now, most of the journalistic debate has focused on “spon-
campaign is newsy enough, it might just get on TV for free. sored content” and “native ads,” or paid advertisements designed
“We’ve never done a traditional TV commercial. It’s too to look like news articles. Thinkmodo doesn’t pay for anything—
expensive,” says Hitesh Hajarnavis, chief executive officer it just releases a video, racks up millions of views, and then sits
of Popcorn, Indiana, which sells snacks back and waits for Matt Lauer to call.
everywhere from Whole Foods to Walmart. “There’ve always been exceptions to advertising, and
According to media agency TargetCast
tcm, the price of airing one 30-second
“studios are this just sounds like the latest one,” Rothenberg says.
Thinkmodo’s tactics remind him of the 1980s trend of
prime-time ad is well over $100,000— starting to video news releases, or VNRs, in which public relations
and that’s just for one spot. A frequently
aired campaign can easily cost millions of
reaLize …  companies created their own news segments and allowed
stations to broadcast them freely. “This is essentially
dollars. So Hajarnavis hired Thinkmodo. spending is out the same thing.”
In 2012, Percelay and Krivicka filmed a
video about the Popinator, the “world’s
of controL” After four hours of frightening people with the demonic
baby stroller—including one New York policeman who’s
first” machine that shoots popcorn directly about to radio for backup when Percelay runs up to him
into people’s mouths. The Popinator made it onto ABC News and explains it was just a joke—the group breaks for lunch.
and the Huffington Post; Seth Meyers even mentioned it on Fiedler and Rappaport run off to fix the carriage, which stopped
SNL’s Weekend Update. A year and a half after the video’s working after a confused sanitation worker bumped into it with
release, Hajarnavis says he’s still fielding calls from people his cart. Once it’s repaired, they’ll go back to filming in the last
who watched it. But that doesn’t guarantee sales. “It’s a good few hours of winter daylight. “It’s looking great,” Krivicka says.
gambit, but it’s a narrow type of ad for most companies,” says “But tomorrow let’s make the baby vomit.” <BW>
 Etc.

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 Etc.
Don’t SwEat It
Exercising with co-workers or clients is a bad idea. By Kurt Soller
W
e e-mail from our beds, tote
our laptops home for the holi-
days, and ensure the ski cabin
has Wi-Fi. The only time we’re
ever untethered is at the gym,
when our smartphone’s in the
locker and our mind’s con-
sumed with not falling off the
treadmill. Working out is our
last respite from our colleagues, the one
place we are truly alone.
It used to be, at least. Group fitness
programs such as Physique 57, Barry’s
Bootcamp, and CrossFit, not to mention
countless peppy cycling studios, have
outpaced the megagyms of the last
decade, and their emphasis on commu-
nity and team building has bled into the
corporate sphere. “Salespeople have
64 stopped winning clients with a four-
course dinner or hours of drinks,” says
Gabby Etrog Cohen, the director of mar-
keting at SoulCycle spinning studios.
“Instead, they just book a class.”
Sweating indoors can be expensive,
especially in a city, so these fitness free-
bies increasingly trump other swag. Tough
Mudder—its grueling obstacle course
includes 15-foot muddy walls and a field
of live electric wires—provides discounts
Rant
and travel packages to employee teams
sponsored by Goldman Sachs, Bain,
PricewaterhouseCoopers, and dozens of
other massive companies. These groups
“make up a noticeable percentage of every
start wave,” says Tough Mudder Director of
Sales Matt Hirschbiel. Flywheel became so
popular among Microsoft employees that
the company had the indoor
cycling chain open a loca-
tion on its Redmond (Wash.)
campus. And SoulCycle A drink?
is offering discounted
corporate-entertainment Fine. A spin
packages that include clAss?
advance bike reservations
during busy after-work not hAppening
hours and a highly tweetable
slogan: “Sweatworking is the
new networking.” Even at $45 per class,
sweatworking is still easier on a tightened
expense account than a bottle of Barolo.
There’s a reason business outings
often come with booze. Socializing
with co-workers and clients is already
awkward. How could it possibly be a good
idea to add in a public changing room,
spandex, and the occasional grunt?
“You spend all this time cultivating pro-
fessional relationships, and then they
see you at your most vulnerable,” says
Ariel Moses, a communications execu-
tive, recalling a particularly difficult Bar
Method class she took with two work con-
tacts. “They’re not judgmental, at all, but
I was judging myself more.”
At least once a month, an e-mail
arrives from a business acquaintance who
wants to “catch up” over
the latest trendy fitness
craze. I either ignore these
requests or lie and say I’ve
decided to quit exercise
cold turkey. A drink? Fine.
A workout? Not happening.
Fitness, like its closest
cousin, ath letics, always
comes with an undercur-
rent of competition. That’s
beneficial when you’re training for a mar-
athon or trying to lose weight. But most
of us are already striving to outperform
our colleagues on a daily basis. Adding
more rivalry—Bob is the best spinner,
Kate fell off the Tough Mudder wall, John
is so damn slow—is unnecessary at best
and destructive at worst. You’re better off
pretending the invite went to your spam
folder or ducking out of work early when
everyone’s putting on their short-shorts.
If you see co-workers at your gym,
switch gyms. If you can’t
do that, nod from
afar. Don’t engage,
even positively, as it
just gets weird: “Once,
I said to my co-worker, ‘I want
to have abs like yours,’ ” remem-
bers David Perez, who works
in public relations. “It did not
go over well.”
The biggest issue isn’t
the workout itself, it’s
what happens after. “I
once ran into my boss in
the showers, totally naked,
and he wanted some exercise
advice from me,” says Kivanc
illustration by al murphy
Ozdemir, a hotel executive.
He told his manager that he
should try more cardio.
“Obviously, I saw him
differently after that.” <BW>
 Organization Etc.
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 Etc.
downton
downturn
In the period drama returning to PBS, real-world problems
aren’t much fun. By Claire Suddath
I
f I were to ever search for logic, I would
not look for it among the English upper
class,” says Downton Abbey’s quippy
66 conscience, the Dowager Countess
Grantham (Maggie Smith), in the third
episode of the show’s fourth season,
which premieres on Jan. 5 on PBS.
Three-and-a-half months after airing in
Britain, where it averaged 11.8 million
viewers per episode and became the
U.K.’s most-watched drama, the period
series returns on a note of change.
Even the Dowager, the character
most closely bound to the old, aris-
tocratic ways, is moving away from tradi-
tion. Last season, when Lord Grantham
(Hugh Bonneville) wore black tie to dinner
instead of white, she told him he looked
like a waiter. When it happens again in
the fourth season, she merely sighs, “And
so another brick is pulled from the wall.”
The premiere begins in the after-
math of tragedy: Matthew Crawley,
Downton Abbey’s likable and cute male
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lead, was—spoiler alert—killed off in an
untimely car accident at the end of season
three. (The actor, Dan Stevens, pulled a
David Caruso and left to pursue a film
career.) Without him, fans wondered,
was there any reason for Downton to go
on? Crawley’s widow, Lady Mary (Michelle
Dockery), spends much of the fourth
season asking the same question. In fact,
the grand English country house enters
1922 populated mostly by widows, grieving
mothers, and orphans, and its once highly
refined social strata are in complete dis-
array. Past episodes saw Downton struggle
to maintain its splendor, first in wartime—
when the new hardships, while appalling,
were at least temporary—and then amid
the cosmopolitan and increasingly dem-
ocratic world that surrounded it. Now
Downton’s heir is dead, the death taxes
are due, and Lord Grantham says he can’t
afford them unless he sells off some of the
estate. It’s the beginning of the end for
British nobility, and everybody knows it.
“You are just not going to find
the perfect match.” We all settle,
but those with lower search
costs—because they like browsing
or are bored with life—will wait
around longer. p8
something about his skills.”
sites a long time, you’re seen
“It’s OK to exaggerate because
everyone else does.” Most people
fudge height and weight on
dating profiles, so few potential
suitors take those numbers
at face value. In game theory, this
is called “cheap talk.” p42
Of course, that doesn’t mean the
world is without conflict—just that the
problems seem more relatable and less
“the Duchess was called the wrong title
at lunch!” A black jazz singer is intro-
duced this season and encounters the
expected bigotry. Ugly duckling Edith
Crawley (Laura Carmichael) contem-
plates marrying a soon-to-be-divorced
man—even the complications specific to
landed gentry have modernized. Lady
Mary finally gets control over some of
the estate but worries that, as a young
woman, she won’t be taken seriously.
Happily (and completely anachronisti-
cally), she decides to Lean In.
In creator Julian Fellowes’s transition
to modernity, it’s harder for American
viewers to live out their Anglophile fan-
tasies. Sure, a society that values blood-
lines over hard work is anathema to our
country’s ideals. But who wouldn’t want
to inherit a sprawling country estate
and wear fabulous flapper dresses to
dinner? Most of us watch Downton Abbey
assuming that we’d be given a place at
the Crawleys’ dinner table, when the
truth is we’d almost certainly be eating
with the servants.
This season, Downton’s a sad place that
gets even sadder as it begins to fall. But
while the joy may be gone, the drama def-
initely isn’t. Fellowes has written plenty
of salacious subplots to keep fans enter-
tained. There are still grudges and rival-
ries and backstabbing servants, and one
endearing scene in which the cook, Mrs.
Patmore (Lesley Nicol), confronted with
the invention of the electric mixer, worries
that her job has been made redundant.
On its surface, Downton Abbey’s an
photo illustration by alis atwell; Castle: Jeff Gilbert/alamy; briCks: brookselliott/Getty imaGes
escapist soap opera disguised as a PBS
drama, much like its grandparent, Upstairs,
Downstairs , and it’s easy to watch it
smugly, secure in the knowledge that
we’re from a more liberal, accepting time
in a more liberal, accepting country. But
with each passing season, the future that
Downton trudges toward seems more like
our own. And where’s the fun in that? <BW>
“Unemployment, like
being single, becomes
a self-reinforcing state—
employers figure the fact
a jobless person has been
“Pretty simply, men
passed up … implies
are looking for
attractive women,
If you remain on dating
women are looking
for attractive and
as less desirable. p135
rich men.” Improve
these attributes and
you’ll get approached
more. p169
 What I Wear to Work Etc.
What’s Just Business?
It’s a personal concierge
service. I take care
That’s a very of one family per day.
happy sweater. stella & Dot I do a lot of organizing
Blouses and sweaters and research. And
give a really finished I have 10 staffers who
look to any outfit. work events.
Cotton loses its
shape by noon and
How did you get into
then dies in my concierging?
laundry basket. I started in PR, and I
really hated it. I was 24
and waiting tables and
BurBerry thought, “I don’t want to
do this forever, so how
can I sort of wait tables
for people’s lives?”

MotH

Are you a watch

Julia Baker
connoisseur?
No! But worse is a woman
pulling a cell phone out of
the top of her dress. I see
it all the time at events.

Hansen
I mean, come on, ladies,
buy a watch.

67
31, owner, Just Business, Denver

What’s your outfit Morgan Carper

strategy?
I love to mix patterns.
And I always wear
cowboy boots. My job
requires a lot of schlep-
ping and sprinting, so
heels are out.
antHropologie

Why not just wear slacks and

photograph by Christopher Leaman for bLoomberg businessweek

comfy shoes?
When you’re serving people, you
run the risk of losing a little bit
of yourself. The more people are
telling you what to do, the more
important it is to express yourself
through what you wear. Are you behind on
your own errands?
How do you do that? Totally. Drive-throughs
Sparkle and spirit. are the only thing
Whether I’m taking that keeps my life going.
care of my 1-year-old And the dry cleaner,
liquor store, and banks.
or a professional,
I keep a strong grasp
on the fact that my Interview by Arianne Cohen

spirit is just as special HolDing Horses

as everyone else’s.
 Etc. How Did I Get Here?

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wolfgang puck Chef and restaurateur
“My mother was a chef “My stepfather said I was good
in Austria. I started cooking EduCatION for nothing. A month into
with her when I was 12. my apprenticeship, the chef fired
When I was 14, I left school me. I walked to a bridge—
Hauptschule St. Veit,
to get an apprenticeship St. Veit, Austria,
I thought I’d kill myself before
at a restaurant.” class of 1963 I proved my stepfather right.
Instead, I asked for my
job back. The chef let me stay.”
WORK
“Raymond Thuilier EXPERIENCE
was my first mentor— “People call it the
everyone from first Asian fusion
the Queen of England 1963-66 restaurant. This
Chef ’s apprentice, happened mostly
to Picasso ate there.” Parkhotel, because I didn’t
Villach, Austria know how to cook
Chinese food.”
1969-72
“One day the sous chef Chef de partie,
L’Oustau de Baumanière,
came over and said, ‘Who Les Baux-de-Provence,
made this sauce?’ I said France

u’ll realize you can do better.” 3. “Adversity helps people, but sometimes it’s also nice to know that you’re appreciated.”
‘Me,’ and he said, ‘This is
1972
the best sauce I’ve ever Night chef,
68
had.’ That’s when I knew Maxim’s, Paris
I was pretty good.” 1973-75
“In one Chef, La Tour, “Johnny Carson would eat at
year’s time Indianapolis
Spago, then ask for 10 pizzas.
Puck at the fish market
in Los Angeles I cooked more 1975-81 He said, ‘I put them in
Chef and part owner, the freezer, and when I have
steak well Ma Maison, Los Angeles
people over, my guy puts
done than 1982 them in the oven, and
I have during Opens Spago in
West Hollywood, Calif.
they’re just as good
the rest as new.’ So I started
of my life.” 1983
Opens Chinois on Main
making frozen pizzas.”
in Santa Monica, Calif.

1987 “You have to be so organized

Launches a line in catering. We did weddings
of frozen pizzas
in the middle of Missouri
1991 and Montana where, if you
Opens Wolfgang Puck forgot something, you had
Express restaurants
to drive two hours to go get it.”
1998
Starts Wolfgang Puck
Catering

2011
Opens Cut steakhouses
Puck, top: George Pimentel/Getty Images; Thuilier:

in Singapore and
courtesy of the subject; Wolfgang Puck Express:
America/Alamy; Streep: courtesy of the subject

London
Manuel Litran/Paris Match via Getty Images;
Chinois: Lennox McLendon/AP; fish market:

2014
Will open Cut in Dubai “I want to
conquer Puck with Meryl Streep at

LIfE LEssONs
the Middle the 84th Academy Awards

East!”
yo

r
te
1. “Don’t expand a business if you don’t have the talent to support it.” 2. “You may think the first dish you make is good, but when you try it again a we ek la
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