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 the equality issue
○ the battle for
transgender rights 56
○ LLOYD’S OF LONDON looks
male and pale 62
○ how to make your company
March 25, 2019 more gay-friendly 68

college
is a
racket REBECCA KANTAR,
founder of testing
startup IMBELLUS

THIS HARVARD DROPOUT SAYS

SHE HAS A BETTER WAY 44
 ADVE RTI S E M E NT
F W st G
the Best Ideas Out of Your
Next Brainstorming Session
A good brainstorming session can be pivotal
for any business, but a bad one can leave
participants with lower morale and the feeling
that they’ve just wasted a few hours at work.
Follow these steps to set up your next
brainstorming session for success:
1 Be smart about scheduling and the setting
Getting out of the office can help participants focus on the
task at hand. Choose a brightly lit space with plenty of room
to move around. To encourage collaboration, place large easel
pads or hang posters around the room that people can use
to sketch out ideas. Start early in the day, so that participants
won’t be worried about getting out to head home.
2 Invite the right people
While you’ll need to invite the core members of your team, you
may want to cast a wider net. “Diversity is important to increase
the creative potential of the group,” says Keith Sawyer, author
of Group Genius: The Creative Power of Collaboration and
a professor at the University of North Carolina. “It’s important
to have people who bring different bodies of knowledge that
might be relevant to the problem.”
Everyone in the group should feel like they’re participating,
so if you have more than eight to 10 participants, consider
breaking into smaller groups.
3 Unplug
If participants are on laptops and smartphones, it will be
easier for them to become distracted. Instead, hand out
notebooks, pens and markers, and ask everyone to turn
off their electronics for the session.
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4 Provide tools and tasks that spark innovation
Consider starting with an icebreaker, such as inviting
participants to create a vision board that draws inspiration from
your company or the problem you’re hoping to solve. Provide
posters, scissors, glue or magnets and plenty of magazines,
postcards and photos with which they can create the board.
Other props that might help trigger ideas include a deck
of cards with thought starters, or blank mind map templates
that people can use to organize information and thoughts.
Participants should also arrive to the session prepared with
some written ideas recorded in journals and notebooks. This
will help the team think about solutions in advance, and to
come to the meeting owning their ideas and ready to share.
Phillips & Co., an Illinois-based innovation consultancy that has
worked with brands including Hyatt and Verizon, often creates
custom tools for brainstorming sessions, such as worksheets
or maps showing a customer’s journey. “You’re trying to take
very conceptual ideas and make them physical,” says company
President Matt Phillips. “Paper is the best tool for that. It allows
you to take something that might be a service or process and
turn it into a sketch. Then people around the table can play
with it or modify it using markers or pens.”
5 Appoint a leader to keep things moving
While you want ideas to be free-flowing, you also want to
ensure that the team is able to remain focused. Make sure
everything is written down: In addition to having one person
lead the brainstorming session, you’ll also want to appoint
a note-taker to capture the ideas generated throughout the
day and to create a report afterward. Even a small thought
that might seem inapplicable in the moment could ultimately
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 March 25, 2019

◀ Clockwise from
far left: Transgender
workers Christian
Oropeza, Victoria
Starrett, Julian Harris,
and Donna Rose

3
PHOTOGRAPHS BY ZACKARY DRUCKER FOR BLOOMBERG BUSINESSWEEK

SPECIAL ISSUE 41 The Business of Equality

44 Fixing the college admissions mess with video games. Yes, video games
51 The wealth gap between black and white households is widening
52 A dating app that’s also helping gay Chinese men have kids
55 Natural disasters have a way of making inequality worse
56 Transgender workers encounter discrimination, misperceptions—and triumphs
62 Harassment is common. Drinking is expected. Welcome to Lloyd’s of London
67 Gender roles are loosening, but there’s still a ways to go
68 How Dow Chemical became an unlikely refuge for LGBT rights
72 California gets more women a place at the board table
 ◼ CONTENTS Bloomberg Businessweek March 25, 2019

◼ IN BRIEF 7 The Fed and interest rates; $23 million for Boeing’s CEO How to Contact
Bloomberg
◼ AGENDA 8 Apple streams; Ukraine’s front-runner; wine at Sotheby’s Businessweek
◼ OPINION 8 India has to fight harder against fake news
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◼ REMARKS 10 One takeaway from Christchurch: Regulate social media Ad Sales
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 Bloomberg Businessweek March 25, 2019
 IN BRIEF By Benedikt Kammel

○ Deutsche Bank and ○ U.S. Federal

Commerzbank said they’re
in exploratory talks to Reserve officials
merge, potentially creating a left interest rates
German banking champion unchanged.
after years of failed cost
cuts and management
shake-ups.  23

In a sign of concern about economic

growth, the Fed also lowered its
projected interest-rate increases
this year to zero and said it would
stop reducing its bond holdings in ○ High-water records were set across Nebraska in this week’s flooding, and
September. authorities have had to rescue at least 175 people. More rain is on the way.

○ Boeing revealed that CEO ○ Bayer shares slumped ○ Nursultan Nazarbayev, ○ Norway’s Norsk Hydro,
Dennis Muilenburg was paid after the German chemicals Kazakhstan’s one of the world’s biggest
company lost the first leader-for-life, aluminum producers,

$23.4m
for 2018, a big increase
round in a U.S. jury trial over
claims that its Roundup
weed killer causes cancer.
resigned after
29 years in power. He was
succeeded as president
suffered production
outages after a cyberattack
affected operations across
from the previous year. by Chairman of the Senate Europe and the U.S.
The announcement comes Kassym-Jomart Tokayev.
as the company grapples The Senate elected Dariga
with the aftermath of two Nazarbeyeva, Nursultan’s 7
737 Max crashes. daughter, as its new
chairwoman, putting her in
€62.71 the line of succession to the
3/20/19
€60.51
presidency.
12/20/18
FLOODS: JEFF BUNDY/OMAHA WORLD-HERALD/AP PHOTO. NAZARBAYEV: AP PHOTO. ARDERN: WIKTOR SZYMANOWICZ/GETTY IMAGES

○ Fidelity National ○ New aland Prime

○ “The government Information Service plans Minister Jacin
to buy Worldpay for about Ardern s s her
cannot legitimately submit govern nt will

the same proposition or $34b

in cash and stock, the
overhaul gun laws
after the worst mass
shooting in the
substantially the same biggest deal ever in
international payments.
nation’s h
history left
50 people dead at
proposition as that of last two mos ues in the
South Is nd city
week, which was rejected.” of Christc
 10
church.

Speaker John Bercow of the House of Commons detonated Prime Minister

Theresa May’s effort to call another vote on her Brexit plan after two previous
attempts ended in humiliating defeat, throwing her departure road map into crisis.

○ Cyclone Idai, striking Mozambique on March 15, may have killed more than 1,000 after widespread flooding.
○ Authorities apprehended a Turkish-born gunman who murdered three people on a tram in the Dutch city of Utrecht.
○ Manila, the capital of the Philippines, is reeling from its most severe water shortage in nearly a decade.
○ France has banned some yellow-vest protests after riots on the main boulevards destroyed luxury stores.
 ◼ AGENDA
Bloomberg Businessweek March 25, 2019

▶ Felix Sater, a former ▶ Shares in Lyft, the

business partner of
Donald Trump, appears on
March 27 at a congressional
hearing probing his role in a
Moscow skyscraper plan.
second-largest U.S. ride-
hailing service behind
Uber, will begin trading on
the Nasdaq Global Select
Market on March 29.

▶ Ukraine holds presidential ▶ Local Turkish elections

elections on March 31.
Volodymyr Zelenskiy, a TV
comic who likes to poke fun
at the country’s elites, is
leading in opinion polls.
▶ Apple to Take a Bite Out of Netflix ▶ Mexico’s central bank
Apple will unveil a streaming service on March 25 that unveils its interest-rate
combines original content with programming from decision on March 28.
HBO, Starz, and other partners. The offering opens a Inflation in the country has
battlefront with Hollywood studios, Amazon, and Netflix, slowed, lifting expectations
which says it won’t be part of the platform. of a rate cut later this year.
on March 31 could be a
referendum on President
Recep Tayyip Erdogan’s rule
and a gauge of his support
in Istanbul and other cities.
▶ Sotheby’s March 29-31
wine auction in Hong Kong
could set records, fetching
as much as $26 million for
almost 17,000 bottles from
one collection.

◼ BLOOMBERG OPINION

police content that is, among other things, “blasphemous,

8
India vs. Fake News
● In the deadly battle against disinformation,
New Delhi shows what not to do
For online trolls, India might be the world’s fattest target.
Nearly a billion people are registered to vote in the country’s
upcoming elections, the largest in history. Meanwhile, India
is one of the fastest-growing markets for social media plat-
forms and messaging apps. The potential for hoaxes, slander,
rumors, and sundry other misinformation to influence voters
is vast. The country’s efforts to combat that threat, however,
risk undermining the very democracy they’re meant to save.
The challenge India faces is emblematic. Misinformation is
upending politics and worsening tensions across the develop-
ing world. It’s even contributed to violence, from the pogroms
of Rohingya in Myanmar stoked by Facebook posts to lynch-
ings in India sparked by rumors on WhatsApp. Several
vulnerable democracies are also going to the polls this year.
India’s approach to the problem is something of a test case.
Unfortunately, it’s making a hash of it. A recently published
set of draft regulations would impose drastic if not impossi-
defamatory, obscene, pornographic, paedophilic, libellous,
invasive of another’s privacy, hateful, or racially, ethnically
objectionable, disparaging, relating or encouraging money
laundering or gambling, or otherwise unlawful in any manner
whatever.” The algorithm that could decide what content falls
into such categories hasn’t been invented yet.
Making matters worse, such vague strictures are an invita-
tion to official abuse. Virtually any government agency could
demand that a post be taken down or its author traced. It’s
not hard to imagine such powers being misused to censor crit-
icism, attack political opponents, or facilitate corruption.
A better approach is clearly needed. As India and other
countries confront this challenge, their primary goal should
be protecting citizens and democratic discourse. That means
chipping away at disinformation without violating fundamen-
tal privacy rights or suppressing freedom of speech.
Tech companies will of course be on the front lines of
this fight. Although they’ve taken some welcome steps
recently—including hiring more staff to police disinforma-
tion, making political ads more transparent, and weeding
out fake accounts—they’ll need to do more. Boosting invest-
ment in fact-checkers, public-education campaigns, and tools
that help users learn to question what they encounter online
would be a start. Platforms should also warn users about fake
ILLUSTRATION BY PETER GAMLEN

ble obligations on platforms. One rule would force them to
break end-to-end encryption if asked to trace the source of
objectionable content, a demand that could worsen security,
eliminate privacy, and undermine freedom of speech. Another
rule would require companies to use automated filters to
content they’re likely to see and make it easier to flag dubious
posts. Giving independent researchers access to internal data,
meanwhile, could help weed out potential vulnerabilities. <BW>
Written by the Bloomberg Opinion editorial board
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 ◼ REMARKS

10
When Lives Are on the Line
 ◼ REMARKS Bloomberg Businessweek
● After the New Zealand massacre,
will governments begin to regulate
how social media oversees content?
● By Polly Mosendz and
Gerrit De Vynck
Evil travels freely on the internet. It flickers before us in plain
sight. Yet, despite the livestreamed horror of March 15 in
Christchurch, New Zealand, enacting social media reforms
will take massive efforts in regulation, requiring the coopera-
tion of the tech giants, governments, and consumers.
In a perfect world, YouTube’s and Facebook’s algorithms
would race through a video as soon as someone tries to upload
it. If the machines recognize troubling content or a video that’s
already been banned, the images would never reach the public.
So what happened in New Zealand? Alleged gunman
Brenton Tarrant had an audience of only about 200 people
during the 17 minutes he broadcast his attack on the Al Noor
mosque in Christchurch. Yet, though Facebook Inc. took the
video off Tarrant’s page 12 minutes after the livestream ended,
hundreds of thousands of clones of the footage were produced
and circulated on the internet. The video was reposted on
Twitter, where it auto-played on the timelines of unsuspect-
ing users; it appeared in Reddit’s infamous “Watch People Die”
forum, which is exactly what its name says it is; and, of course,
it showed up on YouTube, the world’s leading video-hosting
site. Facebook managed to stop 1.2 million copies from circu-
lating on its site—but 300,000 still got through. At its peak, the
video was uploaded once per second, YouTube Chief Product
Officer Neal Mohan told the Washington Post.
Google’s and YouTube’s AI censors work well for videos
they’ve had time to “learn” to recognize, such as previously
collected terrorist propaganda or child pornography cataloged
by police officers. To a certain extent, the algorithms may spot
permutations of that footage. They still struggle, however, with
what’s going on in clips they’ve never seen, according to Rasty
Turek, chief executive officer of Pex, a startup that helps com-
panies identify videos infringing on copyright. Even if the plat-
forms identify fresh material as objectionable, the people who
post it can use simple tricks like changing the size of the clip,
speeding it up or slowing it down, or simply flipping it on its
side to fool the algorithms.
Google and Facebook have spent years trying to find ways
to stop problematic videos from appearing on their websites.
PHOTO ILLUSTRATION BY 731; PHOTO: ALAMY
YouTube’s Content ID tool, which has been around for more
than a decade, gives copyright owners such as film studios the
ability to claim content as their own, get paid for it, and have
bootlegged copies deleted. Similar technology has been used
to identify illegal or undesirable content. But when a new
video circulates, it can be copied, altered in a minor way, and
re-uploaded, slipping past the censors. “It’s whack-a-mole,”
March 25, 2019
Turek says. “People are genius at these things. They will figure
out how to get something past it.”
At congressional hearings in the U.S. over the past two
years, executives from Facebook and YouTube said they were
investing heavily in artificial intelligence that would be able
to find and block violent and graphic videos before anyone
saw them. But if all you have is a split second, how do you
distinguish fact from fiction, and freedom of expression from
murderous reality? Getting from AI’s idealistic intentions “to
understanding the context of a video is like a frog understand-
ing a grocery store,” Turek says.
By the point in the livestream when Tarrant left his car and
entered the mosque, it was too late to save lives. But could
social media platforms have stopped him long before that?
Perhaps, if they’d recognized the warning signs in Tarrant’s
online behavior. Two days before the assault, he posted mul-
tiple photographs on Twitter of assault-style firearms and
ammunition, marked with telltale writing. Among the inscrip-
tions were the names of accused mass murderers: Alexandre
Bissonnette, convicted of killing six Muslims at a mosque in
Canada; Luca Traini, a neo-Nazi convicted of shooting six
African immigrants in Italy; and Josué Estébanez, who killed
a teenager who was protesting fascism in Spain. Tarrant made
multiple mentions of “14,” a reference to the 14-word-long
white supremacist slogan. Also on view was a bulletproof vest
covered with symbols commonly used by neo-Nazis: a Celtic 11
cross and the black sun—or Sonnenrad—patch.
Even before posting photos of his weapons, Tarrant spent
weeks tweeting out racist videos, calling immigrants “invad-
ers,” and claiming white people were being subjected to geno-
cide. He also posted a link to an 87-page manifesto to Twitter
hours before the shooting. None of this behavior raised red
flags at Twitter. His profile remained active until the murder
spree in New Zealand.
Tarrant is an Australian citizen, but in the U.S., where
Twitter is based, his tweets would have been largely protected
by the First Amendment to the U.S. Constitution. The rifle
photos, however, could press against the boundary of inciting
violence. “Putting the name of a mass shooter on your rifle is
pretty much the same as yelling ‘fire’ in a crowded theater,”
wrote Robert Evans, who reports about right-wing extrem-
ism for the online investigative journalism site Bellingcat. “If
you’re posting pictures of your rifle with the names of other
mass shooters on it, [Twitter] should look into where that guy
is posting from and inform law enforcement.”
Following the attack, Twitter removed Tarrant’s profile. By
then, however, users on YouTube had already preserved it
and uploaded videos that scrolled through his account, which
included links to the manifesto. YouTube also became home
to numerous re-uploaded versions of the original Facebook
Live broadcast. Internet service providers in New Zealand took
matters into their own hands, blocking a website popular with
white supremacists where the video was spreading. “It’s an
unprecedented action,” tweeted Jason Paris, CEO of Vodafone
New Zealand Ltd., when questioned about whether the
 ◼ REMARKS Bloomberg Businessweek
internet service provider was engaging in censorship.
“However, terrorism won’t get any oxygen from Vodafone.”
The world’s democracies have been reluctant to remove
content from the web, though, fearful of mirroring the policies
of more restrictive regimes, such as China. “While the intent
may be to protect citizens from bad stuff, rather than to reg-
ulate or coerce, progressives would have a hard time squar-
ing their love of freedom with shutting off access to things like
YouTube or Facebook,” says Ari Ezra Waldman, a professor
at New York Law School who studies technology regulation.
Hate speech is banned in Australia—though penalties are rela-
tively light, mostly resulting in apologies. But in New Zealand
the Department of Internal Affairs declared that sharing the
March 15 video was a crime. Legislators also quickly proposed a
ban on semi-automatic rifles like those used in the attack. And,
in the wake of the massacre, politicians have called for regula-
tion of social media companies, which have been highly resis-
tant to policing their own content.
In the U.S., despite slews of congressional hearings, law-
makers have been reluctant to impose restrictions on tech-
nology companies. Some have tried to put together a federal
online privacy bill, but to no avail. A bill that would have
restricted online political advertising lost steam when its
Republican sponsor, Arizona Senator John McCain, died.
Congress did pass a law that makes online platforms bear
12 some responsibility for activity on their sites—but limited it
to sex trafficking.
If the U.S. doesn’t find a way to regulate internet content
and establish watchdogs, could the American tech giants be
forced to do so by overseas pressure? The European Union
has imposed fines on Google and others for antitrust issues.
Last year it enacted the General Data Protection Regulation,
which includes “the right to be forgotten,” requiring compa-
nies to delete data on any individual who asks them to. Data
collectors also need to get consent from people before storing
their information. Some U.S. companies have already complied
with the European rules worldwide. Could the EU likewise
force U.S. companies to increase management of the content
that reaches its market of 500 million people? The scale of the
undertaking might just make compliance universal.
Immediately after news of the massacre broke, lawmakers
in Europe were calling for regulation. “We’ve heard a lot
today about taking back control,” Tom Watson, deputy leader
of the U.K.’s Labour Party, said on the radio. “Well, today the
big social media platforms lost control. They failed the vic-
tims of that terrorist atrocity. They failed to show any decency
and responsibility. And we can’t go on like this. Today must
be the day when good people commit to take back control
from the wicked, ignorant oligarchs of Silicon Valley.” Sajid
Javid, the U.K. home secretary, also expressed frustration
with Facebook, Google, and Twitter for allowing extremist
content. “Take some ownership,” he tweeted on March 15.
“Enough is enough.”
“At some point, we will have to regulate,” said Frans
Timmermans, a Dutch politician who serves as the first vice
March 25, 2019
president of the European Commission, at the World Policy
Forum on March 18. “The first task of any public authority
is to protect its citizens—and if we see you as a threat to our
citizens, we will regulate. And if you don’t work with us, we
will probably regulate badly.”
The imagery that populated Tarrant’s posts would be
difficult to find in Germany. After World War II the coun-
try banned the symbols of “unconstitutional organizations”:
swastikas, the Aryan fist, the Iron Cross, and others. In 2017
it passed the Network Enforcement Act, which fines social
media platforms that fail to remove illegal content, includ-
ing hate speech, defamation, and calls for violence. “By far,
the largest numbers of people who work to remove hateful
comments for Facebook are Germans working in Germany,
far more than there are in the U.S., even though the U.S. is
a far larger country,” says Henry Fernandez, a senior fellow
at the Center for American Progress who studies the role of
technology companies in radicalization. Europe is far more
willing to regulate content online because of its history with
fascism. “European interpretations of the importance of free
speech are simply different,” says Waldman of New York Law
School. “The cultural memory is very much tied to the hor-
rors of World War II.”
In February, Germany’s federal cartel office—which over-
sees antitrust issues—imposed “far-reaching restrictions”
on the way Facebook and its WhatsApp and Instagram sub-
sidiaries collect, combine, and deploy user data. The coun-
try’s policing of social media giants has caught the attention
of EU regulators. “We study it with the same great interest
because of the two legs, both that Facebook is a dominant
player in this market but also how they interpret privacy
rules,” EU Competition Commissioner Margrethe Vestager
told Bloomberg in early February.
Both Waldman and Fernandez believe European coun-
tries are more likely than the U.S. to regulate radical and vio-
lent content online. In New Zealand, Prime Minister Jacinda
Ardern focused on Facebook in front of Parliament on
March 19, saying, “They are the publisher, not just the post-
man. There cannot be a case of all profit, no responsibility.”
Still, in the U.S., threats to the bottom line are more effective
than lobbying Congress to restrict platforms that promote
white supremacy. Companies such as Procter & Gamble Co.
or Walt Disney Co., which spend hundreds of millions of dol-
lars a year on YouTube alone, have pulled ads when crimi-
nal or terrorist content popped up on the platform. “The
companies are driven first and foremost by a profit motive,”
Fernandez says. The algorithms they use “do not prioritize
curbing hate online. Profit first.”
That situation may change with a new generation of U.S.
legislators. “As younger people are being elected,” Fernandez
says, “they are engaging aggressively on social media as a
way to communicate. I would anticipate they would then
come with a different understanding of what regulation might
look like over time.” The question is: What can social media
companies do right now to prevent the next massacre? <BW>
There’s a feeling you get
when you talk face-to-face,
not face-to-website.

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 Bloomberg Businessweek March 25, 2019

14

Levi Strauss Wants to

GETTY IMAGES. ALAMY

Edited by
James E. Ellis and
Dimitra Kessenides Be Bigger Than Jeans
  BUSINESS
○ The company counts on
tops to boost sales as it
prepares to go public again
In 1873, German immigrant Levi Strauss founded an
industry when he began outfitting California gold
miners with blue jeans. His company evolved by
innovating—adding belt loops, for example—and
expanding its product line, making clothing for
women, kids, and teenagers. By the middle of the
last century, Levi’s jeans were an American icon.
In the 1980s competition from the likes of Calvin
Klein and Gap dethroned Levi Strauss & Co. Fashion
shifted away from denim, to khakis in the 1990s and
more recently to athleisure’s mix of workout gear
and casual clothing, adding to its woes. Now the
company synonymous with pants says it’s found a
strategy to revive its past glory: tops.
Sales of Levi’s tops doubled in the past five
years, to more than $1 billion. The category—
encompassing button-downs, sweatshirts, and
fleece cover-ups—generated more than half the
company’s growth during that period, and now
accounts for about 20 percent of revenue. That
success is the main reason its executives decided
to take Levi’s public again. They can pitch inves-
tors on the brand’s ability to evolve, this time into a
label making everything from hats to shoes. “That’s
the goal, to be more than just a jeans brand,” says
Michael Zuccaro, an analyst for Moody’s Investors
Service who covers the company’s publicly traded
bonds. The growth in tops “shows people are buy-
ing the brand, it’s not only Levi’s bottoms.” He adds
that changing the consumer’s mind about a brand
is extremely hard to do.
Prior efforts to get beyond men’s jeans faltered,
and sales slowly declined, dropping from $7 bil-
lion in 1997—almost $11 billion today, adjusted for
inflation—to $4.1 billion in 2009. But last year the
company posted $5.6 billion in sales, representing
growth of 14 percent, its best mark in more than a
quarter century. Tops played a major role, grow-
ing 37 percent, almost five times the rate of pants.
During that same 20-year stretch, Nike Inc.
crossed over into fashion from athletic perfor-
mance and increased revenue to almost $40 bil-
lion. But it’s an outlier. After initial breakthroughs,
many brands fail to make the leap into new cate-
gories. Under Armour Inc., struggling to become
DATA: COMPANY REPORTS
a fashion brand, has stepped back from a push
into trendier attire.
A visit to Levi’s flagship store in New York’s
Times Square shows how hard it’s trying. Just
Bloomberg Businessweek March 25, 2019
beyond the entrance, the first thing visitors see are
piles of T-shirts, sweatshirts, and accessories. The
company has struck a licensing deal with Peanuts,
a comic franchise with broad nostalgic appeal, so
there are Snoopy backpacks, jackets, hats, socks,
and even boxer briefs. Jeans are nowhere in sight,
until you head to the basement.
The shift to tops has been led by Chip Bergh, ○ Share of Levi’s sales
who became chief executive officer in 2011. He  Pants
arrived after almost three decades at Procter &  Other apparel
Gamble Co., where he helped integrate Gillette
after its $61 billion acquisition and then ran the 100%
men’s grooming unit. When Bergh joined Levi’s it
was overloaded with debt—the result of a leveraged
buyout by the founding family, who took the com-
pany private in 1985 and spent billions more pur- 50
chasing shares from other Strauss descendants to
consolidate ownership.
Bergh, who declined to comment for this arti-
cle, replaced most of the top management, paid 0
off debt, and cut costs, including reducing the head 2004 2018
count by about 7 percent. That freed up capital,
allowing him to embark on a classic brand expan- ○ Levi’s revenue
sion strategy: He boosted marketing—among other
things, acquiring the naming rights to the sta- $6b
dium of the NFL’s San Francisco 49ers—and began 15
expanding sales overseas. He opened a product lab
a few blocks from the San Francisco headquarters
to speed innovation, and in 2015 relaunched Levi’s 3
women’s business, which has seen its sales increase
for 14 straight quarters.
Levi’s now makes jeans blended with Spandex
to add stretch—and comfort. Revenue from Asia 0
and Europe has grown to 45 percent of all sales. 2004 2018
Bergh has multiplied the number of company-
operated stores by 75 percent, to more than 800,
giving it a bigger platform to reshape its image.
“Everywhere I look I see upside” and “someday a
$10 billion brand,” Bergh wrote in a piece for the
Harvard Business Review last year.
In late February, Levi’s disclosed plans for an
IPO, targeting a share price of $14 to $16. In a pos-
itive sign, on March 20, Levi’s sold 36.7 million
shares at $17 each, raising $624 million. The stock
was set to begin trading on March 21.
There are still plenty of risks for investors.
While profitability has improved, sales growth has
averaged less than 3 percent a year since Bergh’s
arrival, though it’s accelerated since 2017. The com-
pany points to China as a market with lots of poten-
tial. The country, which accounts for 20 percent of
the global apparel market, contributes just 3 per-
cent of Levi’s sales, or $167 million. But its econ-
omy is slowing.
Then there are people like Willy Davis, a
 ◼ BUSINESS
stylish 37-year-old from Harlem. He bought his
first pair of Levi’s jeans a couple of years ago and
says he loves the fit. As he shops the Levi’s depart-
ment at Macy’s flagship store in Manhattan, he
barely notices the shirts. Two-thirds of the com-
pany’s sales still come through Macy’s and other
wholesale accounts, and in these locations, the
focus remains piles of jeans. “I’m not really feel-
ing their tops,” says Davis, a program supervisor at
Manhattan’s Intrepid Museum. “I grew up thinking
Levi’s jeans, and I guess that’s how a lot of people
think.” �Matthew Townsend
THE BOTTOM LINE Forever known as a men’s jeans brand, Levi’s
is trying to sell investors on its ability to expand beyond pants to
other apparel and accessories.
How A.I.
Ate the
16
Colonel
● Yum China is betting on cashless stores,
innovative food items, and customized service
In Shanghai’s southeastern district of Xujiahui,
Colonel Sanders’s smiling visage looms over the
restaurant entrance, as it does at thousands of
KFC locations around the globe. But step inside,
and it quickly becomes clear that this is no ordi-
nary KFC.
Customers line up before a row of touchscreen
kiosks, keying in orders while a camera scans their
faces to process payment in less than a second.
Downstairs, a robot arm whirs to life to prepare
an ice cream cone. Diners can choose the joint’s
background music via app and listen to a favorite
tune while they eat.
So far only a few hundred KFC locations
have been similarly tricked out. But Yum China
Holdings Inc. says 86 percent of transactions
are already cashless and about half of orders
are placed via mobile app or digital kiosk at its
more than 8,400 KFC, Pizza Hut, and Taco Bell
Bloomberg Businessweek March 25, 2019
restaurants. The next step is to harvest data from
▲ Self-service
machine at a KFC
the more than 180 million Chinese who belong to restaurant in Tianjin
KFC and Pizza Hut loyalty programs and use arti-
ficial intelligence to customize a menu for each
diner based on preferences and local tastes. Yum
says the AI-powered menu, introduced in January,
has already boosted average per-order spending
by 1 percent—the equivalent of about $840 million
worth of fried chicken and pan pizzas each year.
China’s biggest fast-food operation, Yum is seek-
ing to maintain its dominance amid intensifying
competition from a newly assertive McDonald’s
Corp. (under Chinese management since 2017) and
smaller U.S. chains such as White Castle and Shake
Shack, as well as local fast-food operations looking
to undercut the incumbents on price. Yum acceler-
ated its expansion last year to two stores a day—the
company says it will have 10,000 by 2021. It’s bet-
ting the AI-powered menu and increasing automa-
tion will help cut costs, boost sales, and outsmart
rivals. “We need to stay ahead of the clear trend in
digital development,” Chief Executive Officer Joey
Wat says. “That’s the future.”
When Yum China was spun off from parent
Yum! Brands Inc. in 2016, the rationale was sim-
KFC: ZHANG PENG/GETTY IMAGES. FOGEL: WEI LENG TAY/BLOOMBERG
ple: Executives sitting in Louisville couldn’t pos-
sibly keep up with all the developments in China, “Loyalty to any
where consumers are uncommonly tech-savvy and chain is fragile”
ready to try new things. In big urban centers, shop-
ping is increasingly cashless, convenience stores
are unmanned, and everything from forks to fur-
niture can be delivered within hours. For most
Chinese, such convenience has so far trumped pri-
vacy concerns, so companies such as Yum are able
to collect customer data with relative impunity.
The menu on KFC’s app pushes items to
customers based on their ordering patterns and
◼ BUSINESS
local demographics. “The menu is customized
based on who they are, and it takes less time
to order food, so customers are happy,” Wat
says. “We know the transaction pattern of each
store, which lets us do better forecasting, which
means we have less waste. And that enables us to
achieve better margins and be very careful about
increasing prices.”
The selection bears little resemblance to the
value meals and buckets of traditional Middle
America KFC. In China, fried chicken is sold by
the piece and easily mixed and matched with
such local favorites as rice rolls, egg tarts, and
lotus soup. Car salesman Xia Baohua, a KFC reg-
ular who tries to eat healthy, sees soup or corn
when he opens the app rather than fries or ice
cream. Xia, 48, typically gets a piece of chicken,
side salad, and hot tea, which he orders by smart-
phone for pickup while he walks from the subway
to the auto dealership. “I like that it’s convenient,
trustworthy, and healthy,” he says. “There aren’t
many other chains in China like that.”
The emphasis on customization and localiza-
tion ratchets up pressure on Yum to roll out items
more quickly. In March the company opened a
27,000-square-foot innovation center in Shanghai.
The wealth of data on customer preferences is also
pushing Yum’s fast-food brands beyond their com-
fort zones. Pizza Hut, for example, is revamping
its menu to offer more nontraditional items such
as steak or pizza topped with Peking duck.
Although overall company revenue has grown
25 percent in the past two years and KFC has seen
same-store sales increase every quarter since the
spinoff, the same metric at Pizza Hut has been
declining as it fights rivals for Chinese middle-class
diners. Like Starbucks Corp., which is losing sales
to an aggressive challenge from local startup
Luckin Coffee, Yum China isn’t guaranteed invin-
cibility, despite its current dominance. “Because
Chinese consumers are so mobile and used to con-
venience, they are also more fickle,” says Jason Yu,
Shanghai-based general manager of research firm
Kantar Worldpanel China. “Loyalty to any chain is
fragile.” In 2013 a food safety scare, a bird flu out-
break, and local competition precipitated a two-
year slump for KFC.
Yu says Yum’s technological push and data min-
ing can’t hurt. “The fun and efficient customer
experience can help attract eyeballs,” he says. “But
ultimately it’s health and food safety that makes or
breaks a fast-food chain.” �Rachel Chang
THE BOTTOM LINE The business that runs KFC, Pizza Hut, and
Taco Bell in China is focusing on customization and localization to
maintain its market dominance.
Q&A Glenn Fogel
● CEO of Booking
Holdings Inc., whose
brands include Agoda,
Kayak, and Priceline
● Joined the company
in 1999
● Harvard J.D., 1985;
Wharton B.S., 1983
Fogel recently appeared on Businessweek Talks,
where he addressed the increasing competition in
the $2 trillion global travel industry. Technology is
the key to beating rivals, he says, and to bringing
Booking’s brands closer together.
You’ve got to provide more value, both to the
customer who’s going to be traveling and the
①
other side—the host, or the supplier, or the
How do you
hotel owner. The way you do that is using
differentiate
technology. It’s getting really smart people—
yourself from 17
AI specialists, people who understand the
the pack?
data—so you can come up with a better
solution for both sides of the marketplace.
I don’t think anybody can go to sleep and
not be concerned about what will Google do
next, or Facebook, or Amazon, and that’s just
②
in the U.S. The fact is, though, travel is a lot
Are Google
harder than you think. We have thousands
and Facebook
of people, every day, who are calling on
your ultimate
hotels to make sure we’re getting the best
competitors?
prices for our customer and working those
relationships. That’s not just technology,
that’s boots on the ground.
Think about all the troubles you’ve had
③ traveling, about all the problems of booking
How has the something, and then something goes
travel business wrong. How do you fix it? We are building
changed in a frictionless solution. That’s what we want
the almost two at the end of the day, that you just have to
decades you’ve do it once, and it’s done, and if anything
worked in it? goes wrong, there’s somebody who knows
everything that happened and can fix it.
● Listen to Bloomberg Businessweek with Carol Massar
and Jason Kelly weekdays 2-5 ET on Bloomberg Radio
 Bloomberg Businessweek
2
The Big Tech
T
E
C
H ● State and federal officials
N are exploring antitrust actions
against Google and others.
They’re short on consensus
O Last September, Jeff Sessions, then the U.S. attor-
ney general, called a meeting of state attorneys
L
18
general to discuss his suspicions that Google and
Facebook were suppressing conservative views.
After hearing him out, the state officials argued
that the real problem was Silicon Valley’s mar-
O ket power and its handling of personal data, and
they made the case for aggressive antitrust action,
according to three people familiar with the event
who spoke on condition of anonymity because the
G discussions were private.
Concern about Big Tech had already been
mounting in statehouses, but Sessions’s face-to-
face meeting created its own momentum. During
Y the meeting, Makan Delrahim, the head of the anti-
trust division at the U.S. Department of Justice, sug-
gested that attorneys general form a group and
come back for further planning, according to a
person who attended the meeting. In the weeks
that followed, the National Association of Attorneys
General (NAAG) formed a task force to look into
issues in the technology industry, although the plan
to follow up with the Justice Department ended
after Sessions stepped down in November.
Separately, a smaller group of state AGs has
begun investigating possible antitrust or consumer
protection violations by Google Inc. in particular,
say people familiar with the matter. It’s not yet
clear whether this preliminary effort, which has
Edited by
Jeff Muskus
not been publicly disclosed, will develop into legal
and Jillian Ward action. But it marks the most significant step state
rch 25, 2019
officials have taken toward a coordinated antitrust
action against the technology industry since the
federal government and a large group of states
sued Microsoft Corp. in the late 1990s.
“Privacy and security are built into all of our
products, and we will continue to engage construc-
tively with state Attorneys General on policy issues,”
a Google spokeswoman said in a statement.
The developing action on the state level contrib-
utes to a threatening, if muddled, political land-
scape for Big Tech. Five of the six most valuable
companies in the S&P 500 are now technology com-
panies, with a combined market value of almost
$4 trillion. This concentration of economic power,
combined with numerous controversies over pri-
vacy and content moderation, have led to broad
calls for government action. The March 15 kill-
ings of more than 50 people at mosques in New
Zealand again drew scrutiny to tech platforms after
the alleged shooter, an avowed white supremacist,
posted a manifesto online and streamed the shoot-
ings live on Facebook. (Human and automated fil-
ters at YouTube and other sites struggled to keep
up with millions of reposted versions of the video.)
But as Sessions’s meeting illustrated, there’s more
agreement that a problem exists than there is
around its exact nature, what should be done about
it, or who should be in charge.
The fault lines on tech don’t always follow tra-
ditional party lines. When he still worked for
Donald Trump, Steve Bannon suggested that com-
panies such as Facebook and Google were effec-
tively public utilities and should be regulated
as such. Democratic Senator Elizabeth Warren
of Massachusetts announced a sweeping legis-
lative regulatory plan on March 8, based on the
same idea. The response from Democrats was
mixed. When Facebook temporarily removed
 ◼ TECHNOLOGY
ads promoting this idea from its social network,
Republican Senator Ted Cruz of Texas came to
Warren’s defense on Twitter. “First time I’ve
ever retweeted @ewarren,” wrote Cruz, who has
used his time in congressional hearings to com-
plain about the sort of stuff that comes up when
he types his own name into Google. “But she’s
right—Big Tech has way too much power to silence
Free Speech.”
One of tech’s most aggressive GOP antagonists
has been Josh Hawley, a Republican who served as
attorney general of Missouri until he joined the U.S.
Senate in January. In late 2017, Hawley announced
that he’d launched an investigation of Alphabet Inc.,
Google’s parent company, for potential antitrust
and privacy violations. His office subpoenaed the
company and promised to reach a decision about
whether to bring a lawsuit by summer 2018. It later
opened a similar investigation into Facebook. By
that time, Hawley was deeply engaged in his bid
for the U.S. Senate. His successor in Missouri, Eric
Schmitt, declined through a spokesman to comment
on whether he’ll pursue the issue.
In January, Hawley said he’d like to work with
Democratic Representative Alexandria Ocasio-
Cortez of New York on a bipartisan probe into tech
issues. He’s also bemoaned the passive approach
of federal regulators. “Any robust definition of con-
sumer welfare must acknowledge that these com-
panies have harmed consumers by conditioning
participation in the modern public square on giv-
ing away enormous—and growing—amounts of per-
sonal information and by leveraging scale to cripple
ILLUSTRATION BY NEJC PRAH
emerging competitors in their infancy,” he wrote in
a March 11 letter to the Federal Trade Commission.
“Yet the approach the FTC has taken to these issues
has been largely toothless.” The FTC said it had
received the letter but declined to comment further.
Bloomberg Businessweek March 25, 201
An emerging leader among the state officials is
Nebraska’s attorney general, Doug Peterson. He
attended the meeting last fall, and in an interview
with Bloomberg Businessweek earlier this month,
said he was “carrying the ball” for attorneys general
concerned about privacy and market power. But
Peterson also suggested that the work was in its early
stages. “The topic is deep and complex, and so we’re
learning,” he says. When asked about the group inves- 19
tigating Google, he declined to comment further.
People familiar with the states’ interest in the
tech industry say that impatience with federal
efforts may push the group toward action. But
those involved also realize how big a fight they’d
be picking. It’s possible states will encourage fed-
eral regulators to take the lead or shy away from
the issue altogether. “First time I’ve
State attorneys general met earlier this month ever retweeted
in Washington at NAAG’s annual meeting. They’ll @ewarren.
return later this month for the American Bar But she’s
Association’s spring meeting on antitrust, which right—Big
begins on March 26. That same week, the FTC will Tech has way
hold a two-day hearing in which technological too much
change, privacy, and competition are among the power”
major slated topics.
Antitrust experts say the chances of a serious
lawsuit against a technology company seem to be
increasing. But some of them also acknowledge
that they’ve been anticipating the next big legal bat-
tle ever since the FTC ended its antitrust investiga-
tion into Google in 2013. “A platform is going to be a
defendant in a big case,” says Chris Sager, a law pro-
fessor at Cleveland State University. “It’s felt that way
for five years.” �Joshua Brustein and Peter Robison,
with Chibuike Oguh and David McLaughlin
THE BOTTOM LINE Frustrated by federal inaction, U.S. state
attorneys general are considering taking the lead in the fight to
curb the power of Google and Facebook.
  TECHNOLOGY
Trump’s CTO Nominee vs. China
○ A former Peter Thiel deputy has won over some industry skeptics. Mobilizing for AI and 5G will be tougher
For the first time in two years the U.S. is set to
have a chief technology officer. On March 21
President Trump will nominate for the post
Michael Kratsios, a former venture capitalist who
now serves as deputy CTO, a White House official
tells Bloomberg Businessweek.
Kratsios is just 32, but he’s exceedingly well-
connected, having worked as chief of staff at
investment management firm Thiel Capital before
joining Trump’s transition team in late 2016. The
firm’s namesake, archconservative-by-Valley-stan-
dards Peter Thiel, had broken with the technology
industry by endorsing Trump and then helping
with the transition. After the inauguration, Thiel
kept his day job as an investor, but Kratsios was
named deputy CTO, becoming Trump’s de facto
head of tech policy while the top job went unfilled.
20 Kratsios has spent the past couple years in the
somewhat uncomfortable position of fashion-
ing tech policy for a president who doesn’t use
email and has expressed open hostility to the big-
gest tech companies and to technology gener-
ally. Trump has loudly criticized Amazon.com,
Facebook, and Google. Yet even some of the pres-
ident’s critics say they’ve been encouraged by
Kratsios’s record as deputy. “It gives me some
hope,” says Aneesh Chopra, a Democrat who
under President Obama was the nation’s first CTO.
“I’ve had no conversations with him that make me
think he’s partisan.”
And while they may not like Trump’s barbs,
they’ve welcomed his orders calling for national
action to develop technology, including artificial
intelligence and superfast 5G wireless networks.
“These initiatives will ensure the U.S. continues to
grow and thrive,” says Microsoft Chief Executive
Officer Satya Nadella, who earlier in the year
described Trump’s separation of immigrant chil-
dren from their parents as “abhorrent.”
Skeptics have said the administration’s grand
tech proclamations have so far gone largely
unmatched by policy prescriptions or bud-
get appropriations. They’ve also used Kratsios’s
youth and Trump’s failure to nominate a head of
the Office of Science and Technology Policy until
August as evidence of an indifference to the sci-
ences, something the White House disputes.
Bloomberg Businessweek March 25, 2019
Since its creation in 2009, the CTO position has
had a nonpartisan aura. In addition to Chopra,
Obama named a chief information officer and a
chief performance officer, announcing that the
three roles would “give all Americans a voice
in their government and ensure that they know
exactly how we’re spending their money.”
Under Trump, the job of modernizing govern-
ment has mostly been transferred to the Office of
American Innovation, headed by his son-in-law,
Jared Kushner, and the U.S. Digital Service, run by
former Google engineer Matt Cutts. Kratsios sees
himself as having more of a policymaking role. His
goal, as he describes it, is “to take the president’s
message and map it to a tech agenda.”
He’s been trying to devise policies to counter
Made in China 2025, the Chinese government’s
plan to develop the world’s top AI and 5G tech-
nologies. In February, Trump signed an executive
order on AI that, among other things, directs gov-
ernment agencies to release data sets that scien-
tists and private companies might be able to use
to train machines. “They have CCTV cameras on
every corner and funnel that data into private AI
companies,” Kratsios says of China. “That doesn’t
mean we don’t have data sets that are extraordi-
narily valuable.” One possibility, which the Trump
administration is exploring, is to share anonymized
health records that have been stripped of identify-
ing information with medical researchers, includ-
ing records maintained by the Department of
Veterans Affairs. Kratsios says that could help AI
and biotech startups train their software to dis-
cover new drugs and gene therapies.
Even so, any government promotion of AI will ○ Kratsios
heighten privacy concerns. Kratsios says the White
House will protect privacy, and Chopra expects
that the Trump administration will enact rules in
keeping with the spirit of the Obama administra-
tion’s proposed internet Bill of Rights. “We are
ultimately reaching a consensus on these issues,”
MICHAEL BROCHSTEIN/AP IMAGES
Chopra says.
Kratsios seems to enjoy playing the role of
the moderate, even when it contradicts oth-
ers in Trump’s camp. In March the president’s
reelection campaign proposed the creation of a
government-run wholesale market for 5G internet
 ◼ TECHNOLOGY
access, which some in the telecom industry regard
as tantamount to nationalization. Kratsios rejects
that idea. “We firmly believe in the free-market
approach,” he says. “That is the stance of this
White House.” The Trump 2020 campaign has
since backtracked. �Max Chafkin
THE BOTTOM LINE Kratsios, previously the tech chief by default,
has his fans among Obama-era officials but isn’t planning to
mobilize U.S. industry the way his Chinese counterparts have.
Intel’s Short Memory
● The company’s renewed bet on a volatile
business has disappointed analysts who wanted
a fresh look from its new CEO
It can be tough to recall that Intel Corp. invented the
memory-chip business half a century ago. It gave up
on the field for more than a decade, starting in the
1980s, and has struggled since returning in 2006 to
match the success of Samsung Electronics Co. in
the historically low-margin product category. The
bigger issue for Intel, however, is that memory-
chip technology hasn’t been advancing as quickly
as more profitable gear. The limitations of memory
chips are starting to lessen the value customers see
in buying, say, Intel’s lucrative server chips, threat-
ening a central profit center.
That’s why Bob Swan, Intel’s chief executive offi-
cer since late January, is sticking with his predeces-
sor’s push into a new kind of chip, called Optane,
which the company says doesn’t have the weak-
nesses of existing technology. According to Swan,
Optane represents an evolution serious enough
to keep pace with leaps that Intel has made in the
data-center gear its biggest customers buy. “We
think we have something special,” he says.
Analysts are skeptical, given Intel’s checkered his-
tory with memory chips. “In what was at one point
the best market in history, they were losing money,”
says Stacy Rasgon, an analyst at Sanford C. Bernstein.
Swan says the ledger will start looking better soon.
There are two basic types of memory chip,
each with different advantages. DRAM (dynamic
random-access memory) chips read and write data
quickly but can’t store it when a system is powered
down; NAND (short for “not and”) flash memory
COURTESY INTEL
chips are basically the opposite in how they function.
Intel says Optane chips can permanently store data
and read and write it faster than NAND, if not faster
Bloomberg Businessweek March 25, 2019
than DRAM. The product, which went on sale at the
end of last year, will require more investment in man-
ufacturing before the company can mass-produce it.
But it’s been tested successfully by Alibaba Group
Holdings Ltd. and Google’s cloud division, accord-
ing to the companies. “There are a lot of operations
where you benefit from having all the data accessible
to one processor,” says Google product manager Paul
Nash. “We think it is going to be commercially viable
in a few quarters’ time.” Alibaba used the technology
to support its massive Singles Day sales.
Still, memory chips tend to be the most volatile
slice of the $470 billion semiconductor industry.
Only the Paranoid Survive, a seminal Silicon Valley
history written by Intel co-founder Andy Grove,
spends a great deal of time arguing that it was smart
to get out of memory in the Reagan era. In some
ways, the company’s efforts to figure out the mar-
ket still seem like a work in progress: Intel posted a
$5 million operating loss in the NAND business last
year, on $4.3 billion in revenue.
Intel as a whole hit a record $71 billion in reve-
nue during that period, but it’s facing new obstacles
at a pivotal moment. Delays in the rollout of manu-
facturing updates have undermined the company’s
lead in chipmaking technology for the first time in 21
decades, and there’s growing evidence that some of
its biggest, most reliable customers are considering
doing business with cheaper competitors or mak-
ing their own chips. Cloud leader Amazon.com Inc.,
which uses a staggering number of server chips, in
November unveiled a service based on its home-
grown Graviton chips, saying the product would
come with a “significantly lower cost.”
While he’s an experienced chief financial officer, ▲ Intel’s Optane chip
Swan has been at Intel only since 2016, and during
his six months as interim CEO he repeatedly said he
didn’t want the top job permanently. Now that he
has it, he’s picking up the pursuit of memory from
his predecessor, Brian Krzanich, who was ousted
in 2018 for a years-earlier affair with a subordinate.
Some investors had hoped Swan’s background in
finance would mean he’d cut back on riskier bets in
favor of more stable businesses.
Intel says data-center operators spend about
$15 billion a year on DRAM that would be better
spent on Optane chips. And in Swan’s reckoning, the
only thing holding back Intel’s memory-chip num-
bers recently has been all the money it’s been spend-
ing to develop Optane. “The difference over the next
couple of years,” he says, “is we’ll have returns com-
ing in.” We’ll remember he said that. �Ian King
THE BOTTOM LINE Intel CEO Swan is wagering that a deeper
push into a low-margin business with the new Optane chip will help
the company’s more profitable operations.
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 Bloomberg Businessweek
The Outlook
For Europe’s Banks
● The proposed Deutsche
merger with Commerzbank is
just the start of a long, painful
PHOTO ILLUSTRATION BY 731; PHOTO: NIDAY PICTURE LIBRARY/ALAMY
process for Europe
The world’s largest money manager has a stark
warning: More than a decade after the global
financial crisis, European banks still face a long
and tortuous path to recovery. “Europe is in the
midst of a painful, painful transition,” Philipp
Hildebrand, vice chairman of BlackRock Inc., said
on Bloomberg TV. “I would expect it to entail sig-
nificant changes in the way banks operate, in their
business models, and it will take time.” Until then,
March 25, 2019
F
I
N
A
N
C
E
23
he said, investors will probably steer clear.
That the region’s financial institutions,
including some of the biggest, are in a state of
grinding decline is a grave cause for concern—and
not just for their stockholders and bondholders.
Europe relies heavily on its lenders to fuel growth.
Banks provide about three-quarters of financing
to companies and nine-tenths of credit to house-
holds. In the U.S., corporations rely on capital
markets—selling bonds and shares—for the bulk
of their financing.
Indeed, part of the pressure on Deutsche
Bank AG and Commerzbank AG to consider a
merger came from parts of the German govern-
Edited by
ment that very much want a healthy national finan- Howard Chua-Eoan
cial champion to help accelerate the country’s and Pat Regnier
  FINANCE
flagging growth. But there’s no easy fix. Both
banks are struggling with their own overhauls, and
even if they can manage the tens of thousands of
job cuts that would likely come with a marriage,
it’s not clear that a bigger entity would be signifi-
cantly stronger.
With economic expansion sputtering not only in
Germany but also across the European continent,
time may be running out for banks to heal them-
selves. Another recession would complicate their
turnarounds. At the heart of the difficulties are weak
balance sheets and modest profitability. Many banks
are still just barely able to cover their cost of equity—
that is, what investors seek as compensation for
companies’ perceived risk.
Nowhere is this lack of confidence more visible
than in stock valuations. Since January 2018, when
shares touched a two-year high, the benchmark
STOXX 600 Banks Price Index has dropped about
26 percent. European banks are worth just a quar-
ter of their peak value, reached in 2007.
By comparison, U.S. banks have rebounded
from the abyss and by early 2018 had recovered
almost all of their post-crisis losses, with profits
reaching a record last year. As measured by return
24 on equity, profitability stands at about 9.5 percent
in Europe. In the U.S. it’s closer to 12 percent.
European banks have bolstered their balance
sheets, offloaded toxic assets, and retreated to
core activities and geographies after the threats to
their survival unleashed by the financial and subse-
quent sovereign debt crises. Nudged by more strin-
gent regulation, they’ve also adopted more prudent
lending and trading practices. But investors are
hardly pricing that in. Banks on average trade at
20 percent below their book value, with a huge
divergence that sees some of the biggest compa-
nies—that’s you, Deutsche Bank—trade at discounts
of as much as 75 percent. By contrast, U.S. banks
are valued significantly more highly by investors,
at a 40 percent premium to book value, according
to Bloomberg Intelligence.
While leaders of European banks can do more to
address their institutions’ weaknesses to revive prof-
itability, they’re stuck in a quicksand of low interest
rates and rising costs. Regulation is forcing banks
to hold more funds to help cushion potential losses
in the event of crises, and investment needed to
tighten controls and upgrade antiquated technology
is pushing expenses higher. Meantime, competition
from financial-technology upstarts is forcing banks
to spend more on innovation and chipping away at
fees they can charge on payments such as interna-
tional cash transfers, all of which is eroding margins.
What’s more, the region’s failure to complete
Bloomberg Businessweek March 25, 2019
its vision for a single, Europe-wide financial-
services market—the so-called banking union—has
left in place obstacles that make it almost impos-
sible for banks to grow outside their home mar-
kets. Instead, rising national interests have led to
a splintering of Europe. Britain’s decision to leave
the European Union will add further barriers and
exacerbate the fragmentation of capital markets.
The future looks bleak.
After the financial crisis, Europe and the U.S.
set off on divergent courses. While the federal gov-
ernment swept in to recapitalize America’s biggest
banks in 2008, getting them to write off their toxic
assets sooner, Europe stopped short of forcing the
broader industry to reboot, instead salvaging indi-
vidual lenders that were on the verge of collapse.
Seeking state backing carried a stigma of despera-
tion that European lenders sought to avoid. They
resorted to raising capital piecemeal and to mod-
est reorganization.
Armed with stronger balance sheets, U.S. banks
quickly recovered, while in 2011, when Europe was
hit by another crisis, it became apparent that its ○ Draghi
lenders still needed fixing. As Cyprus, Greece,
Ireland, Portugal, and Spain requested interna-
tional aid—in part to prop up their financial indus-
tries—calls for capital injections to mimic what the
U.S. had done weren’t heeded. Lenders in some of
the bigger economies, such as Italy and Germany,
were left largely to muddle through. “Europe’s big
problem was that it reacted very slowly to the cri-
ses, taking small steps ex post each time and never
taking ex ante resolute action,” says Dante Roscini,
a Harvard Business School professor.
In the end, banks across the euro zone did get
Investors Are Skeptical of Europe’s Banks
STOXX 600 Banks Price Index Price-book value ratio
European banks
180
0.8
150 U.S. banks
1.4
JASPER JUINEN/BLOOMBERG
120
3/19/2018 3/19/2019
DATA: COMPILED BY BLOOMBERG
◼ FINANCE
some help, but it was in the form of cheap loans
from the European Central Bank—€700 billion
($795 billion)—and quantitative easing through
the ECB’s purchase of €2.6 trillion in corporate
and sovereign bonds. While that helped push up
asset prices, improving bank balance sheets and
bolstering confidence, it also encouraged banks
to buy more of their own nations’ sovereign debt.
That fueled a so-called doom loop that potentially
reduces lending, undermining the economy, and
adds to both bank and government weakness.
Since 2014 the ECB has also maintained nega-
tive interest rates, which have turned the bread and
butter of the euro zone’s banks rancid. Among the
bigger European lenders, the average net inter-
est margin—the difference between the interest
they receive on loans and what they pay out on
deposits, adjusted for assets—is about 1.6 percent,
less than half of the 3.3 percent enjoyed by the
top U.S. banks, Bloomberg Intelligence data show.
Banks in the 19 countries that use the euro have
to pay 0.4 percent interest on the €2 trillion they
park with the ECB, costing them about €8 billion
every year, according to a recent research paper
by Deutsche Bank.
ECB President Mario Draghi has signaled that
low interest rates are here to stay. As he cut the
growth forecast for the euro zone from 1.7 percent
to 1.1 percent for 2019, Draghi pledged that rates will
stay at the current record-low levels at least through
the end of the year, pushing back the outlook for
faster economic growth. “There is no end in sight
to banks’ profit squeeze,” says Peter Hahn, a dean at
the London Institute of Banking & Finance.
Just four months ago, the expectation that inter-
est rates would rise helped lure Doug Braunstein,
a former chief financial officer at JPMorgan Chase
& Co., to Deutsche Bank stock. In announcing he’d
bought a 3 percent stake in the bank in November,
he pointed to the “significant upside” to earnings
for the private and commercial bank from rising
interest rates.
Deutsche and Commerzbank are holding explor-
atory talks to create Europe’s fourth-largest finan-
cial institution, with a €1.8 trillion balance sheet.
The thinking is that by removing overlaps at home
through job reductions, the deal will also lower the
banks’ overall funding expenses. The combined
businesses will see profitability rise, and the big-
ger company could also compete more effectively
with other global banks in securities trading.
A combined bank would still have to cope
with Europe’s structural inefficiencies. More than
6,200 banks operate across the EU. While that’s
down from 8,500 in 2008, the market remains
Bloomberg Businessweek March 25, 2019
deeply fragmented. In Germany, the top five insti-
tutions hold about 30 percent of the banking assets;
in the U.S., the figure is more than 65 percent.
A merger would leave Deutsche Bank and
Commerzbank with just a 10 percent to 15 percent
market share, giving them little pricing power in a
cutthroat sector. Hundreds of Germany’s public-
sector savings banks and cooperative lenders com-
pete with commercial lenders on unequal terms,
because they’re not as driven by profitability. While
a single supervisor, the ECB, oversees the biggest
lenders, smaller ones are regulated by national
agencies, adding to inconsistencies. The absence of
a truly single European market will continue to hin-
der cross-border combinations, too. Lenders can’t ● ECB growth
forecast for the
make the most of expanding outside their home euro zone in 2019
markets, because they can’t move funds around
freely. Even across the euro zone, countries still
run individual deposit insurance programs.
1.1%
National interests hinder progress. Some gov-
ernment officials are resisting efforts to create a
Europe-wide agency to help detect and prevent
dirty money flows, despite the obvious need. In
September, Denmark’s Danske Bank AS reported
it had moved about $230 billion, much of it suspi-
cious, through its Estonia unit. Since then more 25
than half a dozen European lenders have faced alle-
gations of money laundering either as the prime
lender or as correspondent banks.
The European Commission, the executive
branch of the EU, has proposed giving more
power to the European Banking Authority, but
national judiciaries would probably still need to
be the enforcers. Other structural weaknesses
abound. The average European bank has sov-
ereign debt exposure equal to 170 percent of its
core Tier 1 capital, more than triple the exposure
of U.S. banks, according to Deutsche Bank ana-
lysts. What’s more, about 60 percent of an average
European bank’s sovereign holdings are of their
home government’s debt, the research shows.
That’s because, for now, sovereign debt on banks’
books still carries a zero risk weighting, meaning
it doesn’t count in calculations of how much cap-
ital they must hold.
While choking under the weight of bad loans,
Italian banks used much of the stimulus funding
from the ECB to buy sovereign debt rather than
boost lending in the recession-hit economy. As
things stand, bad loans still make up more than
10 percent of total loans, and Italy slipped back into
recession last year.
The ECB’s efforts to revive the euro zone’s
economies by keeping rates low isn’t working, says
Harvard Business School’s Roscini. “Instead of
 ◼ FINANCE
prompting businesses and households to bor-
row, negative interest rates over a long period cre-
ate a sense of anxiety,” he says. “Banks need more
profitability to take on more credit risk. Europe
is beginning to look ever more like Japan.” That’s
a grim description: Declining margins have left
many of Japan’s lenders limping for two decades
now. �Elisa Martinuzzi, Bloomberg Opinion
THE BOTTOM LINE Europe is even more dependent on strong
banks to fuel its economy than the U.S. Yet the continent’s lenders
can’t seem to find healthy profits.
How Fast Can
$360 Billion Grow?
● The new boss at CalPERS used to deal in
trillions of yuan. This challenge may be bigger
In January, Ben Meng started his job as chief invest-
26 ment officer of a seriously big fund: the $358.4 bil-
lion California Public Employees’ Retirement
System, or CalPERS, the largest U.S. pension. But
neither the scale nor the political spotlight that
comes with the role seem likely to intimidate him.
For the last three years, he was deputy CIO at the
State Administration of Foreign Exchange (SAFE),
the tightly controlled $3 trillion reserve fund in
China. “It’s not often that an individual has the
opportunity to hold key roles for two of the larg-
est pools of capital in the world,” wrote Stephen
Schwarzman, chief executive officer of private
equity giant Blackstone Group LP, in an email.
Perhaps more daunting for Meng is this fig-
ure: 7 percent. That’s CalPERS’s annual return
target. It may not sound very high given that the
S&P 500 returned almost an annualized 11 per-
cent in the five years through January 2018. But
CalPERS made only an annualized 6.3 percent in
that period. And deep into both a bull market and
economic expansion, there may not be a lot of
easy gains to be made from here.
The stakes for CalPERS are high, since missing
the mark too widely endangers retirement pay-
ments for its 1.9 million members. “We need to do
things differently,” says Meng in his Sacramento
office. The walls are still bare, and the furniture
arrangement is in flux as he tries to find a place
where the sun’s glare won’t hit his computer screen.
Meng’s plans to improve returns hinge on
Bloomberg Businessweek March 25, 2019
private equity. Unlike owning stocks and bonds, ● CalPERS investments
investing in private equity funds means holding
Stocks
illiquid stakes in companies that may take years to $173.6b
realize their value. In theory, such investments can
play to the advantage of CalPERS as a very long-
term investor. Money managers who ignore their
institution’s innate strengths and weaknesses, he
says, “are the profit center for the other people.”
But CalPERS also faces private equity capacity
constraints—it may have more money than it can
profitably invest. Its $45 billion allocated to private
equity includes $17 billion in uncommitted capital.
It needs to place $10 billion a year just to keep up
with growth and replace funds that have reached
the end of their investment terms. And it’s com-
peting for deals as the private equity industry’s dry
powder—money it hasn’t invested yet—climbed to
a record $1.2 trillion at the end of 2018, according
to Preqin Ltd. That’s a sign that private equity, too,
may not offer the bargains it once did.
Meng is exploring a range of options to find
opportunities, including creating funds to buy
late-stage startups and other companies CalPERS
could hold for the long term, competing head-to-
head with some of the pension’s longtime part-
ners, such as Schwarzman’s Blackstone. He says Bonds
he’ll need five years to hire the investing talent $97b
and change the culture at CalPERS to implement
his vision. “For the investment portfolio to show
the effect, it may have to take 10 years,” he says.
He passed his first political hurdle on March 18,
when the board endorsed his plan to invest $20 bil-
lion in startups and long-term company holdings.
“It may or may not work now,” he told the board.
“We will not know if we don’t try. And in this chal-
lenging capital market environment, we owe it to
all our stakeholders to explore all the options avail-
PHOTOGRAPH BY CARLOS CHAVARRIA FOR BLOOMBERG BUSINESSWEEK; DATA: CALPERS, AS OF JAN. 31
able.” Skeptics, including State Controller Betty Yee,
a CalPERS board member, questioned whether it’s a
Real estate
good idea. “We’re taking on a larger risk for a future $34.1b
benefit that likely will not move the needle,” said
Yee, who voted against the plan.
Meng was born in the Chinese port city of
Dalian, the youngest of two sons of an engi- Private equity
neer and a history teacher. It was 1970, a year $27.8b
before President Richard Nixon reopened U.S.-
China relations and almost a decade before Deng
Xiaoping began reforms that launched China’s
transformation into a global economic superpower.
“If I were born 20 years earlier, I wouldn’t have had
the opportunity to leave China and go to the U.S.,” Infrastructure and
forestland $5.9b
he says. “I was born in an era when you didn’t have
Inflation-linked
to be from a rich family to be successful.” assets $4.2b
He came to the U.S. in 1995 for a Ph.D. program Cash and other
in civil engineering at the University of California $8.5b
◼ FINANCE

at Davis. His new California friends were all buying

stocks, making a bundle on the dot-com bubble, so
he opened an E*Trade account, bought tech stocks,
and watched the money grow. He enjoyed investing
so much that he enrolled in a new financial engi-
neering program at UC-Berkeley. To pay tuition,
he sold his stocks—just before the market crashed.
“Dumb luck,” he says. “I didn’t know the difference
between alpha and beta.” That’s investment jargon
for beating the market and tracking it, respectively.
“I didn’t know about bonds,” he adds.
After earning his financial engineering degree
in 2002, he worked at Morgan Stanley, Lehman
Brothers, and Barclays Global Investors. Then he
joined CalPERS in 2008, when the financial crisis
sent the fund plunging 24 percent. He focused on
a variety of investment areas, helping CalPERS dig
out of its hole. He became a U.S. citizen in 2010.
In 2015 he took the job in China to broaden his
work experience, he says, but also to be close to his
recently widowed mother, who still lives in Dalian
with his brother. Meng says he’s not permitted to go
into detail about his work at SAFE, where he advised
the CIO through last year. “They manage the foreign
exchange reserves for China, so that’s an even big-
ger challenge than CalPERS,” says William Overholt, 27
a senior research fellow and China specialist at He says he took the CalPERS job for the mis- ▲ Meng
Harvard’s Kennedy School of Government. The sion, “to serve those who serve California.”
reserves include international currencies (mostly His 2019 maximum pay is $1.7 million, includ-
U.S. dollars), gold, and other foreign exchange ing a performance-based bonus. Amid all the big
assets, according to SAFE’s website. Overholt says numbers he manages, Meng sometimes struggles
SAFE and the People’s Bank of China, the central to keep things in perspective. “When I make an
bank, are “two entities but closely joined.” China’s investment decision at CalPERS or anywhere, it
exchange rate management—sometimes called can easily be a half-billion dollars,” he says. “Then
“manipulating” by President Donald Trump—is one I think about the average retiree making less than
of the key trade disputes between the world’s two $3,000 a month from CalPERS.”
largest economies. Meng tells a story to illustrate how, in money
Meng declines to wade into a politically management, nothing is guaranteed. After he got
charged discussion about U.S.-China relations. He the CalPERS CIO job, his mother was so proud that
says his big takeaways from SAFE were developing she opened a brokerage account in China. She
professional relationships and working on a huge would phone her son from China every day to ask
scale. “Once you see $3 trillion, to go to $350 bil- if her stocks were going up, and he would reply
lion is helpful,” he says. “When you work in that he couldn’t be sure. After a while, she stopped
another country, you see things from an entirely calling. “My brother told me she got really worried
different perspective—you’re right there, right in about what I’m doing,” he says. “How can I manage
the middle of things.” other people’s retirement money if I can’t even talk
Having lived outside China for 20 years, Meng to my mother with certainty?”
says he felt like a visitor when he returned for work. Investors can, at best, learn the odds and play
He stayed in touch with his former colleagues at them in their favor, he says. “The market is not
CalPERS, and he applied for the CIO job there as an accommodating machine,” he says. “It doesn’t
soon as he heard of its opening last year. His return give you 7 percent every year just because you
to Sacramento has been easy in some respects, need it.” �John Gittelsohn
he says. He even moved back into the house he
THE BOTTOM LINE To earn returns high enough to pay
bought in 2012 and never sold, as if he were “maybe California’s public retirement bills, the CIO has plans to find new
subconsciously thinking I was coming back.” opportunities in private equity investments.
 Bloomberg Businessweek March 25, 2019

E
C
A Beginner’s
○ An overview of a once-fringe Keynes’s The
General Theory

O school of economic thought

that’s suddenly of the moment
of Employment,
Interest and Money
created the field of
macroeconomics

N Strong connection
Weaker connection

Neoclassical
○ Jevons
○ Clark
Marginal
productivity
○ Marshall

O
theory
○ Walras
○ Malthus ○ Menger
Demand gap ○ Keynes
MMT’s first
○ Say textbook says that

28
M Supply creates
demand

○ Franklin
“it is probable”
Marx’s theories
influenced Keynes

○ Marx
○ Veblen
Monetary theory of
production, institutions

I ○ Smith
Labor theory
of value ○ Ricardo
Monetary theory
of production,
class struggle,
crises
ry

C There’s a lot of debate swirling around Modern

Monetary Theory—some strident. Its critics call it
Fortunately, the first academic textbook based
on the theory was published in February. The

S
a hot mess. “MMT has constructed such a bizarre,
illogical, convoluted way of thinking about macro
that it’s almost impervious to attack,” Bentley
University economist Scott Sumner claimed
recently on his blog. MMT’s proponents say it’s
the critics who are impervious to reason—“part of
a degenerative paradigm that has lost credibility,”
says Australian MMTer William Mitchell.
This state of confusion isn’t good because
Modern Monetary Theory, once confined to blogs
and a handful of colleges including the University
of Missouri at Kansas City, suddenly matters. In the
U.S., the left wing of the Democratic Party is citing
MMT to make the case for massive federal govern-
ment spending on a Green New Deal to wean the
U.S. off fossil fuels and fund Medicare for All. It’s
virtually certain that MMT will be dragged into the
debates of the 2020 presidential race. So the time
is right for a semi-deep dive into Modern Monetary
Edited by
Theory—what it is, where it comes from, its pros
Cristina Lindblad and its cons.
573-page tome, titled simply Macroeconomics,
is by Mitchell, an economist at the University of
Newcastle in Australia; Randall Wray of Bard
College in Annandale-on-Hudson, N.Y.; and Martin
Watts, an emeritus professor at Newcastle. This
article is based on the textbook as well as academic
papers and blogs by MMTers and their critics.
A good place to start is with a simple descrip-
tion that you can carry in your pocket: MMT pro-
poses that a country with its own currency, such
as the U.S., doesn’t have to worry about accumu-
lating too much debt because it can always print
more money to pay interest. So the only constraint
on spending is inflation, which can break out if the
public and private sectors spend too much at the
same time. As long as there are enough workers
and equipment to meet growing demand without
igniting inflation, the government can spend what
it needs to maintain employment and achieve goals
such as halting climate change.
If you’ve absorbed that much, you’re already
  ECONOMICS Bloomberg Businessweek March 25, 2019

Guide to MMT Austrians

○ Hayek, et al.
Supply siders
○ Mundell, et al.
○ Plosser
Real business cycle
This is the school
○ Bernanke of thought that
○ Debreu tary/macro
New monetary/macro predominates
○ Arrow ○ Lucas in central banks
○ Pigo
ou consensus and leading
○ Hahn Rational expectations, universities
General equilibrium new classical
theory
Old Keynesians ○ Moslerr
○ Samuelson Monetarists
s ○ Mitchel
New Keynesians Post-Keynesians
○ Hicks ○ Friedmann ○ Wray 
○ Mankiw ○ Minsky 
○ Tobin ○ Greenspan ○ Forstatter
er
○ Stiglitz ○ Davidson
○ Blinder ○ Kregel ○ Kelton 
Modern
Monetaryy
○ Mitchell ○ Robinson 
Theory
Business cycles ○ Kalecki
○ Commons Institutionalists
Theory of law ○ Ayres
○ Dillard 29
Robinson explored
○ Foster
“The issuer of a
how employers could
○ Sraffa pay workers less than
currency faces no
financial constraints”
they’re worth

ADAPTED BY BLOOMBERG BUSINESSWEEK FROM MACROECONOMICS, PUBLISHED BY RED GLOBE PRESS

ahead of a lot of the critics. Because MMT is
associated with the Left, some people assume it
favors soaking the rich to pay for social programs.
In fact, MMT breaks with liberal orthodoxy by say-
ing that while taxes on the wealthy are good for
lessening inequality, they aren’t essential to pay for
government spending. Another misconception is
that MMT says deficits never matter. On March 13
the University of Chicago Booth School of Business
published a survey of prominent economists that
misrepresented MMT that way, leaving out its
understanding that too-big deficits can cause exces-
sive inflation. The surveyed professors roundly dis-
agreed with MMT as described. MMTers cried foul.
Modern Monetary Theory says the world still
hasn’t come to terms with the death of the gold
standard in 1971, when President Richard Nixon
declared that the dollar was no longer convertible
into gold. In the modern era of “fiat” currency,
MMT says, the U.S. and other big economies no
longer need to worry about having enough gold to
back their paper money, so they’re free to print
however much they need.
MMT claims to be the legitimate heir to the
theories of Britain’s John Maynard Keynes, who cre-
ated the field of macroeconomics during the Great
Depression. Keynes coined the term “paradox of
thrift.” His insight was that while any single house-
hold can dig itself out of a hole by cutting spending
when its income falls, the economy as a whole can-
not. One household’s spending is another’s income,
so if everybody cuts back, no one gets paid. What
you get then is a depression—a situation only gov-
ernment can fix because, unlike the private sector, it
can afford to spend freely, putting money in people’s
pockets and thus getting the economy back on track.
In MMT’s reckoning, Keynesianism was gutted
in the following decades by successors such as Paul
Samuelson, who unrealistically tried to make eco-
nomics like physics, playing down the role of fun-
damental uncertainty. MMTers haven’t endeared
themselves to the mainstream by referring to that
school of thought as “bastard Keynesianism,” a
coinage of the late British economist Joan Robinson.
MMT also draws on the “functional finance”
work of the Russian-born British economist Abba
 ◼ ECONOMICS
Lerner, who wrote in the 1940s that government
should spend what’s required to achieve its goals,
deficits be damned. Later, Britain’s Wynne Godley
developed the concept of sectoral balances, which
focuses on the accounting truth that when the gov-
ernment runs a deficit, the nongovernment sector
must run a surplus, and vice versa.
Starting in the 1990s, the budding movement
coalesced with the financial and intellectual sup-
port of Warren Mosler, a hedge fund manager who
lives in the U.S. Virgin Islands and has interests
ranging from politics to catamaran design. It ran
into skepticism. When Mitchell presented the ideas
at an economic conference, he recalls, the first
comment was from a man who said, “I think we
are being visited by a presence from Mars today.”
MMT rejects the modern consensus that econ-
omies should be steered primarily by the raising
and lowering of interest rates. MMTers believe that
the natural rate of interest in a world of fiat money
is zero and that pegging it higher is a giveaway to
the investor class. They say tweaking interest rates
is ineffectual because businesses make investment
decisions based on prospects for growth, not the
cost of money.
30 MMTers argue that economies should be guided
by fiscal policy—government spending and taxa-
tion. They want a nation’s central bank to do the
bidding of its treasury. So when the treasury needs
money, the central bank accommodates it with a
keystroke—creating base money from thin air by
crediting the treasury’s checking account. The new
textbook says that today, governments “tend to run
unduly restrictive fiscal policy stances so as not to
contradict the monetary policy stance.”
MMT says that, contrary to appearances, banks
don’t make loans out of deposits. Rather, they make
loans based on the demand for borrowing, then the
borrowers stash the proceeds in the bank. Anyone
they write a check to simply makes a deposit in
another bank. The bottom line is that loans create
deposits rather than deposits creating loans. This
is one aspect of MMT that even some conserva-
tive central bankers—including those at Germany’s
Bundesbank—agree with.
To stabilize employment, MMT would add a
federally funded, locally administered job guar-
antee. Government would employ more people
in slumps than in booms. Pavlina Tcherneva of
Bard College’s Levy Economics Institute is refin-
ing the plan. Representative Alexandria Ocasio-
Cortez, the Democratic Socialist from the Bronx
who’s in her first term in Congress, supports the
job guarantee and says MMT should be “a larger
part of our conversation.”
Bloomberg Businessweek March 25, 2019
MMT challenges a core principle of conventional
economics, which is that an increase in budget defi-
cits will tend to raise interest rates, all else equal.
Just the opposite, it says, sounding a bit like the
White Queen from Alice in Wonderland. When
the government spends more, the private sector
gets the money and puts it in the banking system.
With more money in the system and no increase
in demand for it, interest rates will tend to fall, not “I think we
rise, MMT says. That is, unless the government are being
chooses to soak up reserves by selling bonds, which visited by a
it doesn’t have to do. presence from
The reason the government doesn’t need to sell Mars today”
treasury securities, or levy taxes, to spend money is
that the central bank, under the control of the trea-
sury, can pay for everything by conjuring up elec-
tronic money. In MMT’s ideal world there would still
be taxes, but their main purpose, aside from lessen-
ing inequality, would be as “offsets” to keep infla-
tion under control. Taxes would drain just enough
money from consumers and businesses so total
spending in the economy won’t be excessive.
It’s tempting to view MMT’s conception of fis-
cal policy as essentially similar to that of the
mainstream—“Hey, they believe in taxes, too!”—
but that’s not quite right. MMTers hold that infla-
tion isn’t primarily the result of excessively strong
growth. They blame much of it on businesses’
excessive pricing power. So before trying to choke
off growth to kill inflation, they would try to break
up monopolies and stop banks from making too ● Cash in circulation
plus banks’ reserves in
many loans. “The more actively we regulate big the Federal Reserve
business for public purpose, the tighter the full
employment we can achieve,” three MMTers wrote $4t
in a letter to the Financial Times’ Alphaville column
that was published on March 1.
With that formula, it’s no wonder that MMT has
loud critics on Wall Street, where it’s sometimes 2
derided as Magic Money Tree. What’s more sur-
prising is how much flak the school of thought is
taking from liberal economists who’d appear to be
natural allies, such as Larry Summers, the former 0
Treasury secretary and former Harvard president. 1/12/00 3/13/19
Summers has been making the case that wealthy
nations are suffering from “secular stagnation” and
require permanently high levels of stimulative defi-
cit spending by governments to keep them out of
recession, which is similar to what MMT argues. Yet
in a recent Washington Post op-ed, Summers called
MMT “fallacious at multiple levels.”
Summers and others may be worried that MMT
will give a bad name to their more convention-
ally dovish views on deficits. “As long as they’re
out there claiming that standard macroeconom-
ics is all wrong, I guess we need to respond,” Paul
 ◼ ECONOMICS Bloomberg Businessweek March 25, 2019

Krugman, the Nobel laureate who is a professor at
City University of New York Graduate Center, wrote
on his New York Times blog.
MMT’s critics argue that trying to use fiscal pol-
icy to steer the economy is a proven failure because
Congress and the president rarely act quickly
enough to respond to a downturn. And they say
politicians can’t be relied upon to impose pain on
the public through higher taxes or lower spend-
ing to squelch rising inflation. MMTers respond
that they also oppose fine-tuning and instead want
to use automatic stabilizers—including the jobs
guarantee—to keep the economy on track.
MMT’s detractors are skeptical of the idea
that the treasury and central bank should work
PREVIOUS SPREAD: SMITH: BRIDGEMAN IMAGES; KEYNES: NORDICPHOTOS/AGEFOTO; MARX: AKG-IMAGES; PIGOU, ROBINSON: ALAMY; FRIEDMAN: ULLSTEIN BILD/GRANGER; GREENSPAN, BERNANKE: COURTESY FEDERAL RESERVE; MINSKY:
“not a card-carrying MMTer,” he believes it offers
a “robust architecture for a fiat currency world.”
In any case, the new textbook gives MMT a good
slingshot. Samuelson, in the preface to the 1990 edi-
tion of his best-selling principles book, wrote, “I
don’t care who writes a nation’s laws—or crafts
its advanced treaties—if I can write its economics
textbooks.” Stephanie Kelton, an MMTer who was
the economic adviser on Vermont Independent
Senator Bernie Sanders’s presidential campaign in
2016 and is a Bloomberg Opinion columnist, sees
the tide turning. In presentations, the Stony Brook
University economist likes to flash up a quote that
says, essentially: First they ignore you, then they
laugh at you, then they fight you. Then you win.

in concert. The Federal Reserve did the Treasury �Peter Coy, Katia Dmitrieva, and Matthew Boesler
Department’s bidding during World War II, but that
THE BOTTOM LINE Modern Monetary Theory has sparked a
“overdraft” privilege was used spottily thereafter
COURTESY WASHINGTON UNIVERSITY ARCHIVES; WRAY: GABRIELE BARTOLETTI; KELTON: SCOTT MCINTYRE/BLOOMBERG; DATA: FEDERAL RESERVE BANK OF ST. LOUIS ; THIS SPREAD: PHOTOGRAPH: FABRIZIO GIRALDI

heated debate in economic circles about debt and deficits, but

and permanently ended in 1981—precisely because many of its proponents say the school of thought is misunderstood.
economists warned that a subservient central bank
would allow inflation to race out of control. They’re
also dubious of the job guarantee, arguing that if
the government’s wage for guaranteed jobs is too
low it won’t do much to help unemployed workers Italian Boot and Chinese Belt
or the economy, while if it’s too high it will under-
mine private employment. Tcherneva’s plan calls 31
for $15 an hour. MMT envisions that government-
employed workers would move back into the pri-
vate sector when the economy strengthened, but
that means some government functions would no
longer be performed. In an email, Wray said the
cyclical fluctuations in government employment
are manageable.
Critics of MMT reject its reassurance that a
country with its own currency doesn’t need to
worry about deficits. After all, it’s been proven
that a nation that loses the confidence of the
world’s investors will see its currency plummet.
As recently as 1976, the U.K. was forced to appeal
to the International Monetary Fund to stabilize the
value of sterling. Wray said the U.K.’s mistake was
trying to peg its currency to the dollar and the cri- ●Trieste is seeking Chinese investment to boost
sis eased when it allowed the pound to float. container traffic at its port
Other disagreements are harder for laypeople to
parse. There are complicated arguments over how
interest rates are determined and whether the gov- More than seven centuries after Marco Polo set ▲ The port in Trieste

ernment and private sectors compete for savings,
for example. Mainstream economists argue that the
correct parts of MMT aren’t new and the new parts
aren’t correct. But MMTers point out that the estab-
lishment hasn’t covered itself in glory in recent
years—largely failing to foresee the global financial
crisis a decade ago, for instance. Paul McCulley,
the former chief economist of bond giant Pacific
Investment Management Co., says that though he’s
off from Venice on a voyage that would culminate
at the court of Kublai Khan, the Italian city con-
tinues to tout itself as the westernmost point of
the ancient Silk Road and China’s gateway into
Europe. Now it faces some competition from
Trieste, an increasingly busy port city on the
northeastern edge of Italy, whose contributions
to commerce and culture include popularizing
coffee by importing, roasting, and shipping the
 ◼ ECONOMICS
beans northward, to Vienna’s cafes and beyond.
Today, Trieste is eagerly preparing to open its
port to China as a European point of entry for the
“Belt and Road” initiative (BRI), a massive infra-
structure spending project designed to bolster sales
of Chinese-made goods and services around the
world. China and Italy are expected to sign a pre-
liminary agreement in Rome during a state visit by
President Xi Jinping scheduled for March 22. Italy
will become the 124th nation to join up, but it will
be the first in the Group of Seven, in defiance of
loud warnings from the U.S.—and more quietly
voiced concerns from some quarters of Europe—
that BRI is first and foremost a vehicle for Beijing
to expand its sphere of influence.
As part of a constellation of deals that will be
signed on the sidelines during Xi’s visit, Trieste’s
port plans to enter its own agreement with Belt
and Road’s biggest builder, China Communications
Construction Co., or CCCC, according to Zeno
D’Agostino, president of the port authority.
“Trieste will become Singapore or Hong Kong,”
he says optimistically.
The city has a long way to go to reach that stat-
ure. Greece’s port of Piraeus—whose operator is
32 majority-owned by China’s Cosco Pacific Ltd.—has
seven times the cargo traffic (4.9 million containers)
as Trieste, which in 2018 handled about 725,000 con-
tainers. This is why D’Agostino is seeking Chinese
help. A new master plan for the Trieste port has a
wish list of €1 billion ($1.14 billion) in improvements
that would speed the movement of goods across the
Continent. One of them, dubbed Trihub, envisions
linking the port with a newly opened freight train
line to points north in Germany, as well as upgrading
local rail connections that lead to Eastern Europe.
The €200 million project is among more than a
dozen the European Union put on the table in talks
with China last year on the EU-China Connectivity
Platform, a Brussels-led initiative.
Italy’s attempts to cozy up to Xi, who unveiled
Belt and Road in 2013, are drawing rebukes both
inside and outside the country. “Endorsing BRI
lends legitimacy to China’s predatory approach
to investment and will bring no benefits to the
Italian people,” the White House’s National
Security Council said on March 9 in a Twitter mes-
sage. Businesses operating in Italy don’t appear
to be heeding Washington’s warnings. Recent
announcements by TIM SpA (known as Telecom
Italia) and Vodafone Group Plc suggest the com-
panies plan to move ahead on partnerships with
Huawei Technologies Co. to roll out 5G mobile net-
works in the country, even as the Trump adminis-
tration has been pressuring allies to freeze out the
Bloomberg Businessweek March 25, 2019
Chinese telecommunications equipment supplier. ● Foreign direct
investment in Italy
With outside pressure mounting, members of
Italy’s fractured leadership appear to be waking
up to the geopolitical implications of the photo €45b
op with Xi. On March 11, the Ministry of Economic
Development announced there wouldn’t be any pact 30
on 5G technology in paperwork to be signed during
Xi’s visit, seeming to bow to critics who objected on 15
national security grounds. Earlier that day, Deputy
Premier Matteo Salvini of Italy’s anti-immigrant 0
League party told reporters he doesn’t want “for-
eign companies colonizing Italy.” -15
What Italy stands to gain from a closer rela- 2007 2018
tionship with China is clear. Its sputtering econ-
omy slipped into the third recession in a decade
at the end of last year. Foreign direct investment ● Trade with China
as percent of GDP
amounted to €18.2 billion last year, less than half
U.S.
the €48.1 billion the country logged in 2007, the
EU
year before the global financial crisis. Bilateral
Italy
trade with China totaled €43.9 billion in 2018, equal
to 2.5 percent of Italy’s gross domestic product. 4%
That’s smaller than the EU’s 3.8 percent or the U.S.’s
3.4 percent, so there’s clearly room for growth.
Potential downsides lurk in the details of what-
ever partnerships bloom, including the prospective 2
relationship between Trieste and CCCC, which for
now includes no financial terms or contractual obli-
gations, according to D’Agostino. CCCC has faced
allegations of fraud in several of the more than 0
100 countries in which it’s building roads, ports, 2000 2018
bridges, and other projects. The company was
blacklisted by the World Bank for eight years, start-
ing in 2009, for alleged fraudulent bidding prac-
tices for a Philippine highway; Malaysia halted two
rail projects with CCCC last year amid corruption
investigations; and Canada blocked it from acquir-
ing a construction company on national security
DATA: BANK OF ITALY; DATA: EUROSTAT, INTERNATIONAL MONETARY FUND, BUREAU OF ECONOMIC ANALYSIS
grounds in May. CCCC Chairman Liu Qitao in an
interview in September disputed the allegations.
D’Agostino insists fears about China are over-
blown. The paperwork he plans to sign with
CCCC isn’t “a concrete agreement,” he says. His
goal isn’t bringing in investment so much as bring-
ing in ships. “We want traffic,” he says. Of Italy’s
imports by sea, less than 2 percent have come
from mainland China in recent years as measured
by tonnage, according to EU statistics. At most,
D’Agostino sees CCCC taking a 10 percent stake in
the Trihub project, the equivalent of €20 million.
Says D’Agostino: “People are talking geopolitics.
For me, it’s only business.” �Vernon Silver and
Sheridan Prasso, with Giovanni Salzano
THE BOTTOM LINE Italy defied Brussels and Washington to
become the first G-7 nation to join Beijing’s Belt and Road initiative.
Infusion of Chinese money may come with strings attached.
5280 feet
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 Bloomberg Businessweek
5
One British
P Industry That
Isn’t Worried
O About Brexit  Britain opened its first private prison in 1992,
L
● Despite scandals and backlash,
private prisons are expanding
I
When British prison inspectors appeared unan-
nounced at Her Majesty’s Prison Birmingham,
a large private facility in central England, they
encountered pools of blood and vomit on the
T
floors. Guards locked themselves in offices to
sleep during patrol hours, and inmates wandered
the corridors visibly high. At one point the chief
inspector, Peter Clarke, became so overcome by
I drug fumes that he had to leave the housing unit.
Earlier that week, his team’s cars had been torched
in the secure staff parking lot, according to a letter
he wrote to the justice secretary last August.
C
34
Two weeks after Clarke’s visit, ministers
used emergency powers to take control of HMP
Birmingham from G4S Plc, the private company
that had run it since 2011. Britain holds a greater
S proportion of its inmates in for-profit prisons than
any other country except Australia and does so at
twice the rate of the U.S. Almost 20 percent of the
82,000 inmates in England and Wales are housed
by three companies: G4S, Serco, and Sodexo.
The private sector has an even bigger footprint in
Britain’s immigration removal centers and pris-
oner transport services, and it also runs some of
its police cells and probation monitoring. A G4S
spokeswoman says the company has “no excuses”
for the recent conditions at Birmingham, adding
that its four other British prisons perform better.
The opposition Labour Party has promised to
rein in private prison companies, accusing them
of cutting corners to boost earnings. “The incar-
ceration of human beings for profit is immoral,”
says Richard Burgon, Labour’s justice spokesman.
At least three other smaller opposition parties are
also against commercial prisons. Critical politicians
point to a string of scandals beyond Birmingham,
including the collapse of a major private probations
provider, Working Links, in February. A Ministry of
Edited by Justice report found that Working Links compro-
Jillian Goodman,
Dimitra Kessenides, and
mised “professional ethics” and falsely assigned
Stephen Merelman the prisoners’ risk statuses to meet targets. Fraud
March 25, 2019
probes into G4S’s and Serco’s electronic-monitoring
contracts are under way after a 2013 audit revealed
billing for supervising prisoners who had died or
left the country. Serco says it has changed internal
procedures since the audit. G4S says it’s “cooper-
ating fully” with the investigation.
when the country was strengthening police pow-
ers and sentencing laws under Conservative Prime
Minister John Major (“Society needs to condemn a
little more and understand a little less,” Major said
in a 1993 interview), a process that continued under
his successor, Labour’s Tony Blair. Since then, pris-
oner numbers in England and Wales (excluding
Northern Ireland) have almost doubled. Scotland
has followed a similar path, with numbers rising
more than 60 percent since 1990, although they’ve
recently started declining. In Ireland they’re up
about 80 percent in the same period.
Overall crime rates have dropped over the past
25 years, yet homicides, stabbings, and robberies
are on the rise—a potential major challenge for an
already overstretched police and prison service.
Last month three teenagers were stabbed to death
in Birmingham, part of a spate of knife crimes
that police chiefs and politicians have termed a
national epidemic.
Some take the combination of privatizing and
surging inmate numbers as a harbinger of dark
days. “The dynamics look eerily similar to the U.S.,”
says Michael Jacobson, director of CUNY’s Institute
for State and Local Governance and a former New
York City corrections commissioner. The U.S. has
the highest total incarceration rate in the world, far
outstripping both the U.K. and Australia. “We have
seen the movie here, and it does not end well,” he
says. In the five years from 2014 through 2018 alone,
serious assaults in English and Welsh prisons have
increased 130 percent, while self-harm incidents
have almost doubled.
Privatization proponents say for-profit compa-
nies still have a lot to offer. Prisons Minister Rory
Stewart declined to be interviewed but wrote in
PHOTOGRAPH BY KALPESH LATHIGRA FOR BLOOMBERG BUSINESSWEEK
an email that both public and private prisons face
problems and that the private sector has “played
an important role” in the justice system, which he
vowed would continue. Stewart, a former aid min-
ister and founder of a nongovernmental organiza-
tion in Afghanistan, told members of Parliament last
year that he’d like to see prisoner numbers fall in the
U.K. but that it’s unlikely to happen in the near term.
Craig Thomson, a former Scottish public prison
director who now manages Serco’s Thameside
prison in south London, says he was won over by
the private sector’s approach. Without the “red
Her Majesty’s Prison Thameside
in south London, run by Serco
 The inside of Thameside
tape” generated by government management,
36 Thameside operates with about half the staff of a
comparable public institution, he says, and spends
more of its budget on facilities, including a well-
equipped gym and in-cell computers. On a recent
day there even the inmates seemed satisfied, and
several said they prefer Thameside to London’s
older public prisons. “If Serco is making a small
margin and is still cheaper” than the government,
says Thomson, “what’s wrong with that?”
Last year, Stewart announced plans to build
six more facilities that will accommodate as many
as 10,000 prisoners. Reaffirming his commitment
to privatization, he told Parliament that for-profit
companies will compete to run the prisons and that
the public prison service would manage them only
if no company provides an adequate proposal. The
first two facilities, scheduled to open within the next
three years, will be privately run, Stewart confirmed
in November. Julian Le Vay, the former finance direc-
tor of Britain’s prison service, calculates that new
prison contracts could be worth more than $6 billion
over the next decade, based in part on contracts set
to expire that cover thousands of spaces for prison-
ers; the government will either renew them or run
the prisons itself. “If you are in the detention busi-
ness, you have got to be interested,” Le Vay says.
Burgon says his Labour Party is putting com-
panies “on notice” and will seek to end all private
prison contracts signed by Prime Minister Theresa
May’s government if it comes to power at the next
election in 2022—or sooner, as Brexit continues to
● Share of prisoners in
bedevil May’s Conservative government. Marcus De private prisons
Ville, Serco’s spokesman, says Labour’s warning isn’t
on the company’s “immediate radar” but adds that Australia
if Britain stops contracting with Serco, it will look 18.4%
for more business abroad, particularly in Australia. England and Wales
Meanwhile, HMP Birmingham’s future remains 17.8
uncertain. Parliament is still trying to determine Scotland
what went wrong, but a previous investigation fol- 15.0
lowing a 2016 riot there uncovered “chronic staff- New Zealand
ing shortages” and prisoners who were “policing 9.7
themselves.” G4S developed a plan to improve U.S.
security following the disturbance. Opposition 8.5
MPs are now calling for companies to make pri-
vate prison staff numbers public. The public prison
service already reports its staffing, but the three ● Annual assaults in
prisons, England and
private operators have resisted, arguing that it’s a Wales
commercially sensitive matter. This summer the ◼ Serious assaults on
British government will review whether to return staff
control of the prison to G4S. ◼ Serious prisoner-on-
prisoner assaults
Liz Saville Roberts, an opposition MP and
DATA: GOVERNMENT REPORTS, U.K. MINISTRY OF JUSTICE
co-chair of a parliamentary group representing 4k
prison officers, says the lack of transparency hin-
ders politicians from scrutinizing how private
companies run their prisons. “We need to iden-
tify whether there was something happening in 2
Birmingham that could be waiting to happen in
other private prisons,” she says. �Joshua Jacobs
THE BOTTOM LINE Labour has vowed to end private prison
contracts if it retakes Parliament. In the meantime the industry is
0
thriving, thanks to supportive ministers. 2010 2018
  POLITICS
An Exiled Billionaire
Haunts Thailand
○ Supporters of former Prime Minister Thaksin
are favored in the March 24 elections
Thaksin Shinawatra hasn’t set foot in Thailand since
he was convicted in a corruption case brought after
a 2006 coup that deposed him. But in the poor
northeast, the billionaire former prime minister is
seemingly everywhere.
On a sweltering March day, pickups full of
farmers wearing straw hats and carrying umbrel-
las clogged the roads heading to a rally in Khon
Kaen, one of the biggest cities in a region that’s
helped Thaksin’s allies win every election since
2001. Speakers for the Thaksin-linked Pheu Thai
party invoked him repeatedly in speeches, and
supporters wore T-shirts depicting his sister
Yingluck, who was ousted in a 2014 coup. Sudarat
Keyuraphan, a former cabinet minister under
Thaksin who’s one of two candidates leading the
polls in the race to become the next prime minis-
ter in the March 24 election, jumped on a motor-
cycle to make it to the stage on time. “We believe
in the majority of farmers, in the little people,”
Sudarat says in an interview, echoing the message
that endeared Thaksin—who, as an exile, is for-
bidden from direct involvement in the election—
to working-class Thais.
The vote will again test whether Thailand’s
rural masses repudiate its coup-prone generals,
PRISON: PHOTOGRAPH BY KALPESH LATHIGRA FOR BLOOMBERG BUSINESSWEEK; THAKSIN: KYODO/AP PHOTO
who’ve ruled the country since seizing power in
2014. Thaksin’s opponents—a loose faction of sol-
diers, bureaucrats, and wealthy Bangkok families
with royal connections—have used the military and
the courts to invalidate the results of the past three
credible elections and to remain in power.
This time the military has a greater say in who
will assume power: A nonelected Senate hand-
picked by the ruling junta will get a vote for prime
minister, making it harder for Thaksin’s allies to
form a government, even though they’re set to win
the most seats in the House of Representatives.
The prospect of a messy result risks more of
the same discord that’s led to bloody protests in
Bangkok followed by bouts of army rule over the
past 15 years. The political battles have hampered
economic policymaking and eroded Thailand’s
position as a top manufacturing destination in
Southeast Asia.
Bloomberg Businessweek March 25, 2019
Since 2007, Thailand has dropped the most
among the region’s biggest economies in the World
Economic Forum’s ranking of global competitive-
ness. Growth is projected to be 4 percent in 2019,
according to the Bank of Thailand—less than the
5.2 percent across Southeast Asia as a whole. It’s the
seventh straight year Thailand would lag its peers.
In the northeast, a vast plateau of agricultural
land that’s home to a third of Thailand’s population,
voters still laud the populist policies Thaksin intro-
duced two decades ago, including cheap health care
and agricultural subsidies. “Thaksin was the first to
pay attention to the region,” says Prajak Kongkirati,
head of the government and politics department at
Thammasat University in Bangkok.
Prajak says the former leader’s allies face a tough
challenge because of a new welfare plan rolled out
by junta chief and current Prime Minister Prayuth
Chan-ocha’s government. Conceived in part by a
former Thaksin deputy, it offers farmers funds for
harvesting and provides low-income earners about
$10 per month to purchase household staples. A
party backing Prayuth has also proposed lowering
taxes, boosting the minimum wage by more than
30 percent, and guaranteeing prices for rubber,
rice, and sugarcane. 37
Sangiam Dangpaung, a farmer who’s always ○ Thaksin
voted for Thaksin-linked parties, may switch his
support to the junta chief because of the cash hand-
outs. “I’m fed up with them now,” Sangiam says of
Thaksin’s allies. “They only talk about being against
Prayuth and nothing about how they’ll help us.”
Some in the region are also backing an upstart
pro-democracy party called Future Forward, led
by Thanathorn Juangroongruangkit, a 40-year-
old scion of a billionaire family. “Democracy
is the most important thing,” Future Forward
candidate Chutchawan Apirukmonkong says of
the new party.
Politicians advocating democratic reforms have
found themselves targeted by junta-appointed elec-
tion authorities. Future Forward’s leaders poten-
tially face a ban from politics for allegedly spreading
false information online, and a Thaksin-linked
party was disbanded this month after it nominated
King Maha Vajiralongkorn’s sister for prime minis-
ter. Nevertheless, Thaksin’s allies are the ones to
beat in the election, most polls suggest. “The party
represents Thaksin’s ideas,” says Kum Bomkod,
a 70-year-old rice farmer who plans to vote for
Pheu Thai. “Life was good with Thaksin.” —Blake
Schmidt and Siraphob Thanthong-Knight
THE BOTTOM LINE Thailand’s national elections are seen as a
chance to remove the ruling junta and allow the country’s voters to
legitimately elect the next government.
  POLITICS
The Cop Museum
○ The fund running it is close to defaulting on some of the money it borrowed
Former Presidents Bill Clinton and George H.W.
Bush, six former attorneys general, one current
attorney general, and even Richard Belzer, who
played Munch on Law & Order: Special Victims
Unit, couldn’t make the National Law Enforcement
Museum a success. Just two months after its gala
opening in October, the National Law Enforcement
Officers Memorial Fund said its museum a few
blocks from the Mall in Washington was headed
for default on some of the $103 million it borrowed
in 2016. That kind of failure is rare in the $3.8 trillion
municipal bond market. And it’s a dramatic descent
after two decades of planning and construction.
To survive, the museum needs more visitors will-
38 ing to pay $20 a head. A lot more. In its first three
months, it attracted only about 15,000. It’ll require
20 times that to meet its first-year goal. That’s no
easy feat in a city with more than 160 museums—
and amid widespread anger over police use of force.
Executive Director David Brant had been positive in
February: “The reason I’m consistently optimistic
is there’s nothing like this facility,” he said. “There’s
not too many topics that are more important to the
average citizen.” Brant resigned in March.
After passing through airport-style security, vis-
itors can take a photo in a patrol car’s front seat or
check out a prison cell. A display shows off shivs,
shanks, and other prison contraband. One section
lets visitors guess what weapon was used to bash in
different skulls, and they can use mock guns to nav-
igate a simulated mass shooting. There’s a display
on the rise of body cameras after the 2014 shooting
of an unarmed teenager in Ferguson, Mo., which
caused what the museum calls a “national debate
about law enforcement and race.”
The museum was conceived to complement a
monument honoring slain officers that opened in
1991. The Memorial Fund, which oversaw the monu-
ment, was put in charge as part of a 2000 law signed
by Clinton. The nonprofit raised money from com-
panies such as gunmaker Glock, motorcycle manu-
facturer Harley-Davidson, and Target, as well as the
J. Edgar Hoover Foundation. Celebrities including
Belzer and actors from NYPD Blue and The French
Bloomberg Businessweek March 25, 2019
Connection pitched in, the 2016 bond documents say.
Permitting issues and the 2008 downturn
delayed the opening, and not until October did Clint
Eastwood cut the ribbon. The actor became a super-
star in 1971 for Dirty Harry, in which he portrayed a
vigilante cop bent on violent justice. That two-edged
role exemplified the tension at the institution’s core.
The museum opened at a fraught moment. For
decades, departments have aggressively policed
minor crimes on the theory that doing so would
forestall major offenses. But minority communities
have complained of discrimination. Phone cameras
and social media have allowed people to see officers’
use of force—including killings—firsthand, giving rise
to the Black Lives Matter movement. There were
riots and protests in Baltimore, Chicago, Ferguson,
and other cities after police killed black men.
The museum convened an advisory board of aca-
demics, religious leaders, and consultants and says “If the choir is
it wants to promote dialogue. “If the choir is talking talking to the
to the choir, you’re not pushing the conversation choir, you’re
forward,” says Kris Marsh, a University of Maryland not pushing the
sociology professor on the panel. conversation
But the institution doesn’t prompt critical think- forward”
ing, says Natacia Knapper, an organizer with the
Stop Police Terror Project DC. More balanced pre-
sentations are available—free—at the Smithsonian
Institution’s National Museum of African American
History and Culture and the National Museum of
the American Indian, she says. “I don’t think this
museum has anything to say,” Knapper says.
Now its ability to transmit any message is in doubt.
The fund reported a $6.1 million net loss in 2018, lead-
ing it to raise ticket prices and cut 12 percent of staff.
The bondholders’ outlook is grim. The organization
told investors in January that it probably wouldn’t pay
interest on debt due in 2020. It has already missed
payments this year. Big-name backers have asked for
ILLUSTRATION BY RINA BARBARIĆ
assignments on how they can help, says Lori Day,
interim chief executive officer. “We’re telling them
to call their friends,” she says. —Amanda Albright
THE BOTTOM LINE A museum that was first proposed in the
tough-on-crime era encountered a very different world when it
opened in the wake of outcries over police shootings.
FUTURE
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 the
Bloomberg Businessweek
business
of
equality
OR, HOW EDUCATION WILL HOLD US BACK AND SET US FREE
by JEANNA SMIALEK
ANYONE WHO BELIEVES
the system is rigged would
have experienced a grim
“told you so” moment on March 12,
when federal prosecutors charged
33 parents who’d bought into a
scheme to ensure their children
spots at elite universities. Those
*FOR PERSONS AGE 25 AND OVER. EARNINGS ARE FOR FULL-TIME WAGE AND SALARY WORKERS.
implicated included an Oscar-
nominated actress, a co-chairman
of international law firm Wilkie
Farr & Gallagher, and the former
DATA: U.S. BUREAU OF LABOR STATISTICS, CURRENT POPULATION SURVEY
chief executive of Pimco. Their
alleged crimes were as varied as
conspiring to fix test scores, brib-
ing coaches, and falsifying athletic
records. What they all had in com-
mon was wealth.
The Twitterati crowed, non-
wealthy students lamented, and
for once both sides of the politi-
cal spectrum were in agreement:
The sweeping indictment under-
lined how deeply unfair U.S. higher
March 25, 2019
41
education has become. Success in their black counterparts, Census Bureau data show.
the modern economy often seems The Pell Institute for the Study of Opportunity in
to be more an accident of birth— Higher Education finds that nearly 90 percent of
hinging on family income bracket high school graduates from affluent families enroll
and connections or the student’s in college, vs. 60 percent of kids in the bottom quar-
race and gender—than a reward ter of income.
based on individual ability and Outside of education specifically, unequal
achievements. It’s an impression access to opportunities is a global story. Barriers
that cuts deep, given how crucial vary by country, but children are generally more
education is to economic mobility.
College attainment is a decent
proxy for a shot at the good life, unemployment rates and earnings by
at least in the U.S. Four-year grad- educational attainment in 2018, U.S.*
uates earn about twice as much
per week as high school dropouts unemployment median usual
rate weekly earnings
and have better health outcomes.
Research by the late economist doctoral 1.6% $1,825
Alan Krueger, who died on March professional 1.5 1,884
16, showed that some of that benefit master’s 2.1 1,434
may come from college attendees’ bachelor’s 2.2 1,198
better starting positions in life. Non- associate’s 2.8 862
Hispanic white adults are almost 60 some college, no degree 3.7 802
percent more likely to have gradu- high school diploma 4.1 730
ated from a four-year college than less than h.s. diploma 5.6 553
 Bloomberg Businessweek
likely to earn incomes similar to their
parents’ in nations with higher income
inequality. The graph of this relation-
ship is often called a Great Gatsby
Curve, first introduced by Krueger and
named after F. Scott Fitzgerald’s novel
about social mobility and its costs. Kids
in Panama and Madagascar, where
income is very unequal, are more
likely to stay poor if they’re born poor.
In countries where earnings are fairly
evenly spread, such as Denmark and
Finland, they’re more likely to be mas-
ters of their own fates.
America is further toward the high-
inequality, high-immobility end of the
scale than other advanced economies.
Such stickiness leads to a problem
International Monetary Fund econo-
mist Shekhar Aiyar calls “talent misal-
location.” When high-aptitude people
are shunted to the margins of society,
“not only is it unfair, it’s also bad for
growth,” he says. As Aiyar describes in
a February paper, countries with high
42 income inequality paired with low mobil-
ity see slower economic progress.
Higher income inequality goes hand
in hand with lower upward mobility in
America, research by Harvard econo-
mists Raj Chetty, Nathaniel Hendren,
who escapes their parents’ fates?
countries where children are less likely to be locked into their
parents’ educational paths are also where they’re less likely to
be locked into their income levels.
PORTUGAL
ETHIOPIA
NEPAL
INDIA
PERU
EAST TIMOR
BENIN BOLIVIA
GUATEMALA
⊳ parents’ education more
predictive of child’s
March 25, 2019
the equality issue
and others has shown. “It just speaks to this kind New York at Queens College.
of question: To what extent are we a country where Today, he and his wife both
kids have this notion of the American dream?” hold full-time, salaried jobs
Hendren says. “What can we do to improve it?” and are raising their 9-year-
old son in Queens. He’s not
BOTH JONATHAN GREENBERG and Tyrell Jackson rich, but he has a good work-
graduated high school with big dreams of work- life balance and feels like he’s
ing in music—Greenberg as a professor, Jackson making a contribution. “I
as a performer. They’re imperfect analogues, but don’t think of it just in terms
their stories demonstrate how different life can look of making money.”
depending on the world you were raised in. Jackson, 31, grew up in
Greenberg, who’s 43, grew up in an affluent sub- New Jersey, the black son of
urb of Boston, the high-achieving son of two white a single mother who hadn’t
parents. His father is a physician. If there was ever graduated college but held
a question around college at his private high school, down a decent job. Lacking
it wasn’t whether he would go but where? Brown guidance and familiarity
University was Greenberg’s answer, and his parents with the higher-education
paid his tuition in full. system, he enrolled in a
“I didn’t even really think twice about study- community college musical
ing humanities in college,” he says. He graduated theater program after grad-
with degrees in music and philosophy—and without uating high school. “I felt
debt, which he doesn’t hesitate to acknowledge was like I was swimming in deep
a privilege. “I was able to pursue things I wanted to water,” he says.
pursue without thinking about the implication of He was living with family
college loans.” and working at a restaurant
He worked relatively low-paying but résumé-pad- in Newark’s airport to sup-
ding jobs. After a Fulbright-administered teaching port himself, commuting an
gig in Austria, he pursued a fellowship-funded Ph.D. hour and a half from home to
in musicology from the University of California at get there. Getting from work
Los Angeles. He later earned a second master’s, to school took another hour.
in library science, from the City University of Not long after classes started,
TAIWAN more income �
DENMARK FINLAND
NORWAY SWEDEN
CANADA
GERMANY
JAPAN NEW ZEALAND
SLOVENIA
RUSSIA
ROMANIA
FRANCE
NOTE: MOBILITY DATA REPRESENT INVERSE OF INTERGENERATIONAL INCOME ELASTICITY
CROATIA SPAIN
U.K. SOUTH KOREA
ITALY
U.S. UZBEKISTAN
JORDAN
CHILE
BRAZIL
CHINA
KENYA
RWANDA
ALBANIA
LATVIA
MOROCCO
EGYPT
ECUADOR UGANDA
less income �
DATA: WORLD BANK
COLOMBIA
parents’ education less
predictive of child’s ⊲
 Bloomberg Businessweek March 25, 2019
the equality issue

he was kicked out of his

home. After about a month,
Jackson dropped out. He was
$2,000 in debt, with no col-
lege credits to his name and
nowhere to live.
In the 13 years since, he’s
held jobs as a waiter, a singer
with a Motown-style band,
and a nursing assistant. He’s
currently attending a free pro-
gram at Per Scholas, which
provides job training in tech-
nology. When he’s finished,
he hopes to land a job that
will allow him to help people
and pay rent. For now, he calls
a Bronx men’s shelter home.
Neither Greenberg nor
Jackson is working in music.
Both have been largely
self-sufficient throughout
their adult lives. But while
COLLINS and JACKSON in the BRONX
Greenberg’s upbringing laid
a foundation for his evolving
dreams—one built on familial Seth Zimmerman at University of Chicago away while she was in school. At her 2011 graduation, 43
and community expectations, Booth School of Business, to favor men Collins found herself alone, grieving, and with few
with an emphasis on educa- who went to pricey private schools. prospects in a tough economy. “My opportunities
tion—Jackson had less to fall Despite all the unwritten rules, invisi- were limited to whatever I could land a job in,”
back on. ble cultural barriers, and hard-to-breach she says. She’s worked in sales ever since but has
First-generation and low- social divisions, education and training struggled with strict quotas and meager advance-
er-income students often can help to level an uneven playing field. ment opportunities.
have trouble navigating the It’s an imperfect relationship, but places Collins is now living in Harlem and studying at
opaque higher education sys- with educational mobility—where paren- Per Scholas, where’s she’s completing a 15-week
tem. In fact, poorer students tal education is less likely to determine training program in IT Support. She goes to class
who perform well on stan- a child’s education—also tend to have five days a week, usually from 9 a.m. to 4 p.m., then
dardized tests generally don’t better income mobility, World Bank clocks a shift at a Trader Joe’s from 5 p.m. to mid-
apply to selective colleges researchers find. night. Per Scholas has a good track record: About 85
and universities, according Terri Collins, 31, is hoping to break percent of students at its Bronx location graduate,
to research by Stanford econ- through her circumstances. She was and 80 percent of them report getting jobs related
omist Caroline Hoxby, even raised by her mother, who worked to their training within the year. New York City’s
PHOTOGRAPHS BY VICTORIA HELY-HUTCHINSON FOR BLOOMBERG BUSINESSWEEK

when they’re highly qualified.
College admission is only
part of the mobility story
in the U.S. and around the
world. Elite college gradu-
ates dominate Chile’s top
corporate jobs, for exam-
ple, but women and poor
men who attend top schools
aren’t among those with bet-
ter access to the most elevated
roles. The country’s preferen-
tial network goes beyond alma
mater, suggests economist
on and off as a home health aide, but
mostly they lived on her grandmother’s
pension. Collins was a good student who
wanted more than Brooklyn’s Flatbush
neighborhood seemed to offer. “I
wanted to get out,” she says. “You’re in
control of your own destiny: That was
always ingrained in me.” She got a schol-
arship to study English at Union College
in upstate New York.
It was a promising start, but it wasn’t
enough to secure her path to prosper-
ity. Her grandmother died before she
left for college, and her mother passed
tech industry, like the nation’s, is thirsty for qual-
ified workers.
Participants in the philanthropy-funded program
have to fall below 200 percent of the federal poverty
level to qualify, and admission is selective—only 25
percent of applicants get in. But such approaches
could help reduce America’s twin gaps: opportu-
nity and skill.
Collins hopes it’s a ticket to a fulfilling career. For
now, she’s “ringing up zucchini and heads of lettuce
and cabbage, and apologizing for being out of cau-
liflower gnocchi,” she says. But she’s keeping her
dreams alive. “This is not permanent if you don’t
want it to be.” <BW>
 Bloomberg Businessweek the equal

the way
out of
college
admissions
hell is …
44

video
games?
ity issue March 25, 2019

A 27-YEAR-
OLD HARVARD
DROPOUT HAS A
SURPRISINGLY
PLAUSIBLE
FIX FOR A
NOROTIOUSLY
UNFAIR SYSTEM
by ROMESH
RATNESAR
photographs by
ROZETTE RAGO

no. 2 pencil not required

 Bloomberg Businessweek

IN STATISTICAL TERMS, this

is the golden age of American
higher education. More than
1 in 3 Americans has at least a bach-
elor’s degree, the most ever. Almost
70 percent of high school seniors gradu-
ating this spring will go to college in the
fall, compared with about half during
the mid-1970s.
The benefits of all that education,
however, are highly uneven. The cam-
puses of elite colleges remain dispro-
portionately populated by the rich. At
selective universities—ones that admit
fewer than half of applicants—3 out of 4
students come from the richest quartile
of families. According to Opportunity
Insights, a research group led by
Harvard economist Raj Chetty, chil-
dren from families in the top 1 percent
of income distribution are 77 times more
likely to attend an Ivy-plus school—Ivy
League plus Duke, MIT, Stanford, and
the University of Chicago—than those
from the bottom 20 percent.
46 Put another way: Higher education in
America is a racket.
On March 12, just as millions of ner-
vous 12th graders were about to find out
where they’ll be spending the next four
KANTAR
years, the FBI announced the arrests of
50 people—including two Hollywood
actresses, the co-chairman of a prom- of American opportunity. says, benefits the wealthiest and highest-achieving
inent global law firm, and the former Yet for millions, it’s become students, while leaving the vast majority ill-qualified
chief executive officer of Pimco—in a exactly that, a myth—and a for the jobs of the future. She says a big part of the
scandal that exposed a culture of fraud very expensive myth at that. problem is the avalanche of standardized tests
at the heart of the college-admissions The average student leaves students take from kindergarten through high
process. The FBI investigation, called school carrying $30,000 in school, a $10 billion industry that drives much of
Operation Varsity Blues, found that debt. More than 40 percent what’s taught in the classroom. At the top of the
wealthy Americans are no longer buy- of students who enter college pyramid sit the SAT and ACT, the generations-old
ing spots for their children the old- fail to earn a degree within six multiple-choice tests that still help to determine
fashioned way, with seven-figure years, and many of them wind who gains entry to top colleges and universities.
donations, or finagling them through up in the workforce lacking In Kantar’s view, those tests reveal little, if any-
family legacies and social connections; the credentials and practical thing, about whether a student has the cognitive
they’re actively conspiring with crimi- skills required to get ahead. skills essential for success beyond college. As the
nal fixers, coaches, and college officials The U.S. system of higher edu- FBI’s investigation reveals, the SAT and ACT can
to cheat, lie, and bribe their way in, too. cation isn’t the main source also be gamed: The mastermind of the scheme
As Andrew Lelling, the U.S. attorney for of economic inequality in had parents petition for their kids to take the
the District of Massachusetts, put it in America. But it’s almost cer- tests in largely unsupervised settings, then sub-
a press conference, “The case is about tainly making things worse. mitted fake scores on their behalf. “The system
the widening corruption of elite college A 27-year-old entrepreneur has coalesced around things that work for at most
admissions through the steady applica- who dropped out of Harvard, 30 percent or so of kids,” Kantar says. “They don’t
tion of wealth combined with fraud.” Rebecca Kantar, has a plan to work for the rest.”
Getting a college degree has long fix it. The American obsession Kantar is the founder of Imbellus Inc., a
been integral to the mythic promise with college admissions, she startup in Los Angeles that aims to reinvent
Bloomberg Businessweek
testing and, in the process, challenge
the received wisdom about what stu-
dents are expected to learn. The digi-
tal assessments Imbellus has developed
resemble video games. Placing users
in a simulated natural environment,
they present test takers with a series
of tasks, all the while capturing the
decision-making process used to com-
plete them. And because each simula-
tion delivers a unique user experience,
they’re intended to be cheatproof.
Since coming up with the idea for
the company four years ago, Kantar
has raised more than $23.5 million in
funding, hired a dozen Ph.D.s, and per-
suaded the consulting giant McKinsey
and Co., and a few others, to work with
Imbellus to create game-based tests
that measure prospective employees’
decision-making, adaptability, and crit-
ical thinking. She argues that by har-
nessing advances in computing power,
artificial intelligence, and data science,
her assessments can deliver a quantita-
tive picture of how a worker thinks. But
her goals go beyond providing corpo-
rate America with a sharper hiring tool:
“That is a problem. We do try to address
it,” she says. “But it’s not the problem.”
Kantar’s premise is that huge num-
bers of American students lack the
competencies required in an age of
automation, because the country’s
schools are failing to provide them with
the proper preparation. “It’s not an
aptitude problem—it’s a practice prob-“for more than
lem. They aren’t practicing the right
kind of thinking.” In her view, expand- 50 percent of kids,
ing economic opportunity is
impossible without transform- college is net bad”
ing the way big institutions test for and
evaluate student potential. “If you want
to change the default settings in the sys-
tem,” she says, “you’ve got to start at
the top.”
KANTAR STANDS 5-FOOT-4, with
straight brown hair that falls almost to
her waist. She speaks in bursts of increas-
ing velocity, as if she’s in a hurry. She
grew up in Newton, Mass., an affluent
suburb of Boston that churns out high
achievers. Kantar’s parents own a con-
struction company that specializes in
the equality issue March 25, 2019
environmentally sustainable development, which degree from a high-quality
they run out of the bottom floor of their elegant university was your ticket to
five-bedroom home. success,” says her mother,
From the start, Kantar’s interests were mostly Ruth. “But there was no
extracurricular. She sewed her own clothes, played stopping her. It wasn’t just
the trumpet, took up stained glass and pottery, and ‘I want to quit because this
sold her handmade creations at friends’ bar mitz- is too hard’ or ‘I don’t want
vahs. In junior high she started taking Mandarin— to do this anymore.’ She just
she slipped worksheets into waterproof folders finally convinced us that this
so she could practice in the shower—and earned was the right thing for her.”
a grant from the city council to stage a Chinese- Kantar sold BrightCo to
language production of Cinderella. In high school, the expert-advisory com-
Kantar helped create Minga, a student-run char- pany Gerson Lehrman Group
ity dedicated to raising awareness about the child Inc., moved to New York,
sex trade. The group raised $100,000 in five years, and began plotting to dis-
with Kantar leading a half-dozen other teens on a rupt the U.S. education sys-
40-city speaking tour. At 18 she gave her first TED tem. She initially thought of
Talk. “I really enjoyed thinking about how complex designing an alternative col-
the problem was, how many different pieces were lege curriculum focused on
involved,” she says, over a plate of pasta near her work-oriented, project-based
parents’ home in Newton. “That’s what I learned learning and selling it to
about myself: I had a propensity for thinking about elite universities. “It was the
complex systems dynamics.” most fabulous nonstarter I’d
But she had little patience for formal education. ever encountered,” says Jeff
“She didn’t enjoy her classes,” says her father, Brenzel, a former dean of
Jonathan, “but she did take them seriously. And undergraduate admissions 47
she’s very competitive.” She devoted considerable at Yale, who met Kantar in
time to tutoring her younger brother, Josh, who 2014. “These schools were
has an undiagnosed developmental disability. “I’ve not going to outsource half
always believed Josh is capable of more things than of their undergraduate pro-
most people would assume, if he were taught those gram to Rebecca Kantar.”
things in the right way. And as a little kid I put in She decided to shift her focus
a lot of energy figuring out what is the right way.” away from what college stu-
As a high school senior, she was accepted to dents learned on campus to
Harvard, Princeton, and Yale, and was offered how they got there.
In 2018 more than 2 mil-
lion students took the SAT
and 1.9 million took
the ACT. Kantar
argues that these stan-
dardized tests exacerbate
a full scholarship to Duke. She chose Harvard. inequality in two ways.
“I wouldn’t say I was excited when I started, but I Most obviously, they give an
recognized why it was important to try it. After my advantage to wealthier stu-
first semester, I was like, ‘Yeah, no. Done.’” Her par- dents who can pay for tutor-
ents allowed her to move back home but insisted ing and test-preparation
she stay in school. courses—or for fake scores,
By that time, she’d written a business plan and as was the case in Operation
gotten seed funding for her first company, BrightCo, Varsity Blues. The other
a network of socially minded young entrepre- effect is more pernicious. At
neurs who provided brand advice to large corpo- least as early as high school,
rations. When Harvard rejected her proposal to classroom instruction is
create an interdisciplinary major called Leadership geared to boost kids’ perfor-
and Organizations, she decided to drop out. “For mance on college-admissions
us, it was drilled into our heads that a four-year tests. But those tests
 Bloomberg Businessweek the equality issue March 25, 2019

measure what students already know, not the are institutions of higher ecologically themed, the idea being that
qualities employers and economists say they need education. They can’t get any test taker, regardless of background,
to thrive in the future: problem-solving, criti- too far ahead of what higher could grasp the laws of the natural world.
cal reasoning, collaboration, creativity, empathy. ed wants. And getting higher To prevent cheating, Kantar insisted that
“I’m interested in introducing tests that, hope- ed to change is hard.” In an no two test takers experience the game
fully, impose standards that shape curriculum in emailed statement, College in the same way, which required devising
a way that’s better than tests that are shaping it Board spokesman Zachary tens of thousands of variations of each
now,” Kantar says. “It’s less about who does and Goldberg says its research scenario, each with a uniform level of dif-
does not get into Harvard. Yeah, that matters. It’s demonstrates that SAT scores ficulty. It took a year to create the first
a topic. But it’s secondary to changing the default “improve the ability to predict prototype. “Very few people understand
settings of the education-to-employment system so college performance above what a hard-science problem building a
that it works better for all kids.” high school GPA alone.” high-stakes assessment is,” says Kantar,
Kantar advocates project-based learning, rather who compares it to drug development.
than content mastery, and pushing students to IN 2016, KANTAR moved to “Each one of these costs many millions
apply their knowledge outside of the classroom. Los Angeles with the begin- of dollars to build, and we’ve only raised
She doesn’t necessarily support a German-style sys- ning of the idea that would $25 million. So you don’t get that many
tem, in which a student is placed in either a bacca- become Imbellus. She stud- swings at bat.”
laureate or vocational track before entering high ied Tesla Inc.’s impact on the Kantar realized that finding a recep-
school. Rather, she’s arguing for creating standards car industry. “What would it tive audience for her tests also required
that force schools to prioritize teaching students take to disrupt the big tests challenging employers’ fixation on
how to think for themselves. “The nature of human in this way? My answer was: undergraduate credentials. It makes
intelligence required in even the most elite jobs is a lot of time, a lot of people, little financial sense for a student who
very different than what it was 30 years ago. If you and a lot of money. And I felt wants a career as, say, a high-end elec-
look at any job across the spectrum, whether it’s that, you know, those are trician or coder to go to a four-year col-
a blue-collar job or a white-collar job, the thinking things that you can acquire.” lege and amass hundreds of thousands
48 skills involved are getting harder, not easier,” she Her first hire was Richard in debt. The trouble is that companies
says. “My point is not to reconnect education to Wainess, a 65-year-old educa- “overindex” for bachelor’s degrees
work so that we pump kids out of college into fac- tional psychologist at UCLA’s
tory jobs. It’s about schools’ focusing a little less on National Center for Research
one specific set of information and a little bit more on Evaluation, Standards,
on the thinking faculties needed to be an adult.” and Student Testing. A
Brenzel, the former Yale admissions dean, says veteran of the entertain-
the SAT and ACT “have become essentially what ment and gaming indus-
Rebecca believes: a measure of an important but tries, Wainess focused his
very narrowly defined cognitive skill set. But there’s research on how to create a
been no alternative.” The College Board—the non- reliable test that’s as engag-
profit consortium of schools that owns the SAT and ing and immersive as a video
which generated more than $1 billion in revenue game. “Until now, no one had
in 2017—has over the years introduced changes to done it successfully,” he says.
the test, in response to accusations of bias in its “They either sacrificed game
questions. But it’s largely resisted altering the basic for test or they sacrificed
format: a timed, multiple-choice test of math and test for game.” After his first
literacy skills, administered in a proctored setting meeting with Kantar, Wainess
on a scheduled date. told his wife, “I’ve just met
The SAT remains a useful tool for predicting Bill Gates, Mark Zuckerberg,
whether students can handle their first year of col- and Steve Jobs.”
lege, says Jack Buckley, a former senior vice pres- They began assembling
ident of the College Board, who joined Imbellus an eclectic team: psycho-
in January as its president and chief scientist. But metricians, 3D animators,
in the wake of Operation Varsity Blues, the folly video game designers, the-
of using such an easily manipulated test for high- oretical physicists. Kantar
stakes evaluation has never been more apparent. named the company Imbellus,
“There are a lot of people hungry for the system to after a kind of betta fish that
change,” Buckley says. “But the College Board is a doesn’t swim in schools. She
membership organization where the key members decided its games would be
Bloomberg Businessweek
when making hiring decisions, even for positions
that don’t require a B.A. That’s in part because
they lack the time and resources to assess a can-
didate’s skills in any other way. If Imbellus could
show that its approach to testing could help com-
panies identify talent they would otherwise have
missed, it would be easier to persuade the educa-
tional establishment to start giving the assessment
to students. Kantar just needed a partner willing to
allow its recruitment process to be used as a labo-
ratory for her product. She found one: McKinsey.
Over the past 18 months, about 5,000 McKinsey
job candidates in 20 countries have taken the
Imbellus assessment, alongside the company’s
traditional multiple-choice exam. For about half of
those recruits, their performance on the Imbellus
test is a factor in determining whether they receive
an in-person interview. Presiyana Karastoyanova,
a 22-year-old Bulgarian who’s studying for a mas-
ter’s in finance at Imperial College London, took
both tests after applying for a job at McKinsey in
November. She prepared extensively for the paper-
and-pencil test, but had no idea what to expect
when she was handed a laptop with the Imbellus
simulation on it. “I thought I’d just improvise.”
After she logged in, an animation of a lush tropical
island appeared on the screen. She was presented
IMBELLUS headquarters in CULVER CITY, CALIF.
the equality issue
with three different scenarios,
each one depicting a natural
environment under stress. In
one part of the island, she had
to devise a plan to save native
species from an impending
natural disaster; in another,
she was instructed to create
a coral reef ecosystem that
could withstand elevated lev-
els of toxicity. She navigated
crystalline scenes of wild ani-
mals, fish, plants, mountains,
and ocean waters. “I became
totally immersed. I forgot the
world around me,” she says.
Karastoyanova completed the
tasks in half an hour and felt a
rush of adrenaline, as if she’d
just played a video game. (She
made it through two rounds of
interviews and was offered a
job in December.)
McKinsey plans to double
the number of candidates
taking the Imbellus assess-
ment by the end of 2019 and
March 25, 2019
even begin allowing some to take it on
their home computer. Keith McNulty,
the company’s head of people analyt-
ics and measurement, says the number
will grow “significantly over time.” Early
data suggest that a candidate’s perfor-
mance on the Imbellus problem-solving
simulation is a slightly stronger indica-
tor of whether she’ll be hired than her
scores on McKinsey’s traditional test—
though Kantar says those results are not
“earth-shatteringly groundbreaking.”
And that’s still a long way from prov-
ing those people will be more successful
on the job. “We kind of need compa-
nies who at this stage are interested in
taking the pretty long-term view. Which
is, they’re eventually going to run out
of talent in their pipeline who are fit
for the nature of cognition their work
requires if they don’t invest in reori-
enting school toward teaching to these
deep-thinking skills.”
IMBELLUS’S HEADQUARTERS IN
Culver City sits in a cluster of sleekly ren- 49
ovated warehouses. When I visited on a
balmy morning in late January, Kantar’s
black Tesla was parked in front. The
office’s glass garage doors were pulled
open, and a row of potted bamboo trees
gave the place the feel of a boutique
hotel lounge. While a group of Imbellus
employees sipped coffee in the open-air
kitchen, Kantar chased her Dalmatian,
Nala, across the concrete floor.
The company has developed six
game-based simulations, in collabora-
tion with McKinsey and its other cor-
porate partners. (Citing confidentiality
agreements, Kantar declined to identify
them.) Imbellus’s software captures and
analyzes every keystroke a player makes
while going through the simulation, to
arrive at both a “product score” and a
“process score,” which Imbellus gen-
erates within two hours of the game’s
completion. Erica Snow, the head cog-
nitive scientist, says, “We’re not just
interested in whether you got it right
in the end. Cognition is dynamic—so
we’re also incredibly interested in how
you got there. The goal is not the same
as in scoring a multiple-choice test. We
want to know: How did you make the
 Bloomberg Businessweek
choices you made? When you made
errors, how did you correct them?”
The company uses artificial intelli-
gence to make the virtual environments
and animals look indistinguishable from
the real thing. “You want to get people in
a flow state while they’re taking the test,
so that they’re functioning at their high-
“i’m not saying that
est capacit y,”
Kantar says. “You
kids don’t need
never want the art to distract. If I gave
your kids a game that looked like Pac-
Man from the ’80s,
they’re going to be to know history or math
like, ‘Why is
the screen bro- or biology. they do.
they’re used to seeing.”
but can you move the north
ken?’ It doesn’t look like what
by “something like 50” venture
star of the system a bit?”
Kantar says she was rejected
capital firms during a fundraising round
last year, before securing her first major
investment from Owl Ventures, an
educational-technology-focused fund.
VCs are skeptical about her in part
50 because, she says, “I don’t look the part
of someone who would be running a
hard-science company. There are no
mental models that they can hang on
to in order for me to make sense. And
Elizabeth Holmes certainly didn’t help
my case.”
Comparisons to Holmes, the dis-
graced ex-CEO of the defunct blood-
testing company Theranos—another
dazzlingly bright, twentysomething
female college dropout—are unavoid-
able. “People even say I look like her,”
Kantar says, sheepishly. Jeff Hunter, a
former Bridgewater Associates execu-
tive who’s advised Kantar, says, “When
you’ve got a young female entrepreneur
who is selling a big vision, you’ve got a
lot people who are, like, is this smoke
and mirrors? Is this going to be some-
thing where no one’s really peeling back
the layers and looking behind the cur-
tain and saying, ‘Is this real?’ But she’s
making it work. There’s a real thing
there.” Kantar has surrounded herself
with women—including Imbellus’s chief
operating officer and all four of its board
members—but says doing so wasn’t a
conscious decision.
“It’s something we’ve discussed,
the equality issue
how much less scrutiny we
would face if we were men,
how much more implicit
trust you’d get. But there’s
nothing you can do about it,
and talking about it makes
you sound kind of silly,” says
Meredith Perry, founder
of the wireless technology
startup UBeam and a close
friend. “Rebecca’s not eas-
ily influenced by anyone at
all. She’s not like some lucky
kid. Everything she does is
planned and thought out and
very strategic.”
Kantar plans to begin
giving the Imbellus test to
high schoolers later this year.
She also says, without going
into many details, that the
company is bidding to take
part in a federally funded
national assessment that will
test 100,000 students in 2022.
IF THEY GAIN traction, tests
such as Imbellus’s could,
over time, help reduce the
fixation on four-year college
degrees by bolstering alter-
native paths to employment.
Kantar says that “for more
than 50 percent of kids, col-
lege is net bad.” Her goal
isn’t to make higher educa-
tion obsolete but to convince
colleges they’re select-
ing students based on stan-
dards that no longer make
sense: “We’re establish-
ing that simulation-based
assessments are a better
March 25, 2019
medium for getting at deep-thinking skills than
multiple-choice tests,” she says. “We’re using that
to go back to colleges and say, ‘Hey, we’re already
testing 70 percent of your graduates. Let us run our
tests alongside the SAT, the ACT, and APs.’ If we
can build a test that definitively measures skills that
matter more for work and better predict outcomes
that really matter on a longitudinal basis, like, why
keep what we have now?”
For all her ambition, Kantar is clear-
eyed about the prospects for
top-to-bottom reform of the U.S.
educational system. “I don’t
think my test is a silver bullet. A
lot of school districts have a lot of problems
beyond the assessments they’re using. The
under-resourced
schools are still
going to struggle.
But I think that over
a generation, hopefully, I can inch toward some-
thing that’s more relevant to adulthood than what
we have today. The schools who start way behind
are still going to be relatively behind in hitting that
North Star. But hopefully in their preparation for
it, their kids are going to be left a little better off.”
Will they? “My worry is that the kind of assess-
ment she wants to build is going to take us in
the wrong direction—away from college prep
and toward something even fuzzier and less rig-
orous and cognitively challenging than what we
have today,” says Michael Petrilli, president of the
Thomas B. Fordham Institute, a think tank focused
on promoting standards-based reform. He’s met
with Kantar. “My sense is that she doesn’t see a
lot of value in teaching traditional academic skills,
and I disagree.”
To that, Kantar responds, “I’m not saying that
kids don’t need to know history or math or biol-
ogy. They do. But my thought is, can you move the
North Star of the system a bit? You’re still going
to biology class and history class, but in those
courses there’s a little less focus on specific mod-
ules of curriculum and more focus on practicing
the thinking that’s required for work and not just
college. What I’m trying to do is to reconnect K-12
education with the world of work and the reality
of being an adult.”
She goes on: “I just want people to know that
we won’t stop. At some point, it’s going to work,
whether it takes 5 years, or 20 years, or 50 years
and whether it means doing it alone or doing it with
others. I’m really pretty sure that my initial mis-
sion and research was right—that this testing has
to change to see the rest of the dominoes fall.” <BW>
Bloomberg Businessweek the equality issue March 25, 2019

home sweet home equity

by 2016, median
black household
wealth had
fallen to
9 percent of
whites’—the
same level as
in 1965

51

mass
incarceration
of black men
black household income peaked caused black
at 62 percent of whites’ in household
1977, according to the data the wealth to
researchers assembled. it was slip in the
57 percent in 2016 1980s

○ THE BEST RESEARCH on differences in black and white Americans’ median income median wealth

income and wealth comes from Germany. University of Bonn econo- white AMERICANS white AMERICANS

mists Moritz Kuhn, Moritz Schularick, and Ulrike Steins assembled his- black AMERICANS black AMERICANS

torical data from the Federal Reserve’s Survey of Consumer Finances

from 1949 to 2016, analyzing income from all sources by households, $60k $160k

not individuals. They found that the median black household nar-
rowed the income and wealth gaps with its white counterpart through
the late 1960s and ’70s in percentage terms, but it’s lost ground since.
During the financial crisis, the housing market collapse was especially 30 80

cruel to the best-off black households, because they were more likely
to be highly leveraged, Schularick notes. They were also targeted with
predatory loans. The researchers found that at the 90th percentile—
households better off than 9 of 10 of their race—black wealth “col- 0 0

lapsed” after 2007 while whites were “largely unaffected.” �Peter Coy 1953 2016 1953 2016
 Bloomberg Businessweek the equality issue March 25, 2019

CHINA’s GRINDR THE URGE TO have a child hit

Geng Le hard after age 35. A for-

turns to
mer cop from China’s Hebei province,
he’d launched a gay dating app called
Blued a couple of years earlier, in 2012,

surrogacy
and had become something of an icon
for the Chinese LGBT community. Still,
he felt his life was somehow incomplete
without a child and that he owed it to
his parents to sire a new generation.
The next question was how to go
about it. A friend had become a parent
to triplets via surrogate, but that seemed
sketchy because surrogacy is illegal in
China. Another option was Thailand, a
popular, relatively low-cost option, but
by 2015 that country had banned foreign
surrogacy. Geng decided on California,
which offered the best legal protections
for “intended parents” such as himself,
excellent advanced medical care for the
surrogate and the newborn, and a U.S.
passport for the baby. “I thought about
how the child, after it was born, might
feel a lot of pressure, experience preju-
52 dice, feel insecure—‘other people have
mothers, I don’t have a mother,’ ” he
says. “But he’d have U.S. citizenship, so
I could send the kid to study overseas.”
The surrogacy process was a long
drumbeat of tests, contract signings,
and administrative details. When the
due date came around, Geng flew to Los
Angeles for the birth and held his son for
the first time. “I was just a person, I was
used to that,” he says. “After you become
a father, you experience this love and
this responsibility.” He returned home
with his son, Xiao Shu, in March 2017.
He also brought back a new idea
for Blued: an overseas surrogacy ser-
vice for gay men. The app was doing
well, on its way to building up 40 mil-
lion users and more than $130 million
in venture capital; he figured many of
the people on Blued would be willing
GENG with BLUEDBABY marketing cutout to pay if the system could be made eas-
ier to navigate. A few months later, he
BLUED, A POPULAR DATING APP, IS HELPING PAIR GAY MEN WITH launched Bluedbaby.
OVERSEAS SURROGATES. WILL THE CHINESE GOVERNMENT MIND? The service, part of a larger strategy
of diversifying into new business lines for
by DUNE LAWRENCE & DAVID RAMLI the LGBT community, has seen modest
success. Blued has its eyes on an initial
photograph by KA XIAOXI public offering—ideally in the U.S., which
offers a simpler IPO process and deeper
Bloomberg Businessweek the equality issue
capital markets. The trick for Geng will be convinc-
ing investors that he can expand his operations in
a country where gay people have few legal protec-
tions and where every new service pushes the fron-
tiers of government tolerance and social acceptance.
NOT SO LONG ago, Geng was known by his birth
name, Ma Baoli, and was married to a woman. But
online, he was living a parallel life as Geng Le, cre-
ator of an increasingly popular website for gay
men. In 2012 local media exposed his offline iden-
tity. When his superiors told him he could stay on
the police force if he shut down the site, he decided
to resign. In a country where stable government
jobs are highly prized, the news that he was quit-
ting horrified his parents. Their distress was com-
pounded when they realized he was gay.
His life transformed, Geng decided to double
down on his online venture and launch a smart-
phone app. It was promising enough that, two years
after it was released, Shunwei Capital and DCM
invested a total of $30 million. At the time, Blued had
fewer than 40 employees, no revenue, and no busi-
ness plan, recalls David Chao, a DCM co-founder and
general partner. What it did have was online traffic
from a sizable community that, outside of urban cen-
“if, like me, you’re in your 40s
and you still haven’t married,
ters such as Beijing and Shanghai, remained isolated
and hidden. The wager was based on demograph-
ics. “We believe that all human beings are alike, so
China, with 1.4 billion people, could potentially have
140 million LGBT members,” he says. “Hence you that followers can reward with vir- your parents?”
have a large enough community to support an entire tual gifts and money; Blued then
economy of its own.”
Chao’s 10 percent estimate might be too high—
recent studies suggest that a lower percentage of
people are gay—but in a country as populous as
China, the market is still well into the tens of mil-
lions. Gay consumers are also wealthier consum-
ers, says Eric Huet, a general partner at Ventech
China Ltd., which invested in Blued in 2016. He esti-
mates that in China they have five times the spend-
ing power of straight people, because they tend to
have better jobs and no children (at least for now).
And then there’s the international market; Geng esti-
mates that two-fifths of Blued’s 40 million users are
overseas. The company doesn’t disclose financial
figures, but he says the domestic business has been
profitable for the past two years.
A few days before Chinese New Year in February,
Geng leads a reporter on a tour of Blued’s head-
quarters in east Beijing. On the street below,
workmen on rickety scaffolding are
putting up signs for a Bluedbaby
shop front, intended to advertise
the service and give clients and
staff a place to talk, away from
the bustle of the main operation
a floor above. The offices upstairs
are adorned with rainbow flags,
posters from global pride parades,
and vivid murals depicting cartoon
men (and a few women) wear-
ing lab coats, hard hats, rainbow
rocket packs, or mermaid fins.
The current meeting room for
Bluedbaby clients features a card-
board cutout of two young fathers
embracing a burbling baby. Geng
waves at a clutch of lawyers who’ve
come to discuss IPO plans, his “Just
Do It” T-shirt contrasting with their
dark suits.
Blued, like other dating apps,
uses geolocation to help men find
dates and connect with friends. Its
most popular and lucrative service
allows users to broadcast videos
you still don’t have
children, how can you face
takes a cut. The app also brings in
money from traditional advertis-
ing. In addition to Bluedbaby, the
company is trying to get into the
pharmaceuticals market by apply-
ing for a license to market PrEP,
an HIV-prevention drug regimen.
Geng, who’s on PrEP himself, says
it’s impossible to get the drug in
most Chinese cities, and it’s very
expensive when available. The
eventual plan is to market and
sell it directly to Blued users and
to leverage its sales power to nego-
tiate lower prices.
The company’s investors have
suggested to Geng that he develop
his diversification plans more
before taking the company public.
March 25, 2019
He says he hopes to have a $1 billion
valuation by the end of the year—an
ambitious target, to be sure. “The
biggest difference between us and
other companies listing is our ideals
and beliefs,” he says. “We want to
showcase a Chinese company dil-
igently serving the LGBT commu-
nity, showing that we do things with
value, with philanthropy. That’s
what I want to do the most.”
THERE’S SOME IRONY for Geng
that, as he’s worked to promote
Bluedbaby, he hasn’t been living
with his son. Xiao Shu is in Geng’s
hometown of Qinhuangdao, about
190 miles east of Beijing, being
cared for by Geng’s partner and
parents. He video chats with Xiao
Shu frequently and visits when he
can. The air quality and lifestyle
are better in Qinhuangdao, Geng
says, and his parents are overjoyed
to have their grandson with them.
He credits his son with helping 53
mend family ties; his mother was
so shocked to learn he was gay, he
recalls, that she fell seriously ill.
His experience with the surro-
gacy came to inform Bluedbaby.
Hoping to have twins, he’d chosen
for the surrogate to be implanted
with two embryos. When only
one came to term, he regretted
not working with a second surro-
gate, a surer but more expensive
bet. Bluedbaby shepherds clients
through such choices, connecting
them with steps such as choosing
an egg donor, finding a surrogate,
signing contracts, and navigating
American culture. (Among other
differences, Chinese custom often
dictates that pregnant mothers stay
inside and eschew computers, nail
polish, and sex.) Three employees
in L.A. book hotels, pick up clients
at the airport, and help get them
 Bloomberg Businessweek
around the city. Fees for
Bluedbaby can run to thou-
sands of dollars, on top of
what clients pay directly to
fertility clinics and egg dona-
tion and surrogacy agen-
cies. Geng estimates he paid
$200,000 to such providers
for his own child.
Bluedbaby tries to elimi-
nate some of the uncertainty
inherent in the surrogacy
process, he says. But there
are contingencies no com-
pany can claim to prevent,
such as miscarriages or
stays in a neonatal intensive
care unit. And for Chinese
would-be parents, there’s
the uncertain legal climate
back home. Going abroad
to have a baby by surrogate
isn’t specifically banned,
but China limits the amount
each citizen can send off-
54 shore each year to $50,000,
making transfers to provid-
ers difficult.
There’s also risk after
the child is born. China
maintains an arcane sys-
tem of residency permits,
or hukou, which determine
where children can get pub-
lic schooling and health care.
Parents have no standard
process to ensure that babies
YARITZA MICHEL, a surrogate
working with BLUEDBABY in
the U.S.
the equality issue
borne by overseas surrogates get these
permits, raising the hugely expensive
prospect that, as “foreigners” with a
U.S. passport, the children will someday
have to attend international schools.
Still, the profit margins and potential
demand are promising, and Geng expects
Bluedbaby to be making money by the
second half of this year. During the inter-
view prior to the Chinese New Year, he
describes the holiday period, known as
Spring Festival, as a difficult time for the
LGBT community, and an illustration of
the need for a service such as his. “If, like
me, you’re in your 40s and you still hav-
en’t married, you still don’t have chil-
dren, how can you face your parents,
how can your parents face their friends?”
Geng says, describing the holiday stress
the LGBT community faces. “The regret
is that your life isn’t complete enough.
The second regret is that you owe a debt
to your parents.”
Bluedbaby wouldn’t make any of the
clients it has signed up available for an
interview, citing privacy concerns, but
other gay men who’ve sought out inter-
national surrogates recount similar
motivations. One, a 37-year-old market-
ing specialist for an international com-
pany who asked to be identified only by
his English name, Russell, worked with
a California agency called Los Angeles
Surrogacy to arrange an egg donor and
a surrogate for the child he’s planning
to raise with his partner of five years.
Family pressure, he agrees, was a major
motivation. “I’m thinking maybe I can
just skip the step, skip marriage, just to
babies—that’s much easier for me,” he
says. He’s already hatching a story about
a girlfriend leaving him with the baby.
Russell is exactly the kind of cli-
ent Bluedbaby is targeting, though he
hadn’t heard of the new venture when
he started looking around. He expresses
surprise on hearing that Blued is openly
promoting a surrogacy business. “That’s
a very controversial thing,” he says. “Our
government is very communist. You
don’t know what they’re going to do in
the future. Maybe one day they’ll say,
‘Okay we have to stop this. You cannot do
surrogate babies in China and you cannot
promote it.’ What do you do?”
March 25, 2019
It’s not illegal to be gay in China, and the days
when the police would round up men who met
surreptitiously in parks and charge them with
“hooliganism” are mostly gone. Homosexuality
was removed from an official list of mental dis-
orders in 2001. On the other hand, China has no
explicit legal protections against discrimination
based on sexual orientation or gender identity.
And the government has in recent years broadly
suppressed civil society groups, including ones
that promote gay rights, according to Darius
Longarino, a senior fellow at Yale Law School’s
Paul Tsai China Center.
“Advocates in China don’t think the government
is targeting LGBT issues per se,” he says, “but they
are wary of any form of organization where people
are finding each other and trying to create move-
ments.” A few years ago, for example, one of the
biggest apps for China’s lesbian community, Rela,
was shut down following an event in Shanghai
aimed at raising awareness of gay rights. (It later
relaunched.) There’s also been some retrenchment
of rules relating to public depictions of homosex-
uality. In 2016 the government banned portrayals
of “abnormal” sexual behavior, including homo-
sexuality, on Chinese television. The next year a
government-affiliated group issued similar rules for
online content, leading some platforms to ban any-
thing gay-themed.
Geng’s approach has been to cultivate relation-
ships with officials and work assiduously to align
Blued with public-health objectives such as HIV
prevention and education. And when controversy
has erupted, he’s managed to make his points to
officials without drawing their ire. After the online
content rules were issued, for example, he didn’t
comment publicly, despite uproar in the gay com-
munity. Instead, he reached out to one of the offi-
cials responsible, who explained that he’d applied
the TV rules without realizing what would happen.
Geng framed it as a business issue, and suggested
that next time there be opportunity for public
comment. In January, when rules were issued for
PHOTOGRAPH BY RAMONA ROSALES FOR BLOOMBERG BUSINESSWEEK
short-video platforms on subjects ranging from
criticisms of the Communist Party to foot fetishes,
they didn’t single out homosexuality. Geng con-
siders it progress.
Connecting gay men to surrogates is an espe-
cially challenging business, he acknowledges. It’s
politically complex, high-touch, and slow com-
pared with most e-commerce. Still, it’s coming
along. Blued has so far helped a few dozen clients
get to the U.S., and Geng anticipates good news
within weeks. One of the surrogates is due on
April 9. The first Bluedbaby baby is coming soon. <BW>
Bloomberg Businessweek the equality issue March 25, 2019

house of the rising waters

FEMA paid out

95,235 flood
loss claims in
2017, up from
12,907 in 2014

55
disparities in
the distribution
of FEMA aid left
less economically
stable victims,
regardless of
race, worse off

HOWELL found that

white people were
the most likely to
benefit, except
for those with the
least education

○ JUNIA HOWELL, a professor at the University of Pittsburgh whose wealth change from 1999 through 2013 associated
with natural hazards*
work deals broadly with race and socioeconomic inequality, once
lived in a depressed area of Houston and saw how frequent flooding homeowner renter ● gain in wealth ● loss
affected her neighbors. She studied the impact of natural disasters BLACK LATINX WHITE
on wealth in the long term and found that extreme weather events
are exacerbating inequality—not just because of who the victims are, college $176k
educated
but also because of how society distributes disaster relief. Thanks to
insurance payouts, white, college-educated homeowners who were
affected by a large-scale disaster generally saw an increase in their high
long-term wealth. Most black victims, on the other hand, ended up school
worse off. Those patterns extend to disaster payments from the Federal
Emergency Management Agency, which disproportionately help white
homeowners in higher-priced areas, according to Howell. “FEMA aid eighth $158k
is constructed to restore property,” she says, “not people’s lives.” grade

�Christopher Flavelle
*IN COUNTIES THAT EXPERIENCED $1B IN HAZARD DAMAGES.
CHANGES IN WEALTH DO NOT REFLECT FEMA AID
 Bloomberg Businessweek
trans rights enter
the workplace
TRANSGENDER PEOPLE FACE WIDESPREAD DISCRIMINATION, AND THE SUPREME COURT HAS YET
TO DECIDE WHETHER THEY’RE PROTECTED
by JOSH EIDELSON interviews by RILEY GRIFFIN
photographs by ZACKARY DRUCKER
UNTIL JULY 2013,
Aimee Stephens’s boss
had only ever known her
as a man. That month she
pulled him aside at R.G. &
G.R. Harris Funeral Homes
in Garden City, Mich., where
56 she worked as a funeral
director, and handed him a
letter that explained every-
thing: how she’d felt impris-
oned in her body; how, with
help from her wife and her
therapist, she’d “decided to
become the person that my
mind already is”; and how
she’d soon “return to work
as my true self,” dressed “in
appropriate business attire.”
Stephens offered to
answer any questions her
boss, Thomas Rost, might
have and enclosed her ther-
apist’s business card in case
he wanted another perspec-
tive. She says he replied, “I’ll
get back to you,” and walked
away. A couple of weeks
later, Rost fired Stephens.
In a later deposition, he
said he’d done so because
Stephens “was no longer
going to represent himself as
a man” and “wanted to dress
as a woman” instead.
The dismissal set events
in motion that could define
the equality issue
trans employees’ rights in the U.S. At
issue is whether the Civil Rights Act
of 1964, which bans discrimination
on the basis of sex, prohibits compa-
nies from firing people because they’re
trans. Under the Obama administration,
both the Department of Justice and the
U.S. Equal Employment Opportunity
Commission said it does. “Someone
is discriminated against because they
changed genders—that’s discrimination
on the basis of sex, basically by defini-
tion,” says David Lopez, a Rutgers Law
School co-dean who served as general
counsel of the EEOC under Obama. In
recent years, trans workers have won
unlawful-dismissal cases in district and
circuit courts, including in the 6th U.S.
Circuit Court of Appeals, which issued
a precedent-setting ruling in Stephens’s
favor in March 2018.
Harris Funeral Homes has asked
the U.S. Supreme Court to overturn
that ruling, saying that Rost felt he’d
be “violating God’s commands” by
allowing Stephens to come to work
as a woman. Under President Trump,
the Justice Department has reversed
its position on protections for trans
workers, and with conservatives hold-
ing a 5–4 majority on the nation’s high-
est court, LGBTQ advocates worry
that the court will agree to take up the
case and wipe out their lower-court
victories. Stephens has no regrets.
“I’d do it again,” she says. “If you’re
part of the human race, you should
March 25, 2019
have the same rights as everybody else.”
Stephens was 48 when she first acknowledged
to her wife in 2009 that there was “something dif-
ferent” about her—something she’d felt since the
age of 5. For a few years after that, she stayed clos-
eted at work. “You can, up to a point, compart-
mentalize everything into its own little square
hole, and everything works,” she says, “until
you get to that point: ‘I can’t do this anymore.’ ”
Writing the letter to her boss took months, she
says. The day she was fired, a Friday, Stephens
called her local American Civil Liberties Union
chapter in Detroit. By Monday she was meeting with
an attorney there, Jay Kaplan, who helped her file
a complaint with the EEOC. A district court sided
with the funeral home, ruling that federal religious
freedom law prevented the EEOC from forcing the
company to rehire Stephens. But the 6th Circuit
rejected that argument, ruling that “it is analyti-
cally impossible to fire an employee based on that
employee’s status as a transgender person without
being motivated, at least in part, by the employ-
ee’s sex,” therefore making such action illegal.
The funeral home, which is represented by the
right-wing group Alliance Defending Freedom,
argued in its appeal that the judges “usurped the
role of Congress, which has repeatedly consid-
ered and rejected” changing civil rights law to
include explicit transgender protections. It said
the company “reasonably determined” that let-
ting Stephens come to work dressing and present-
ing as a woman would “disrupt the healing process
of grieving families.” John Bursch, vice president
for appellate advocacy at the ADF, says it’s health-
ier for people such as Stephens to try to “align
their mind with their biological reality” rather
than to “change their gender.” The funeral home
Bloomberg Businessweek the equality issue March 25, 2019

wasn’t acting out of ill will, he says, but rather meet some of your
“out of love both for Stephens and for employees.”
Fewer than half of all states have laws explicitly transgender co-workers
shielding trans workers in the private sector. If the
Supreme Court does grant the funeral home’s plea to
take the case and overturns the circuit court ruling,
it could leave employees in much of the U.S. with-
out legal protection if they’re fired for being trans.
There is precedent to support the 6th Circuit’s
decision. The judges cited Price Waterhouse v.
Hopkins, a groundbreaking 1989 Supreme Court
ruling establishing that the types of sex discrim-
ination prohibited by the Civil Rights Act include
punishing employees for not adhering to gender
stereotypes, not just punishing them for being male
or being female. There’s also the unanimous 1998
decision in Oncale v. Sundowner Offshore Services,
Inc., written by Antonin Scalia, which held that the
Civil Rights Act protects men from being sexually
harassed by other men, thus extending its protec-
tions beyond what Congress may have had in mind.
If the Supreme Court doesn’t take up the
funeral home’s appeal, Stephens will be entitled
to seek damages. That wouldn’t protect trans
workers in other courts’ jurisdictions, however.
“At the state and local level and company level, 57
we have this big patchwork of explicit protec-
tion,” says Harper Jean Tobin, policy director for
the National Center for Transgender Equality.
DONNA ROSE 60 mobile professionals. leadership—all the way
But “there is a lot of confusion—even more so That was my life track up to our chief informa-
when you have a president and a Department of PHOENIX in my mid-30s, and it tion officer—provides
was pretty good. I had
Justice who basically, through their policies and ENTERPRISE LAN/ me to continue to be
WAN infrastructure come to peace with the involved in LGBT work
their case briefs, are saying that this 20 years program manager, two people living in this and, specifically, trans
of case law is fake news.” The NCTE’s 2015 U.S. AMERICAN AIRLINES body. I found the inter- workplace leadership
net and, all of a sudden,
Transgender Survey found the unemployment is one of the things that
pronouns: she, I wasn’t alone anymore. keeps me at American
rate among respondents was 15 percent, three her, hers Airlines. There’s no
times the overall rate at the time. Among non- were you worried shame, no hiding.
about coming out
white respondents, 20 percent were unem- when did you start
coming out? at work? how do you describe
ployed. “The discrimination against transgender I knew something was I wasn’t, because at your gender
people is pervasive,” Kaplan says. Most of the wrong from a young that point I’d come out identity?
to my wife, which was
calls the Michigan ACLU’s LGBT Project receives age, which seems In my day-to-day life, I
to be a fairly con- horrible; to my son, never even think about
these days come from trans people, he says. sistent narrative for which was hard; to it. That’s the irony of
Stephens herself has been out of work for five what I’ll call “mid- my family. I’d become it all. There’s a time
very good at it. There’s
years, battling kidney failure. (Due to her health, she life transitioners.” For when it’s all-consuming,
those of us who grew a quote: “Courage and then there’s a
wasn’t available for a photo.) After the funeral home, up in the ’60s and ’70s, isn’t the lack of fear. time when it’s such a
she worked for about half a year as an autopsy there were no words It’s the recognition non-thing. It’s been this
that there’s some-
technician at a private hospital in Detroit. She was or labels to apply. I way now for 20 years,
fit into the roles that thing more important and I think I’ve found
known as Aimee from the day she arrived. “It was were expected of me than fear.” That’s how I who I am.
just a nice feeling to be able to go to work as myself,” very well. I played foot- approached it.
she says. Now she goes to dialysis three times a ball. I was attracted
to girls. My wife and how often does your
week and tries not to think about the possibility I bought two homes. gender identity
that the Supreme Court will use her case to vacate We had a child. They come up at work?
I’ll be perfectly honest:
trans workers’ protections. “If they do, it doesn’t used to call us yup-
pies—young, upwardly The support that my
mean we stop,” she says. “We keep going in differ-
ent avenues until we can achieve our final goal.” <BW>
interviews edited for length and clarity
 Bloomberg Businessweek the equality issue March 25, 2019

CHRISTIAN
OROPEZA 34
WASHINGTON, D.C.
vice president
for commercial
insurance,
LONG & FOSTER

pronouns: he, him,

his

why did you go into

insurance?
I was an animal hos-
pital receptionist
15 years ago, check-
ing someone out, and
they said, “Hey, kid, do
you want to sell insur-
ance?” So, I started
① transitioning: changing

selling insurance.

when did you start

coming out?
I was transitioning ①
[while working at the
animal hospital]. My
manager didn’t believe
in gay people but did
believe in trans peo-
ple. She believed it was
possible we were wired
as the wrong sex, but
58 she only thought you
could be a trans guy lik-
ing women. One woman
refused to use male pro-
one’s gender expression to conform with one’s gender identity; may involve any or all

nouns with me. Then

there was another
male receptionist,
he flicked me in the
chest and said, “Do
you think you’re a guy
now?” They were sup-
portive at times, but
weirdly homopho-
bic and aggressive. It
was funny. Well, it’s
funny now. At the time
it was just awkward
and uncomfortable.

what are
your career
aspirations?
I would like to men-
tor more people. Last
month this guy shocked
me with something
he came up with. And
I was like, “Bro, who
trained you?” and he
was like, “You did. …” I
want to be CEO soon. If
it’s not at this company,
someone is going to
make me CEO within
five years. It doesn’t
matter where.

of the following: counseling, changing one’s name and/or clothing, hormone treatments, gender confirmation surgery
 Bloomberg Businessweek the equality issue March 25, 2019

VICTORIA
STARRETT 32

LOS ANGELES
staff attorney,
public counsel

pronouns: they,
them, theirs

how do you describe

your gender
identity?
There are so many
words going around
now. Genderqueer ①
is something that I
also identify with, but

in between or outside the binary

nonbinary trans feels
the most authentic.

were you worried

about coming out
at work?
It was sort of terrifying.
On my fourth day I
introduced myself to
someone using my
pronouns, and they said
they didn’t know what
that meant, so they
weren’t going to use
them. The organization
has admitted that they
weren’t ready for trans 59
folks and nonbinary ②
folks to work there—
and, quite frankly, for

binary, either male or female; the gender spectrum includes gender identities that fall
some of our clients
who identify that way.
The organization has
been taking steps, but
it’s been a long road
to get here. [Margaret
Morrow, president and
CEO of Public Counsel,
says she and her staff are
“proud of the changes
we’ve made,” and
that Victoria’s coming
forward has “made us a
better organization.”]

how is your
experience
being nonbinary
different from
that of binary
trans people?
I am always feeling
like a fraud. Like, am
I queer enough? Am
I trans enough? Can
I even use that label
for myself? No matter
where I go, I’m going to
have to do a lot of work
to prepare people to be
more inclusive.

① genderqueer: similar to gender nonconforming; the word “queer” on its own can also refer to sexuality ② nonbinary: refers to the gender
 Bloomberg Businessweek the equality issue March 25, 2019

� LIZ institutional support trans-specific situations,

in terms of HR policies honestly, it doesn’t
FONG-JONES 31
and health care. happen very often. I
am open being trans,
BROOKLYN, N.Y.
when did you start but at the same time,
currently:
coming out? I’m not mentioning it in
developer
I have both the privilege every breath.
advocate,
and the awful luck that
HONEYCOMB.IO
I realized I was trans have any of
formerly: staff
when I was 15 years your colleagues
developer
old. My dysphoria ① responded to you
advocate, GOOGLE
was so bad, I couldn’t in a way that
cope with it other than stood out?
pronouns: she,
trying to transition. I People would ask ques-
her, hers
never had to deal with tions in bad faith. Like,
coming out at work. On “What about the white
why did you go
the other hand, it does men in the industry?”
into software
mean I had to deal with or “Could you explain
engineering?
parents who were not to me how it’s possible
It was a family business:
supportive, and that to have more than two
My uncles and aunts
was very traumatic. genders?” Questions
are engineers. Google
that make your
is one of the best places
how often does your blood boil.
where a transgender
gender identity
person can work. In
come up at work?
terms of community,
As someone who is a
there’s a lot of transgen-
binary trans person,
der employees—there
I’ve run into sexism all
are several hundred out
the time. But in terms of
in the open. There’s

60

� ASHLEY varied, inconsistent my cisgender ② peers

guidance about on the experiences,
OERTH 25 the documentation challenges, and diver-
required. I spent an sity of trans individuals.
NEW YORK
additional 10 months
investment
① dysphoria: refers to gender dysphoria, recognized by the AMERICAN

waiting to have the how has coming

strategy analyst,
procedure. Three out as trans
OPPENHEIMERFUNDS
months ago, I began affected the way
INC.
the same process for your co-workers
another procedure, this treat you?
pronouns: She,
one newly, although I often wonder how my
her, hers
only partially, covered. experience would be
Even with meaningful if I didn’t mostly pass
did your health
connections through as a cisgender woman.
plan cover the
health-care providers While I’m grateful for
medical care
and experts, senior HR the positive reception
you needed?
colleagues at my firm, and support of my
There were limitations
and advocates for the team, I did notice that
in the plan I was initially
trans community, I still some colleagues outside
on when I joined the
spend hours on the of my group may have
company, which meant
phone and doing my stopped saying hi to me
I’d need to switch to a
own research to make in the hallways, and I
different, less preferred
my health care happen. catch some staring now
hormonal treatment
and then.
until open enrollment
how often does your
began the next year.
gender identity
I spent eight months
come up at work?
speaking with insurance
At least once a week—
representatives
usually by me. For
about getting my
me personally, it’s
first procedure cov-
important to educate
ered and was given

PSYCHIATRIC ASSOCIATION as involving “a conflict between a person’s physical or assigned gender and the gender with which they identify”
Bloomberg Businessweek the equality issue March 25, 2019

JULIAN
HARRIS 39

WASHINGTON, D.C.
licensed
independent
clinical social
worker, therapist

pronouns: he, him,

his

how does your

racial identity
intersect with your
gender identity
at work?
The relationship
between a client and
therapist tends to be
a microcosm for their
world. Sometimes
they’ve never been
able to trust a man.
Or they’ve been
victimized by a man
who was black. Or
they’re struggling
with their own gender
identity, and the fact
that I’ve been sitting
in mine makes them
uncomfortable. A lot
of times, we produce a
reparative relationship. 61
They recognize that I’m
not hurting them.

There have been times

when clients have been
openly transphobic,
homophobic, or queer-
phobic. But it can never
be about me. However
they feel about trans
people doesn’t impact
me—not on a per-
sonal level. When it
comes to institutional
structures and people
in power who have neg-
ative feelings toward
a certain population,
then, yes, that impacts
me. Sometimes people
are lashing out because
they’re hurt, and you
just happen to be the
person that’s there.
If you can recognize
it is not you, then it
becomes easier to cope.

② cisgender: describes someone whose assigned gender conforms to their gender identity and expression
 Bloomberg Businessweek the equal

the old boys

62

HERE’S TO TRADITION, SAY THE

DAYTIME-DRINKING, SEXUAL-HARASSING
MEN OF THE LONDON INSURANCE MARKET
ity issue March 25, 2019

of LLOYD’s

63

by GAVIN FINCH
photograph by CHARLIE KWAI
 Bloomberg Businessweek
R I S I N G F RO M T H E heart of
London’s financial district along
Lime Street is a tower so otherworldly that
Marvel Studios cast it as an office building
for a highly advanced civilization in the
film Guardians of the Galaxy. The build-
ing’s guts—air ducts, stainless steel stair-
cases, even power cables—are mostly
on the outside, creating the futuristic-
looking facade. The reality within, how-
ever, is years in the other direction.
The tower’s iconic inhabitant, Lloyd’s
of London, occupies the most archaic
64 corner remaining in global finance,
where life vacillates between the 17th
century and the 1980s. Lloyd’s runs a
331-year-old exchange for the world-
wide insurance market, not too dissim-
ilar from the New York Stock Exchange
of old. But while electronic trading has
transformed exchanges across the rest of
finance, including at the NYSE and the
Chicago Board of Trade, the underwrit-
ers and brokers of Lloyd’s mostly do busi-
ness the old-fashioned way: face-to-face,
using rubber stamps, pens, and sheaves
of paper. Thousands pack Lloyd’s cavern-
ous trading floor in the well of the Lime
Street tower’s 12-story atrium. Four addi-
tional open trading floors reach up the
atrium’s sides like balconies over a noisy
courtyard. The throngs work for insur-
ers bidding to sell trillions of dollars in
complex coverage to brokers represent-
ing the world’s largest corporations. If
you fly on a commercial airliner, work
on a deep-sea oil platform, or occupy a
desk at a Fortune 500 company, you’re
probably covered by a policy arranged
through Lloyd’s.
Beyond the quaint nature of the trad-
ing, other rites date to the first exchange
Edward Lloyd opened in a 1680s London
the equality issue
the main trading floor at LLOYD’s
coffee shop. When a ship is lost at sea,
the event is recorded with a quill pen
in a leather-bound ledger kept near the
center of the main trading floor, which
Lloyd’s calls the underwriting room. To
mark major disasters that yield billions
of dollars in claims, such as the terrorist
attacks of Sept. 11 and the Indian Ocean
tsunami of 2004, a man in a red tunic and
white gloves rings a golden bell.
Other anachronisms are less genteel,
March 25, 2019
including a deep-seated culture of sex-
ual harassment—the full appalling
range, from inappropriate remarks
to unwanted touching to sexual
assault. Bloomberg Businessweek spoke
with 18 women who have more than
300 years of combined experience in the
insurance market, and they described
an atmosphere of near-persistent harass-
ment. “It’s basically a meat market,” one
industry insider says. After a harrowing
experience that, she says, involved a
senior manager drunkenly attacking her
in a pub right around the corner from
Lloyd’s, her employer convinced her it
would be bad for her career to pursue
a complaint. She’s since configured her
professional life to stay away from the
exchange. It’s a common choice among
the women of London’s insurance mar-
ket, and one reason the trading floor at
Lloyd’s is a sea of men.
The vast majority of people who
work at Lloyd’s are not employees of
the exchange, which has a worldwide
staff of about 1,000 people, but the
norms of the insurance market are in
part shaped there. Inga Beale tried to
redirect the industry after becoming
the first female chief executive officer
of Lloyd’s in 2014. She pushed for mod-
ernization of technology, attitudes, and
behaviors—and met resistance at every
step. She left shortly before her fifth
anniversary, last fall. Among the relative
handful of women left in the industry’s
senior executive ranks in London, many
fear that even the modest advances
achieved under Beale are in jeopardy.
They fear that Lloyd’s, already a deeply
backward-looking institution, might
actually be on the verge of regressing.
THE MEN OF Lloyd’s pride themselves
on their dress. Well-tailored dark blue
and gray suits are the norm, often with
bold chalk stripes. One does not wear
brown shoes. A code mandating suits was
lifted last year, but it was clear on sev-
eral recent tours of the trading floors that
almost everyone still adheres to it. Some
ANDY SHAW/BLOOMBERG
of the older underwriters wear brightly
colored suspenders, or braces. Even by
the standards of London’s financial dis-
trict, the vibe is sartorially conservative.
Bloomberg Businessweek
The exchange comprises
members—mostly major
insurance companies but
also wealthy individuals
(called “names” by the trad-
ers) and some private equity
groups—that join together
to form underwriting syndi-
cates. They insure everything
from global oil shipments
to the Mona Lisa and even,
famously, David Beckham’s
feet. There are roughly 80 syn-
dicates at Lloyd’s, each allot-
ted a cluster of small desks
and benches known as a box.
When it gets busy, brokers
form long queues at the boxes.
Veterans use junior employ-
ees, known as slip jockeys, to
hold their place in line until
it’s their turn to sit on a stool
next to the underwriter. They
can, however, lose their privi-
leges. Underwriters have been
known to send brokers away
from their boxes for not wear-
ing a necktie.
When some of the cur-
rent crop of senior execu-
tives started their careers,
women were still banned
from the Lloyd’s floor. The
ban was lifted in 1973, but, as
with the dress code, chang-
ing the rules didn’t seem to
change the culture. Women at
Lloyd’s continue to be judged
by their looks, according to
Mairi Mallon, an insurance
public-relations specialist
writing in her blog, Sexism in
the City. “Women at Lloyd’s
boxes [are] still being called
a host of names including
‘totty,’ ” Mallon wrote in 2017,
and they’re rated “from 1-10
on ‘shagability.’ ” Historically,
underwriters competed
openly to hire the most attrac-
tive female assistants, in the
belief that the prettiest ones
would draw business to their
“it’s basically a meat market”
the equality issue
boxes, market veterans say.
Traders still call them “box
girls” or even “box bitches.”
Beale knew the under-
writing business and its cul-
ture. Her first job, in the
1980s, was as an underwriter
trainee at Prudential’s London
office, where she was the only
woman on a team of 35. One
day she privately complained
to her boss about posters fea-
turing women in wet T-shirts
and bikinis. “The next day,”
she recalled in a 2016 BBC
interview, “I came in, I walked
around the corner, and saw
my desk—and my desk was
wrapped up in the posters.”
She walked onto the eleva-
tor and out of the building,
and three days later resigned.
That was 1989.
Some things have changed
in the 30 years since that
morning—there are far more
women working in the
London market, and these
days they’re allowed to wear
what they like—but the boys-
club mentality runs deep.
“Fundamentally, to crack
behaviors [and] clubby groups
that have known how to sup-
port each other over centuries,
to kind of really crack that is
incredibly tough,” Beale told
Bloomberg Businessweek in
September. It was one of her
last interviews before she
stepped down.
Early in Beale’s tenure, she
introduced several diversity
initiatives, asking the CEOs
of the world’s biggest insur-
ance companies to commit to
increasing diversity and inclu-
siveness in their firms. Before
long, she faced challenges
from within. She was told by
the council and the governing
board of Lloyd’s that she spent
too much time on diversity.
March 25, 2019
Some male executives doing business at the exchange com-
plained privately that they found her patronizing and aggres-
sive. One of Beale’s friends recalls men approaching her to
inquire whether she could ask Beale to “tone it down.” From
that point forward, Beale carefully tracked her time, mak-
ing certain she spent less than 25 percent of it on diversity
initiatives.
Other critics, particularly the anonymous ones, were much
less subtle. The trolling came via email and—this is Lloyd’s,
after all—on paper. Some messages went to Beale’s sixth-floor
desk, including one that declared she “should go and die”; oth-
ers were sent elsewhere within Lloyd’s. One said that Beale
should stop speaking about her bisexuality—“She shouldn’t
be talking about things that go on in the bedroom”—and
demanded that Lloyd’s “fire this woman.”
Women in the market faced similar verbal harassment
and occasionally endured physical assault at the hands of
powerful executives. Having a woman upstairs had changed
that almost not at all.
ALTHOUGH LONDON IS a global leader in entertainment,
media, and finance, the kind of #MeToo allegations that have
hit those sectors in the U.S. have yet to surface in a meaning-
ful way inside the U.K. That’s likely a result of a British legal
system geared to protecting privacy, which limits the kind of
naming-and-shaming culture that’s pushed so many men out 65
the door in America.
Many of the women Bloomberg Businessweek spoke to said
pursuing their abusers in the U.K.’s courts wasn’t feasible given
the high costs involved and potential damage to their reputa-
tion within the industry. All of the women would speak only
on the condition that their identity be protected. Bloomberg
Businessweek verified their employment records and, where
possible, confirmed with colleagues or friends that they had
previously shared their accounts. They’ve worked for some of
the world’s largest insurers and insurance brokers, including
Aspen Insurance Holdings, Arthur J. Gallagher & Co., Marsh &
McLennan, Munich Re, and more.
“We want women to have every opportunity to build great
careers and thrive in a culture where inclusion is a core value,”
Chris Lay, CEO of Marsh U.K. and Ireland, said in a state-
ment. “Inappropriate behavior is unacceptable and will face
the strongest sanction.” A spokesman for Munich Re said the
company “strives for an open, equal culture and takes indica-
tions of misconduct seriously.” Aspen and Gallagher declined
to comment.
Women with international experience in insurance
and other areas of finance say the pervasive harassment
at Lloyd’s and in the wider London market is unique. And
they all say it begins with alcohol. Deals born on the Lloyd’s
floor, or in nearby offices, slosh into the pubs and vice versa.
All day long, underwriters move from the trading floor to
the pub to their own offices, then back to the pub again.
The London insurance market is the last
place in global finance where drinking
 Bloomberg Businessweek
isn’t only tolerated, it’s expected.
The historic Leadenhall Market, an ornate cov-
ered arcade, is just a few steps from the entrance
to Lloyd’s, and most lunchtimes insurance indus-
try workers crowd outside the Lamb Tavern, a pub
that dates to 1780, sipping pints of frothy ale and
talking loudly about the morning’s deals. Smartly
dressed senior executives drink alongside junior
underwriters and their secretaries. In the summer
months the drinkers outside the Lamb can number
in the hundreds.
Under most circumstances the atmosphere is
boisterous and good-humored, but Lloyd’s drinking
culture has created an environment in which women
aren’t always safe. One female executive in her 30s
says a male manager assaulted her after a night out
with co-workers. She was new to the insurance
industry, having spent much of her career in bank-
ing in the U.S., and was surprised by the amount
of drinking. But she felt the need to go along. She
agreed to share a cab with the manager back to their
respective homes. The man was so drunk he was
slurring. Suddenly he grabbed her. She was terrified
until she managed to break free from his grip and get
out of the car, she recalled during an interview at a
66 coffee shop around the corner from Lloyd’s. Wary
at first about talking of the attack, she soon becomes
angry and her voice rises. “After that, he basically
started bullying me, and things got progressively
worse,” she says. “I was new to the team and just
wanted to be accepted, so I stuck it out.” She became
increasingly marginalized. She levied a formal com-
plaint, and then was moved to another part of the
business. Her attacker was allowed to stay in his job.
Young women at Lloyd’s “are just cannon fod-
der,” one female broker says. “Unless you have a rich
father, you aren’t going to be able to afford suing.
You’re also going to f---ing destroy your reputation,
and you basically have to decide that you will never
work in the industry again.”
None of this comes as a surprise to Barbara
Schönhofer, an industry headhunter with more than
20 years’ experience in the market. “I don’t know
a single woman who hasn’t been harassed in one
form or another in the London market,” she says. A
decade ago, Schönhofer started a group for female
leaders in the business. The Insurance Supper Club
now has more than 700 members worldwide and
holds events in seven countries. At every one, she
says, sexual harassment comes up.
At a dinner in London last year, Schönhofer says,
she asked 10 senior executives which of them had
been harassed at work. Nine raised their hands.
“No one should ever experience harassment of
any kind at work, and it is distressing to hear that this
the equality issue
is still happening,” said John Neal,
Lloyd’s new CEO, in a statement.
“We take it extremely seriously and
will be talking to the Lloyd’s market
to ensure that we stamp out these
inappropriate behaviors. Lloyd’s
has worked really hard to put the
broadest inclusion agenda at the
center of everything we do.”
BEALE DIDN’T PUBLICLY connect
the drinking culture at Lloyd’s to
sexual harassment, but in early 2017
she sent an email to Lloyd’s employ-
ees banning booze during the day.
“The London market historically
had a reputation for daytime drink-
ing, but that has been changing,”
Beale’s note said. “Drinking alcohol
affects individuals differently. A zero
limit is therefore simpler.” Although
it applied only to Lloyd’s employees,
it was one of those moves that had
the potential to influence the whole
industry doing business inside the
Lloyd’s exchange.
Complaints deluged the Lloyd’s
intranet and were heard across the
industry. Some men drew compar-
isons to an Orwellian Big Brother
state; others sneered that Beale was
trying to run their life as if she was
their mother. “Fury as Lloyd’s of
London bans its staff from drinking
alcohol from 9-5,” ran a headline on
the website of the Daily Express.
“Be careful not to take too dim a
view of alcohol,” said the headline
atop one letter from a broker pub-
lished in the Financial Times. In
the end, it was all noise. The ban
has been widely ignored, accord-
ing to executives from insurers in
the market.
Beale did inch Lloyd’s forward
in other ways. She did more than
any other executive to drive diver-
sity and inclusion to the top of the
agenda in the industry. Many of
the biggest Lloyd’s insurers now
include it as a metric when cal-
culating senior executive pay.
Beale also forced the brokers and
underwriters at Lloyd’s onto an
electronic trading platform. When
March 25, 2019
she took over, everything was being
done on paper, much as it had been
for the past three centuries. By the
time she stepped down, about
16.5 percent of the market’s busi-
ness was being placed online.
Women working in the London
market say Beale’s focus on diver-
sity first, and harassment after that,
might have gotten it the wrong way
around. Senior ranks are thin on
women, they say, because so many
are forced out in their 20s and 30s
by the constant stream of harass-
ment from male colleagues. Beale
seemed to acknowledge as much.
“If I look out at the very senior
level, it looks a bit bleak, if I’m
honest, and it doesn’t feel great,”
she said in September. “I’ve seen
so many senior women departing
their roles.”
Many of those who remain told
Bloomberg Businessweek they’re
concerned that Lloyd’s was send-
ing them a message with its new
CEO pick. Lloyd’s Chairman Bruce
Carnegie-Brown had set six criteria
for the new CEO, and they didn’t
include anything about diversity.
A headhunter generated a list of
candidates, which was whittled
down to five men and one woman.
Carnegie-Brown chose Neal, the
former CEO of the Australian
insurer QBE Insurance Group Ltd.,
who’d spent most of his career in
London. The all-male nominations
committee agreed with the choice
and sent Neal to the Lloyd’s coun-
cil, whose 14 men and 2 women
concurred on Sept. 7.
Council members knew Neal’s
former employer had docked his
pay for not disclosing he was in
a relationship with his personal
assistant. What they didn’t know,
according to senior sources famil-
iar with the selection, was that the
woman in question had replaced
Neal’s previous assistant—after he
had married her.
Neal declined to comment on
his hiring. He took over Lloyd’s on
Oct. 15. <BW>
 Bloomberg Businessweek the equality issue March 25, 2019

a woman’s place is where?

the U.S.
BUREAU OF LABOR
STATISTICS
estimates that
women still
spend an average
of 67 percent
more time on
child care than
at least men do.
according to
the GENERAL
SOCIAL SURVEY,
millennial
men are more
egalitarian
than millennial
women. seventy-
nine percent
said women
should be
equals at home
and at work, vs.
67
74 percent of
women in their
age group.

in 1977,
59 percent of
respondents to
the survey said
women should
work at home
and nowhere
else. about a
decade later,
that figure
had shrunk to
20 percent.

○ ATTITUDES TOWARD WOMEN’S roles in society have been grow- share of respondents in each class

ing more egalitarian since the disco era, but there’s a long way to go. egalitarians split attitudes traditionalists

University of Illinois at Chicago Ph.D. candidate William Scarborough

and professor Barbara Risman, along with Ray Sin, a behavioral scien- 60%
DATA: ATTITUDES AND THE STALLED GENDER REVOLUTION

tist at Morningstar Inc., analyzed more than 40 years’ worth of data

from the federally funded General Social Survey to try to discover why.
After examining two sets of responses—one pertaining to women’s 40

roles in the home and one about their roles outside of it—they found
that those attitudes began to diverge in the 1990s. Americans increas-
ingly accepted women in the workplace, but they still wanted them to 20

put family first. The good news, says Scarborough, is that 69 percent
of Americans today think men and women should be equals in both
spheres. “That’s not to say we should be happy with what we’ve got,” he 0

says. “But we’ve done some things right.” �Jillian Goodman 1977 2016
 DOW employees in MIDLAND, MICH.

OGE ANAZIA
senior product stewardship specialist

how DOW
68

JIM FITTERLING PAULINE TALLON

chief executive officer lead commercial representative

LIZ WESTERMAN WILLIAM GRZEGORCZYK ANTHONY RIVARD

production coordinator customer service representative data analysis specialist
 Bloomberg Businessweek the equality issue March 25, 2019

SHAWN HEILIG CAMILLE P. TONEY EMILIE SCHROEDER

logistics specialist counsel, employment labor and benefits operational excellence specialist

69

ot ke
JAMIE CURTIS-FISK ELAINE WINTLAND MRUNMAYI KUMBHALKAR
manufacturing product leader sourcing analyst senior engineer, core R&D

DOW CHEMICAL IS BASED IN

TRUMP COUNTRY, LOATHED
BY ENVIRONMENTALISTS, AND
RUN BY A GAY CEO

by JEFF GREEN
NICOLAS SANCHEZ DE MARCO
funding manager photographs by RYAN PFLUGER
 Bloomberg Businessweek
ON APRIL 1, DOW Chemical
will be spun off from
DowDuPont Inc. to form an
independent company. The
move will be big for the corporate finan-
ciers behind it, and for the manufacturers
around the world that put Dow’s chemi-
cals in running shoes, mattresses, adult
diapers, baby wipes, and many other
products. But it will also be a bellwether
for a great many other people. When
the spinoff is complete, Dow, which
was founded in 1897, will be the first
large industrial company with an openly
gay chief executive officer and only the
second major public company with a gay
CEO, after Apple Inc.’s Tim Cook.
“I hope the first thing that people
think about me is not that I’m gay,”
says the new boss, Jim Fitterling, during
an interview at Dow’s headquarters in
Midland, Mich. “I’ve put a lot of my life
into the company, and I understand the
company really well, and I know what it
takes to deliver good financial results.”
70 Unlike Cook’s identity—which he
announced in a Bloomberg Businessweek
essay that made international news
when it was published in 2014—
Fitterling’s sexuality went mostly unre-
marked on when he was appointed by
Dow’s former CEO, Andrew Liveris,
last year. “It’s just interesting when it
comes up. People say, ‘How did you get
there?’ ” says Liveris, referring to Dow’s
having a gay CEO. “And I kind of look at
them quizzically and say, ‘Get where?’ ”
Although neither Liveris or Fitterling
would ever put it this way, Dow—whose
legacy includes making napalm during
the Vietnam War and much of the plas-
tic waste polluting the world’s oceans
today—is also, somewhat improbably,
woke. The company has scored a per-
fect 100 on Human Rights Campaign
Foundation’s Corporate Equality Index
every year since 2005, meaning it meets
every requirement for an LGBT-friendly
workforce. These include having policies
protecting employees from discrimina-
tion, benefits for domestic partners, cov-
erage of the health needs of transgender
employees, and a track record of advo-
cating publicly for LGBT causes.
Dow, of course, isn’t alone. While the
the equality issue
country remains deeply divided over
LGBT rights, corporate America has been
faster to embrace social change than the
rest of us, and not only in coastal cities
or traditionally liberal industries. Dow’s
hometown of Midland, population
42,000, is a world apart from Apple’s
home base in the Bay Area. Less than
a week after the Supreme Court legal-
ized gay marriage in 2015, a Midland
district judge stopped performing
marriages. The same year, when the
local newspaper announced the pro-
motion of one of its editors, a state rep-
resentative sent out an “agenda alert”
to warn constituents that the editor
was gay. (The representative later apol-
ogized.) Donald Trump won Midland
County by 20 points; the county has
voted for a Democratic presidential can-
didate only once in the past century, for
Lyndon Johnson in 1964.
But Dow’s politics are different from
Midland’s. Starting in the late 1980s, it
began creating “employee resource
groups” for women and minorities.
There are now 10 such groups, which
Liveris says has allowed the company
to recruit from a wider talent pool and
to avoid losing longtime executives
such as Fitterling to more progressive
“when they come to work here,
they need to “If you’re a young employee coming
feel safe” toof the
work here and you think that one
top managers of the company is
companies. “We’re here in the middle
of Michigan, and there’s no question
we could be labeled as a company that
may be superconservative based on the
physical location of our headquarters,”
says Liveris, who turned the company
over to Fitterling last July. But, he con-
tinues, “we’ve always put a premium
on human talent.”
FITTERLING IS 57, and like many of
the company’s executives, he’s a Dow
lifer. He grew up on a farm in Odessa,
Mo., about 35 miles from Kansas City
and joined Dow after graduating from
the University of Missouri. In the mid-
1980s he worked at various points in
sales, marketing, and supply chain
March 25, 2019
management before relocating to Hong
Kong to work on a unit dedicated to
water treatment products. During his 11
years in Asia he rose through the ranks,
eventually taking over Dow’s opera-
tions in Southeast Asia and Australia,
with stints in Sydney, Bangkok, and
Kuala Lumpur.
Through all this, only those closest
to Fitterling knew about his sexuality.
He met the man he eventually married
while posted in Hong Kong in 1994, but
at work he was still in the closet. “It
wasn’t something that you went out of
your way to talk about,” he says. “There
was almost no reward for doing it, and
there was a lot of risk.”
Fitterling finally decided to come
out in 2008, after he was diagnosed
with cancer. “I was going through sev-
eral surgeries, a year’s worth of chemo,”
he recalls. “I started to look around and
say, you know, I’m going to have to make
some changes in my life. And one day I
was thinking about a lot of stresses that I
needed to reduce, and one of them was
trying to live two different lives.”
Initially he told only close col-
leagues, but as he continued to climb
the executive ranks, he started to feel
like he had do something more public.
gay but not willing to be out publicly,
then what’s your thought process about
being able to be out?” he says. Then he
supplies the answer: “Well, if he’s afraid
of doing it, then I’m afraid of doing it.”
In 2014 he decided to make an
announcement at an internal com-
pany event for National Coming Out
Day. Next to him on stage was Chief
Financial Officer Howard Ungerleider,
a straight man and the executive spon-
sor of the LGBT employee group GLAD
(for Gays, Lesbians, and Allies at Dow).
“I would say to you, having lived with
my own thoughts, inside my own mind,
for a number of years, and having come
out, most of that fear was my own, and
it wasn’t anything that was out there to
Bloomberg Businessweek
be afraid of,” Fitterling told col-
leagues in an auditorium at the
corporate headquarters or watch-
ing via webcast. He’d been at Dow
for 30 years, he pointed out, and
with his partner for 20. “That part
of my life had been very separate
from my Dow life for that whole
20 years,” he said. The following
year, after the Supreme Court rul-
ing, they married.
IN MIDLAND, WHERE Dow is so
beloved that even the odd smells
emanating from its factories are
treated with something close
to affection, it’s common to see
the company’s inclusiveness as
a strand of its corporate DNA. “It
starts with the fact that Herbert
Henry Dow was not from here,”
Ungerleider says.
Born in Canada, the company’s
founder picked Midland as his cor-
porate base in 1897 because of the
area’s plentiful supply of bromine,
a key ingredient in medicines,
photographic chemicals, and
other products. “This was a farm-
ing community, and the townsfolk
at the time called him Crazy Dow,”
Ungerleider says. Extracting bro-
mine required shooting electricity
through salt water, which can be
dangerous. “He literally and figu-
ratively blew himself up a few dif-
ferent times,” Ungerleider says.
Although the hit products the
company eventually developed
and sold—among them Saran wrap
and Styrofoam—came to define a
certain suburban conformity, they
were, Ungerleider argues, radi-
cal in their own ways when Dow
introduced them, in 1933 and 1947,
respectively. (The company sold its
consumer brands to S.C. Johnson &
Son Inc. in 1997, shifting its focus
back to specialty chemicals.) Dow
hired its first female research scien-
tist in 1929, and a team of women
was instrumental in the expanded
usage of silicon-based materials
in the 1940s. Bettye Washington
Greene, who joined Dow in 1965,
the equality issue
was an early advocate of black
women in the sciences. The com-
pany’s first employee resource
group was the Women’s Innovation
Network, in 1989.
In 2000 a group of Dow employ-
ees that included Louis Vega, a
former Republican political oper-
ative who’s gay, began a push to
get the company to offer domestic
partner benefits to same-sex cou-
ples. Dow agreed two years later;
it added gender identity to its
nondiscrimination policy in 2007.
GLAD, as Vega’s group came to be
known, included gay and straight
employees and eventually grew to
include more than 3,000 partici-
pants in 45 chapters.
Today, Vega, who served as
chief of staff to Liveris and is now
Dow’s vice president for North
American government affairs and
advocacy, acknowledges that the
company’s progressiveness might
appear unlikely, but he sees it as
sending a powerful message to
other companies. The effect, he
says, is that others might think,
“Wow, if this company has these
stances, then shame on us.”
LAST YEAR, DOW started fly-
ing the rainbow flag outside its
headquarters, near the Stars and
Stripes and those of other coun-
tries where it operates. The small
gesture prompted letters to the
local newspaper cautioning the
company not to impose its views
on locals. Fitterling isn’t both-
ered by the response. He says he
likes to think of Dow’s offices as
embassies—whatever the law out-
side, Dow policies and values are
enforced on its grounds. “Maybe
we’re in a state where an LGBT
person doesn’t feel safe because of
some of the state laws, but when
they come to work here, they
need to feel safe,” he says.
Fitterling acknowledges that
Dow’s record for women and
minorities still needs improve-
ment. Only 27 percent of the
March 25, 2019
company’s U.S. employees are women, and its lead-
ership is composed overwhelmingly of men. Just
18 percent of top managers are women. Meanwhile,
only 21 percent of its U.S. workers aren’t white.
To help boost some of those numbers, Dow
appointed its first inclusion executive and added
an inclusion goal to top executives’ bonus struc-
ture last year. They’re now expected to set—and
meet—goals for their departments. The change is
designed to get more white men involved in dis-
cussions about diversity, a step Fitterling regards
as crucial. Most of GLAD’s members, he notes,
aren’t gay. “Inclusion is about everybody feeling
like they’ve got an equal shot to get ahead and
everybody feeling like it’s a safe environment,” he
says. “That’s what we’re trying to create.”
Of course, protecting this safe environment
means protecting the new company once the
spinoff is complete. Hedge fund manager Nelson
Peltz, who advocated for the 2015 plan to merge
Dow with DuPont and then spin off the combined
operations into three companies, sold his stake in
late 2017, shortly after the merger was completed.
In February, Bloomberg News reported that Dan
Loeb, another prominent hedge fund manager and
backer of the merger and spinoff, was no longer 71
as optimistic about the company’s prospects
because of the slowdown in the global economy.
DowDuPont shares have fallen about 21 percent in
the 18 months since the merger.
Fitterling has waved off concerns about
financial performance, promising at an investor
presentation in November that after the spinoff
Dow will pay the highest dividends of any chemi-
cal company. He also said he expects to increase
plastics production by 1.4 million tons per year.
The added revenue, plus cost cuts, will contrib-
ute to Dow’s plan to increase earnings by about
$3 billion, he said. (He also acknowledged envi-
ronmentalists’ concerns about increased plastic
production and suggested that the solution was
improved waste management.)
A marker of the company’s progress came on a
June evening last year, when Fitterling threw out
the first pitch for Pride Night at Dow Diamond, the
venue where the Class A Great Lakes Loons com-
pete against the likes of the Fort Wayne TinCaps
and Quad Cities River Bandits. Pride nights still
aren’t that common in minor league baseball,
but with Dow’s backing, Midland has embraced
the concept. The Dow CEO took the mound in a
rainbow-patterned uniform and tossed a rainbow
baseball. On his feet were a pair of Under Armour
running shoes with rainbow padding. The foam,
like so much else, was manufactured by Dow. <BW>
 the equality issue

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3,732 women wanted
○ BY THE END of this year, all public companies
based in California will be required to have at
least one woman on their board. By the end of
2021, most will need three, according to a law
passed last year—a sea change that could offer
women 692 seats at the table, enough to cause
a measurable shift in the gender balance of U.S.
Mississauga, ON L5T 2N1. Email: bwkcustserv@cdsfulfillment.com. QST#1008327064. Registered for GST as Bloomberg L .P. GST #12829 9898 RT0001. Copyright 2019 Bloomberg L .P. All rights reserved. Title registered in
company boards overall. By 2021, companies with five directors
must have two women on their boards, and companies with six
or more must have three. But what if it doesn’t stop there? If
every state were to follow California’s lead, Russell 3000 com-
panies would need to open up 3,732 board seats for women
within a few years, an increase of 75 percent from current levels.
�Jeff Green, Hannah Recht, and Mathieu Benhamou

● board seat held by a man, U.S.

● board seat held by a woman
board seat held by a man that energy financials
would have to go to a woman by health care
consumer
2021, by sector staples
consumer
discretionary

communication
services

72

industrials

information
technology

materials

real estate

utilities

94 percent of
CALIFORNIA companies
have six or more
board members
LET’S BUILD FAIR AND
TRANSPARENT FINANCIAL MARKETS.

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investment management profession. We strive for a more
efficient and transparent industry because we believe
stronger capital markets and healthy economies begin
with putting investors’ interests above our own.

Demand the best. Demand a CFA® charterholder.

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