April 10 — April 23, 2017 | bloomberg.com SPECIAL DOUBLE ISSUE North of the Border, South of the Wall What the U.S. has to lose by cutting off Mexico p62 vk.com/stopthepress FRESH MAGAZINES EVERYDAY СВЕЖИЕ ЖУРНАЛЫ НА АНГЛИЙСКОМ ЯЗЫКЕ В ГРУППЕ VK.COM/STOPTHEPRESS “WE DON’T LOSE LIBERTY IN THIS COUNTRY BECAUSE SOMEBODY’S SOFTWARE IS NOT WORKING. 1 IT JUST ISN’T RIGHT” PHOTOGRAPH BY HANNAH WHITAKER FOR BLOOMBERG BUSINESSWEEK p44 “Time is brain” p34 “Not only did we have this commonality of startups, but we both loved Jesus” “We’ve exposed a myth that Germans want to be with Germans and Brits with Brits” p56 p18 Cover Trail April 10 — April 23, 2017 How the cover gets made Opening Remarks What’s behind so many Wall Street pitches: Tortured data 8 Bloomberg View The ANC’s misguided loyalties • A fair EU approach to Brexit talks 10 Movers A Spotify-Universal Music duet Pepsi’s Kendall Jenner ad falls ﬂat 13 “Soon to be replaced by a big, beautiful wall.” Global Economics While all eyes watch the Fed, the Fed watches the Street 15 Guadalajara pitches itself as Silicon Valley’s sanctuary city 16 A print-only satirical weekly strikes fear into French politicians 17 “All together now,” Thomas Cook tells its multinational travelers 18 Companies/Industries Putting a price on miracle drugs 21 Shipyards may bustle again as demand picks up for LNG tankers 23 Who’s to blame for sluggish U.S. car plants? SUV buyers 24 With new brands, H&M goes after older, more affluent shoppers 26 Politics/Policy Russiagate: The Senate pieces the parts together 28 A change of mission for ICE’s community-relations officers 30 Technology 2 Lucrative hackathons help elite coders avoid the job grind 33 Why is a treatment for stroke victims slow in reaching most Americans? 34 Changing its name, Taser sells police on its body cams 35 China’s DJI rules the air with its civilian drones, but it may need more lift 36 Innovation: Synthetic cartilage that could transform joint replacement 37 Markets/Finance Eyeing $100 million in savings, North Carolina’s treasurer ﬁres fancy money managers 38 In Toronto’s hot property market, many buyers don’t wait for inspections 39 Active fund managers try a new twist on ETFs 40 Wall Street chatterers love disappearing messages 41 Features COVER AND COVER TRAIL: PHOTOGRAPH BY KIRSTEN LUCE FOR BLOOMBERG BUSINESSWEEK ① “We have a photo essay that examines the area around a 55-mile stretch of the current Mexican border fence.” Buying Trouble Post-it creator 3M has struggled in the high-stakes ankle bracelet business 44 Plane Drain The F-35 ﬁghter jet might be the U.S. military’s most expensive mistake 50 Entrepreneurial Spirit One of America’s fastest-growing churches nurtures startups, too 56 A Wall’s Limits A look at life and commerce along 55 miles of border fence in Texas 62 Etc. The designer behind the revolutionary Nest thermostat has been tinkering with the camera 71 Fashion: Consider the white sock. Seriously 74 The Critic: The very long history of loan-sharking 75 Sport: All the stuff you’ll need to give stand-up paddleboarding a go 76 Survey: What could possibly go wrong during a team-building activity? 78 What I Wear to Work: Aday co-founder Meg He wears her clothing line’s silk shirts for rock climbing, too 79 How Did I Get Here? H&R Block CEO Bill Cobb went from marketing stuffed-crust pizza to helping us with our taxes 80 “Perhaps.” “I have a thought: Maybe we should put a picture of the fence on the cover.” “Your creativity never ceases to amaze me.” Index People/Companies SUPing in Austin T Page, Carter 29 Parish Home Inspections 39 Patrick, Tim 37 Payless ShoeSource 13 Pence, Mike 29 PepsiCo (PEP) 13 Persson, Karl-Johan 26 Play With a Purpose 78 PNC Financial Services Group (PNC) 58 Precidian Investments 40 Primark Stores 26 Procter & Gamble (PG) 33, 58 Putin, Vladimir 17, 29 T-Mobile US (TMUS) 46 Taser International (TASR) 35 Tesla (TSLA) 13 Thomas Cook Group (TCG:LN) 18 3M (MMM) 44 Toyota Motor (TM) 24 Trump, Donald 13, 15, 16, 24, 29, 30, 52 Trusheim, Mark 21 21st Century Fox (FOXA) 13 Twitter (TWTR) 29 Two Sigma Investments 8 U Q Qualcomm (QCOM) 72 R A 4 Abilla, Pete 78 ACA Compliance Group 41 Aday 79 Airbnb 58 Aite Group 40 AlixPartners 24 Allstate (ALL) 13 Amazon.com (AMZN) 26, 33 Andrews, Martin 21 Apple (AAPL) 16, 36, 41 AQR Capital Management 8 Arnott, Rob 8 Asness, Clifford 8 AT&T (T) 46 Autodata 24 Axon 35 B Bank of America (BAC) 41 Bannon, Steve 13 Baumhauer, Judy 37 Bayer (BAYN:GR) 13 Berkshire Hathaway (BRK/A) 38 Bienaime, Jean-Jacques 21 BioMarin Pharmaceutical (BMRN) 21 Black, Diane 30 BlackRock (BLK) 38, 40 Blackstone Group (BX) 38 Boeing (BA) 52 Bogdan, Christopher 52 Bould, Fred 72 Brunswick (BC) 46 Bryan, Garnier & Co. 26 Buckingham Strategic Wealth 40 Buckley, George 46 Buddi US 46 Buffett, Warren 38, 58 Burr, Richard 29 C Capital Lending Centre Carson Dunlop Carter, Ashton Carticept Medical Cartiva Century 21 Leading Edge Realty Chapin, Steve Charles River Ventures Cisco Systems (CSCO) Citigroup (C) Clarke, Stephen Clearasil (RB:LN) 39 39 52 37 37 39 46 72 16 41 40 58 Clinton, Hillary Cobb, Bill Cohen-Watnick, Ezra Columbia Threadneedle Investments Comben, Christina Comey, James Correct Tech 29 80 28 40 78 29 46 D D.E. Shaw 8 Daewoo Shipbuilding & Marine Engineering (042660:KS) 23 Day Translations 78 DecisionWise 78 Deutsche Bank (DB) 41 Dimensional Fund Advisors 8 DJI 36 Dodge (FCAU) 24 Dudley, William 15 Dunford, Joseph 13 GlaxoSmithKline (GSK) 21 GlobalData 26 Goldman Sachs Group (GS) 41 Google (GOOG) 33, 46 Google Ventures (GOOG) 72 GoPro (GPRO) 72 Gordhan, Pravin 10 Gorkov, Sergey 28 Grannan, Dave 72 Greenspan, Alan 15 H H&R Block (HRB) Hainan China Agriculture & Flight Service Hana Financial Investment (086790:KS) He, Meg Heinz, David 40 24 36 39 28 40 Facebook (FB) 17, 29, 33 Fadell, Tony 72 Fanatics 33 Fankhauser, Peter 18 Fifth Third Bancorp (FITB) 58 Fillon, François 17 Fillon, Penelope 17 Find a Tutor Near Me 78 Fisher, Sharon 78 FlipKey 58 Flynn, Michael 29 Folwell, Dale 38 Ford (F) 13, 24, 58 Foust, Lyden 58 Foxconn Technology (2354:TT) 72 FPV Style 36 Freedman, Charles 15 Frost & Sullivan 36 G Gartner (IT) General Electric (GE) General Motors (GM) Gilead Sciences (GILD) 23 79 52 39 S 39 30 23 58 78 37 29 Safariland 35 Salesforce.com (CRM) 33 Samsung Heavy Industries (010140:KS) 23 Sandoval, Aristóteles 16 Satellite Tracking of People 46 Saxo Bank 17 Schiff, Adam 28 Sears Holdings (SHLD) 33 Seeed Studio 36 Signal Digital 41 Sikhounmuong, Somsack 13 Smith, Lamar 30 Smith, Rick 35 Société Générale (GLE:FP) 26 Sovcomﬂot 23 Spark Therapeutics (ONCE) 21 Starwood Capital 38 State Street (STT) 40 Stryker (SYK) 34 Lacker, Jeffrey 42 Laroia, Rajiv 72 Le Pen, Marine 13, 17 Legg Mason (LM) 40 Li Shufu 24 Liberty Interactive (QVCA) 13 Light 72 Lockheed Martin (LMT) 52 Logitech International (LOGI) 72 Lyons, Jenna 13 33 40 V 13 24 8 8 72 72 15 23 23 36 Vanguard 8 Verizon Communications (VZ) 13, 46 W Warburg Pincus Warner, Mark Weiss, Scott WhatsApp Wizeline 38 29 58 41 16 28 Sally Yates XYZ Xerox (XRX) 33 Yates, Sally 28 Yellen, Janet 15 Zhejiang Geely Holding Group 24 Zuma, Jacob 10 M 50 Hennes & Mauritz (HMB:SS) Hewson, Marillyn Honda (7267:JP) Horeau, Louis-Marie HP (HPQ) Hyundai Heavy Industries (009540:JP) 26 50 24 17 16 23 I IBC Advanced Alloys (IB:CN) 52 InCrowd 78 Inditex (ITX:SM) 26 InfoTrends 72 Intel (INTC) 16 International Business Machines (IBM) 16, 33 IPro Realty 39 J.Crew Jabil Circuit (JBL) Jefferies Group (LUK) Jenner, Kendall Ma, Max 36 Macron, Emmanuel 13, 17 Manafort, Paul 29 Marrazzo, Jeff 21 Mattis, James 52 May, Theresa 18 McCabe, Daniel 40 McCain, John 29, 52 Medtronic (MDT) 34 Mercedes (DAI:GR) 13 Meyers, Jim 21 Microsoft (MSFT) 16, 33 Mitsubishi Heavy Industries (7011:JP) 23 Moreno, Lenín 13 Morningstar (MORN) 24, 40 Mortgage Wellness Group 39 Muilenburg, Dennis 52 Musk, Elon 13 N Nest Labs (GOOG) Nunes, Devin 72 29 O J 36 58 24 21 Kawasaki Heavy Industries (7012:JP) Keller Williams Experience Realty Kelly, John Keppel (KEP:SP) Kiessling, Will Kosloff, Janet Ku, David Kushner, Jared L Marillyn Hewson F K 80 E Eaton Vance (EV) Edmunds.com EHang Ekko Title Ellis, Michael ETrade Financial (ETFC) Ralph Lauren (RL) RBC Capital Markets Renaissance Technologies Research Affiliates Rogers, Matt Roku Rosengren, Eric Royal Dutch Shell (RDS.A) Royal LePage West Real Estate Services Uber UBS (UBS) 13 16 41 13 Obama, Barack Ollerton, Seth Oracle (ORCL) Owl Labs O’Reilly, Bill 30 78 16 58 13 How to Contact Bloomberg Businessweek Editorial 212 617-8120 Ad Sales 212 617-2900 Address 731 Lexington Ave., New York, NY 10022 Email email@example.com Fax 212 617-9065 Subscription Customer Service URL businessweekmag.com/service Reprints/Permissions 800 290-5460 x100 or email firstname.lastname@example.org Letters to the Editor can be sent by email, fax, or regular mail. They should include address, phone number(s), and the email address if available. Connections with the subject of the letter should be disclosed, and we reserve the right to edit for sense, style, and space. Corrections & Clariﬁcations In “A Miracle Drug Big Pharma Doesn’t Want” (Companies/Industries, April 3-April 9, 2017), the per-person price that Parsemus Foundation expects to charge for its male contraceptive Vasalgel in low- and middle-income countries was incorrect. It should be $10 to $20. MAIN: BOBBY SCHEIDEMANN FOR BLOOMBERG BUSINESSWEEK: HEWSON: ALBIN LOHR-JONES/BLOOMBERG; YATES: PETE MAROVICH/GETTY IMAGES 76 P s, Damn , c Statistics By Peter Coy 8 It’s hard to beat the market, but there’s always a new product that tries anyway Early E y in Ja anuary a y in a Chicago hote e el, g b ll Harvey y gave a rip-snortiiing Campbell H presidentia to the p d al address dd h Americccan Finance Ass sssociation, the world’s leading g s society y forr research on financial ecoon nomics. To o get published in jjournals, he s said, there e e’s a p powerful temptation p to to h data a a until it confesses—that o f a torture th he is, to cond duct d round after round of tests in search of a finding g that can be claimed to be statistically y significant. cant. t Said Harvey, y, a professor at Duke Universsity’s y Fuqua School S h l off B Business: siness “Unfortunately, “Unforttunately our standard testing methods are often illequipped to answer the questions that we pose.” He exhorted the group: “We are not salespeople. We are scientists!” The problems Harvey identified in academia are as bad or worse in the investing world. Mass-market products such as exchange-traded funds are being concocted using the same flawed statistical techniques you find in scholarly journals. Most of the empirical research in finance is likely false, Harvey wrote in a paper with a Duke colleague, Yan Liu, in 2014. “This implies that half the financial products (promising outperformance) that companies are selling to clients are false.” Most of us have a vague sense that we’re being ripped off by investment firms that charge hefty fees while producing results that are no better than you’d get throwing darts at a page of stock listings. It’s troubling nonetheless to find out we’re correct. And it’s important to understand the mechanics of what has gone wrong. The core of the problem is that it’s hard to beat the market, but people keep trying anyway. An abundance of computing power makes it possible to test thousands, even millions, of trading strategies. The standard method is to see how the strategy would have done if it had been used during the ups and downs of the market over, say, the past 20 years. This is called backtesting. As a quality check, the technique is then tested on a separate set of “out-of-sample” data— i.e., market history that wasn’t used to create the technique. In the wrong hands, though, backtesting can go horribly wrong. It once found that the best predictor of the S&P 500, out of all the series in a batch of United Nations data, was butter production in Bangladesh. The nerd webcomic xkcd by Randall Munroe captures the ethos perfectly: It features a woman claiming jelly beans cause acne. When a statistical test shows no evidence of an effect, she revises her claim—it must depend on the flavor of jelly j bean. So th statistician tests 20 fl the flavors. Nineteen s show nothing. By y chance there’s a high correlation between jjelly bean consump-t tion and acne breakouts for one flavor. T The final panel p of the cartoon is the front page of a newspaper: “Green Jelly y B Beans Linked to Acne! 95% Confidence. Only y 5% Chance of Coincidence!” It’s worse for financial data because researchers have more knobs to twist in ssearch of a prized “anomaly”—a y subtle pattern in the data that h llooks k like it could be a moneymaker. They can vary the period, the set of securities under consideration, or even the statistical method. Negative findings go in a file drawer; positive ones get submitted to a journal (tenure!) or made into an ETF whose performance we rely on for retirement. Testing out-of-sample data to keep yourself honest helps, but it doesn’t cure the problem. With enough tests, eventually by chance even your safety check will show the effect you want. Harvey’s term for torturing the data until it confesses is “p-hacking,” a reference to the p-value, a measure of statistical significance. P-hacking is also known as overfitting, data-mining—or data-snooping, the coinage of Andrew Lo, director of MIT’s Laboratory of Financial Engineering. Says Lo: “The more you search over the past, the more ILLUSTRATION BY 731 O g Remarks Also known as data-mining or overfitting, p-hacking is the technical term for forcing data to bend to your will likely y it is you are e going to find exotic pattternss that you happen to like or focus on. T se patterns arre least likely Thos y to repeat.”” Su uch tricks w weren’t necessary y when W l Streeters could make a good Wall l living g charging for f their stock-selection -s sk lls. That gig became skill b scarcer when h i be ecame clear that a ffew could o o sit consist tly beat a low f tent w-cost index fund that track ks, say, the S&P S 500. In ndex funds a are cheap p because their sp nsors don’t n spon need d to h hire expensive p stockpickers, bu y aren’t perfect. f stoc ut they Stocks in the ind h d by ndex are weighted market value, so Apple l is 3.7 percent of the S&P 500 w while Rupert p Murdoch’s News Corp. is jusst 0.008 percent. When a stock gets hot fo for whatever reason, the index fund has tto buy y even more of it, which may not b be the wisest choice. Wall Street’s answer is today’s d y most stylish investme yl smart b ent style: beta. At the end of February, more than $500 billion wa d in equity as invested exchange-traded f d funds in the U.S. that use smart beta sstrategies, according d to data compiled by b Bloomberg. l b “Beta” is lingo for the retu urn on investment you get from owning a slice off the entire stock market, as in a co onventional index fund; the “smart” partt refers to breaking g the link with market value. Stocks in a smart beta index may be b weighted h d by anything yh g from company sales s or book value to special-sauce ingredients such g as “quality” (on the theory that ll d companies tend d to well-managed o p outperform in the stock market).. T Trouble is, fund managers have g gotten too creative in the competition c p ii f investors’ dollars. To quote for q the b l y, y burlesque strippers in Gy Gypsy, you g k There h gotta get a gimmick: are E ETFs ffor more than a thousand n d l new indexes. Creativity, alas, d d doesn’t equall success. Vanguard, th b investment manager, callthe big cculated l d in 2012 that h ETFs did d d great o h b k o f g on their backtests, outperforming th k b i the market by 10 p percentage points a year on average in the five f years b f before they went live, but then underperformed the market by y 1 perc centage point a year y in the five years y a afterward. The most complex p strattegies suffer the biggest drop-off from eg gg th backtests, their b k according d g to an article l in the Journal J of Portfolio Management. t. Fg Fights have broken out over who g up with h spurious is or isn’t coming investment concepts. AQR Capitall Management off Greenwich, Conn., w f which started as a quant hedge fund, h dl by b managing other h r has grown rapidly f people’s money in smart beta funds. I focuses on “factors” such as quality It y and momentum that it says y lead to reliia able outperformance. p f AQR’s founder f and chief investment officer, Clifford Asness, is a billionaire. Rob Arnott, a rival who’s CEO and founder of Research Affiliates in Newport Beach, Calif., says, “I think Cliff has done some outstanding work over the years,” but adds that he’s “insufficiently skeptical about the pervasiveness of data-mining and its impact even in the factors he uses. uses.” d by emaill that h “there h Asness responds i little evidence” so far that AQR’s q is qual-ity-focused y fund is performing g differently y now from how it did in backtesting. But t that’s not much of a claim, says y Robert Novy-Marx, y a professor at the University y o Rochester’s Simon Business School of f AQR Q and now who once consulted for consults for another group, Dimensional F Fund Advisors. “Even if it p performed really lly poorly, ly y you wouldn’t ld k know. There’s h j just not enough out-of-sample -s p time to make any y claim one way y or another.” T The old adage applies: If asset m g f f managers and finance professors a h ain’t they h y are super-smart, why s h The h b super-rich? big money is b being m made by fi firms that ignore fi finance theory. y Renaissance Technologies o n Long g Island is dripping g with m h d physicists hy mathematicians and but will not hire a ffinance Ph.D. Two Sigma Investments is run by d mathemah acomputer scientists and ti i ticians. D.E. S Shaw was founded by ya c computational l biologist. b l And d so on. Reflecting g mathematicians’ disdain for s sloppiness in finance, a 2014 essay y in the Journal of the American Mathematical Societyy referred to backtest overfitting g a “pseudo-mathematics as p m and finannc al charlatanism.” cial ha la a ” H a r ve y y, w h o’s s i n c e c o m pleted his term as president of the p p American Finance Association,, h written that finance lags has g other f fields, including g g genetics, in m making certain that its findings are s statistically y valid. “Many y in our f g me,” have profession, including s j subjected data to inadequate tests i the past, he said in Chicago. in Th h disgruntled d g l d some That speech p l h h people, he says now, b but that’s OK. “To push the field further, y you s sometimes have to be willing g to be very y unpopular.” —With Saijel j K Kishan and Dani Burger g r 9 Bloomberg View To read Eli Lake on the Trump wiretapping controversy and Barry Ritholtz on the reality of investing, go to Bloombergview.com Patience Is Running Out in South Africa The ruling African National Congress must choose country over President Zuma to safeguard the integrity of its institutions—its parliament, judiciary, and central bank. It needs to dismantle the patronage networks that sap its economic strength. It needs to tackle a dysfunctional educational system that puts unqualified teachers before struggling students. It needs to reform labor regulations that make it harder to hire workers and that privilege well-connected unions. It needs to maintain its free press and nourish a vibrant civil society that holds politicians to account. Almost eight years of misrule suggest that neither Zuma nor anyone close to him is up to these tasks. Voters may be coming round to the same idea: They delivered a warning in municipal elections last summer, rewarding the opposition with unprecedented gains. The government had better pay attention before voters’ patience is exhausted. Europe’s Firm but Fair Approach to Brexit 10 South Africa’s ruling African National Congress has a choice: It can help President Jacob Zuma or it can help the country. The party’s survival as a respected national force depends on its doing the latter. Support for the ANC has fallen amid charges of corruption and incompetence. Now, Zuma is embroiled in a struggle with his former finance minister, Pravin Gordhan, and other cabinet members, claiming that Gordhan and his allies are seeking to undermine him. Zuma’s firing of Gordhan on March 31 rattled investors, sparking a downgrade of South African bonds to junk status—a setback that raises the country’s debt burden and could deter badly needed foreign investment. Underlying this recent volatility is a deeper malaise. Economic growth under Zuma has been anemic—less than 1 percent last year—and South Africa’s already high level of unemployment has risen from 23.6 percent in 2009, when he was elected, to almost 27 percent today. The national debt has doubled. State companies and agencies are in disarray. Business confidence has fallen, and the country has slumped in global rankings of competitiveness. Lately the plume of scandal that’s followed Zuma from his first days in office has billowed into an all-encompassing cloud. Last year, for instance, South Africa’s top court ruled that his failure to repay taxpayer funds spent on upgrading his home violated the constitution. South Africa’s former graft ombudsman reported Zuma may have dispensed favors and sweetheart contracts to friends who do business with his son. Still to come is a possible judicial reinstatement of 783 charges of corruption, racketeering, fraud, and money laundering. Zuma’s response has been to fire up supporters with a toxic brew of populist proposals—everything from strengthening the power of the president and banning foreigners from buying agricultural land to outright expropriation. South Africa doesn’t need a stronger president. It needs With talks on Britain’s exit from the European Union finally about to begin, one procedural issue looms large: Do the negotiations on three big subjects—exit terms, transitional arrangements, and a future comprehensive agreement on a U.K.-EU partnership—move in parallel or in entirely separate stages? An understanding on how the talks should proceed is needed at the start, and a formula suggested by the European Council offers grounds for optimism. The EU is concerned, in the first instance, that Britain settles its liabilities and meets its other obligations to the EU when it leaves. The U.K. wants that discussion to happen alongside talks on future arrangements, so concessions in one area might be traded against concessions in another. The problem is that the European Commission has proposed an exit bill of as much as €60 billion ($63.9 billion), a figure one British minister has called absurd. If the EU presents these terms on a take-it-or-leave-it basis, and the British government is unable to justify them to its citizens, the talks could fail almost before they’ve begun. The European Council, the body representing EU governments, issued draft guidelines to its negotiators. The overall posture is firm but fair—and on this issue of sequencing, the council isn’t ruling out compromise. Describing the first phase of talks, the guidelines say the council will “determine when sufficient progress has been achieved to allow negotiations to proceed to the next phase.” “Sufficient progress” is sufficiently vague to allow negotiators to move on to other matters before exit terms are signed and sealed. The greater the scope for compromise, the better the prospects of a successful, mutually advantageous result. The chances of Brexit ending well are poor. But if Europe’s leaders adopt these guidelines, they’ll deserve some credit for choosing not to cripple the talks from the start. ROGAN WARD/REUTERS Without room for compromise, the talks will be doomed almost from the start Movers By Kyle Stock 2017 498k “Stormy weather in Shortville …” Tesla CEO Elon Musk mocked short-sellers in a tweet as his company’s market value surpassed that of Ford. MUSK: HECTOR GUERRERO/AFP/GETTY IMAGES; BREADBOWL: JAIMIE DUPLASS/HEMERA/GETTY IMAGES; MORENO: MARIANA BAZO/REUTERS; LYONS: MIREYA ACIERTO/GETTY IMAGES; BANNON: NICHOLAS KAMM/AFP/GETTY IMAGES; NORTE: JOSE LUIS GONZALEZ/REUTERS; PEPSI: YOUTUBE; ILLUSTRATIONS BY OSCAR BOLTON GREEN; CHICKPEA DATA: USDA 1987 15k Liberty Interactive Hummus fever is agreed to sweeping the country buy General as U.S. farmers are Communication, expected to plant 53 percent more Alaska’s largest acres of chickpeas phone operator, this year than in for $2.7 billion. 2016. Consumers and snackmakers are Liberty will use gorging on plantthe deal to help based proteins. it reorganize, combining its cable assets with its QVC-led home-shopping business, two units that now trade separately. New York City’s Eleven Madison Park topped the annual list of the World’s 50 Best Restaurants, published by Restaurant magazine. Osteria Francescana in Modena, Italy— which is still pretty tasty—slipped to second. A federal regulator ordered Wells Fargo to rehire the manager who reported the bank’s widespread practice of secretly opening unwanted accounts for customers. Wells Fargo also has to pay the whistle-blower Removing a major obstacle to its IPO, Spotify inked a licensing deal with Universal Music Group. nt The arrangement eep lets Universal ke new music off er Spotify’s free tie for two weeks. $7.2b, a 20 percent premium to its market value. JAB has slowly amassed a cupboard of beloved brands, including Krispy Kreme Doughnuts, Caribou Coffee, and Jimmy Choo shoes. Amazon.com struck a $50m deal with the NFL to stream 10 Thursday night games in the upcoming season. They will be available to Amazon Prime’s 60 million subscribers. $5.4m Ups JAB Holding agreed to buy Panera Bread for On April 4, Staples shares surged almost Lenín Moreno, Ecuador’s former vice president and ruling party leader, was declared the winner of a close presidential election. He’s slated to take office on May 24, though Moreno’s opponent, conservative Guillermo Lasso, has refused to concede and is demanding a vote-by-vote review. 15% as the company shopped for a private equity buyer. The talks come less than a year after a federal judge blocked the company’s $6.3 billion takeover of Office Depot. in damages, legal fees, and back pay. 13 Downs Verizon s Communications says it will combiine AOL and Yahoo!, two s, recent purchases under the name Oath. O e If Twitter jokes are any indicator, the ess is rebranded business already in trouble. J.Crew Executive Creative Director Jenna Lyons is Di leaving the struggling retailer le after 26 years. Sales at a comparable stores have fallen c ffor three consecutive years. Lyons’s deputy, Somsack L Sikhounmuong, will become S hief design officer. ch French presidential candidate Emmanuel Macron criticized far-right candidate Marine Le Pen in a tense debate on April 4 in advance of the April 23 vote, saying, “What you are proposing is nationalism. …Nationalism is war.” Eight states and New York City sued the Trump administration for delaying energy-efficiency standards on consumer products such as ceiling fans. The rules are now scheduled to take effect six months later on Sept. 30. PepsiCo yanked an ad from YouTube in which model Kendall Jenner hands a soda to a riot officer. The spot drew widespread criticism for trivializing the Black Lives Matter movement. 400 Number of stores that Payless ShoeSource plans to close, according to its bankruptcy protection ﬁling. Payless is the ninth major retailer this year to seek Chapter 11. or Trump removed his chief strategist, Steve Bannon, from the principals committee of the National Security Council weeks after intelligence officials criticized his participation. Marine Corps General Joseph Dunford, chairman of the Joint Chiefs of Staff, was reinstated to the group. Bannon will retain the highest-level security clearance. Norte, a daily newspape er in northern Mexico, abruptly closed after 27 years, citing recent killings of journalists from other news organizations. More than 40 brands, including Mercedes, Allstate, and Bayer have pulled ads from 21st Century Fox’s O’Reilly Factor, after the New York Times reported the network paid $13 million to settle ﬁve sexual harassment claims against star Bill O’Reilly. Ralph Lauren will close its New York ﬂagship Polo store and cut an unspeciﬁed number of jobs in a bid to save $140 million a year. The fashion house is also abandoning a plan to build its own e-commerce platform. U.S. auto sales in March fell far short of analyst estimates, as lavish incentives failed to sway drivers. Consumers are on pace to buy 16.6 million vehicles in 2017, down from the 17.6 million cars and trucks they bought in 2016. More p24 Global Economics Guadalajara ﬁnds G d a way around the th wall ll 16 6 Le L Canard d doesn’t do s duck d k controversy 17 ? Brits s and d What Brexit? Germans are happy y to mingle Mallorca 18 mi l on M ll April 10 — April 23, 2017 Th F d K Swing p I Eye on S ck Market Janet Yellen may be b leaning g toward the idea that Wal Wall Street can be an early economic indicator PHOTO ILLUSTRATION BY 731; PHOTO: SHANNA BAKER/GETTY IMAGES “Animal spirits in ﬁnan ancial markets wax and wane” wa William Dudley, president of the he Federal Reserve Bank of New York, rk, has long believed that Fed policymakers should pay more attention to stock market swings. Now, with the Fed lifting rates for the first time in almost 10 years, Dudley, who also serves as vice chairman of the Fed’s Open Market Committee, has a chance to put his ideas into practice. The Fed has a dual mission: to keep unemployment low and prices stable, which it tries to accomplish mainly by making changes in a key lending rate, the federal funds rate. To assess the economy, it examines data such as monthly reports on the job market and consumer spending. It doesn’t put a lot of weight on stock prices, which can be volatile, plunging and soaring from day to day, sometimes for no apparent reason. rket swings can make Yet mark tors feel poorer or richer, influinvesto ncing their willingness to spend enci money. Because that may give an earlier signal on the direction of the economy than statistics such as consumer spending, Dudley thinks the Fed should factor what happens on Wall Street into its monetary policy deliberations. If it does—and with the stock market up more than 10 percent since Donald Trump’s election—the Fed could raise interest rates higher, or more quickly, this year than other statistics might indicate. “Animal spirits in financial markets wax and wane, pushing asset values up or down in a manner that can more than offset the effects of movements in short-term interest rates,” Dudley said in a speech titled The Importance of Financial Conditions in the Conduct of Monetary Policy on March 30. “The movements in many financial markets following last year’s presidential election are a notable example of this phenomenon.” In the 1990s, while serving as chief economist at Goldman Sachs Group Inc., Dudley became intrigued with work done at Canada’s equivalent of the Federal Reserve. The country’s central bankers had a communications problem: Capital flows in international financial markets were leading to swings in the Canadian dollar, affecting the ability of businesses to export goods and services to the rest of the world. Those shifts could overwhelm the Bank of Canada’s attempts to guide the economy using its traditional tool— tightening or loosening monetary policy by raising or lowering the shortterm interest rate—according to 15 Global Economics 16 Charles Freedman, deputy governor of the bank from 1988 to 2003. Canadian businesses benefiting from a weaker exchange rate, for example, might not get the message the bank was trying to send by raising rates. “To get that point across, we developed a ‘monetary conditions index,’ which basically put the two channels together,” so the public could compare the economic effects of interest rates with those of swings in the currency, says Freedman, who’s now a scholarin-residence at Carleton University in Ottawa. “Someone could look at that measure and say, ‘Interest rates haven’t moved, but the exchange rate did move, and therefore market and monetary conditions have eased—or tightened depending on which direction we’re going,’ ” he says. The idea caught on fast on Wall Street, including at Goldman Sachs. In an October 1996 speech at Princeton, Dudley argued that “Fed officials should evaluate carefully the implications of changes in financial asset prices on the performance of the real economy,” according to a summary of his remarks. He cited indexes that Goldman economists developed to track interest rate and currency developments in several countries. Those monetary conditions indexes owed “a big debt to the pathbreaking work of the Bank of Canada, in general, and Chuck Freedman, in particular,” he said. In February 1998, after congressional testimony by then-Fed Chairman Alan Greenspan, Dudley and his Goldman team went a step further. Greenspan told Congress that though inflation-adjusted interest rates had risen, “in virtually all other respects financial markets remained quite accommodative and, indeed, judging by the rise in equity prices, were providing additional impetus to domestic spending.” Those comments spurred Dudley’s team to add a stock market measure to their monetary conditions index, transforming it into a “financial conditions index.” Dudley still relies on the index, and there are signs Fed Chair Janet Yellen is paying attention. Following the FOMC’s March 15 rate hike, Yellen told reporters “the higher level of stock prices is one factor that looks like it’s likely to somewhat boost consumption spending,” citing “some of the more prominent analysts and indices” that have showed overall financial conditions are improving, despite recent rate increases. One of the analysts she was referring to was almost certainly Jan Hatzius, who worked for Dudley at Goldman, helping him to refine the financial conditions index and succeeding him as the bank’s chief economist in 2005. Hatzius says if the index continues to indicate improving market conditions in the face of Fed rate hikes, officials may decide to speed up the pace of increases. “The concern is that financial conditions are quite easy and we are generating a sizable positive impulse to growth at a time when the economy seems to be at full employment and inflation is close to the Fed’s target,” Hatzius says. Some members of the Fed’s ratesetting committee, such as Boston Fed President Eric Rosengren, are already making that case. He said in a March 29 Bloomberg TV interview that “we don’t want to grow so much faster than potential at this point” and suggested the situation warranted four rate increases in 2017. Ultimately, the Fed will have to see whether the boost in the mood of the markets translates to an actual acceleration in consumption, Freedman says. “Stock markets go up. That in itself is not relevant,” he says. “What is relevant is its effect on people’s willingness to spend.” —Matthew Boesler The bottom line If the Fed factored the stock market into its inflation debates, the current swings would argue for more rate hikes. Mexico Give Us Your Coders Yearning to Be Free Trump’s visa scare inspires Jalisco to promote itself as a tech haven “We’re tolerant and inclusive and think talent has no borders” “Poor Mexico, so far from God and so close to the United States,” the Mexican dictator Porfirio Díaz once lamented. But Aristóteles Sandoval, the governor of the northwestern state of Jalisco, believes that often uncomfortable Silicon Valley del Sur Foreign direct investment in electronics and high-tech in the Mexican state of Jalisco, in U.S. dollars $300m $200m $100m $0 2014 2015 2016 DATA: JALISCO GOVERNOR’S OFFICE proximity creates a unique opportunity in the time of Donald Trump. Sandoval has been courting tech companies in the U.S., telling them that if the new administration won’t issue visas to the foreign engineers and coders they want to hire, he’ll gladly find cubicles for them in Guadalajara, the state capital. “We’re tolerant and inclusive and think talent has no borders,” says Sandoval, sleeves rolled up and hair slicked back, as he sits at his desk in Casa Jalisco, the governor’s mansion. “Brilliant minds will always have a place here.” That should be interpreted as a dig at President Trump, who’s alarmed the tech industry with orders to ban immigration from some mostly Muslim countries and freeze the expedited processing of H-1B visas for skilled workers. Sandoval, who toured San Francisco and Silicon Valley in February, says he talked with more than 40 executives, from companies including Microsoft Corp., who were “very interested.” The companies declined to comment. After being elected governor in 2013, Sandoval set up a state Ministry of Innovation, Science, and Technology to promote Jalisco’s capital as a technology hub. As much as 40 percent of the workforce in Guadalajara, which has a population of 1.5 million, is employed in the industry. Several U.S. tech companies already have research centers, factories, or satellite offices in the picturesque city, which is a four-hour flight from San Francisco. Foreign direct investment in electronics and other tech segments totaled more than $271 million in 2016, up from $75 million the previous year, according to data collected by Sandoval’s office. “We have academia, private businesses, and government. There’s an excellent relationship among all. This communication allows us to plan better and Global Economics to America as migrant fieldworkers. The 182 people on Wizeline’s payroll in Guadalajara hail from more than 10 countries, including Egypt and France. The open-plan office has a Silicon Valley vibe, with pingpong and foosball tables. Employees get around on scooters and enjoy free meals. Sandoval will brag about Guadalajara for as long as anyone cares to listen. “We have everything—great universities, golf courses, excellent shows, you name it,” he says. The surfing paradise of Sayulita is a four-hour drive west, and there’s no shortage of tequila, which has been made for centuries from the agave plants that blanket fields not far from the city limits. The governor could be onto something, says Gary Burtless, a senior fellow at the Brookings Institution who researches labor markets. If he can “siphon some of those would-be immigrants from the U.S., that’s great news for Mexico.” —Andrea Navarro Intel’s campus in Guadalajara The bottom line A Mexican governor is telling U.S. tech companies to open offices in Guadalajara to get around Trump’s immigration ban. 17 Elections HECTOR GUERRERO/BLOOMBERG (2) Software maker Wizeline employs 182 in the city receive more investment,” says Cesar Castro, the Guadalajara-based logistics director at Jabil Circuit Inc., a company based in St. Petersburg, Fla., that designs and manufactures electronics in Mexico, as well as in Singapore and China, for Apple, Cisco Systems, and HP, among others. U.S. companies started setting up factories in Jalisco in the 1970s to take advantage of lower labor—wages are about a third of those in Silicon Valley— and government subsidies for construction licenses and property taxes. Much of the activity is still in exportoriented assembly and manufacture, but some software makers, including International Business Machines and Oracle, have campuses rivaling those up north. Intel’s 25-acre engineering center is its largest in Latin America, employing 1,400 workers. Sandoval hasn’t released details of his plan to turn Guadalajara into a Silicon Valley satellite, and it’s unclear just how it would work. “The governor’s openness is headed in the right direction,” says Jesús Palomino, who runs Intel’s Guadalajara design center. “The message is excellent, but how to go about it will be a challenge.” Mexican immigration laws wouldn’t pose an obstacle for someone from, say, India who wants to work in Guadalajara for a company headquartered in Seattle, says Edgar Mayorga, an immigration lawyer at Goodrich, Riquelme y Asociados AC. Bismarck Lepe, founder and chief executive officer of Wizeline Inc., a business applications and software provider based in San Francisco, says he opened a Guadalajara office in 2013 because the U.S. had gotten “way too expensive.” It was a return to his roots: Lepe’s Mexican-born parents came The Duck That Clipped Fillon’s Wings Paris’s top newsbreaker is satirical weekly Le Canard Enchaîné “Our job is to inform and distract readers with newsprint and ink” Political discourse around the world tends to be driven by sober media stalwarts like the Washington Post, the Times of London, or Germany’s Frankfurter Allgemeine Zeitung. In France, the star of the show is an eight-page weekly that features excruciating puns for headlines, irreverent cartoons depicting political grandees as dwarves or devils, fake news such as imagined diaries—and real scoops that have laid low countless power brokers over the decades. On Tuesday nights, before Le Canard Enchaîné (“the Chained Duck”) hits the streets, political and media elites across Paris flock to the paper’s offices just a few steps from the Louvre to get an Global Economics Giscard’s candidacy two years later. In 1993 socialist Prime Minister Pierre Bérégovoy committed suicide after Le Canard reported that he’d gotten a 1 million-franc interest-free loan from an industrialist—a scandal that led to the party’s defeat in parliamentary elections. “Fortunately, Le Canard is a weekly,” President François Hollande said at a February cabinet meeting— according to the paper itself. “If it were a daily, imagine the situation we’d be in.” —Alexandre Boksenbaum-Granier and Geraldine Amiel The bottom line Le Canard Enchaîné can lay low France’s rich and mighty with satire, bad puns, and aggressive investigative reporting. Travel A German, a Swede, and A Brit Walk Into a Hotel … Thomas Cook ends segregation by nationality on package tours “Most people are now willing to mix if the mix is right” For decades, Thomas Cook Group Plc had a policy of assigning each European nationality its own hotels at popular destinations such as Spain’s Canary Islands and the beaches of Greece. On March 28, Britain’s biggest tour operator announced the rule is history, just hours before Prime Minister Theresa May formalized the U.K.’s decision to quit the European Union. From now on, Cook said, Britons, Germans, Swedes, and other continentals will be bunking together while on holiday. The change is the result of a survey that showed that most Cook clients would be happy to vacation with a cross-section of travelers. “We’ve FROM TOP: PHOTO ILLUSTRATION BY 731; PHOTO: PATRICK KOVARIK/AFP/GETTY IMAGES; ILLUSTRATION BY 731 18 early bead on scandals rates of French 10-year sovereign taking flight. bonds and Germany’s benchMixing facts, half-truths, mark bund hit a four-year high and off-color jokes, Le Canard amid growing concern about (as everyone calls it) presents a potential victory for Le Pen, details of behind-the-scenes who’s questioned France’s membership in the European Union machinations that readers perand threatened to revive the ceive as more accurate and ffra anc as the national currency. less filtered than what’s pub“ we have to check Le Canard “Do lished by its mainstream every Wednesday?” asks rivals. As campaigning has Pierre Martin, a trader at Saxo picked up for presidential Bank A/S in London. “Yes. elections this spring, the Undoubtedly.” paper has broken dreamGoing into this election season, shattering stories week after Fillon the biggest concern of the French week. In January it reported that political establishment was that fake conservative presidential candidate news might overrun Facebook and help François Fillon had employed his wife propel Le Pen to a populist triumph. in a no-show job for years—sending his Instead, Le Canard has garnered attencampaign into a tailspin and his poll tion with investigative stories that have numbers into the dumpster. Playing hobbled the candidacy of the erstno favorites, Le Canard has also pubwhile favorite Fillon. The publication lished details of a taxpayer-funded trip followed its scoop on Fillon’s wife, to Las Vegas by center-right candidate Penelope, with another alleging that Emmanuel Macron during his tenure his children had similar arrangements as economy minister, and targeted in the Senate. And in March, Le Canard nationalist leader Marine Le Pen, most recently with an April 5 report on inves- revealed that a Lebanese tycoon had paid Fillon $50,000 for an introduction tigations of an associate for alleged to Vladimir Putin. misuse of public funds. “Le Canard is The newspaper has something of neither right nor left, but rather in the the sensibility of the Onion in the U.S., opposition,” says editor-in-chief Louishammering away at the foibles and Marie Horeau. “We’ve never been the failings of the rich and powerful with vassal of any party.” Le Canard’s power is all the more sur- tongue-in-cheek stories and illustrations. But Le Canard does more than prising in an era when online upstarts spoof: Its 30 editors and reporters milk such as Politico, the Huffington Post, and BuzzFeed have an increasingly pow- a network of tipsters reaching into the highest echelons of French society. erful voice. While Le Canard’s closely The staff-owned weekly carries no watched Twitter feed, with almost advertising, and controversial stories 400,000 followers, lights up every Tuesday with a handful of teasers on are often unsigned—making it harder that week’s stories, anyone wanting to for the elite miscreants exposed each week to exact revenge. With a read them must visit a newsstand. The weekly circulation of about 400,000 century-old paper does have a website, copies selling for €1.20 ($1.30) each, but just barely: The landing page features its logo with the slogan “A palm Le Canard in 2015 reported €25 million in sales and profit topping €2 million. in the cyber-sea … but only one” and Founded in 1915, the paper has little more than links to images of front pages on which you can read headlines, a long record of political and business scoops. In the 1920s it took aim but not articles. “Our job is to inform at Banque Oustric—a shady collection and distract readers with newsprint of shaky investments assembled by a and ink,” the website says. tycoon named Albert Oustric—helping The paper’s reports—typically sprinpush the bank into insolvency and kled with political gossip and details of taking down a finance minister impliprivate conversations such as Fillon’s cated in the affair. In 1979 the paper questioning by a judge about renovareported that conservative President tions at a château he owns—are increasValéry Giscard d’Estaing had accepted ingly credited with moving markets. diamonds from the African dictator As the Fillon story gained steam in Jean-Bedel Bokassa, helping scuttle February, the spread between interest *CUSTOMER NATIONALITY DATA IS FOR 2016; DESTINATION DATA IS FOR THE 2016 SUMMER SEASON ONLY; DATA: THOMAS COOK Despite Brexit, Thomas Cook is pushing for more unity in Europe exposed a myth that Germans want to be with Germans and Brits with Brits,” Chief Executive Officer Peter Fankhauser told reporters in London. “Most people are now willing to mix if the mix is right.” Cook, which has units in Belgium, Britain, Germany, and Scandinavia, found that 90 percent of the customers it polled have no problem rubbing shoulders with sun seekers from other countries. The company plans to ensure that no single nationality accounts for too great a proportion of the occupants of most hotels, sprinkling in Nordic travelers—viewed as the most congenial—to lighten the mood where needed. The move suggests that Britons have become less fretful that early-rising Germans might lay claim to the best sun loungers with strategically placed beach towels and that continental tourists no longer view U.K. travelers as boorish beer swillers. For Cook, the shift will likely help “fill empty rooms in destinations in the western Mediterranean where it boosted capacity too much” following terror attacks in MBA Programs • Full-time • Part-time • Executive grad.business.uconn.edu Global Economics Turkey, says Stuart Gordon, an analyst at Berenberg Bank 9m (est.) in London. Germans Britons 5.8m As part of Scandinavians 1.6m the change, the Other Europeans 4.2m 176-year-old tour operator is … And Where to* expanding the target audience Greece 17% for packages sold Balearic Islands 16% via two Nordic Canaries 14% brands—family13% oriented Sunwing Turkey Other 40% and adults-only Sunprime—as it seeks to lure wealthier clients. Since Sunprime opened the Monsuau Hotel on Spain’s Mallorca to travelers from Britain and Germany two years ago, the 109-room hotel has garnered customer feedback scores that are among the group’s best. Fankhauser, though, says there are limits to openmindedness. Magaluf, a Mallorca resort known for British bachelor parties, fish-and-chips shops, and Irish pubs, will likely remain the province Who’s Booking … of vacationers from the U.K. And Cook will continue to steer non-Germans away from hotels across the bay in Playa de Palma—sometimes called “the 17th German state” and known for Oktoberfest-style beach tents. The policy shift doesn’t mean Cook isn’t unaffected by Britain’s plans to quit the EU. The slump in the pound following last year’s referendum has increased hotel costs, which Cook is “trying to pass on to the customer,” says Christoph Debus, who heads the group’s airline operations. With fewer euros to spend once they get overseas, some Britons who would once have booked a two-week break are vacationing for 10 days instead, he says. Brexit has had “an impact,” Debus says. “But it has been more in travel habits, rather than people staying away.” —Christopher Jasper The bottom line Britain’s biggest tour operator says most vacationers don’t mind rubbing elbows with people from other cultures on holiday. Edited by Cristina Lindblad and David Rocks Bloomberg.com “ I know my degree will set me apart in the corporate competitive landscape. ” Leonard Borriello ’18 MBA Companies/ Industries Liqueﬁed natural gas is keeping shipbuilders aﬂoat 23 Trump wants more auto plants, but sedan sales are skidding 24 H&M grows up and adds brands 26 PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (3) April 10 — April 23, 2017 Ho M ch Is ? New one-shot med edic icines could eliminate years ic rss of costly care e “So $1 million upfront … that’s not much, if they’re healed for life” Sofia Priebe, 14, is slowly going blind. Her parents were devastated when they were told there’s no treatment for the genetic mutation that’s causing her retinas to deteriorate. For the dozen years since Sofia received that diagnosis, her mother has lived every parent’s nightmare—being powerless to help her suffering child. Now a gene therapy for a similar form of blindness is expected to receive U.S. Food and Drug Administration approval this year, and Laura Manfre, Sofia’s mom, is holding out hope that her daughter may soon get treatment as well. “We don’t really care what it costs,” she says. But how much is a miracle really worth? A million dollars? Five million? More? And who will pay and how? It’s one of the most vexing challenges confronting drug and insurance companies as modern medicine advances, spurred by research on the human genome. Spark Therapeutics Inc., which developed the gene therapy to cure a rare form of childhood blindness called RPE65-mediated inherited retinal disease, is among the first to face this question. Spark’s treatment, voretigene neparvovec, delivers a functioning piece of DNA directly to the eyes to preserve remaining sight and even restore some vision. Other companies, including GlaxoSmithKline Plc and BioMarin Pharmaceutical Inc., have also been grappling with the pricing problem. Some new treatments, such as Spark’s retina drug, are intended to work with just one shot—promising a lifetime cure from a single, costly treatment. Insurers don’t dispute the worth of cures in the pipeline but say they’re not equipped to pay one large sum upfront. The U.S. healthcare system is built around managing symptoms with prescriptions that insurers pay reimbursements for monthly: For example, medicines such as cholesterol-lowering Lipitor or acid-reflux drug Nexium are often taken over a period of many years and don’t deliver a permanent fix. Insurers are “used to paying rent for health, and we’re asking them to buy a houseful of cure,” says Mark 21 Companies/Industries 22 Trusheim, a visiting scientist at MIT’s for life,” Bienaime says, adding that Sloan School of Management who’s BioMarin hasn’t decided how to price leading a working group to explore its drug, which is going through trials. financing models for upcoming drugs, MIT’s Trusheim is considering drawing from examples in the housing more radical payment plans, such market and activist hedge funds. as having the U.S. government buy Spark Chief Executive Officer Jeff an entire company instead of paying Marrazzo sees his company’s pricing for its drugs. “The government could decision as precedent-setting, as it sell off the research and developwould be the first gene therapy “Why is it that there ment arm of a company, like approved in the U.S. Spark are not more cures? a Carl Icahn,” he says, referIt’s not because has spent about $400 million ring to activist investors there are bad actors. to create the treatment and who take over corporations, It’s an industry full now wants to be compensated of people who often selling off units that react to incentive for the efforts and huge risks they deem peripheral. The structures.” it took during the research idea is to then have the feds —Spark CEO and development phase. How Jeff Marrazzo provide the drug to Medicare the payment debate plays and Medicaid patients and out will determine not only charge commercial insurers whether patients will be able to gain a cheaper price than they likely access to these treatments but also how would have paid to a for-profit private hard drugmakers will push to develop company. other transformative medicines. “Why Other ideas that his group is invesis it that there are not more cures?” tigating include government grants Marrazzo says. “It’s not because there or prizes to developers of cures, or are bad actors. It’s an industry full of volume-purchase commitments such as people who react to incentive structhose used by the Bill & Melinda Gates tures.” If compensation could be redeFoundation in developing nations, signed to reward one-time treatments which guarantee manufacturers that over chronic treatments, “that’s where a minimum amount of a drug will be people would play,” he says. bought if they successfully develop it. One idea under consideration is Trusheim’s group plans to publish its to spread payments from insurance recommendations by early next year. companies to drugmakers over years, When designing payment models, like an annuity. Another is to have a the size of the patient population money-back guarantee, so if a drug or matters: The larger the potential treatment stops working for a patient, impact, the more the system will strain the manufacturer is on the hook to to deal with the huge cost of one-time refund part of the cost to the insurer. cures. That’s what Gilead Sciences Payback contracts, or “value-based Inc. learned in 2015, when it launched pricing” in pharma industry parlance, a cure for hepatitis C at $84,000 for a are already used in Europe. In the U.S. three-month regimen, or $1,000 a pill. they’re trickier to execute, because For anyone facing the prospect there isn’t a single payer with which of liver cancer or a liver transplant, to negotiate and patients frequently that $84,000 is a very good value, switch insurance plans throughout says Jim Meyers, Gilead’s executive their lives. Jean-Jacques Bienaime, CEO of BioMarin, proposes creating legislation requiring patients to carry Leadiant Biosciences’ pricey long-term drug, Adagen, has an annual cost of about the reimbursement obligation with them when they change jobs or insurers, to ensure drugmakers continue to be paid. BioMarin is working on a gene therapy for the blood disorder to treat the “bubble boy disease,” while the hemophilia, which Bienaime argues Strimvelis gene therapy by GlaxoSmithKline runs is easily worth millions of dollars per patient for a cure. “The average cost of severe hemophilia A is about $500,000 a year, so $1 million upfront would cover two years—that’s not much, if they’re healed for a single-shot treatment.* $320k $634k vice president for global commercial operations. The price was in the ballpark of existing treatments, and “there wasn’t a payer we spoke to in market research that felt a price in the $80,000 to $85,000 range wasn’t acceptable,” he says. The drug proved immensely popular—far beyond Gilead’s expectations—thanks to a quick endorsement by the American Association for the Study of Liver Diseases. About 3 million Americans have hepatitis C, and many wanted the cure immediately. “We started to see a flow of patients well above what any of us anticipated, and a price that made eminent sense to payers suddenly didn’t make sense,” Meyers says. Rather than winning kudos for treating an intractable malady, Gilead quickly became a poster child for high drug prices, an image it’s fought to shed for the past two years. Meyers warns that the backlash has already spooked others. “What I hear is that they call it ‘the Gilead HCV experience,’ and by that they mean everything that it entails: the publicity, scrutiny, the payers first accepting then reacting, the Senate Finance Committee,” says Meyers. “I’ve heard, ‘Why bother?’ ” Such market realities may already be reflected in new-drug prices. When GlaxoSmithKline brought its Strimvelis gene therapy to market in Europe last year for the “bubble boy disease” that leaves children without an effective immune system, it picked what’s arguably a bargain price: €594,000 ($634,000) for the one-time treatment, equivalent to two years of the enzyme replacement therapy that patients previously had to take for a lifetime. Martin Andrews, Glaxo’s senior vice president for rare diseases, notes that the drug could have been valued higher, but he says the company had to bow to economic realities, including the big deficits in European governments’ health budgets. “We didn’t want to have the world’s most expensive therapy that nobody ever used,” he says. Spark has a few more months to put a price tag on reversing progressive vision loss. Employees are researching court cases involving the value of sight. “How has our judicial system awarded for damages in the case of patients who Hyundai Heavy Industries 20k Shipbuilding industry jobs lost in the last year SEONGJOON CHO/BLOOMBERG; *COST INFORMATION FROM GLAXOSMITHKLINE. STRIMVELIS ONLY AVAILABLE IN EUROPE have lost their vision?” asks Marrazzo. “That’s basically everyday Americans sitting on a jury and answering this question in a way that you can’t purely do with hard and fast economics.” Whether that will help its drug reach the market without consumer or government blowback remains to be seen. —Caroline Chen The bottom line Spark Therapeutics has spent $400 million developing a blindness cure. What’s unclear is how to price the breakthrough. Shipping Finally, Some Good News for Shipyards Demand for vessels to transport natural gas is expected to jump “Gas is going to be the bright spot for shipbuilders” The global shipyard business has fallen on hard times as China’s trade has grown more slowly and demand for offshore drilling platforms and oil tankers has declined with the halving of oil prices in the past three years. Shipbuilders cut more than 20,000 jobs in the last year alone. But now builders of oceangoing vessels are seeing a glimmer of hope from an unlikely corner of the energy world: natural gas. Contracts for vessels to transport liquefied natural gas are picking up amid an abundance of shale gas in the U.S. and increasingly stringent global curbs on pollution that are pushing utilities and transportation operators toward the clean-burning fuel. LNG is made by cooling natural gas until it becomes a liquid, which can be carried over long distances in specially built ships with insulated tanks. Annual global LNG production capacity is expected to increase 39 percent, to 377 million tons by 2019 from 272 million last year, according to Bloomberg New Energy Finance. Shipments of LNG could rise as much as 5 percent a year from 2015 to 2030, Royal Dutch Shell Plc estimates. To move the fuel, the world may need 180 more vessels, which would benefit shipbuilders with LNG expertise such as Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co., says Hana Financial Investment Co. in Seoul. “Gas is going to be the bright spot for shipbuilders,” says Park Moo-hyun, a Hana analyst. “We might see a spurt of orders as early as in the second quarter.” Asia is the largest destination for LNG, with much of it bound for China and India. China’s gas demand is expected to more than double, to 450 billion cubic meters, by 2030, according to Shell’s LNG Outlook. Earlier this year, China said it plans to halt, delay, or eliminate no less than 50 gigawatts of coal-fired power projects as part of its move to clear the smog choking cities from Beijing to Xi’an. The world’s three biggest shipyards, all based in South Korea, have as much as 80 percent of the LNG tanker market, Park says, but the entire industry could use the help from growing demand for gas. Declining orders for other types of vessels and offshore rigs have led to losses or profit drops at shipyards including Hyundai Heavy, Samsung Heavy Industries, and Singapore’s Keppel, forcing them to trim production capacity and slash employment. Japan’s Mitsubishi Heavy Industries Ltd. is considering spinning off its shipbuilding operation, and Kawasaki Heavy Industries Ltd. said it’s reviewing whether to continue in the business. Daewoo Shipbuilding, the world’s largest shipyard, is waiting for a second conditional lifeline from its two biggest creditors to complete work on pending orders and to help stay afloat. The lenders say they’ll provide loans and swap some debt for equity only if other creditors and bondholders agree to restructure their own debt exposure. 23 Companies/Industries 24 Better times could be ahead. In March, Hyundai Heavy agreed to build one LNG ship for a Norwegian customer, and Daewoo Shipbuilding secured a 414.4 billion won ($369.4 million) order from a European client to build two LNG carriers, with an option for two more. These are in addition to orders for six such vessels that Hyundai Heavy and Daewoo Shipbuilding won last year. Along with boosting the market for tankers, the LNG boom has helped shipyards gain contracts to build small offshore facilities known as floating storage and regasification units. Demand is even picking up for LNG tankers that run on LNG. In March, Hyundai Heavy’s Hyundai Samho unit received a $240 million contract from Russian shipping company Sovcomflot OAO to build four crude tankers powered by LNG—the first carrier ships powered by the fuel. One reason for such innovations: The International Maritime Organization has cut limits on sulfur in marine fuels to 0.5 percent from 3.5 percent, effective 2020. LNG emits virtually no sulfur. “We are just now entering the boom era for LNG carriers,” Park says. “Not all shipyards will benefit. Shipbuilders that can deliver vessels that can help operators lower costs will be the winners. It’s all about cutting costs.” —Kyunghee Park, with Dan Murtaugh The bottom line The ailing shipbuilding industry cut more than 20,000 jobs last year. Demand for vessels to carry natural gas could ease the pain. Autos The Real Cause of the U.S. Car Slide: SUVs The consumer shift means more U.S. car plants aren’t necessary “Higher incentives have pushed demand about as far as it can go” Ford Fusion: down 37 percent. Chevrolet Malibu: down 36 percent. Toyota Prius: down 29 percent. As those grim sales numbers suggest, the U.S. auto industry was blindsided in March by just how fast sedans have fallen out of favor with Americans Year-to-date change in sales Top-selling SUVs in the U.S., as of March Nissan Rogue 47% Honda CR-V 32% Ford Escape 6.6% Toyota RAV4 5.8% Ford Explorer –1% Top-selling sedans in the U.S. Honda Civic –6.5% Honda Accord –9.4% Toyota Corolla –9.7% Nissan Altima –13% Toyota Camry –13% DATA: AUTODATA enthralled with roomier sport utility vehicles. The swerve in consumer taste is just one of the forces—along with slumping used-car values and a pullback in subprime auto lending—changing the equation for automakers as President Trump leans on the industry to build plants to boost hiring. That will be hard to pull off, though: A glut of both new and used vehicles on the market has sparked an incentives battle, meaning new factories— particularly for sedans—are the last thing the nation’s carmakers need. Automakers set a record in the U.S. last year, with 17.6 million vehicles sold. Analysts had projected the annualized sales pace in March to hit 17.2 million vehicles. Instead, adjusted for seasonal trends, it came in at 16.6 million, according to researcher Autodata Corp. “It shouldn’t be a surprise,” says Morningstar Inc. analyst David Whiston. “Once you hit peak sales, it seems like you only have bad news ahead.” Ample discounts have failed to spur demand for such aforementioned models as General Motors Co.’s Malibu and Ford Motor Co.’s Fusion, which are being surpassed by SUVs as the vehicle of choice for American families. Toyota Motor Corp.’s Prius sedan model continued its slump despite a thorough makeover in late 2015 that improved the esteemed hybrid’s ride. It was a markedly different story for big SUVs and their smaller crossover brethren, which are keeping the industry’s profits afloat. In March, sales of crossovers including the Honda CR-V, Chevrolet Equinox, and Dodge Journey were up 11 percent, according to Autodata. With an average sticker price of more than $38,000, a truck or SUV costs about $10,000 more than the average car. The incentives needed to sell them amount to an 8.8 percent discount, compared with 11 percent for cars, according to researcher Edmunds.com Inc. Still, dealer inventories are high in the U.S., and even SUVs increasingly need more and more discounts to keep sales moving, as many brands try to stay close to 2016’s record results. “Higher incentives have pushed demand about as far as it can go,” Joe Spak, an auto analyst with RBC Capital Markets, wrote in a recent report. While industry sales probably won’t fall by much, profits could slip as automakers cut production, causing them to operate factories less efficiently. So Trump will have a hard time getting manufacturers to pony up for the investment he’s been demanding, even with consumer confidence strong and unemployment low. “You’re not going to see the U.S. get new plants,” says Mark Wakefield, who heads the automotive practice for consulting firm AlixPartners. “The market went from pull to push nine months ago. We don’t see it going upward from here.” Since last year, GM has been making cuts at passenger car plants in Michigan and Ohio, eliminating more than 3,000 workers who build Chevy Cruze compacts and Impala sedans. In January, after deciding it didn’t need to boost output of its Focus compacts, Ford canceled plans to build a $1.6 billion factory in Mexico. Wakefield projects overall sales will slip by about 300,000 vehicles this year, as a cyclical decline of 15 percent to 20 percent begins. “When it drops, it drops sharply,” he says. That may be why Trump’s call for a resurgence of auto plants in the U.S. to fuel his “new industrial revolution” is finding its biggest support from an unlikely source: foreign carmakers still building their U.S. presence. Volvo Cars, the premium brand long known for Swedish style and safety that’s now owned by Chinese billionaire Li Shufu’s Zhejiang Geely Holding Group Co., is erecting in Charleston, S.C., its first U.S. assembly plant. Starting with 2,000 workers next year and creating more than 8,000 jobs in the area, it plans to make S60 sedans and another model, with half of them for export. Companies/Industries The bottom line U.S. auto sales could slide by 300,000 vehicles this year, dimming Trump’s hope that car plants will be opened. Fashion The Taming of a Teen Emporium Seeking a broader customer base, H&M is creating brands Hitting “a point where it becomes challenging to keep up growth” 26 At the H&M store on Boulevard Haussmann in Paris, teens comb racks packed with velour tank tops as tourists load up on cheap jeans to a soundtrack of bouncy pop music. While the bustle and bargains once appealed to Pierrick Beringer, at age 35 he prefers quality to quantity, so these days he’s more likely to turn the corner to a store called COS, where the pace is far calmer. “I like the shape,” the hairstylist says, pulling a thick-cotton T-shirt from a display. “And it’s less well-known, so you don’t see it everywhere.” For H&M, that’s not a problem, because both establishments are creations of Hennes & Mauritz AB. Faced with falling profit amid competition from rivals such as Zara and Primark Stores Ltd., as well as online players like Amazon.com Inc., the Swedish retailing juggernaut is beefing up its portfolio of niche brands. H&M is betting outlets such as COS can help for two-thirds of Inditex revenue, it expand its appeal beyond budgetcomprises just one-third of the comconscious young shoppers. The plan pany’s 7,300 stores. H&M, by contrast, is to add 80 stores from the company’s only started diversifying in 2007, when half-dozen smaller brands this year, vs. it created COS—or Collection of Style. 350 more H&M outlets. That includes a It added three more youth-oriented new concept called Arket, a higher-end concepts in 2008 with the purchase of shop with clothing, home goods, and a Scandinavian retail group, then introa cafe serving Scandinavian-inspired duced the premium women’s wear line dishes. The first Arket store—the name & Other Stories in 2013. Those brands means “sheet of paper” in Swedish, today make up less than 10 percent of a reference to starting with a blank the company’s almost 4,400 stores. slate—is scheduled to open this fall on While H&M doesn’t break out its London’s Regent Street, followed by revenue, Bryan, Garnier & Co. analyst branches in Brussels, Copenhagen, and Cédric Rossi says sales from the smaller Munich. “This isn’t like anything else brands account for about 5 percent of the total. we have,” says H&M Chief Executive The new concepts aren’t a bad idea, Officer Karl-Johan Persson. “It’s a completely different expression.” Rossi says, but it’s more important to fix the flagship brand. He says Zara is more The push beyond the flagship brand fashion-focused, and with factories in comes as H&M’s margins have been narrowing. Goods from Asian suppliers, or near Europe, Inditex can respond faster to runway trends than H&M, priced in the strengthening U.S. dollar, which ships most of its goods from have become more expensive, pushing Asia. “What’s absolutely necessary is to net profit down to 9.5 percent of sales return to growth in existing locations today, vs. almost 26 percent in 2007. at H&M,” Rossi says. “Without this, the And with increasing competition, H&M business isn’t sustainable.” has had to resort to deeper discounts H&M says it’s working to reduce lead to clear its shelves. The company’s times so fresh products get to stores shares in March fell to their lowest more quickly. And it says it’s automatlevel in four years after H&M reported ing warehouses and improving data colinventory levels were up 30 percent lection so shortages and overruns can year-on-year. “When you’ve got a very mature brand, you reach a point where be addressed more quickly—reducing the need for margin-busting markit becomes challenging to keep up downs. “We haven’t been as precise, growth,” says Maureen A COS store, more exact, and flexible as we could have Hinton, an analyst minimalist than H&M and targeting a been” in logistics, says CEO Persson. at GlobalData Plc in different niche “We see big improvement potential.” London. “You’ve got to Longer-term, though, it’s smart to find new markets and new customers.” also find a broader customer base, That has spurred the multibrand says Anne Critchlow, an analyst at effort, which largely emulates a stratSociété Générale SA in London. With egy the world’s No. 1 fashion retailer, Inditex SA, has pursued since 1991. COS, & Other Stories, and now Arket, the company can target different The Spanish company owns Zara niches at the top end—where customand seven other brands including the ers have more resources and prices Italian-themed Massimo Dutti, teenfocused Bershka, and Oysho lingerie are higher, she says. Dresses at COS stores. While Zara continues to account start at €55 ($59), compared with €10 at H&M, while the cheapest jeans at COS are €69, vs. €20 at H&M. “Young value fashion has become extremely crowded,” Critchlow says. “Lifestyle retailers have less competition.” —Robert Williams, with Anna Molin The bottom line As competition heats up and margins narrow, H&M is emulating the multibrand store strategy of its rival Inditex. Edited by James E. Ellis and David Rocks Bloomberg.com COURTESY COS Volvo’s U.S. sales have grown 53 percent since Geely bought it from Ford in 2010. But like its U.S. counterparts, Volvo’s growth has come from SUV models, which saw sales increase 31 percent last year, while its car deliveries fell by 7.1 percent. —David Welch and Jamie Butters, with Melinda Grenier Politics/ Policy The Investigators In December, President Obama ordered the CIA, FBI, and NSA to conduct a review of hacking that took place during the 2016 election. In January they released a report that pointed directly to Russia. The FBI continues to dig into the extent to which Trump associates had contact with Russia. The Senate Intelligence Committee is pushing on with its inquiry into Russian interference and whether Trump associates played a part. Took $45K to sit with Putin at a 2015 gala House Intelligence Committee Mired in partisan squabbling over whether or not to focus the probe in part on alleged misuse of intelligence by Obama administration officials Schiff (D-C De v m es Nun (R-C in if.) al Ad a mir Put adi in Vl if.) al Chair C According to the intelligence report, the Russian president ordered an operation to inﬂuence the U.S. election in Trump’s favor and undermine the democratic process The two committee leaders vow not to politicize what they pledge will be a thorough probe urr rd B (R-N ha .) .C DNC hack arner (DV kW a.) Fake news stories Senate Intelligence Committee Ric 28 How Will They Know, And When Will They Know It? The Hack Ma r April 10 — April 23, 2017 Chair Federal Bureau of Investigation In March agency chief Comey conﬁrmed the existence of an ongoing investigation of Russia’s role and Trump campaign contacts with Moscow Stateowned RT network Russian trolls Twitter bots Guccifer 2.0 Co mes mey Ja The hacker name under which the DNC emails were released The FBI director may be asked to testify before the Senate as part of its investigation WikiLeaks The U.S. Senate seeks to discover whether Trump associates knew of Russia’s interference “This is not fake news. This is actually what happened to us” ICE community relations jobs are being turned upside down 30 lly Yates Sa The Russian Connections? Since House Intelligence Chair Devin Nunes canceled some House hearings, there’s uncertainty over when key ﬁgures will testify. The Senate has scheduled interviews with some 20 people so far. ael Flyn ich n M Brought into the White House by Flynn Democrats want to hear from the former acting attorney general, who warned the White House over Flynn’s discussions with Russian Ambassador Sergey Kislyak Forced out as national security adviser over Russia contacts, wants immunity to testify Michael Ellis A lawyer in the White House J Session eff Attorney general recused himself from the investigation because of his contact with Kislyak during the campaign Russian ambassador who had contacts with Trump associates during the campaign and the transition Kushn red er Ja Former business partners D ger Stone Ro Trump lobbyist in 1980s. Though no longer with the Trump campaign, he hinted in 2016 of coming hacks of Democrats p Former Trump campaign chair with extensive ties to Russia and Ukraine has offered to testify before the House ald Trum on Trump son-in-law with growing foreignpolicy role. Senate wants to speak to Kushner about his meetings with Gorkov and other Russian contacts gey Gork er ov S an ul M afort Pa gey Kisly er ak Works on the National Security Council at the White House s Showed Nunes intel on surveillance of Trump associates, according to reports S Ezra CohenWatnick Chief of Russian bank subject to U.S. sanctions. Met with Kushner, reportedly at Kislyak’s request rter Page Ca Brieﬂy an adviser to the Trump campaign Energy consultant reportedly targeted by Russian spies for recruitment as a source By Dune Lawrence and Dorothy Gambrell Inside a secure room at CIA headquarters in Langley, Va., about 11 miles from Capitol Hill, there are several thick binders filled with thousands of pages of highly classified documents. It is this intelligence, which likely includes transcripts from phone calls intercepted by the National Security Agency, that formed the basis of the report issued in January by the U.S. intelligence community concluding that Russian President Vladimir Putin covertly ordered his government to intervene on behalf of Donald Trump’s presidential campaign. For the past several weeks, as part of dueling investigations by the House and Senate into Russian interference in the election, teams of congressional investigators have made regular trips to this room to pore over the documents, which contain some of the nation’s most sensitive secrets. Sometimes they’re joined by lawmakers, including the chairmen of both the House and Senate intelligence committees. The work is laborious and decidedly low-tech. No phones, cameras, or recorders are allowed inside. Weeks into the probe, investigators were still reading through the documents, and Senate staffers were negotiating with the CIA about putting a computer in the room. All of this comes against the backdrop of an ongoing FBI investigation into links between Trump associates and Russia, including whether crimes were committed. It began even before the election was over and, along with the congressional investigations, casts a cloud over the nascent administration. It’s not clear if any of this will amount to a presidency-shattering Watergate scandal, or calcify into the kind of lingering Whitewater probe that lasts for years without taking anyone down. What is clear is that this has the makings of the kind of investigation that Washington hasn’t seen in decades— and it’s not likely to end anytime soon. Armed with subpoena power, congressional investigators are looking to answer a familiar Washington question about Trump and his associates: What, if anything, did they know, and when did they know it? 29 Politics/Policy goal will be to produce a bipartisan report that puts to rest what could be an existential question overshadowing Trump’s presidency: Does anything link him directly to Russia’s interference? “We know that our challenge is to answer that question for the American people,” Burr said. —Steven T. Dennis The bottom line Amid multiple probes, the Senate investigation into Russia’s interference in the election has become the main act. Immigration ICE Agents Go From Advocate to Adversary Trump plans to publicize crimes by undocumented immigrants “All it’s going to do is amp up the chilling effect” Over the past decade, Rudy Bustamante spent a lot of time driving around Phoenix, meeting immigrants anywhere they felt comfortable—schools, churches, coffee shops. As a community relations officer for U.S. Immigration and Customs Enforcement, he’s had the difficult task of trying to build trust between immigrants and the federal agency in charge of deporting those who are here illegally. Part of Bustamante’s job has been to persuade immigrants to help ICE find serious criminals while assuring them that they and their families won’t face deportation for traffic violations or other minor offenses. Building that trust hasn’t always been easy, as in 2010, when Arizona passed a law requiring immigrants to carry registration documents and giving police broad leeway to question people. “Rudy Bustamante met with all the different immigrant groups,” says Michael thousand Nowakowski, a Phoenix city counNumber of cilman. “That diaunauthorized immigrants logue really helped considered to during those crises be “removable moments.” criminal aliens”* Bustamante’s 820 BILL CLARK/CQ ROLL CALL/GETTY IMAGES. PREVIOUS SPREAD: AP PHOTO (1); GETTY IMAGES (15). *DATA: MIGRATION POLICY INSTITUTE 30 House officials over their contacts The questions begin with what with Russians, including Flynn, the government says was a massive former campaign chief Paul Manafort, Russian effort to undermine Hillary onetime campaign adviser Carter Clinton’s campaign and, in turn, boost Page, son-in-law and senior White Trump’s. The next question is whether House adviser Jared Kushner, and anybody in Trump’s orbit colluded self-styled political dirty trickster and with Russian attempts to influence the Nixon aficionado Roger Stone. They elections. The real political dynamite also want to hear from several Obamawould be evidence that Trump himself era officials, including Sally Yates, the was involved. And then, as with any Washington inquiry, there will be ques- former acting attorney general fired by Trump, who reportedly warned the tions about whether anyone tried to White House that Flynn could be at cover it up. risk of blackmail from Russia. There’s already been a request for The committee already has received immunity from Trump’s short-tenured briefings from top intelligence officials national security adviser, Michael behind closed doors but plans to hold Flynn, the retired U.S. Army lieutenpublic hearings as the investigation ant general fired for misleading Vice evolves. That’s tricky and potentially President Mike Pence about convertime-consuming as it tries to figure out sations with the Russian ambassawhat can be discussed in public. But dor. The House Intelligence probe is the senators say such hearings are key facing its own credibility crisis after to building public trust. “We simply Devin Nunes, a California Republican must—and we will—get this right,” who served on Trump’s transition Warner said at a March 30 hearing, team, breached the panel’s protocols where cybersecurity experts from by briefing Trump directly on intellioutside the government detailed some gence given to him by people inside of Russia’s hacking operations. the White House. “This is not innuendo or false Warner said it’s clear Putin The Senate comallegations.” ordered a multipronged attack, mittee, by default, —Senator including hacking Democratic has become the main Mark Warner email accounts, with the stolen event. Republican data weaponized through leaks, Chairman Richard Burr and a massive propaganda and of North Carolina and top fake news campaign aided by thouDemocrat Mark Warner of Virginia sands of internet trolls pushing fake are trying to maintain a bipartisan stories on Twitter and Facebook—all approach to an investigation they of it intended to help Trump and hurt both say is among the most important Clinton. “This is not innuendo or false work they’ve done in their careers. allegations,” Warner said. “This is not The duo have vouched publicly for fake news. This is actually what hapeach other, and despite pressure from pened to us.” Republicans (and Trump) to have the Republicans have an incentive to probes focus more on leaks and the conduct of the Obama administration, cooperate with the probe, in part to stave off repeated calls—from Senator Burr, who supported Trump, insists John McCain and others—for either a he’ll abide by his duty to investigate. select committee or an independent Seven Senate staffers are working commission to investigate. Launching on the probe, one of the biggest in Burr’s memory. But early hopes of a that kind of effort from scratch would speedy conclusion have been dashed, take months just to get the necessary security clearances, lawmakers say. amid a continuous drip of disclosures In the meantime, the FBI continues to about contacts between Russians and Trump’s associates. “It’s not something investigate ties between Trumpland and Russia, as first publicly disclosed that can be done quickly,” Burr told reporters on March 29. by Director James Comey in a House Senate staffers have requested inter- Intelligence hearing on March 20. views with 20 people, starting with Burr said they will be sensitive the intelligence officers who comto the overlapping investigations. piled the Jan. 6 report. Lawmakers Warner, ominously, noted the preceventually want to interview the edent for simultaneous criminal and committee probes: Watergate. The web of Trump associates and White Politics/Policy Quoted job is about to change. On Jan. 25, President Trump signed an executive order calling for the creation of a department within ICE, the Victims of Immigration Crime Engagement, or Voice, office. The almost two dozen ICE community relations officers across the U.S. will now be responsible for highlighting crimes committed by members of the community they’ve spent years trying to strengthen. This is all part of Trump’s broader strategy to focus on criminal aliens, or “bad hombres” as he’s called them since he first announced his presidential bid in June 2015. Throughout the campaign, he made cracking down on undocumented immigrants who commit crimes a key part of his platform, despite research showing that undocumented immigrants are less prone to crime than U.S.-born citizens. A new analysis of census data by the Cato Institute estimates an incarceration rate among undocumented immigrants of 0.85 percent, compared with 1.53 percent for U.S.-born citizens. By focusing on acts of crime, the Voice program could undo years of work building relationships between ICE and immigrant communities, says John Sandweg, former acting director of ICE under Obama. “When you now task these guys with going around trying to scare the general public, all you’re doing is reinforcing the message to those groups, ‘Don’t you dare call ICE,’ because they think they’re going to deport you,” Sandweg says. “All it’s going to do is amp up the chilling effect and make it that much harder for ICE agents to do their job.” Although Voice hasn’t been rolled out yet, the broader shift in tone has already started. In March, ICE began releasing its first weekly list of crimes committed by undocumented immigrants and the “sanctuary” jurisdictions that refused to detain them on immigration charges. Voice will eventually provide quarterly reports about “the effects” of crime by the undocumented. In a report released on March 20, the Department of Homeland Security listed the 10 largest sanctuary jurisdictions, including Los Angeles, New York, and San Diego, along with the names of undocumented immigrants released and their “notable criminal activity,” such as domestic violence and burglary. To ensure victims are notified “There were no agreements tonight, and no agreements in principle.” Freedom Caucus chairman, Representative Mark Meadows, after an April 4 meeting between key House GOP members, Vice President Mike Pence, and other White House officials to salvage the Republican health-care bill when an offender is deported or released into the community, DHS is planning to put into operation a system designed under Obama but never formally launched, called the Victim Information and Notification Exchange, which will send victims of immigrant crime updates via text message and email. Until now, victims had no way of knowing whether ICE had deported a perpetrator or released him into the community. Part of the problem has been a lack of funding, says Sandweg, who says he backed the creation of a notification program while at ICE. The other issue has been complexities with privacy laws that limit interaction between certain state and federal databases. As part of Voice, the Trump administration will no longer extend privacy rights to undocumented immigrants, breaking with past interpretations of the 1974 Privacy Act. ICE declined to say how much the program will cost or where the funding will come from. In a Feb. 20 memo, DHS Secretary John Kelly directed that “any and all resources that are currently used to advocate on behalf of illegal aliens” be reallocated to Voice. Obama set up an English and Spanish toll-free hotline for detained immigrants and established the position of “public advocate” within ICE to serve as an access point for people in immigration proceedings and for immigrant advocacy groups. Immigration hardliners, such as Diane Black, a Republican representative from Tennessee, criticized the public advocate as an “illegal alien lobbyist.” Texas Republican Representative Lamar Smith said it was “further proof that the Obama administration puts the interests of illegal immigrants ahead of the interests of Americans.” Congress eliminated the public advocate position in April 2013. Jessica Vaughan, director of policy studies at the Center for Immigration Studies, which advocates for less immigration, thinks eliminating these types of services could free up funds for Voice. “These resources were being used almost exclusively on behalf of people in this country illegally,” she says. “Whereas people harmed by the actions of people in the country illegally were getting almost no help.” Jacinta Gonzalez, field director at advocacy group Mijente, worries that Voice will mean that community relations officers will no longer be a “point of contact” for people detained. “If they’re not even going to be pretending to talk to the community, it just goes to show that they don’t really care at all about the impacts their enforcement is going to have,” she says. Nowakowski, the Phoenix councilman, holds out hope that the new role for community officers like Bustamante will still involve finding common ground. “That’s where Rudy could be that mediator to help somebody who may have lost a loved one and thinks all Mexicans are murderers,” he says. “It’s having a person there who’s levelheaded who can actually tell both sides of the story and help people heal.” —Lauren Etter and Darius Rafieyan The bottom line Under Trump’s Voice initiative, ICE community relations officers will now publicize the crimes of immigrants they once helped. Edited by Matthew Philips Bloomberg.com 31 A cheap stent that’s hard to ﬁnd, but really works 34 The skies are getting crowded for the No. 1 drone maker 36 Down with Taser, up with Axon, and here, have a camera 35 Innovation: Fake cartilage that makes joints good as new 37 April 10 — April 23, 2017 33 Hacking the Need For a Full-Time Job A small group of competitive coders make most of their living on prizes ILLUSTRATION BY BRANDON CELI “I have my time to myself and the freedom to work on whatever it is I want” Peter Ma is looking around his San Francisco condo and realizing he won just about everything in it. His TV, home theater system, 3D printers, phones, tablets, computers, furniture—all were either prizes or bought with prizes, like the Amazon gift card that paid for his leather couch. Stashed under Ma’s sofa is a thick stack of 2- or 3-foot-long cardboard novelty checks, kept as trophies. “The only non-swag I have are shoes,” the 33-year-old says. With his close-cropped goatee and gray hoodie, Ma may look like thousands of programmers roaming the city, but he’s part of an elite corps. He and about a dozen friends travel the nation’s circuit of hackathons, marathon coding sessions that challenge contestants, typically, to create software. Often these are corporate-backed team events offering winners serious cash. Competition is fierce, and caffeine is plentiful. Some hard-core hackathoners have full-time jobs. Most are trying to build a startup and use their winnings to supplement contract gigs, or vice versa. The best can win tens of thousands of dollars a month, though much comes in the form of the swag that lines Ma’s condo. They say the trade-offs in pay and stability are more than worth it. “I have my time to myself and the freedom to work on whatever it is I want,” Ma says during a long waterfront lunch on a sunny Tuesday. He says he’s considered full-time offers from Google, Facebook, and Uber Technologies but prefers living on contract work and contest winnings, as he has for three years. He’s entered more than 100 hackathons, chosen by the money at stake, proximity to the Bay Area (unless flights are covered), Technology 34 whether a contest will teach him new skills, and which friends will be there. Brian Clark, 27, is working on his fourth startup idea and has supported himself with hackathons for more than two years. A mobile gifting app he made for a hackathon sponsored by Kmart and Sears Holdings Corp. won him $6,000 for less than four hours of work. Another time, when he was broke and sleeping on a friend’s couch in Oakland, he entered a hackathon out of desperation. “It was win it or apply for a job,” he says. In a contest sponsored by a laundry list of tech companies, Clark and a partner spent about a day coding a troubleshooting tool for app developers. They beat 800 other teams and won $33,000 in venture funding. Corporations backed more than 1,000 hackathons in the U.S. last year, according to Devpost, a site for developers that tracks the events. For companies such as Microsoft Corp. and Amazon.com Inc., the events are chances to show off their latest virtual-reality headset or voice-control software to talented engineers. The more developers interested in working with a company’s tools, the more successful those tools. International Business Machines Corp. alone holds hundreds of hackathons a year, online and in person. “We know it feeds revenue somewhere down the line,” says chief developer advocate Willie Tejada. IBM’s Watson AI XPrize, a three-year online challenge to solve a problem of the entrants’ choosing with AI technology, carries a $3 million grand prize for the team whose work is judged most important in 2020. A few days before each hackathon, Ma spends a half-hour or so checking that his programs and gadgets are up to date. That’s a habit he learned after a glitch at a hackathon in Las Vegas cost his team hours. He brings his computer, iPhone, two Androids, an internet-connected chipboard, and sensors for temperature, humidity, and touch, in case they’re needed for the event. He doesn’t pack a toothbrush. “You know how a soldier goes to battle with a sword? Our weapons are our laptops” “I bring the basics,” he says. “You know how a soldier goes to battle with a sword? Our weapons are our laptops.” Clark packs his favorite blue fleece blanket and a small pillow into a backpack along with his laptop. (He, too, skips the toothbrush.) He preps by writing a pitch for the project he plans to build, tailored for the sponsors and the technology they’re promoting. In March, Ma and some friends went to a pretty typical 48-hour hackathon in Redwood City, Calif., hosted by Procter & Gamble Co. to promote internet-connected plug-in Febreze dispensers. (Clark skipped it.) Sponsors included Google and Amazon, both interested in connecting the dispensers to their respective smart-home gadgets, Nest and Alexa, as well as PARC, the famed Xerox Corp. innovation lab. For a chance at a $5,000 grand prize and other awards that included PARC internships, dozens of teams worked all weekend to devise useful applications for the Febreze units. Hackers ate Chinese food and drank Red Bull past midnight, napping under tables or in corners in shifts for an hour or two while their teammates kept working. Some brought sleeping bags; others rested their heads on backpacks. Ma and his team used a methane sensor to activate the Febreze plug-in when it detected a certain amount of gas. They lost. Ma says he overthought the technical work and underthought the idea. “We had three guys building a fart app,” he says. “Ninety percent of the customers are all women.” P&G’s winners connected the scent dispenser via Wi-Fi to a smartphone app, allowing users to control Febreze release along with other smart-home functions, such as temperature and lighting. “Hackathons allow us to have access to some of the sharpest minds,” says spokeswoman Lauren Thaman, adding that P&G plans to do more. Living off hackathons may be getting tougher. Massive awards are less common as companies such as Salesforce.com Inc. shift from luring developers with competitions toward free online learning programs that keep them in touch with participants. Of course, some coders give up hackathons for jobs, spouses, or their health. Jay Zalowitz, a developer at online sports apparel retailer Fanatics Inc. in San Francisco, says he spent his mid-20s using contest earnings to fund a startup but cut back once he got a full-time job. It usually takes a couple of days to recover from a hackathon, he says, and given a full-time salary, the money isn’t worth it. Ma says he has no plans to give up the freedom of the hackathon circuit. “I can always get a corporate job,” he says, slicing into seared branzino. “I don’t need to. That’s the backup plan.” —Lizette Chapman The bottom line Semipro hackathon entrants don’t make what their employed peers do, but they have a lot more time to work on their startups. Medical Devices Nice Stent If You Can Get It Stroke-clearing clot retrievers can be tough to ﬁnd “I was 95 percent back the next day. It was miraculous” Lee Bekemeyer collapsed on the driving range at Stoneybrook West Golf Club one morning in 2015, a massive stroke choking off the flow of blood to his brain. The 86-year-old real estate broker couldn’t get up, move his right side, or speak. One in eight patients with such acute strokes dies within months, and two in three suffer lasting complications such as paralysis, slurred speech, and trouble walking or caring for themselves. Bekemeyer wasn’t one of them. He was rushed 15 miles to Florida Hospital in Orlando, a comprehensive stroke center. After a CT scan, doctors threaded a metal stent through an artery into his brain, then expanded it to snare and extract the clot, allowing blood to flow freely again. The entire process took less than two hours. “I was walking to the bathroom that night, and I think I was 95 percent back the next day. It was miraculous,” Bekemeyer says. “Not every hospital has a team that does this.” In the field of stroke treatment, the maxim is “time is brain,” because every minute with a clot costs a patient millions of brain cells. By that standard, Florida Hospital is exceptional. Last Technology Blood Clot, Begone ① A doctor threads the metal stent into a patient’s clogged artery ② The stent expands, trapping the clot in its mesh FROM LEFT: COURTESY STRYKER CORP.; COURTESY AXON ③ The doctor removes the stent, taking the clot with it year 81 percent of its stroke patients were treated within two hours of arrival, up from 22 percent in 2013, according to Indrani Acosta, the director of stroke care. Many who might have been sent to a nursing home went to a rehab center instead, she says, while people who would have gone to a rehab center could go straight home. That’s due in part to clot-retrieving stents such as the one used on Bekemeyer. They’re sold for about $8,000 by companies including Medtronic Plc and Stryker Corp., and according to a 2015 study published in the New England Journal of Medicine, 60 percent of stroke patients treated with a stent retriever functioned independently after three months, compared with 35 percent of those given drugs alone. About 240,000 of the 700,000 Americans who suffer strokes each year have blockages in arteries large enough to be treated with these kinds of clot-retrieving stents. But only about 28,000 were treated with one last year, says Stacey Pugh, vice president of Medtronic’s neurovascular unit. The stents, while relatively cheap in hardware terms, are rare outside of the roughly 150 specialized facilities in the U.S. known as comprehensive stroke centers, because they require an in-house neurosurgery unit, minutesaving training, and space. As a result, the devices have become a bit of a flashpoint among doctors who say more facilities around the country should be equipped to handle extreme cases like Bekemeyer’s. The procedure just isn’t available in many parts of the country. “These treatments need to be available in the community, and access needs to be fair,” says Lee Schwamm, chief of stroke services at Massachusetts General Hospital and a professor of neurology at Harvard Medical School. “We need them to be more equitably distributed. Many are packed in big cities, and there aren’t enough in suburban communities and strategic locations in less populated areas.” Among America’s 1,100 or so hospitals equipped to deal with more minor strokes, the priority is speedy injection of a drug called tPA, which over the past two decades has become the standard of care to break up smaller, less accessible clots. If a paramedic thinks a patient is suffering a stroke more minor than what Bekemeyer experienced, it may not be worth passing a couple of hospitals to head for a bigger pool of stroke experts, as Bekemeyer’s paramedic did. “I can see the desire to open more comprehensive stroke centers, and we are moving in that direction,” says Acosta of Florida Hospital. “But our field is not as big as the cardiology field,” which numbers about 30,000 doctors in the U.S. “There are fewer neurologists by far”—roughly 16,000. Efforts to bring the stents into the mainstream have also been sidetracked by the failures of early versions, which cleared clogged arteries but also resulted in some uncontrolled bleeding in the brain and some deaths. Three major trials of those earlier techniques failed as recently as 2013. Since the 2015 NEJM report, however, a flurry of five positive studies, the most recent one published in March, has led more doctors to push for wider adoption. Medtronic says its research shows that stent-based clot removal also cuts health-care costs. Initial treatment including a clot retriever runs $45,761, vs. $28,578 for treatment with drugs alone. For the next 90 days, however, those patients generate $5,000 less in medical expenses, and over the patient’s lifetime, Medtronic’s Solitaire retriever could save $23,203. “A stroke patient was a stroke patient until two years ago. There was one thing you could do for them, and that was to give them tPA,” says Medtronic’s Pugh. “The health-care system is evolving to come into alignment with the data. It needs to evolve faster.” An additional 350 U.S. medical facilities are equipped to perform Axon Body 2 the stent procedure and are working to receive certification as comprehensive stroke centers. And a pending Stryker study suggests that the stent treatment may be effective as long as a full day after the onset of a stroke, potentially making it much more accessible for a wider range of people. Bekemeyer recommends it. He was golfing again within a month of his stroke and, at 88, continues to hit the links several times a week. He navigates a 19-step circular stairway to get to his bedroom every night. And he allows himself to marvel. “I would have thought if I had a massive stroke the way I did, I would be finished for the rest of my life,” he says. “I would have rather gone on out than to never fully recover.” —Michelle Cortez The bottom line Stents appear to double the recovery rate for some stroke patients, but most Americans don’t have access to them. Policing Forget the Taser, Says Taser With a new name, the company is giving away body camera gear “Oh, sure, there will be some legal challenges” Taser International Inc. has become by far the leading U.S. supplier of police body cameras, which departments have rushed to adopt since the shootings in Ferguson, Mo., and elsewhere led to public demands for greater accountability. Interest in the cameras, and the management of their footage, has pushed the world’s best-known maker of stun guns into cloud computing and digital devices, sold under the Axon brand. Now that business is becoming the face of the $1.2 billion company. The whole place will be called Axon, and b as of April 6 the TASR ticker on the Nasdaq exchange is AAXN. “The Taser brand is a product brand,” says Chief Executive Officer Rick Smith. “People don’t think of cloud 35 Technology Police buy in … About two-thirds of cops say they favor the use of body cameras 82% Oppose 33% of police chiefs and other administrators say they want them Favor 66% … some more than others Officers from certain backgrounds were more likely to say body cameras would help curb inappropriate police behavior White 46% Black Hispanic 71% 53% DATA: PEW RESEARCH CENTER 36 software or sensor devices and the many things we now do.” He’s trying to solidify Axon’s position and deepen ties to local departments with a splashy offer: a year of free cameras for any U.S. police agency. Body cameras and software to manage footage marked Taser’s first successful initiative to expand beyond stun guns after years of failure. In 2011 almost all of its revenue came from Tasers, but last year Axon made up a quarter of sales. Axon says it’s won contracts with 36 of the 41 major city departments that have body cameras. To guide its evolution, Taser brought tech leaders onto its board. In 2013 it bought a Seattle startup that became its research hub. The Seattle office houses 115 employees, and Axon plans to triple its space there. This year it bought two artificial intelligence teams, which for now are focused on automating the labor-intensive redaction of body cam videos for public release. But Smith says the company’s long-term goal is to automatically extract the video information needed to fill out police reports. This could free officers from paperwork—and make Axon a required tool for any department, replacing its traditional record management system. “We are licking our chops at this idea,” Smith says. Rachel Levinson-Waldman, senior counsel at the Brennan Center for Justice, says police technology should balance automation with human judgment. “We know that people get things wrong, but so do computers,” she says. Smith’s first step is to give more cops cameras. About two-thirds support using body cams, according to a January study by Pew Research Center, but Smith estimates only about 20 percent have them. Hence the one-year free trial, software included: It’s partly a PR stunt, partly a bid to end-run often baroque procurement processes. The idea for the free trial grew out of a loss. Last fall the New York City Police Department, the nation’s largest, chose Taser’s top challenger, Seattle’s Vievu LLC, to supply its first 5,000 cameras. Losing the contract sent Taser’s stock down 18 percent. (It hasn’t rebounded.) Taser howled at the decision, saying the NYPD’s field trials were too small and offered the department 1,000 cameras and licenses as a “gift.” Safariland LLC, which owns Vievu, called the Taser offer a “desperate attempt to circumvent the process designed to ensure fair treatment of all vendors.” It added, “If the NYPD had wanted vendors to supply 1,000 free cameras or any other provisions, the NYPD would have spelled out that requirement” in the request for proposals. The NYPD declined the deal. Smith says Axon expects critics to call the latest offer anticompetitive, too. “Oh, sure, there will be some legal challenges,” he says. “Luckily we have plenty of lawyers from our Taser side of the business.” —Karen Weise The bottom line Taser, now Axon, is offering police a year of free body cameras and related software, an effort to make the gear irreplaceable. Drones How Long Can DJI Rule the Sky? The leading quadcopter maker specializes to survive “We have our own factories and can do our own prototyping” As dawn broke on China’s southern Hainan Island, Yang Daozhu clambered up a metal stepladder for a better view over the cornfields, remote control in hand. Wearing a blue surgical mask and rubber boots, the 30-year-old was soon steering a 120-pound DJI drone back and forth above the yellow-tipped stalks, flipping a switch to spray them with a mist of pesticide. About 100 feet away, a co-worker did the same from the ground, occasionally climbing onto a blue truck. By noon they’d covered the same stretch of field it would have taken four or five workers a week to spray with traditional crank-operated backpack dispensers. This is a typical day for Hainan China Agriculture and Flight Service, a year-old company with about 50 employees that’s sprung up to fill a niche. “It’s harder to find people to spray pesticides in the old way,” says Zhang Yourong, the farmer who manages these cornfields. “Young people want to leave the farms and find better jobs in cities now.” Yang’s boss, former realtor Liang Lvsheng, says he’s also interested in using drones to map farms from the sky, a way to spot pests or other problems more quickly. Zoom out a little more, and a broader business plan starts to come into focus. Drones are becoming less of a casual hobby and more like commercial and industrial equipment, and DJI, the world’s leading maker of the little buggers, is working a lot harder to make sure it can meet the market’s changing wishes. DJI makes the Agras-MG1 drones spraying the fields on Hainan, Matrice 200 drones for industrial surveying, and Inspire drones for high-end filmmaking, and it’s got 25 percent of its 8,000 staffers working on research and development and engineering to make sure potential rivals don’t spot an area it’s missed. “Our iteration cycle is about six months,” says Paul Pan, senior product manager at DJI. “We can completely control the supply chain. We have our own factories and can do our own prototyping.” Eleven-year-old DJI more or less invented the modern civilian drone industry when it introduced its first Phantom in 2012. Valued at $10 billion, the Chinese company makes 60 percent to 65 percent of all nonmilitary drones COURTESY DJI (1); COURTESY CARTIVA (2) DJI Agras-MG1 Technology shipped around the world, according to researcher Frost & Sullivan. It’s maintained its lead partly through smart branding and partnerships, getting photography-focused Phantom models into more than 400 Apple Stores. But it’s tough to maintain momentum with hardware alone. Even Apple Inc. is focusing more on software and services, such as music streaming and its app store. And as with the smartphone industry, high-end drones such as DJI’s may be vulnerable to cheaper or more focused rivals, especially in China. On the upper end, EHang Inc. is working on people-carrying drones that resemble George Jetson’s ship. On the low end, startup FPV Style is refining $100 indoor drones for kids. FPV founder Max Ma says his prototype weighs less than an ounce, and the finished product will be lighter. “DJI has been brilliant at making flying cameras, but that’s not all that drones are or can be,” says Eric Pan (no relation to Paul), head of Seeed Studio, a Shenzhen hardware accelerator. As a drone guides itself back and forth across a soccer field near DJI’s gleaming Shenzhen headquarters, surrounded by skyscrapers, Paul Pan is thinking about what comes next. He’s been refining the AgrasMG1’s ability to fly a preset path and adjust for wind. “Even for a farmer with minimal training, this makes it very easy to use and to spray evenly and consistently,” he says. DJI is also working with data services that stitch together data from GPS and the drones’ sensors to create 3D maps of fields, allowing the programmed paths to account for hills. The market for drone hardware will hit $6 billion this year and $11.2 billion by the end of 2020, estimates researcher Gartner Inc. The market for software and services is expected to grow a lot faster. So DJI is also pushing developers to dream up new apps and uses for its drone operating system, says Michael Perry, director of business development. The company says it’s not making its OS available for rivals’ drones. —Christina Larson The bottom line China’s DJI says 25 percent of its workforce is in R&D as it tries to extend its dominance of the civilian drone business. Edited by Jeff Muskus Bloomberg.com Innovation Synthetic Cartilage Form and function Innovator David Ku Cartiva implants are made of polyvinyl alcohol, the main ingredient of contact lenses, and mimic natural cartilage to treat arthritis. Unlike the current standard of care—metal plates fused with joints—they allow for a full range of motion. Age 61 1. Open After opening a patient’s joint to be treated, an orthopedic surgeon bores a hole in one of the bones of the joint. Professor of mechanical engineering and engineering entrepreneurship at Georgia Tech; surgeon Origin Research on blood ﬂow required Ku and his students to create material for artiﬁcial blood vessels. The company they formed to further develop the material was acquired by Carticept Medical Inc. in 2008 and spun off as Cartiva Inc. in 2011. Funding Cartiva has raised $35 million from New Enterprise Associates, Windham Venture Partners, and private investors. 37 ① 2.. Market U.S.-based orthopedic surgeons can use a $4,500 kit from Cartiva to treat arthritis in the big toe. The kit includes a ⅓-inch implant, a drill, and tools for compressing and inserting the implant. Plant The surgeon inserts a compressed Cartiva implant into the hole, where it expands to remain ﬁrmly in place without fasteners. Next Steps “It’s certainly transformative,” says Judy Baumhauer, an orthopedics professor at the University of Rochester Medical Center. “With this advance, we have an implant that doesn’t wear out or cause more troubles.” Cartiva Chief Executive Officer Tim Patrick says the company is seeking Food and Drug Administration approval to implant the cartilage in thumbs, and Ku is working on other applications for his implants, including as replacement blood vessel valves. —Michael Belﬁore Markets/ Finance April 10 — April 23, 2017 Folwell campaigning on his motorcycle 38 A big pension fund is ﬁring pricey money managers but is stuck in some long-term deals “We don’t own alternative investments. They own us” If you had $90 billion to invest, how would you do it? For Dale Folwell, it’s a serious question. As the newly elected treasurer of North Carolina, he’s by law the one person who gets to decide how to manage the state pension fund for government employees, the world’s 26th-largest pool of public money. Folwell, 58, became the state’s first Republican treasurer in 140 years partly on the strength of a simple investment strategy he proposed: Instead of paying money managers big fees, the state should use a slim menu of cheap, mostly indexed investments and manage them in-house when possible. The state paid $600 million in outside managers’ fees, incentives, and related costs last year, seven times more for every dollar under management than it paid in 2000. Folwell envisions saving the fund a minimum of $100 million a year in fees by the end of his four-year term. “It’s not emotional. It’s not political. It’s mathematical,” says Folwell, a certified public accountant and former state legislator—who’s also been a mechanic and a national dirtbike racing champ. His calculation is simple: Expenses come right off the top of returns, and money managers as a group struggle to beat the market How to make an active fund more like an ETF 40 COURTESY DALE FOLWELL Wall Streeters ﬂock to messaging apps for a little privacy 41 after their fees. For example, in the decade through June 30, 2016, about 85 percent of large-cap U.S. stock funds trailed the S&P 500 index, according to S&P Dow Jones Indices. Folwell has already unloaded six actively managed stock funds that controlled $3 billion for the state and charged combined fees of $17 million in the fiscal year through last June. But a wide-scale firing of Wall Street won’t be easy, he says, because his two most recent predecessors signed long-term contracts with some private equity and hedge funds. Such investments are often called alternatives. Funds operated by Blackstone Group LP, Warburg Pincus, and Starwood Capital Group are among those listed in the pension system’s holdings. “We don’t own alternative investments. They own us,” Folwell says. “I think they increase complexity and reduce value.” Folwell’s most recent predecessor, Janet Cowell, declined to comment. The treasurer who came before her, Richard Moore, didn’t respond to requests for comment. One might think a public fund with billions of dollars to put to work would have some leverage to negotiate a discount. Not so simple, Folwell says. Money managers he talks to keep citing most-favored-nation clauses in their contracts that say they can’t offer a break to one client without providing the same break to others. Even if he wasn’t stuck in long-term contracts, it might be difficult to unload huge stakes quickly without needlessly incurring fire-sale losses, because the funds tend to hold illiquid assets. In the election, Folwell won the endorsement of the State Employees Association of North Carolina, which represents 55,000 public employees. “He doesn’t carry water for his party,” says Ardis Watkins, a lobbyist for the group. It had fought the plunge into costly investments and advocated making the terms of the deals with managers public. In February, Warren Buffett gave a boost to Folwell’s argument. The longtime Berkshire Hathaway Inc. boss wrote in his annual shareholder letter that pension funds and other supposedly savvy investors had wasted $100 billion over the past decade on high-priced money managers. North Carolina’s pension fund used to have lower costs. In 2000 the state was paying fees of just 0.1 percent of assets, compared with 0.7 percent now. Then it pushed into alternatives. The underlying investment can include everything from stakes in private companies to derivatives linked to barrels of heating oil and bushels of wheat. “I have $900 million worth of timber,” Folwell says. In theory, such investments can provide a hedge against inflation and the volatility of equities. And at a time when bond yields have been historically low, many big institutional investors have been eager to find investments that might provide some extra return to help meet their obligations. “The U.S. stock market has had a good run, but it’s likely to be unsustainable in the long haul,” notes Josh Lerner, a Harvard Business School professor. For pension funds, he says, private equity in particular may seem like one of the few ways to get a lift. If North Carolina had owned a vanilla stock-and-bond index portfolio instead of shifting into alternative assets, it would have earned an additional $20 billion over the seven years through June 2016, estimates Ron Elmer, an accountant and indexing advocate. Elmer ran unsuccessfully in the Democratic primary for North Carolina treasurer last year before throwing his support behind Folwell. Four-fifths of the fees paid by North Carolina’s pension fund last year went to private equity, hedge fund, and other alternative assets that accounted for about one-fifth of the state’s investments. Investing in alternatives also includes extra costs for such things as sending state employees to annual fund meetings, according to Folwell. Since taking office, he’s been calling money managers to ask about performance, costs‚ and whether they’d work for less. During one call, he says, Robert Kapito, president of BlackRock Inc., which manages about $15 billion for the state, tested Folwell on his claim to be a mechanic by asking where the gas goes into a 1951 Cadillac coupe. Folwell says when he replied that the fill pipe is in the taillight, the BlackRock boss said the treasurer had passed his test. “I said, ‘We may talk with an accent, but we don’t think with one,’” says Folwell. “The purpose of these phone calls was for the managers to pass our test, not for us to pass theirs.” —Neil Weinberg The bottom line The newly elected treasurer in North Carolina thinks his retirement fund can do better with simpler investments. Real Estate Buy Today. Take a Close Look Tomorrow Homebuyers in booming Toronto decide to forget the inspection “You don’t know what could be behind the walls” When a real estate market gets really hot, buyers can feel like they have to roll the dice. In Toronto, some are so desperate to win bidding wars that they’re rushing to make offers without even getting an inspection. The average price for a detached home in Canada’s largest metropolitan area jumped to C$1.21 million ($905,473) in March, up a third from a year earlier. In the same period, Toronto-based home inspection company Carson Dunlop saw a 34 percent drop in volume. Murray Parish, president of the Ontario Association of Home Inspectors, says he’s seen a 30 percent decline at his company, Parish Home Inspections. “The bottom line is we are in a shortage of supply,” says Tasis Giannoukakis, a Century 21 Leading Edge Realty Inc. broker based in Toronto, adding that it’s not uncommon to see bids of as much as C$200,000 over the asking price. “That pressure is what’s causing everybody to remove the conditions on an inspection,” he says. Home price increases in North America’s fourth-largest city and its suburbs have outpaced growth in 39 Markets/Finance conditions, compared with 10 percent to 20 percent previously. Nicholas L’Ecuyer, a managing partner at Barrie-based loan brokerage Mortgage Wellness Group, says he doesn’t see skipping inspections as a red flag for the market but as a necessary evil for buyers in bidding wars. It doesn’t matter if inspections are inexpensive. “For about $400, everybody wants to do it,” he says. “But they know they can’t.” —Kim Chipman The bottom line Toronto’s housing boom is eclipsing those in San Francisco and Vancouver. Buyers are feeling the pressure. Investing Trying to Make Active Funds Cool Again Will investors ﬂock to new funds that look more like ETFs? “Active ETFs unnecessarily blur the lines” Daniel McCabe, chief executive officer of Precidian Investments, is trying to create a new kind of fund, one he thinks will help active money managers survive the unrelenting rise of exchange-traded funds. It’s been an uphill battle. With $10 trillion in assets in the U.S., actively managed mutual funds are big business, but they’re losing market share. For years investor money has been flowing into ETFs, most of which passively replicate market indexes. Index ETFs had assets of $2.5 trillion at the end of 2016, up from $420 billion a decade earlier, according to Morningstar Inc. Precidian’s plan is to wrap active management into something that looks more like an ETF. In doing so, it won’t replicate one of the key things many people like about ETFs—that they’re index funds, which over time tend to beat most active managers. McCabe’s bet is that investors who still want to hire an active manager will be drawn to Precidian by the other features of an ETF, such as the ability to trade them like a stock at any time of day. ETFs also have operating-cost and tax advantages over traditional mutual funds. MARK SOMMERFELD/BLOOMBERG; ILLUSTRATION BY KURT WOERPEL 40 Manhattan, San Francisco, Seattle, hiding behind the walls,” says Shubha and Vancouver, raising concerns that Dasgupta, owner of Capital Lending a correction may be coming. Robust Centre, a Toronto-based mortgage demand in Toronto is bumping against brokerage. A move away from the lowest supply of homes in more inspections isn’t unique to Toronto. than a decade. Buoyed by low interVancouver, Canada’s hottest real est rates, the bidding wars have caused estate market until Toronto took that many shoppers to leave once-standard mantle last year, saw a surge in unconclauses out of their purchase offers, ditional purchase offers in the first such as a professional home inspection half of 2016, says Adil Dinani, an agent in the area with Royal LePage West and financing contingencies. Real Estate Services. Giannoukakis notes that homebuyers are generally savvier when it When problems emerge after a purcomes to repairs and renovations than chase, the financial burden typically they were a decade or two ago, thanks falls to the buyer who opts to skip an inspection. Because the buyer “supto information on the internet and the popularity of home-related TV shows. posedly has the ability to see problems and ability to negotiate either a lower Still, the removal of conditions such price or for work to be done, the law as an inspection isn’t due to voluntary risk-taking but is “100 percent” doesn’t see any reason really to protect you,” says Michael Lamb, a real estate a byproduct of multiple offers on the lawyer and professor at the same property, he says. An inspector views “When you are the only offer University of Western Ontario. the boiler of a home in Toronto Removing the inspection on the table, you can submit a conditional offer,” says Lorand clause is a sign that “speculation has entered the market,” says Marcus Sebestyen, an agent with IPro Realty Ltd. in Toronto, adding that he counSimon, an attorney and owner of Ekko sels clients on the risks of skipping an Title in McLean, Va. The last time he saw a marked increase in waived inspection. “But when competing with inspections in his region was around several other offers, you don’t have 2007, before the U.S. housing crash. that luxury,” he says. Even so, mortgage providers don’t Even for do-it-yourself types, the seem to see much of a problem with potential pitfalls are many—faulty the decline in inspections in Toronto. pipes, eroding foundations, and Banks are far less concerned about termite infestations. Some are more costly repairs that may arise later than surprising. Alan Carson, co-founder they are about the appraised value of a of Carson Dunlop, says his team once property, says Dasgupta, the mortgage found a bathroom that seemed funcbroker. “The home inspection is really tional, but none of the plumbing was more for consumer protection,” he connected. Then there was the house says. “From a home value standpoint, that came with a loaded rifle and a the appraisal is really the key indicator large bag of jewelry in the attic, as well for the bank.” as a “very sooty raccoon” jumping The decline in inspections has from a fireplace damper, he says. spread to other parts of Ontario. The “You don’t know what could be city of Barrie, about 105 kilometers (65 miles) north of Toronto, has “gone nuts” in the last three months, says Peggy Hill, a local broker with Keller Williams Experience Realty. She says 80 percent to 90 percent of the offers she sees have no Market performance kept assets high, but investors withdrew $350 billion in 2016 Markets/Finance A Growing Rivalry $10t Net Assets $8t Actively managed mutual funds $6t $4t $2t Passively managed exchange-traded funds $0 1997 2016 DATA: MORNINGSTAR INC. But Precidian faces a formidable competitor in 100-year-old, $364 billion asset manager Eaton Vance, which beat it to the punch with a rival product called NextShares. Precidian also has to persuade the U.S. Securities and Exchange Commission to sign off on its novel approach. “We recognize that anything like this requires the regulator’s approval,” McCabe says. He’s been trying for three years with Precidian. Eaton Vance’s NextShares won SEC approval in December 2014. The tricky problem for anyone trying to make active funds that work like ETFs is transparency. Say you want to buy 100 shares of State Street Corp.’s popular SPDR S&P 500 ETF at 11:59 a.m. To determine a fair price for those shares, market participants need to know the value of all the fund’s underlying assets at that time. That’s not a problem, because this ETF simply owns the stocks in the S&P 500 index. But most active funds like to be more discreet about their holdings. They select stocks or bonds to try to beat the market and don’t want to give other traders a way to get the jump on them. “It can be harmful to the investors,” says Stephen Clarke, president of the Eaton Vance subsidiary behind NextShares. Eaton Vance adopted a workaround: NextShares funds get the tax and cost efficiencies that come with trading on an exchange, but their price is calculated at the end of the day, as with regular mutual funds. Precidian’s solution involves hiring agents who can see a fund’s holdings to calculate and verify its underlying value. That value would be made public every second of the trading day, even though portfolio holdings would be revealed only a few times a year. In April 2015 the SEC told Precidian that it needed to solve a long list of concerns about its approach before it could get approval. Eaton Vance wasn’t shy about pointing out its rival’s difficulties. It used the Freedom of Information Act to obtain a letter the SEC sent about its concerns to McCabe’s lawyer—and published it. During a call with industry analysts, Thomas Faust Jr., Eaton Vance’s chairman, used it to question the viability of Precidian’s structure. “Nobody has ever done this in our industry before,” McCabe says. At the time, Faust said the company made the letter public to help the market make an informed judgment about potential alternatives to its product. Eaton Vance expects to spend about $10 million this year on the NextShares business, adding to about $16 million spent over the past two years. It’s also on the line to pay $9 million to creators of patents underpinning the funds, regulatory filings show. The funds have less than $100 million in assets. Precidian amended its SEC filing and is awaiting approval. On April 4, it unveiled eight funds it hopes to sell. Whatever the regulator decides, the new funds will have to prove they’re more than a marketing twist. “The trend is clearly toward passive, and ETFs are part of that trend, so they’re jumping on that bandwagon,” says Larry Swedroe, director of research for Buckingham Strategic Wealth LLC. And even when they’re traded on an exchange, active funds still pay someone to pick investments, so they’ll cost more than index funds. One NextShares fund charges 0.65 percentage points per year, a third more than the average U.S. ETF. “Active ETFs unnecessarily blur the lines and can create undue confusion,” says Rich Messina, senior vice president for investment product management at ETrade Financial Corp. Even so, Wall Street companies are willing to give the idea a shot. UBS Group AG and Columbia Threadneedle Investments have rallied behind Eaton Vance’s structure, with UBS announcing last year that advisers in its network could offer the funds. Asset manager Legg Mason Inc. bought a stake in Precidian last year. BlackRock Inc., the world’s largest money manager, has requested regulatory approval to sell funds using Precidian’s model. “The market hasn’t picked a clear winner,” says Spencer Mindlin, an analyst at Aite Group LLC. “Or whether there will be any winner.” —Rachel Evans and Annie Massa The bottom line Investors like being able to trade ETFs all day, but that’s tough to do with funds that need to keep secrets. Wall Street Traders’ New Favorite Way to Swap Secrets WhatsApp and Signal make conversations hard to track “Temptations and the rewards are just too great” Dirty jokes and not-safe-for-work GIFs. Snaps of unsuspecting colleagues on the trading floor. Screen shots of confidential client trading positions. All that— and, on occasion, even legally dubious information—is increasingly being trafficked over the new private lines of Wall Street: encrypted messaging services such as WhatsApp and Signal. Traders, bankers, and money managers are embracing these apps to circumvent compliance, get around the human resources police, and keep bosses in the dark. And it’s happening despite the industry’s efforts to crack down on unmonitored communications, according to conversations with employees at more than a dozen Wall Street companies. On March 30 a former Jefferies Group banker was fined in the U.K. for sharing confidential data on WhatsApp. “You’re really able to operate outside of the bank,” says William McGovern, a former branch chief of the Securities and Exchange Commission who now works at the law firm Kobre & Kim. “We have seen in our investigations that the ground is shifting under everyone, and technology changes are driving a lot of it.” 41 Markets/Finance The U.S. Department of Justice and the FBI conducted an inquiry into the leak Quoted “ … I did not refuse or express my inability to comment and the interview continued.” Medley provides intelligence on macroeconomic policy for hedge funds and other investors, according to its website 42 U.S. financial companies need to keep records of all written business communications, no matter how innocuous, say the SEC and the Financial Industry Regulatory Authority. In some cases, calls are recorded. Representatives for Wall Street banks, including Bank of America, Citigroup, and Goldman Sachs Group, say they have various policies in place to prevent unmonitored communications and unauthorized access to confidential information. They routinely check emails and chats on company devices, restrict personal phones and messaging services on trading floors, and require employees to sign agreements prohibiting unmonitored communications for work. In January, Deutsche Bank AG banned text messages and services such as WhatsApp and Apple Inc.’s iMessage on company phones globally. Nearly two dozen financial industry employees say those policies are routinely ignored, and the use of personal phones for work is a fact of life. No one would speak on the record for fear of losing their jobs. The SEC declined to comment on the widespread use of unauthorized apps. Wall Streeters say they’ve turned to messaging apps because they’re tired of having their every word—work-related or not—ingested into vast databases and scrutinized for tone and taste as well as legal red flags. Some clients also prefer to use those apps to communicate; ignoring the messages would be bad for business. Financial companies have long grappled with new technologies and the need to comply with securities laws. (Bloomberg LP, which owns Bloomberg Businessweek, offers message and chat services that enable firms to set up alerts and restrictions to help enforce compliance.) But it’s gotten harder for compliance to keep up. At companies that ban personal phones, trading desk employees will sneak into hallways or stairwells to use them. Popular texting apps, such as iMessage, route conversations around most monitoring systems. Others such as Confide, Dust, and Signal can automatically delete messages once they’re read. How messaging is used varies widely on Wall Street. At big banks, employees often use the apps to share gossip and communicate with clients. A “don’t ask, don’t tell” mindset prevails. Several employees at one multibillion-dollar hedge fund set up a WhatsApp group chat to exchange market intelligence with one another, according to a person with direct knowledge of the matter. The app is particularly useful if there’s a big market move and for money managers traveling to far-flung places who need to be reachable at a moment’s notice. Occasionally messaging on personal phones has enabled conduct that could be legally problematic, compliance experts say. At least one investment bank has debt salespeople who routinely send screen shots of chats showing one hedge fund’s positions to another client in an attempt to win more orders, a person with direct knowledge of the matter said. At other firms, traders send screen shots of client lists and profit-and-loss statements to prospective employers. “If you look the other way on this, it’s only going to get worse,” says Warren Small, who teaches a program at Middlebury Institute of International Studies for students seeking careers investigating financial crimes. “With financial transactions, temptations and the rewards are just too great.” In the Jefferies case, U.K. regulators said they fined Christopher Niehaus about $46,000 for sharing confidential client information via WhatsApp as he boasted to a personal acquaintance and a friend about deals he had pending. The messages came to light after an unrelated complaint led him to voluntarily hand over his phone to Jefferies, a person with knowledge of the situation said. Richard Khaleel, a spokesman for Jefferies, and Niehaus’s attorney declined to comment. Authorities said none of the parties in the Jefferies incident traded on the information. Banks have implemented software to immediately flag phrases in company email and messaging systems such as “check your phone,” “sent you a text,” or “take this offline.” Technology can only go so far, however. Jack Rader, a managing director at ACA Compliance Group Holdings LLC, which sets up monitoring systems, says he sometimes encounters pushback from the heads of sales and trading desks. That raises a host of thorny questions, says Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “Are the firms really doing what’s reasonable in trying to stop this?” he muses. “Or are they sort of wink-winking?” —Laura J. Keller The bottom line Some mobile apps can make messages permanently disappear, which may help rogue traders. Edited by Pat Regnier Bloomberg.com ANDREW HARRER/BLOOMBERG Jeffrey Lacker, in a statement on his April 4 resignation as president of the Federal Reserve Bank of Richmond. He wrote that in a 2012 conversation with an analyst from Medley Global Advisors, he unintentionally conﬁrmed conﬁdential information the analyst had about the Fed’s policy options. W EN 3M BOUGHT INTO WH THE AN TH ANKL KLE E MONITOR BUSINESS, IT T ACQUI CQ IRED D TR T OU OUBL BLE E PHOTOG P PHO HOTOGRAPH ILLUSTR H ILLUSTRATION ATION BY CREDIT AT TT TK 44 PHOTOG HOTOG OT RAPH AP ILLUSTR LLUSTRATION ATION I BY CREDIT CREDIT TK 4 45 B LAU BY AURE URE REN N ETTE ETTE ET ER PHOT PH O OG OT OGRA RAPH RA PH H BY HA HANN NNAH NN AH WHI AH H TA TAKE KER R he law enforcement community in Massachussetts had a deal. In 2012 the state entered into a contract with the leading manufacturer of electronic ankle monitors, the small GPS devices strapped over the socks of parolees and people awaiting trial to make sure they didn’t skip town or otherwise show up in places they weren’t supposed to. There were problems from the beginning, according to corrections officials, offenders, and attorneys. For example, the battery on the bracelets was prone to dying suddenly and without warning. The internal antenna didn’t always perform well underneath certain clothing or in certain buildings. The devices sometimes relayed inaccurate navigational coordinates, leaving offenders in technical violation of the conditions of their release. Some offenders found themselves having to walk outside in the middle of the night or stand in the middle of a street to establish a satellite connection and prove to authorities that they were where they were supposed to be. A July 2015 article in Massachusetts Lawyers Weekly recounted a criminal defense attorney’s tale of his client’s device showing that he had walked across a lake. What’s unusual FIG. 3 about this chapter in Massachussetts law enforcement history is not the heavy reliance on ankle monitors, which are in wide use around the world, or even that 1970s there were some glitches in the technology. What’s especially Nixon announces the notable is that the devices themselves were war on drugs. Prison populations made by 3M Co. Yes, that 3M. The Post-it Notes begin a long rise. and Scotch tape company, a Fortune 100 T mainstay with a market value of $115 billion, 350K is also one of the world’s largest makers of 300K GPS ankle monitors, a field it entered in 2010. Corrections agencies around the world 250K are desperate for cost-effective alterna200K tives to overcrowded prisons, which is why 125,000 people are being monitored with 150K 1970 ankle devices in the U.S. alone. Peru is considering putting ankle bracelets on more than 20,000 inmates. In Norway, the Ministry of Justice and Public Security is examining the use of ankle monitors for asylum seekers. Germany recently passed legislation allowing them to be used A BRIEF HISTORY OF 1969 OFFENDER TRACKING FIG. 1 Ralph Schwitzgebel is awarded patent No. 3,478,344— a “Behavioral Supervision System with Wrist Carried Transceiver.” ORWELLIAN FANTASY HERE. THIS WAS A MARKET... THAT WE THOUGHT WE COULD ADD INNOVATION TO” to track Gefährder, or potential terrorists. 3M’s operations and sales in 200 countries have allowed it to draw on deep networks to win government contracts and move quickly into the top ranks of the $6 billion offender-monitoring business, as it’s called. But there’s evidence the company’s reach has at times exceeded its technical capabilities, with sometimes disastrous results. Parolees and people awaiting trial have been sent to jail because of false violation alerts generated by 3M monitors; equally troubling, authorities are 1980 sometimes so overwhelmed by alerts that they can’t tell who’s in violation and who isn’t. You don’t have to be a coddler of criminals to understand that this is a problem. 3M says it’s finally gotten a handle on it, but the struggle to master this business has left the company bruised. The company says it can’t comment on specific cases in which wearers claim their bracelets falsely placed them in violation. In a written statement, it adds, “while many offenders violating the terms of their probation claim innocence, their guilt, along with the effectiveness of the system, has been proven in various violation of parole hearings almost every day.” “We have a great business and a wonderful technology,” says Raymond Eby, public security business director at 3M’s Traffic Safety & Security Division, which oversees the electronic monitoring division. “But it’s complicated—it’s probably FIG. 2 the most complicated thing that 3M does, to be honest with you.” And also the thing with the highest human stakes. It’s one thing to turn out simple but DATA: BUREAU OF JUSTICE STATISTICS; FROM TOP: THE RICHARD NIXON PRESIDENTIAL LIBRARY AND MUSEUM; COURTESY U.S. PATENT OFFICE; COURTESY ROBERT S. GABLE 46 “THERE WAS NO FIG. 1: ROBERT GABLE’S BELT-MOUNTED TRANSCEIVER, CAPABLE OF SENDING AND RECEIVING TACTILE SIGNALS. FIG. 2: FROM U.S. PATENT 3,478,344, BEHAVIORAL SUPERVISION SYSTEM WITH WRIST ingenious solutions for consumers and businesses. People love you for that. It’s quite another to be at the center of matters of public safety and civil liberties. When people go to jail with your product bound to their bodies, you attract an entirely different kind of attention. Long before 3M employee Arthur Fry delivered to the world the sticky note in 1980, 3M had endured several near-ruinous mistakes. In the early 1900s the founders almost bankrupted the company by mistakenly digging up anorthosite, for which they had no use, instead of corundum, a tough-as-diamonds mineral they planned to sell for grinding wheels. Then the 1980s company imported 200 tons of Spanish garnet to manufacture sandpaper, but discovered the rock had been rendered useless after a load of olive oil spilled on it during an ocean crossing. Eventually a factory superintendent discovered that the oil could be roasted off, salvaging the shipment and redeeming the company. Even Fry’s sticky note materialized only after a colleague was unable to find a purpose for a not-so-sticky adhesive. Fry, the oft-told story goes, was looking for a way to keep slips of paper from falling out of his hymnal at church. It turned out the adhesive was the perfect solution, and Post-it Notes were born. This quality of renewal and a proud embrace of failure became central to 3M’s identity. Encouraging tinkerers and dreamers became so ingrained in the 3M culture that in 1948 the company introduced its “15 percent program,” in which employees are encouraged to use company time to pursue risky ideas. The concept is now widely used in corporate America—think Google Inc.’s “20 percent time.” All of this has made 3M an archetype of innovation, featured in Harvard Business School case 1990 studies and lauded by management gurus. So when Prison overcrowding George Buckley, an engineering Ph.D. and former reaches crisis level. head of boats-and-billiards maker Brunswick judges to release pretrial detainees or parolees if State spending Corp., took over as 3M’s chief executive officer in they wore a monitoring device. The Department on corrections has December 2005, he was dismayed to learn that of Homeland Security began electronically monitripled in just three years. the company he called “an engineer’s heaven” was toring immigrants to ensure they would show up floundering. 3M’s New Product Vitality for court hearings. Some people, mainly Index, an internal measure that tracks sex offenders, were sentenced to wear an FIG. 4 the share of sales that come from prodankle monitor for the rest of their lives. ucts introduced in the previous five years, Groups along the political spectrum, from was at about 20 percent, down from about the American Civil Liberties Union to the 30 percent in the 1980s, Buckley recalls. Heritage Foundation, embraced the use of Five months after taking the job, ankle monitors. Advocates argued that the Buckley stood before analysts at the devices gave defendants freedom to work Waldorf Astoria in New York City. He and raise their families while under court vowed to breathe “3M imagination” back supervision; they would also reduce the into the company and boost R&D spendmore than $50 billion in annual costs assoing. And, saying that no company can ever ciated with mass incarceration. be the sole fount of ideas, he promised to make complemenInside 3M, executives grappled with whether tracking people tary acquisitions, a tool he’d used to turn around Brunswick. was ethical and whether it conflicted with the wholesome brand He also identified a set of new “emerging business oppor- 3M had cultivated for a century. They decided the technology tunities” that aligned with what 3M called “the mega trends of ultimately made society safer and fit nicely within the company’s society,” including energy extraction, pollution control, and food track-and-trace and security businesses. safety. Early on as CEO, Buckley identified as uniquely prom“There was no Orwellian fantasy here,” says Buckley, ising a trend he called “track and trace.” It already had deep who stepped down as 3M’s CEO in 2012 after reaching the Jack Love, a New Mexico judge, markets a radiofrequency tracking device inspired by a Spider-Man comic. ANDREW LICHTENSTEIN/CORBIS/GETTY IMAGES roots at 3M. In the 1970s the company introduced its magnetized “Tattle-Tape” strips, which were tucked inside the spines of library books to prevent theft. In the early 2000s, 3M developed radio-frequency identification tags, or RFIDs, to track file folders, buried utility lines, and other assets. It had also toyed with fleet-tracking software, installing it in the cars of some company salespeople. Buckley believed so strongly in the future of tracking and tracing the world’s things that he preached to investors gathered at the Waldorf: “It is my belief that within 10 years, every single thing of value on the surface of the Earth is going to be tracked and traced, including you, your dog, your children, your car, and anything that you own which is of value.” Almost three years later, 3M was staggering through the recession—fourth-quarter profits fell almost 40 percent in 2008, and the company laid off 4,000 employees. Buckley turned to the Markets of the Future reports prepared annually by the company’s strategic planning group. Ideas generated for the report have included a smart device for dispensing pills, reflective bicycle tires, reusable plastic Post-its, and “anti-fatigue shoes,” according to an internal 3M presentation. In one of the reports, Buckley noted a trend: “We concluded that security is unlikely to get better, so border crossings, tracking of criminals—you can make rough estimates of where markets are going,” he says. Offender monitoring had come of age by then. In 2010 authorities in the U.S. were electronically monitoring almost twice as many accused and convicted offenders as they had just five years earlier, according to the Pew Charitable Trusts. Some were being monitored by RFID devices, but more were wearing GPS monitors, which typically comprise an ankle-affixed device with a built-in wireless modem programmed to record and store an offender’s location points at selected intervals. The modem wirelessly transmits the information to a data center—essentially by placing a wireless phone call—where it’s downloaded and analyzed by corrections officers or contractors. More and more states began passing laws allowing for CARRIED TRANSCEIVER. FIG. 3: PRESIDENT RICHARD NIXON ANNOUNCES THE WAR ON DRUGS. FIG. 4: A FORMER GYM AT THE DEUEL VOCATIONAL INSTITUTION IN TRACY, CALIF., CONVERTED TO HOUSING. 47 mandatory retirement age of 65. “This was a market that was growing, that was attractive, and that we thought we could add innovation to. This is a typical 3M approach, and it is what 3M is very, very good at.” In August 2010, 3M announced the $230 million acquisition of Tel Aviv-based Attenti Holdings SA. Founded by three former Israeli Air Force pilots, the company was one of the world’s largest manufacturers of GPS trackers; its devices were used in Israel, the U.S., and several other countries, including Australia, Singapore, and Sweden. “This acquisition will position our track-and-trace business as a leader in the high growth electronic offender monitoring market,” 3M said in a news release announcing the deal. On an investor call two months later, a stock analyst questioned Buckley on how exactly Attenti fit into the DNA of 3M, saying the newly acquired company seemed far from the material sciencerelated companies that have been “the core strength and bailiwick of 3M.” Buckley reminded the analyst of his track-and-trace philosophy. “You might remember that we got that library equipment business that tracks library books,” he said. “This is kind of in a way a lateral extension of that—instead of tracking a book, you’re tracking a person. So they’re not that different as you might think.” Except they were. 1998 Pro Tech Monitoring becomes an early “unable to connect” violauser of GPS for tions, as the state probation offender monitoring. office calls them, became so numerous that it became difficult for authorities to determine whether an offender’s device was simply being booted off the cell network, or the offender was interfering with the signal to avoid detection. The sheer amount of data generated by GPS-tracking devices creates problems across the industry and in every state, but the number of alerts in Massachusetts has far exceeded the norm, experts say. Documents reviewed by Bloomberg show that in the 12 months ended in October 2015, 3M bracelets produced 612,492 violation alerts in Massachusetts—more than 50,000 per month, from about 2,800 individuals wearing the devices. Almost 40 percent of the alerts were due to a device 1994 LLC, known as STOP, FIG. 5 was illegal. After more than two years of litigation, the parties reached a settlement. The terms haven’t been disclosed. In 2014, 3M won a contract in New Zealand worth a reported $80 million. Within a year dozens of offenders had been able to cut off the devices, including some who went on to commit serious crimes. After 3M replaced the straps with supposedly stronger ones, a man cut through a new strap with scissors on a TV news broadcast. New Zealand’s prime minister called the situation “ludicrous.” 3M says the company’s bracelets are designed to be cut off in emergencies. In Germany, a report co-funded by the Criminal Justice Programme of the European Union concluded that the 3M software used for the country’s electronic monitoring devices was “too inaccurate” and resulted in “false alarms or false zone transgressions.” The report also found that in 2014, “a firmware installation error on behalf of 3M resulted The U.S. military’s GPS system is completed. The government affirms that it will be available for commercial use. not being able to connect to the network or the GPS not being detected. Roughly 1 percent of alerts resulted in an arrest warrant being issued. Tom Pasquarello, former director of the electronic monitoring program for Massachusetts, estimates that half those warrants were potentially based on faulty or incomplete data. That would be roughly 3,000 warrants. “There were people that were pulled from their house in the middle of the night, that lost their kids, people that lost their job,” he says. The problem of glitchy ankle monitors became so pronounced that the Massachusetts probation department set up an afterhours office in the lobby of a Boston police station so offenders could bring in their bracelets when problems occurred or batteries died. In August 2015, Massachusetts Superior Court Judge Heidi Brieger became so frustrated with the devices that she vowed to stop sentencing anybody to them. “It is simply administratively improper to run a system in this fashion,” she said, according to a court transcript. “We don’t lose liberty in this country because somebody’s software is not working. It just isn’t right.” Last May, nearly six years after entering the business, FIG. 5: GPS SATELLITE ARRAY. FIG. 6: PRO TECH MONITORING’S DATA CENTER IN PALM HARBOR, FLA. FIG. 7: THE BUDDI US ANKLE MONITOR FROM TOP: SCOTT KEELER/TAMPA BAY TIMES/ZUMA PRESS; COURTESY NASA 48 In 2011 the California Department of Corrections and Rehabilitation began conducting a series of field tests on 3M’s devices as part of a search for a single contractor to electronically monitor 8,000 parolees. Even though 3M came in as the lowest bidder, at $23.2 million, corrections officials notified the company that it lost the bid “due to its GPS equipment failing” to meet state requirements, according to court records. Among other things, the state found that the device too often failed to obtain a GPS signal, was unable to map offender locations accurately, frequently ran out of battery power, and was easily manipulated by wrapping the device in foil. 3M sued, saying the awarding of the contract to Houston-based Satellite Tracking of People in all active GPS-trackers being shut off simultaneously.” But nowhere have the deficiencies of 3M’s monitors been as acute as in Massachusetts. One of the most serious flaws with the 3M device, according to numerous law enforcement officials and attorneys, was that it was originally designed to work only on T-Mobile and AT&T 2G networks, and it became even less reliable as carriers upgraded their networks to 3G. Because it wasn’t designed to work with Verizon’s network, offenders were left wearing a state-sanctioned monitoring anklet that couldn’t communicate on the network FIG. 6 of one of Massachusetts’ largest and most effective wireless providers. If an offender’s device was unable to connect to a network, that would trigger an alert. These “THERE WERE PEOPLE THAT WERE PULLED FROM THEIR multiple calls a night from probation officers because the unit would lose its signal, she says. At around 2 a.m. on March 4, Nelson answered a knock at the door and found two police officers. “They said, ‘We have a warrant for Tyler’s arrest,’ ” she recalls. The officers woke her son, handcuffed him, and booked him into the Ash Street Jail in New Bedford. The state of Massachusetts says an alert was generated because Holdsworth had earlier entered an exclusion zone. The next day he was found hanging in his cell. “I believe that killed my son,” Nelson says. “Everything the bracelet put him through.” The electronic monitoring business has proved perilous even for companies with deep roots in corrections. Many of the bracelets on the market can be slipped off without detection. Some offenders will risk triggering an alert by cutting it off, or they’ll wrap it in aluminum foil to mask OF THE NIGHT, THAT LOST THEIR the GPS signal. Hackers can “spoof ” a monitoring device— cause it to report that the wearer is one place when he or she is actually somewhere else. But the most vexing issue is the unmanageable number of alerts. Officers don’t want KIDS, THAT LOST THEIR JOB” to be too lax in responding to them, because any given alert might be the signal that the offender is committing a crime. But they don’t want to respond so frequently that it becomes a nuisance to the offender or a civil liberties violation. There’s also the concern that the sheer volume of alerts emboldens criminals, who might know that author3M began rolling out a new ankle monitor, the ities struggle to distinguish meaningful alerts Tracking Device 4, or TD-4. It’s designed to be from noise. 2010 compatible with multiple cellular networks, Many of the most innovative attempts to including Verizon’s, and has better battery life 3M enters the business. improve location accuracy and bring down the and improved location accuracy. 3M’s Eby says the frequency of violation alerts come from smaller company moved as quickly as it could. “Virtually companies. Buddi US LLC, run by Steve Chapin, everything we make, we have a reputation for who was the CEO of Pro Tech when 3M bought the the highest quality and always standing behind company and stayed with 3M’s electronic moniour products,” he says. “It also means, unfortoring division for two years, sells a bracelet that people worldwide have tunately, we test, test, double-test, triple-test worn 3M ankle bracelets. remains charged for as long as five days and in before it goes out the door.” The product rollout some instances can track the wearer underground. in Massachusetts was completed in December; Buddi recently signed a contract with the governthe state says 91 percent of the units in the field are TD-4s. ment of Colombia. Other companies have started using cell Probation Commissioner Edward Dolan says he’s pleased phones as a GPS-tracking platform, combined with Bluetooth, with the new product. Before the upgrade, he says, “I remote video, biometrics, or voice recognition to verify a percouldn’t distinguish whether an unable-to-connect was son’s identity and location. Eby says it’s one thing to develop a whiz-bang new techyou affirmatively doing something to disrupt the signal, or it really was a signal issue. Now unable-tonology and another to scale it, sell it to a connect is a nonissue, and only every once government agency, and place it on thouin a while we have one.” The agency says sands of people who want no part of it. “If FIG. 7 unable-to-connect alerts have fallen to less the standard is you only want to use technolthan 2 percent of all alerts and resulted in ogy that has no limitations in terms of celluonly eight arrest warrants in February. lar connectivity and GPS, you’re not going to be able to have electronic monitoring at And yet Tyler J. Holdsworth was wearing a 3M bracelet when he died. Holdsworth, all,” he says. “There’s not a technology that who’d been a student at Franklin Pierce will always stay connected to cell networks University, was ordered by the Massachusetts and will never have a GPS problem.” Superior Court in 2015 to wear a 3M ankle Other people say that doesn’t sound 2017 monitor until he could face trial for rape like a great American innovator talking, Monitoring companies charges. (He denied the charges.) He encounnot with stakes this high. “Every business now incorporate tered constant technical malfunctions, including Bluetooth, remote video, has hiccups,” says George Drake, a former corrections officer and president of consultat least one that resulted in him being jailed. “He biometrics, and voice had to walk around the neighborhood for three recognition to verify a ing firm Correct Tech LLC in Albuquerque. person’s identity hours because they couldn’t locate him,” recalls his “But when it happens with an offender-trackand location. Buddi US mother, Cynthia Nelson, of South Dartmouth, Mass. ing company, the consequences are magnified. has a bracelet He quit a warehouse job because the monitor If these people were making shoes, it wouldn’t that can track in some couldn’t locate him inside, and he often received have made a difference to anybody.” subway stations. HOUSE IN THE MIDDLE COURTESY BUDDI 200k 49 DANGER By Paul M. Barrett THE F-35 FIGHTER JET HAS SENSORS THAT SEE ENEMIES OVER THE HORIZON, A VR-STYLE HELMET FOR ITS , AND DONALD TRUMP’S ULL ATTENTION. IT ALSO MIGHT BE A TRILLIONDOLLAR MISTAKE ZONE The ambition to create the version of the F-35 that I watched on the tarmac at Patuxent River—one that can make short takeoffs and vertical landings—was what got the fighter jet’s development under way in the 1980s. The Defense Ad v a n c e d Re s e a r c h Projects Agency (Darpa), the Pentagon’s tech arm, began working at the Marine Corps’ behest on an improved version of the Harrier, a crash-prone vertical-landing jet of British design. According Lockheed CEO Hewson to a Pentagon history of the F-35, Darpa quietly sought assistance from a research and development arm of Lockheed Martin known as the Skunk Works. By the early 1990s, the Darpa-Skunk Works collaboration had produced preliminary concepts, and the Marine Corps began pressing Congress for funding. The Air Force and Navy insisted that they, too, needed stealthy, supersonic fighters to replace aging Cold War-era models. Out of this clamoring grew a consensus that the only way to afford thousands of cuttingedge fighters was to build a basic model that could be customized for each service. “In terms of future tactical aircraft, this was the program,” says Frank Kendall, a senior Pentagon acquisition official during the Clinton and Obama administrations. “There was no other program.” In 2001 the Pentagon declared Lockheed the winner of a five-year competition against Boeing Co. for the opportunity to build the F-35. At the time, the contract was estimated to be worth $200 billion over three decades. Lockheed, which is based in suburban Bethesda, Md., not far from the Capitol and Pentagon, would assemble the plane in Fort Worth, in a milelong facility that’s produced military aircraft since 1942. In addition to the Marine Corps F-35B vertical-landing jet, Lockheed agreed to manufacture the Air Force F-35A, which would take off and land conventionally, and the Navy F-35C, designed for aircraft carriers, with larger, foldable wings, more durable landing gear, and a tailhook. Not only was the F-35 going to offer a 3-in-1 cost savings for the U.S. military, the plane was supposed to help knit together the air forces of 11 American allies—including Britain, Israel, Japan, and South Korea—that have lined up to buy it. But this one-size-fits-all promise quickly led to problems. For the F-35B, the Marine Corps variant, Lockheed incorporated a novel propulsion system with a 50-inch-diameter “lift fan” positioned horizontally just behind the cockpit. When the plane goes into vertical mode, doors on the fuselage open, allowing the fan to draw in air from above and blow it toward the ground. Simultaneously, the plane’s main engine in the rear swivels 90 degrees to expel its exhaust downward. The combined force of fan and engine allows the plane to hover. The lift fan made the common fuselage bulkier than it otherwise would have been. That, in turn, increased drag and decreased fuel efficiency and range. Lockheed engineers also discovered they had to slim the F-35B by thousands of pounds to make it light enough to hover. The degree of commonality among the three versions of the F-35—the shared features—turned out to be not the anticipated 70 percent but a mere 25 percent, meaning that hoped-for economies of scale never materialized. A pattern of continual reengineering resulted in billions of dollars in cost overruns and yearslong delays. Beginning in 2007, the Pentagon accepted delivery of scores PREVIOUS SPREAD: COURTESY U.S. AIR FORCE; THIS SPREAD: COURTESY LOCKHEED MARTIN; ILLUSTRATION BY 731 52 pointy-beaked F-35B Lightning II idles noisily on a runway at Naval Air Station Patuxent River in southern Maryland. Suddenly the plane roars to life and sprints a mere 300 feet before abruptly lifting off and soaring into a cloudless, late-winter sky over Chesapeake Bay. A while later it zooms back into view, slows to a hover over the runway like a helicopter, then drops straight down to the concrete, where it lands with a gentle bounce. A U.S. Marine Corps test pilot is manning the controls. If he were Air Force or Navy, his version of the military’s highly anticipated new fighter jet wouldn’t have this capacity to take off and land on a dime— though it would come with other custom features. This is why Air Force Lieutenant General Christopher Bogdan, who’s in charge of overseeing the acquisition of the F-35, brought three plastic models of the fighter jet to a December 2016 meeting with Donald Trump at his Florida residence. Bogdan, a tall former test pilot who speaks in a raspy, authoritative voice, has been working with Lockheed Martin Corp., the plane’s manufacturer and the country’s largest defense contractor, since 2012. Nine days before their meeting, Trump had called Bogdan’s program “out of control” in a tweet, so the threestar general knew that at Mar-a-Lago, the president-elect would put him on the spot. But what he didn’t anticipate was Trump’s eagerness to demonstrate his own knowledge of aviation. Trump talked with pride about his personal Boeing 757, Bogdan says. “Anything about airplanes, he’s excited about, and he told me that the first time we met.” Amid the gold-inlaid, high-ceilinged splendor of the Jazz Age château in Palm Beach, Bogdan explained the F-35’s advanced sensor system and stealth capability. Trump listened respectfully, but the next day he was back on Twitter, complaining about the plane’s “tremendous cost and cost overruns.” To Bogdan’s continued surprise, in the days before the inauguration, Trump twice telephoned the general at his office in an austere Pentagon annex in Arlington, Va. He wanted to discuss the allegations he’d heard that the F-35’s performance fell short of existing fighters. Bogdan hastened to reassure Trump that those claims were “myths,” “misinformation,” or “old information”—none of them worth believing. On Jan. 30, his 10th day as president, Trump markedly changed his tone. He took credit for knocking $600 million off the price of the latest batch of 90 fighters and told reporters the F-35 was “a great plane.” Since then, he’s made the F-35 an emblem of his dealmaking prowess. During his Feb. 28 address to a joint session of Congress, the president boasted he’d “saved taxpayers hundreds of millions of dollars by bringing down the price of the fantastic new F-35 jet fighter.” In truth, thanks to Bogdan’s negotiations with Lockheed, prices were going to fall with or without Trump’s intervention. And the plane, discounts notwithstanding, is still on its way to becoming the priciest military procurement in U.S. history. Trump’s self- congratulation serves as a distraction from the larger issue troubling the fighter jet: its performance. While the Pentagon’s official line is that, after years of difficulties, the F-35 is meeting high expectations, skeptics both outside and within the military say it’s turning out to be a two-decades-inthe-making, trillion-dollar mistake. of planes, even as Lockheed continued to make design changes and address myriad deficiencies. The military “didn’t follow the old rule of ‘fly before you buy,’ ” says Michael Sullivan, director of defense acquisition oversight for the Government Accountability Office, the auditing arm of Congress. Once new weapons are in the hands of the military services, says Kendall, the former Pentagon acquisition official, “there’s a lot of inertia to continue, no matter what.” Michael Rein, a Lockheed spokesman, declines to comment on what he calls the “ancient history” of this period. The arrival of the Obama administration in 2009 brought new scrutiny to the F-35 program. Ashton Carter, a physicist and former Harvard professor of science and international affairs, took over as the Pentagon’s chief weapons buyer, known formally as undersecretary of defense for acquisition, technology, and logistics. (He went on to serve as secretary of defense in 2015 and 2016.) The dysfunction startled Carter. What was supposed to have been an economical plane at $50 million apiece had doubled in price, he recalled in a talk at Harvard in 2014. Part of the problem stemmed from a policy instituted in the mid-1990s aimed at reducing red tape. “This was a notion of trying to skinny down the acquisition bureaucracy,” says retired General Norton Schwartz, who served as Air Force chief of staff from 2008 to 2012. “In doing so, we regrettably lost much of the systems engineering ability that existed in-house.” The “cost plus” contracts the Pentagon signed with Lockheed HOW THE F-35B LANDS VERTICALLY Doors open to draw air into the lift fan Relatively small wings cut down on weight to ease landing The engine nozzle turns down 90 degrees to allow the plane to hover and descend only exacerbated the situation. The company received all its costs and was eligible for a performance-based bonus on top of that. Despite the program’s disarray, the military consistently awarded Lockheed 85 percent of its potential fee. In his Harvard talk, Carter described confronting the Pentagon program manager, a Marine Corps major general named David Heinz: “He looked me in the eye—I’ll never forget it—and he said, ‘I like the program manager on the Lockheed Martin side that I work with, and he tells me if he gets less than 85 percent, he’s going to get fired.’ ” Instead, it was Heinz who was fired, in 2010. Carter switched the Lockheed contract to a fixed-price arrangement under which the government and contractor split the cost of overruns. Carter declines to comment for this article, but confirms his earlier account. (Heinz, now chief executive officer of IBC Advanced Alloys Corp., an Indiana-based company that supplies Lockheed with the housing for one of the F-35’s targeting systems, also declines to comment, as does Rein, the Lockheed spokesman.) With the program about seven years behind schedule, the Pentagon estimates it will spend $379 billion over 40 years to develop and acquire more than 2,440 of the warplanes. Adjusting for inflation, that’s a 38 percent increase from the initial 2001 estimate. Add more than $600 billion for upkeep, and the total price tag approaches $1 trillion. But the aircraft has already paid off for Lockheed. Having delivered 210 F-35s so far—mostly to the Pentagon, but also to Israel and other privileged U.S. friends—the company is expected to derive more than 20 percent of its revenue in 2017 from the jet. For all its stumbles, the plane’s geographic and political heft make it too big to fail. The three versions of the plane require a total of some 300,000 parts, and Lockheed has parceled out the subcontracting to all but five unlucky states—Alaska, Hawaii, Louisiana, North Dakota, and Wyoming. Lockheed says the F-35 directly or indirectly supports 146,000 jobs across the U.S., ranging from minimum wage broom-pushers to engineers paid well into six figures. Consider Arizona. In December 2011, Republican John McCain, the state’s senior U.S. senator and chairman of the Armed Services Committee, went to the Senate floor to declare that the F-35 program “has been both a scandal and a tragedy.” But less than a year later, the lawmaker, himself a former Navy pilot shot down over Vietnam, sounded mollified. The Marine Corps had decided to base a squadron of 16 early-production F-35Bs in Yuma, Ariz. Joining Lockheed executives and Marine Corps officers, McCain said at a dedication ceremony: “I am—after many years of frustration and setbacks—encouraged that the overall program is moving in the right direction.” The F-35, he added, “may be the greatest combat aircraft in the history of the world.” In addition to maintenance jobs at the Yuma base, the plane provides work for 24 subcontractors in Arizona, supporting a total of 4,620 jobs, according to Lockheed. Across the country in Vermont, the independent Senator Bernie Sanders has disparaged the F-35 in the Burlington Free Press as an example of the Pentagon’s “long record of purchasing weapons systems from defense contractors with massive cost overruns that have wasted hundreds of billions of taxpayer dollars.” Nevertheless, Sanders has 53 endorsed the idea of bringing 18 of the fighters to Burlington International Airport in 2019 to replace a squadron of aging F-16s flown by the Vermont Air National Guard. In the face of local opposition to noise and other environmental objections, Sanders said at a town hall meeting in 2014: “My view is that given the reality of the damn plane, I’d rather it come to Vermont than to South Carolina. And that’s what the Vermont National Guard wants, and that means hundreds of jobs in my city. That’s it.” Lockheed says the jobs total in Vermont will exceed 1,400. South Carolina won’t lose out: There’s a squadron of F-35s stationed at the Marine Corps air base in Beaufort. There are also detachments in California, Florida, Maryland, Nevada, and Utah. 54 Since Lieutenant General Bogdan took over the F-35 acquisition program five years ago, by all accounts he’s kept it from going further off the rails. A blunt, informal officer who leads a 2,000-person bureaucracy devoted exclusively to the F-35, Bogdan wears an olive one-piece flight suit to his office in suburban Virginia. He explains that the F-35’s stealthy profile and matte finish are designed to allow it to succeed against foes with sophisticated radar and surface-to-air missiles—the Chinese or Russians, for example. “You’re the guy who’s going to knock down the door by going very deep into enemy territory, survive, and go against the very toughest threats,” Bogdan says. When in stealth mode, the F-35 carries only two bombs and two airto-air missiles in an internal weapons bay. But once the opposition’s defenses are eliminated, the plane can be outfitted with six additional weapons, three beneath each wing. “I can go and wreak a lot of havoc,” Bogdan says. He points to a three-week aerial exercise in February called Red Flag, which pitted dozens of U.S. warplanes against one another in mock battle over the Nevada desert. The F-35s, the stars of the show, recorded a 20-to-1 kill ratio, meaning they took out 20 opposing planes for each one they lost. And they dropped 51 practice bombs, with 49 direct hits—a level of accuracy Bogdan calls “incredible.” Other military leaders share his enthusiasm. “We can’t get into those aircraft fast enough,” Lieutenant General Jon Davis, the Marine Corps’ aviation chief, told a House Armed Services subcommittee in mid-February. “We have a game changer, a war winner, on our hands.” The F-35, in one of its most futuristic advancements, projects flight data—airspeed, altitude, heading, potential targets, and warnings—onto the curved visor of the pilot’s helmet. It’s almost a virtual-reality experience, pushing the skills of even today’s Xbox-weaned twentysomethings. Six infrared cameras mounted on the exterior stream real-time imagery, allowing the pilot to “see through” the skin of the plane, including straight down. In a process called “sensor fusion,” the main onboard computer can meld data from the exterior cameras, the plane’s powerful radar, and an “electro-optical” targeting system. “It’s always looking in every direction,” says Major John Dirk, a Marine Corps test pilot. The visor’s profusion of images and information takes getting used to, he adds, but “I can see threats I wouldn’t have been able to see before.” Some experts warn that test flights and mock battles are different from the real thing—and that the military’s enthusiasm should be viewed skeptically. “It’s groupthink,” says Pierre Sprey, who worked at the Pentagon during the Vietnam War. He belonged to a clique of aeronautical designers and engineers who called themselves the “fighter mafia” and helped design two respected aircraft: the F-16 Fighting Falcon, a maneuverable specialist at air-to-air duels, and the heavily armored A-10 Thunderbolt II, better known as the Warthog, which supports ground troops by flying low and slow, strafing the enemy with a seven-barrel Bogdan at Nellis AFB in Nevada in 2015 30-millimeter Gatling-type autocannon. “The F-16 and A-10 each do one thing well,” Sprey says. The Marine Corps’ “obsession” with short takeoff and vertical landing, he says, led to F-35 attributes that limit the plane’s maneuverability—the stout fuselage, which increases drag, and small wings, which cut weight but reduce the amount of lift the plane can generate. If F-35s “face the best Chinese or Russian fighters, they will be lucky if they can turn and run,” he adds. One could question Sprey’s objectivity, given that the F-35 is intended to put his creations, the F-16 and A-10, into retirement. Not so J. Michael Gilmore, who served from 2009 to January 2017 as the Pentagon’s director for operational test and evaluation—the military’s chief weapons tester. Gilmore, who has a Ph.D. in nuclear engineering, warned in a memorandum to the Air Force last August that the F-35 will need support from other planes “to locate and avoid modern threats, acquire targets, and engage formations of enemy fighter aircraft due to outstanding performance deficiencies.” According to Gilmore, the sensorfusion system fails to display some potential threats clearly, and the plane’s electronic warfare capability—a reference to classified radar-jamming weapons—is weak. In a separate 2016 annual report released in January, Gilmore addressed the F-35’s protection of soldiers on the ground, saying the plane “does not yet demonstrate close air support capabilities equivalent to those of ” the A-10 and other older aircraft. He cited the F-35’s limited weapons load while in stealth mode. The F-35 burns fuel fast, making it difficult for the jet to circle above a battlefield for long, Gilmore wrote. And he pointed out that test pilots aren’t unanimously enthusiastic about all aspects of the newfangled helmet. “Symbol clutter,” he wrote, obscures the visor representation of air-to-ground strafing, making that function unusable. Perhaps most troubling are the complexities of the autonomic logistics information system (ALIS), which hooks up to the plane in the hangar and provides the information technology backbone for maintenance of each aircraft. ALIS requires 16 million lines of code, compared with 8 million for the F-35 itself. When ALIS malfunctions, which it does somewhat regularly, maintainers have “to use time-consuming workarounds,” Gilmore said. Last April the GAO pointed out that all F-35 data from across the U.S. fleet are “routed to a central point of entry and then to ALIS’s main operating unit with no backup system or redundancy. If either of these fail, it could take the entire F-35 fleet offline,” threatening to ground the planes. FROM LEFT: COURTESY U.S. AIR FORCE (2); COURTESY U.S. AIR NATIONAL GUARD Lockheed’s Rein declines to comment on Sprey’s assessment. As for Gilmore’s critique, the Lockheed spokesman refers to a Jan. 17, 2017, written statement by Bogdan. “The basic design of the F-35 is sound,” it said, but “we recognize there are known deficiencies that must be corrected.” “This plane has a long way to go before it’s combat-ready,” says Dan Grazier, a defense analyst at the nonprofit Project on Government Oversight in Washington. “Given how long it’s been in development, you have to wonder whether it’ll ever be ready.” In an interview, Bogdan responds to criticism of the F-35 with equanimity. He stands by the overall reassurance he offered President Trump but concedes the plane has kinks to be worked out. ALIS, he says, “is nowhere near as good as it should be,” and upgrades are under way, including building in the kind of redundancy the GAO noted is absent. Meanwhile, he acknowledges, F-35 maintenance personnel do have to “do a lot of workarounds.” Bogdan also worries that ALIS could be hacked. The planes themselves have been well-secured against cyberattack, he says, but ALIS connects to other government networks that are potentially vulnerable. This isn’t an abstract concern. A Chinese businessman pleaded guilty last year in the U.S. to participating in a conspiracy with hackers from the Chinese military who prosecutors said stole plans for the F-35 and other American warplanes. Beyond ALIS, Bogdan says the other sensor and software glitches Gilmore and the GAO identified are being addressed and will soon be fixed. The knock on the F-35 that it’s not maneuverable obscures a basic point about contemporary aerial warfare, Bogdan says: Up-close dogfighting is a thing of the past. “This airplane is very maneuverable,” he insists, “but it doesn’t have to be to kill another airplane air-to-air.” Its sensors can identify a foe long before the two pilots can see each other—and fire a missile with deadly accuracy at that distance, Bogdan says. By contrast, close air support of ground troops presents “a tricky question,” he says. The F-35 “doesn’t have all the capabilities it needs yet.” One feature that will be added to new planes—and retrofitted on older ones—is the equivalent of a laser pointer for tracking g moving targets. Currently the F-35 has a surprisiing weakness in its inability to zero in on swift-moving i g enemy vehicles, Bogdan says. Only F-35As hav ve inter-nally mounted 25mm guns for ground strafing g; in the future, similar weapons will be added in ext xternally y mounted belly pods on Bs and Cs. “When peop ople e are complaining about close air capability of the F-35,” he says, “they’re looking at what it can do today, and what it can do today is limited. What it can do tomorrow is going to be very, very good.” But not as good, he admits, as what the venerable A-10 already can do. “We designed the F-35 to be a decathlete,” he explains: versatile and adaptable, if not necessarily a medal winner in any one event. Grazier frames this another way: “You have a plane that at best is a jack of all trades, master of none.” On Feb. 3 the White House announced an $8.2 billion contract with Lockheed for 90 F-35s, the latest and largest batch yet. Based on a per-plane cost for the F-35A of less than $100 million, the deal trimmed $728 million from the last purchase. That savings exceeded the $600 million Trump took credit for after intervening with Lockheed CEO Marillyn Hewson. Since late last year, Hewson has met with Trump at Mar-a-Lago, Trump Tower in New York, and the White House. But long before Trump began meeting, tweeting, or calling Bogdan about the plane, negotiations between the Pentagon and Lockheed were pointing to a significant volume discount. Bogdan told reporters in December that the contract would be valued at about $8 billion overall and that per-plane costs would decrease—both of which happened. The president has balanced his praise for the plane with the admonition that Lockheed shouldn’t get too comfortable. He’s warned that he’d consider substituting some F-35 purchases with Boeing F/A-18 Super Hornets. During a Feb. 17 tour of a Boeing plant in South Carolina, he said, “We are seriously looking at a big order” of F/A-18s. Lockheed’s rival as the second-biggest U.S. weapons contractor, Boeing has naturally tried to encourage Trump’s interest in the Super Hornet. “We’re excited to work with the new administration to bring the right capability to the war fighter,” says Dan Gillian, who heads the company’s fighter jet program. First flown in the 1990s, the twin-engine F/A-18 has seen action over Iraq and Afghanistan. It’s not really comparable to the F-35. The Super Hornet, which is designed to fly off aircraft carriers, lacks the F-35’s stealth characteristics and its array of advanced sensors. Still, the president wants Lockheed and the Pentagon to know he’s in touch with Boeing’s CEO, Dennis Muilenburg. When Trump telephoned Bogdan for the second time, on Jan. 17, Muilenburg was in Trump’s New York office listening in by speakerphone. Bogdan says he didn’t think Muilenburg’s presence was inappropriate: “The things I talked about in front of Mr. Muilenburg were clearly publicly releasable information. I understand the rules.” (In mid-March, Trump selected a senior Boeing executive, Patrick Shanahan, to serve as the Pentagon’s second-ranking official. If confirmed by the Senate, Shanahan would have to recuse himself from Boeing-related matters for two years.) m Formalizing Trump’s fighter jet commentary, Secretary y of Defense James Mattis has o ordered a Pentagon “review” of th nt to which the F/A-18 the exten c ld “prrovide a competitive, could ffective fighter aircraft cost-effe l ative.” But the review alterna doesn’t constitute an existential threat to the F-35. Mattis limited the F/A-18 comparison to the The F-16 (left) and the A-10 Navy’s F-35C carrier-based model. The Navy is scheduled to receive only 260 of its version of the fighter, with the majority of planes—1,763—slated for the Air Force. Lockheed’s Hewson has become something of a Trump foil. At a Feb. 23 White House meeting with manufacturing CEOs, the president complimented her—and himself. “She’s tough, but it worked out well, I think, for everybody,” he said of the recently agreed-upon Lockheed contract. “She cut her price over $700 million, right? By over $700 million. Do you think Hillary would have asked for $700 million?” Bogdan, who’s announced he will retire in the coming months, is already negotiating the next order of 130 F-35s. He expects the total price to exceed $10 billion. Looking further into the future, beyond the F-35, Lockheed’s Skunk Works is again collaborating with Darpa on what the company’s website heralds as “next-generation” planes that will “maintain U.S. air dominance capabilities in the post-2035 world.” 55 56 57 58 or two days, the crowd sits in darkness in plush theater seats, watching the church stage. There are smoke machines and LED screens, harnessed climbers scaling a scaffold “mountain” and raising their arms in symbolic victory over the startup world’s arduous climb. There’s talk of destiny-defining “exits.” Of Jesus and his disciples: “The most successful startup in history!” Of the parable of the talents, in which two servants are lauded by their master for turning a profit with money he staked them: “The first recorded instance of venture capital and investment banking in history!” Of ancient business elites: “A church is the oldest marketplace in the history of the world.” Of the promised land of angel investing, where divinely inspired entrepreneurs dwell: “Because God creates things, too!” Mark Burnett, the producer of The Apprentice and Shark Tank, shows up to remind everyone that “the Bible is full of merchants and people doing work.” At last, near the end of Unpolished 2015, a faith and entrepreneurship conference hosted by Crossroads, an evangelical church in Cincinnati, the marquee event begins: the final round of a pitch contest. Organizers have selected three prospective company founders out of more than 100 entrants, each of whom submitted a minute-long video pitch deck. One of the finalists, Lyden Foust, a 25-year-old ethnographer, presents his entry on the LED screens flanking the church stage. With his chiseled jawline, tightly trimmed beard, and three-button henley, he looks like an L.L. Bean model, save perhaps for his rectangular glasses. In a voice-over, he describes his vision to divide the world’s cities by “vibe,” calling his idea “Google Maps wearing a mood ring.” The cityscape of Nashville rolls past, overlaid in swaths of color: blue for blue-collar neighborhoods, brown for yuppie ones, green for hipster, purple for commercial, teal for family, yellow for artsy. Th accelerator The l and, d across the h street, the h church h h Every successful pitch deck, like every successful religion, includes an origin story, and Foust’s is no different. He recounts booking a place in Nashville through Airbnb Inc., only to find the house situated between a strip club and a manufacturing plant. While retrieving something from his car, he turned to see a man pointing a gun at his face. “I just handed him my wallet,” Foust says. The robbery led to an epiphany: Why not mine social data to tell people what a neighborhood is really like? The idea isn’t entirely new: An app that launched in 2014 with a similar aim (albeit a different crowd-sourcing methodology), SketchFactor, foundered after being widely criticized for appearing to help white people avoid black neighborhoods. But at this point, Foust’s product is pure concept. He has no employees to build it, only a name, Spatial. The other finalists pitch a family-run app-development company and a boardgame-rental app; then the judging is turned over to the audience of 1,200 aspiring entrepreneurs. Foust’s idea prevails, and Brian Tome, Crossroads’ senior pastor, hands him an oversize check for $3,000. Soon after, Foust will begin the next stage of the church’s path to entrepreneurial success, applying for a spot in a member-funded, Bible-based accelerator program, beginning in a few months, that’s designed to train startups in how to raise money and grow. Finally, the house lights come up. At the end of the aisles, attendants await, holding pails overflowing with packets of apple seeds. “God’s placed a seed in you. And he wants to see it come to fruitfulness,” Tome says to the crowd, his spiked and styled dirty-blond hair and untucked plaid shirt lending him the air of an aging film star. Bowing his head, he prays, asking God to lead everyone to “the right seed that will bring forth the right fruit at the right time in every business.” It’s a remarkable altar call: Those who feel inspired are to take these seeds from the attendants and go forth, claiming their spiritual destinies … as entrepreneurs. At the edge of the waist-high stage, people mingle, hugging and holding hands. Others bow their head or kneel under the outstretched hands of strangers to receive prayer. Foust joins them, walking down the aisle and asking for blessings and prayers at the start of his entrepreneurship journey. amed the fastest-growing church in America in 2015, Crossroads has been described by the Cincinnati Business Courier as both an entrepreneurial church and a church for entrepreneurs. Indeed, it was originally a startup—or more accurately an unofficial spinoff from Procter & Gamble Co., the $65 billion conglomerate based downtown, a few freeway exits south of the main church. In 1990, Brian Wells, a brand manager for Clearasil, started a singles Bible study with a P&G power couple, Vivienne Lee Bechtold, then a brand manager in beauty care, and Jim Bechtold, a marketing executive. The group, which met at the Bechtolds’ home, quickly grew to more than 100 people. Eventually the singles started marrying and having children, and Jim Bechtold asked Wells one morning, while the two carpooled to work, whether it made sense to start a church. Over the next few months, a core of 11 people, some of whom had helped build billion-dollar consumer brands, reimagined church as one might expect P&G executives to do. (The company more or less invented brand management, and it’s been a prime breeding ground for business talent—Microsoft ex-CEO Steve Ballmer, Intuit’s Scott Cook, HP’s Meg Whitman, and GE’s Jeffrey Immelt, among many others, are all P&G alumni.) They gathered demographic data on Cincinnatians’ churchgoing habits, with a focus on the city’s affluent east side, which includes the P&G enclave suburbs of Hyde Park and Oakley. They scoured secular popular music and TV comedies for tips on how to keep churchgoers’ attention. They settled on a target demographic, 25- to 35-yearold males, figuring that if they could get the guy, they would get his wife. They wrote brand positioning statements—a church C ss Crossroads ds S Senior Pastor s Tome for friends who don’t like church; a church for people who’ve given up on church. Finally they built a slide deck featuring a mix of data and Scripture and began raising money from friends, family, and business connections. In the spring of 1996, Tome led Crossroads’ first official service, speaking before more than 450 people at a rented auditorium in a local junior high school. Five years later, its rolls swelling, the church purchased a vacant big-box store, using the homes of some senior leaders as collateral. Crossroads spent millions converting the space into a 3,500-seat auditorium with two balcony tiers and enough stage lights to rival a Broadway theater. Today, the church has nine locations in the greater Cincinnati area (with another opening soon), some 30,000 congregants, an annual operating budget of $33 million, and a staff of 274 people, many with ties to P&G. Among the employees is a 75-person “experience team,” the equivalent of an in-house advertising agency, whose branding efforts encompass direct-marketing campaigns, in-church clicker surveys, and customized stage sets aligned with sermon themes. The church also has a labs division—essentially a two-person market-research team led by a corporate brand ethnographer. Its eight satellite churches operate almost as franchises, all of them mirroring the main branch’s tailored signage and other brand imagery. Congregants all watch the same sermons, which are telecast from the main church to the satellites with a brief delay. Crossroads is even in the mergers-and-acquisitions game, having lately acquired (its officials prefer the term “adopted”) a church in Lexington, Ky., with 2,500 members and four locations. In recent years, Crossroads’ version of the prosperity gospel has begun to borrow from Silicon Valley’s. The church included the pitch contest at Unpolished 2015, its inaugural entrepreneurship conference, and that same year some of its members created a for-profit angel-investment wing, Ocean Capital, and the nonprofit Ocean Accelerator Inc., whose mandate is to “increase God’s presence in the marketplace.” Ocean Capital’s first fund, of $230,000, was seeded entirely by six Crossroads members. Ocean Accelerator got an early boost from Crossroads’ annual Beans & Rice Week, when congregants forgo regular meals in favor of beans and rice, then donate the savings to the church. Traditionally, the money goes mainly to fighting the city’s homelessness and heroin epidemics, but in 2015 the church put $120,000 toward the accelerator, a significant share of the program’s operating expenses. Selected entrepreneurs would embark on five-month residencies, and each startup would receive $25,000 from Ocean Capital. (The amount rose to $35,000 in 2016 and $50,000 in 2017.) Also included were free office space and access to dozens of spiritual and business mentors from the church’s membership rolls, a who’s who of Cincinnati’s—and America’s—corporate elite. ne rainy morning in February 2016, Foust and founders from eight other startups, some of them fellow Crossroads members, are gathered before a whiteboard for a talk called “Developing Intellectual Capital.” The speaker is Todd Henry, a longtime Crossroads member and motivational guru who promotes himself as an “arms dealer of the creative revolution.” Ocean Accelerator is across the street from the Crossroads headquarters, in a converted car dealership owned by the church. Among the participants in the accelerator’s second cohort are an app offering restaurant discounts, a social network for sports fans, a recruiting tool matching employees with companies according to cultural fit, a site connecting college athletes with high school students for personal training, and an online auction site for churches to sell used goods. Only one of the nine startups is solely headed by a woman, who’s from London. For a few weeks now, each team has been attending daily spiritual seminars and weekly Bible studies, working from long tables in an open-air room. They’re all preparing for Demo Day, a couple of months hence, when they’ll stand on the Crossroads stage and give five-minute pitches to an audience of venture capitalists and angel investors. With Foust at Ocean is Will Kiessling, a 35-year-old developer who left a job writing software for jet-engine tests at General Electric Co. to become a partner at Spatial (since formally renamed Spatial Labs). The two met years earlier at events in the city’s startup scene but only really got to talking after bumping into each other at church one Sunday. “Not only did we have this commonality of startups,” Foust says, “but we both loved Jesus.” Henry, dressed in a crisp white oxford and bluejeans, begins his talk by asking how entrepreneurs might turn thoughts into value. He cites Warren Buffett, who reportedly spends four to five hours a day reading, as someone who wrests profits from the market by analyzing what’s going on in the world. We have this ability, Henry says, “to co-create new things, to partner with God in transforming creation.” He points out that pattern recognition is crucial for a successful startup, as is understanding what he terms the law of the harvest: “Many of us, especially as entrepreneurs, we live in perpetual harvest mode, constantly trying to reap gain, and some of that is because our investors are telling us, ‘We want to see a return,’ ” he says. “The problem is when you are living in perpetual harvest mode, you aren’t taking the time to go back and plant seeds and cultivate seeds.” He calls on the entrepreneurs to see God as the source of wisdom and Jesus as a brilliant thinker with a “deep systematic understanding of life,” skilled in the practice of pattern recognition. This message resonates with Foust’s original concept for Spatial, which was, in essence, to identify social media and crime-data patterns to help people “navigate like a local” in unknown cities. But as the accelerator unfolds over the next three months, he runs into technical and ethical problems with 59 60 that goal. Early iterations of the service more than 1,000 people. He’s wearing compile a “heat map” of different areas jeans and a tight-fitting gray T-shirt in cities, using crime data on specific emblazoned with the Spatial logo—the neighborhoods in addition to social data. company name in a sans-serif typeface, The approach has clear racial impliwith the letters’ midsection blanked out cations; not only are the sweeps of by a horizontal bar—to pitch to 30 potencolor reminiscent of decades of redlintial investors. ing in black neighborhoods, the data The LED screen behind him displays might have integrated biases prevalent ominous, looping swirls of dark blue on social media into Spatial’s mapping ocean waves behind the Ocean logo. platform. After a few months, Foust The origin story he tells is familiar, but and Kiessling drop crime data comhe explains how Spatial’s model has pletely. “People were talking about not evolved, describing its patent-pending going to a certain part of a city because algorithm, Luminate, which he says it looked like there was a lot of crime will create a layer of social data around there. It made me realize that’s not what cities, or a “third dimension of maps.” I wanted people to do,” Foust says. Among its possible markets, he says, are More than the Bible, he credits Jane travel booking companies, who might Jacobs’s classic book The Death and Life pay for click-thrus to vacation rentals of Great American Cities for the insight. and other services. He suggests that Invoking Jacobs, he cites three quesSpatial could increase booking rates on Refreshments s s at the main church tions that best indicate neighborhood sites such as Airbnb and FlipKey, which safety: “Are there lights on the streets? Are there eyes on the he claims fail to turn 95 percent of their visitors into customers. streets? And does the community know each other? None of “Think of the millions they are leaving on the table,” he says. those things are in crime data. It wasn’t solving the problem.” In recent weeks, as Spatial has begun promoting its soluInstead, Foust concludes that people want something much tion, Foust tells the audience, 10 companies have started using simpler: quick and decisive answers about where to go. “They its data. These clients are mostly early stage startups, includcouldn’t care less about, ‘Is this an artsy area?’ It was less ing PoshPacker in Washington, D.C., a hotel-booking site that about experience and more about ‘Can you just get me to the targets people who want a “hip and high-end-like travel experight place, right now?’ ” rience.” Foust displays screen shots of maps from PoshPacker’s As the product takes shape and Foust prepares to move site: Areas popular with the LGBT community are highlighted from the concept phase to fundraising, a more explicitly spir- in puffs of purple. Orange puffs represent foodie zones. Foust itual question begins to nag at him: “How do you raise money says PoshPacker has doubled its conversion rate since deploylike Jesus?” Foust has attended Crossroads for five years, but ing the Luminate algorithm (though the company will later go his evangelical faith began when he was a child growing up in out of business). “The day of static maps is over,” he concludes. a devout household on a tree farm in Paris, a town in northThe others go through their pitches, and afterward everyeast Ohio. He’s heard from other entrepreneurs how brutal one gathers in another cavernous auditorium to drink craft fundraising can be. You’re going to have to sell your soul, beer with the investors. By design, no startup talks terms on they warn. You’re going to have to lie. Demo Day, says Scott Weiss, a retired corporate chief execuTo forestall this, he starts a reading group with five other tive officer who serves as Ocean Accelerator’s volunteer CEO founders. The book they choose is secular: Venture Deals: Be and chairman. “Our core approach is developing the capaSmarter Than Your Lawyer and Venture Capitalist, by Brad Feld bility and training them to raise money,” he says. But, Weiss and Jason Mendelson. For five weeks, every Friday afternoon, adds, “If you are a Christian and you want to produce in your the participants meet, discussing term sheets and the ins and faith, Ocean teaches you how to raise money in a Christian outs of investor control over startups. The book demystifies way and that there’s got to be an ethical standard to doing the process for the group, but it doesn’t help with the concern that. … We teach them to pick your investors with care and about integrity. After a few sessions, Foust decides that Jesus’ to be very careful, because you are going to be married a first words in the New Testament, from Mark 1:15, best address very long time.” his fears: “The time has come,” Jesus says. “The kingdom of God has come near. Repent and believe the good news!” or Crossroads, embracing the gospel of In the verse, Jesus has just been baptized, and he’s emerging Silicon Valley isn’t solely about money; it’s from the desert to begin his ministry. Describing the passage also about bringing the next generation into later, Foust invokes the Greek translation, interpreting “time” the church. Ocean Accelerator offers a way to not as chronos, chronological time, but as kairos, the “right reckon with two converging trends: growing or opportune moment.” The word for “repent,” he continues, anxiety about jobs and a decline in church means “to turn away from” or “to change one’s mind.” The attendance among young people. “Up until etymology leads him to a decidedly contemporary exegesis of the millennial generation, there was inherent the verse. “The kingdom of God was Jesus’ startup,” he says. faith in large corporations, social enterprises, and governments “A new future he was selling to people. And that’s the same to drive employment,” Weiss says. “But this millennial group thing I’m saying as a startup founder—a moment of time has has come along and said, ‘No, no. It’s actually my responsibilcome, and there’s a new future for us.” ity to create jobs.’ ” Buoyed by this insight, Foust arrives in April to present In his sermons, Tome, the senior pastor, frequently menat Demo Day. Following an early morning group prayer, he tions job growth and lionizes entrepreneurs. “A business strides onto the stage at Crossroads in front of an audience of endeavor is close to the heart of God and every bit as important as anything else on God’s green earth,” he recently preached. Sitting in the church lobby a few weeks later, he describes entrepreneurship as an ancient practice with Biblical roots. Jesus constantly used business metaphors in his parables, he says, and founded the “first multinational corporate entity.” The emphasis appears to be working: According to a survey Crossroads conducted in the fall, 43 percent of adults who’d joined the church in the previous two years were age 18 to 35. And the accelerator’s startup classes are showing some early financial promise. Fifteen of the 19 startups that have gone through Ocean in its first two years have survived, raising a combined $6 million and creating 66 jobs. In keeping with their goals of appealing to younger generations and tapping into the widest possible market, Weiss and the other officials are working to diversify their roster of startup founders. At the close of 2016, Ocean announced its next seven companies. Two of the startups are led by women, and four are international—one of these, Owl Labs, which is building a prosthetic hand that incorporates machine learning, is headed by three entrepreneurs from Sudan. These founders may soon have a larger investment pool from which to draw. Ocean Capital is planning this summer to raise $1.6 million for a new fund, its third. With the money, it will seed three more accelerator classes, keeping the program running until at least 2020. Crossroads is also increasing its commitment; having donated nearly a quarter of a million dollars to Ocean Accelerator for the program’s first two years, the church plans to give an additional $420,000 in 2017. (The money will also help cover the next Unpolished conference, which the accelerator is taking over.) Secular organizations are getting in on the action, too: the foundation of PNC Financial Services Groupis donating to the accelerator, and Fifth Third Bancorp is the lead sponsor of Unpolished 2017. n the months after participating in Ocean, Foust and Kiessling gain admittance to another accelerator, a highly competitive secular one, TechStars Mobility, in Detroit. The experience is much different: for one, they sleep on bunk beds in a house shared by founders from 12 other startups. For another, Foust later recalls, “God never came up.” The pace is breakneck: The first month, called Mentor Madness, requires the pair to talk with 150 different people about Spatial. The second month consists of dozens of sales presentations. By the time Foust takes the stage for TechStars’ Demo Day, following the third month’s arduous vetting process, Spatial’s business model has shifted yet again, to target the automobile navigation market. The work he and Kiessling have put in—fueled by the $120,000 stake they received for winning entry to the accelerator—pays off in a more polished product and presentation. The robbery anecdote remains, but the colored swaths are gone; instead, hexagons appear in response to a driver’s commands. A request for familyfriendly educational events, for example, produces teal hexagons and info on a museum show. A request for a bar with sunset views prompts a digital assistant to suggest a steakhouse on the 72nd floor of a skyscraper downtown: “Would you like me to route you there?” she asks. Then comes the big reveal: the Ford Motor Co. logo, filling an entire slide. Foust announces a partnership with the automotive giant, and the auditorium erupts in cheers. The news comes as Spatial is preparing to kick off its first fundraising round. Originally the plan is to raise $500,000, but the deal with Ford’s Smart Mobility subsidiary helps Foust’s company meet that target almost immediately, and more people want in. A few weeks on, in late September, I meet with Kiessling in a tiny conference room at Ocean, where Spatial is renting space temporarily. As we talk, he points to a clear-glass dryerase board where financial scenarios have been hashed out. “We raised more money and got more people to agree to give us money than we thought we could get,” Kiessling says. “Now it’s kind of like, we have to go back.” To let more people in, Spatial will have to dilute the equity percentages Foust originally offered, without giving up too much of his own equity— and control—in the process. “How do you negotiate that, and do that in kind of a biblical way?” Kiessling asks. Foust is away in Detroit, renegotiating the terms. He recounts later that things went smoothly: “Everyone unanimously said yes, because from an investor standpoint it was less risky.” At other points in the process, he says, “Investors offered us a lot of money, and they were in it for the money and not for our vision, and we had to turn down some money. We retained our vision, and we didn’t sell our soul and didn’t have to lie to raise money.” By the end of October, Spatial has attracted more investment—$1.8 million, including $190,000 from Ocean Capital—than any other Ocean Accelerator startup. Foust and Kiessling reopen the round one more time for two investors eager to get in on the ground floor, bringing the total raised to $2.1 million. A few months later, Spatial opens an office in Cincinnati’s Over-the-Rhine neighborhood, where many of the city’s startups are located, and hires three more employees. The company also has an office in Detroit; while there, Foust and Kiessling sleep on the same bunk beds they did over the summer. And Foust is flying regularly to Palo Alto, establishing a footprint for the company and meeting potential clients there. He won’t say what deals might be in the works, but the immediate goal isn’t to build Spatial into the next unicorn or make a lucrative exit. “I feel like now, even more so than before, I’m having to submit to God’s will, because it’s getting bigger and bigger. You think when you raise a bunch of money, you’d become more confident, but that’s not the case. It gets harder,” he says. “Now we have a bunch of people who believe in us and work for us, and we have to make sure they are taken care of as well.” —With reporting supported by the McGraw Center for Business Journalism at the CUNY Graduate School of Journalism Weiss, center, at an O Ocean Accelerator meeting 61 62 As the Trump administration evaluates bids to prototype a wall along the U.S.-Mexico border, topography will present as big a challenge as political opposition. Corralling often wild land beneath miles of concrete isn’t easy, as can be seen in these photos taken of a 55-mile stretch of fence in the Rio Grande Valley of South Texas between tiny Peñitas and Brownsville, the last major town before land gives way to the Gulf of Mexico. The actual border is formed by the Rio Grande. No barrier can be built in the middle of the muddy green waters, and the banks of the river are a flood plain governed by international treaty. The fence that’s here, a product of the U.S.’s 2006 Secure Fence Act, is a porous collection of concrete and steel barriers set as far as 2 miles north of the actual border and punctuated by gaps to allow access for the thousands of private landowners whose acreage runs to the river’s edge. Cordoned off from the rest of the U.S., these patches between the fence and the river have sprouted their own ecosystems. In border regions such as this one, which facilitate more than half a trillion dollars of trade every year, life must go on. Workers still harvest the crops, tourists still enjoy butterfly sanctuaries, and families still play with their children. —Lauren Etter North of the Border, By Kirsten Luce A U.S. Customs and Border Protection agent stationed outside a break in the fence on private farmland in Peñitas. Only some of these gaps, which occur about every quarter mile, are regularly manned. South of the Wall 1 2 64 1 Each morning undocumented laborers form a caravan of vehicles that travels to the south side of the wall, where they harvest crops—here spinach in Donna, Texas—before returning north at the end of the day. Border guards leave them alone to maintain good relations with landowners. Until the introduction of widespread irrigation in the late 1890s, this area was covered with wild cattle ranges and mesquite trees. 2 3 David Fox and his dog Jesse James hunt doves on private land owned by Damian Mathers in Brownsville. When building the fence, the government gave some landowners their own gates (the Mathers gate is in the background). On a busy work morning, traffic into the U.S. builds at a bridge (foreground) connecting Reynosa, Mexico, to Hidalgo, Texas. Vehicles heading south and pedestrians 3 4 65 4 take the other bridge. Some 6.5 million cars, 470,000 trucks, 40,000 loaded rail containers, and 16,000 buses crossed the U.S. southern border last year along the dozens of official crossings like this one. Ariana Rios (center), 8, of Mission, Texas, plays with cousins at Anzalduas Park south of the border wall. The public playground used to be open from sunrise until sundown but now closes at 5 p.m. because of a growing inﬂux of migrants ﬂeeing drug violence in Central America. They’re often ferried by the Zetas drug cartel, which controls the Mexican side of this border region, and usually end up here at night. The asylum seekers surrender themselves to agents and hope for a lawyer and protection. Border officials want the park cleared of townspeople to reduce confusion. Abram-Perezville, Texas. The Rio Grande ﬂoods seasonally. The wall reinforced existing levees. This extra ﬂood protection, paid for by the federal government, was the reason some locals signed on. 67 1 2 68 1 Border Patrol agents watch a car ﬁre in a ﬁeld south of the wall just next to the Anzalduas International Bridge. The agents had pursued the vehicle, which they believed was loaded with drugs. The driver attempted a “splashdown” into the Rio Grande, but the vehicle crashed, then burst into ﬂames. The driver ﬂed and made it across the river to Mexico. 2 3 Joel Contreras, a Hidalgo County deputy constable, closes a gate. Locked gates stop cars but aren’t much of a deterrent for people who simply walk up, over, and through them in a matter of seconds if no agents are around. Migrants line up alongside the Anzalduas International Bridge as they wait to be processed by agents from Customs and Border Protection. Because there has 3 4 69 4 to be some U.S. soil between the wall and the river, people from south of the border will always have a place to walk to for intentional apprehension. Last year 137,000 family members and unaccompanied children crossed the southwest border, up from about 80,000 the year before. Of those, almost all came from El Salvador, Guatemala, and Honduras. In a ﬁeld south of the border wall in Hidalgo, a Customs and Border Protection agent collects a ladder that had been camouﬂaged with green paint and discarded during a pursuit. Agents regularly dispose of ladders to keep them from being reused by other border crossers. TTEAM-BUILDINGGGGONE W O WRONG SOC S OK A STAND-UP SUMMER AS U SU SPORT S O SHARKS S S OF THE LENDINGG VARIETY t n i o P e Th Shoot d an born Re ra 6 came 1 L e h t esigned e smartphone d d l u o s th Fred B itous a u q i b u s Walker to be a By Rob Ortega s e s s y l yU raphs b g o t o h P Etc. Design A 72 fter more than a year of work, Rajiv Laroia was on the verge of a breakthrough. By the summer of 2014, with the help of five or so engineers, he’d developed a digital image-making system that could achieve the resolution, depth of field, and focus control of a clunky digital single-lens reflex camera (commonly known as a DSLR) in a device just a fraction of its size. At least that was the plan: Although they had the technology locked down, Laroia and his team still faced the daunting task of fashioning it into a product people would actually want to buy. Laroia, now 54, and his business partner, Dave Grannan, 53, envisioned a product that would look “more akin to a smartphone or tablet than a DSLR, or even a point-and-shoot,” Grannan says. The camera, which they dubbed the L16, was to be the first product from Light, the company they’d founded. Even more than the technology involved—16 tiny lenses acting in concert by means of a unique computational-imaging process— the real achievement would be to create a standalone camera compact enough to carry around. The team asked themselves, “What are other things that have done what we’re trying to do here—take something traditional that hasn’t changed in a long time and reboot it?” recalls Light’s senior vice president for marketing and product design, Bradley Lautenbach. That’s when they thought of Fred Bould. Bould’s biggest claim to fame is his work on the Nest thermostat, the revolutionary energy-saving smart home device that won raves from designers and users alike when it was released in 2011. Nest won the top award given by the Industrial Designers Society of America, and it was inducted into the permanent collection of the Cooper Hewitt Smithsonian Design Museum not long after Nest Labs, the company that made it, was acquired by Google Inc. in 2014. The eponymous founder of Bould Design BOULD DESIGNS Some of his firm’s many hits doesn’t have the name recognition of a superstar such as Apple Inc.’s Jony Ive or Swiss designer Yves Béhar, but his 10-person Silicon Valley company has become a go-to for entrepreneurs who dream of reinventing entire product categories. Bould, 53, is soft-spoken and bald, and his standard-issue chunky glasses and black T-shirt make him instantly recognizable as a designer with minimalist leanings. His father was a mechanical and electrical engineer, and though Bould earned a master’s degree in product engineering from Stanford, his true interest was in applying that knowledge to the design world. More specifically, he wanted to call the bluff of people who responded to his design ideas by saying they couldn’t be done. “What you mean to say,” he recalls wanting to tell them, his tone more dry than arrogant, “is that you don’t feel like doing the engineering.” Bould started his company in 1996, and in those days, software-obsessed Silicon Valley was even more resistant to manufacturing objects than it is now. For years he was essentially a solo practitioner, working on a mix of tech products and more traditional industrial design. In the early 2000s, Bould designed the Squeezebox, a streaming audio player created by the startup Slim Devices (later acquired by Logitech International SA). A few years later, in 2010, Bould got an email from Matt Rogers, a fellow graduate of his alma mater, Carnegie Mellon University. Rogers wanted to meet with him to discuss a project idea for his new company, Nest Labs, which he’d cofounded with Apple veteran Tony Fadell. They asked Bould about his design process and knowledge of manufacturing, and then the next day they called to say they’d like to work with him. The whole process was “surprisingly straightforward,” Bould says. They worked together on various Nest products until the Google acquisition—Fadell calls Bould a “great partner”—at which point, Bould says, they parted amicably. “A lot of thermostat makers were kind of phoning it in,” Bould GoPro Hero cameras Logitech Squeezebox streaming players Light L16 camera Nest Protect smoke detectors Roku 2 streaming player Hunter Douglas PowerView Pebble remote controls Nest thermostat Etc. says, cheerfully deflecting credit for the product’s success onto Fadell. “It grew out of a need.” Since then, he’s added designers and scaled up his company’s capacity, working on various versions of Roku Inc.’s digital-media streaming player and consulting on later models of GoPro Inc.’s Hero camera. When the Light team approached him in 2014, Bould recalls, they “more or less came to us with a box of parts.” The only mandate: The device had to be pocket-size. “Today there are 1.5 billion people who have smartphones, and every one of them considers him- or herself a photographer,” Grannan says. “It’s grown the pool.” The ubiquity of the mobile phone camera, along with the parallel rise of social media, has made the device the dominant picture-making tool of our time. About 1.3 trillion digital images will be produced this year, estimates market-research company InfoTrends, a fourfold increase since 2010. But a phone camera’s technical limitations make it unsatisfying for a serious photographer. Most notably, its single tiny lens (or even the two lenses in the iPhone 7) limits a smartphone’s smartphone s ability to zoom unconcealed, treating them as a design feature rather than a flaw. Bould displays an early foam model: a rectangular object with a bunch of cones protruding from the front, each representing the scope of field the lenses capture. One of the biggest challenges of designing the L16 was figuring out how to get people to hold the thing without blocking this array, which meant focusing not only on what the object looked like but also on what it felt like. As convenient as smartphones are, Bould points out, they remain awkward for taking pictures. “Probably there are 10 people dropping their phones as we speak,” he says. Anson Cheung, Bould’s studio director, hauls out a big crate full of later models of the L16 printed on the company’s rapid-prototyping machine. Earlier versions were more sharp-angled and boxy. When the designers—five in all, fully half of Bould’s design team— noticed users wrapping their fingers over the corner to reach the shutter-release button, they smoothed the hard angles into rounded contours to make the grip more natural. Later still, they added a gentle depression along the bottom for the thumb. Most PHOTOGRAPHS BY ULYSSES ORTEGA FOR BLOOMBERG BUSINESSWEEK “Today there are 1.5 billion people who have smartphones, and every one of them considers him- or herself a photographer” or capture decent images in low-light situations. That’s where Light comes in. Laroia first got the idea for the L16 after his previous startup, a wireless telecommunications company called Flarion Technologies, was acquired by Qualcomm Inc. in 2006. He decided to take up photography in the free time he suddenly had, and though on formal expeditions he’d bring his DSLR gear—including a bag filled with pounds of lenses, flashes, and, from time to time, a tripod—he had to settle for his smartphone camera in more impromptu situations. Frustrated, Laroia started speaking to fellow photographers, who felt the same way. He was a novice at optics, but since the experts weren’t solving the problem, Laroia concluded he’d have to start looking into it himself. So far, Laroia has attracted $35 million in funding from backers including Google Ventures and Charles River Ventures, which eventually introduced him to Grannan. As soon as the L16 became available for presale in October 2015, it attracted ecstatic camera-world buzz; the blog PetaPixel called it “a revolutionary new point-and-shoot camera that aims to transform the way we think about cameras.” Although priced at $1,600— three times as expensive as most entry-level DSLRs—the L16 reached its investors’ 30-day sales target in about 30 hours. The company has declined to specify what that figure is, but Light representatives have indicated it’s in the neighborhood of at least $10 million. As with any boundary-breaking product, the L16 went through a number of design iterations. The first thing casual observers will notice about it is the curious collection of circles on its outward face—the lens modules. “Often with technology products, designers spend a great deal of time trying to hide that kind of thing,” Bould says. Instead of disguising this weird array with darkened glass or rearranging the components in a more visually pleasing pattern, he left these technical guts of the camera’s body is metal for durability, but the designers covered the edges where the fingertips touch the device with a thermoplastic rubber that’s warmer. Taken together, these elements mimic the feel of holding a traditional camera, encouraging users to grip it with both hands. Although the presale period vastly exceeded Laroia and Grannan’s expectations, aspects of the production process for the L16 have been less successful. “The hardest thing about being a Silicon Valley hardware startup is getting Tier 1 manufacturers to take your business,” Grannan says. Many top factories only take orders in the millions of units from established giants, not in the thousands from startups. Chinese megafactory Foxconn Technology Co. eventually agreed to handle final assembly, part of an arrangement that included a small investment in Light and an agreement to license a subset of the L16’s technology for use in smartphones. The resulting products won’t match the L16 for quality, but they will noticeably raise the baseline smartphone-photo image resolution. The preordered L16s will finally start shipping this month, and Grannan is planning an aggressive push after that: taking new direct orders by May, then rolling out to specialty online sellers, mass online sellers, and ultimately brick-and-mortar retail by the end of 2017. But the camera’s design is still a work in progress—Bould will have to see what works and keep tinkering from there. “How can we really connect the new technology with the old user? Because users are all old,” he says with a chuckle. “We don’t get a new population every time we launch a new product. You have to work with preexisting behaviors.” Technology may be fast, but design is slow. “A lot of times what happens when new technology comes along, you’re tempted to say, ‘Well, let’s do everything new,’ ” Bould says. “It’s important to step back and say, ‘What do we want the experience to be?’ ” 73 E tc . Fashio on Fa Fal Fa alke Tia iago ag go o cottto ton on o n cr crew ew ssoccks ew k kh y com $30 0; sock ock oc khop ho h hop o ny. co om g a trrou Z Zegn egna ro ou ouse ser ers $24 24 45; 5; Erm Er ene en n gi ne gil illd do o Zeg Ze na b bou outiq qu uees ues h es Joh Joh Jo oh hnst nston on & Murp Murp urp rph hy y sho e $$19 $1 119 98; joh oh hnst nstonm onmurp onm murp ph hyy. hy. y.com om m I ’s It ’s OK, K, rea ealllly, y as long loongg as you as u fol olloow th the he ru ulees By S h By hiib boon Keenn nned dy It’s the First Commandment off men’s office ffi attire: Thou h u shalt h l wear dark-colored d k l d socks. k But as the h acceptable range off pants shades and ffabrics h expanded, so have your options south off has t knee. Some things to keep in mind iff you the d d to wear white: decide h : ① Don’t wear gym socks. k l Finer cotton knits only, pl please. ② Do consider your color scheme. Spring and summer hues go best with white: light h blues for f pants, rich browns for f shoes.. ③ Don’t wear white socks f k with black loafers. Or black h l one pants. There’s only M h l Jackson. k Michael ④ Do show them off. The look is informal, f so give your pants a ffew rolls and flaunt fl your ankles. Th Men’s The ’ Store S o at a Bloomingdale’s ribbed B dress socks d k $11; $ bloomingdales.com g m B Barneys ey New York k r rib-knit midcalf socks y $31; b barneys.com l men’s Uniqlo ccolor l socks k $$2.90; uniqlo.com l m FASHI FASHIO FASH FAS F FA ASH AS A SH N EDIT ED OR: OR: S SHIBON BON B ON KE ENNEDY NE ; PH NE PHOT OTOG OGRAPH PH P HS BY Y KAN ANGHEE A GH GHEE KIM FOR BLO KI KIM B OMB OMBERG OMBER OMBE MB BE B ER RG B BUSIN BUS US SI ESSWE ESSWEE ESSW SSWEE WE K 74 S O O W SOC S The Critic Etc. BEWARE OF SHARKS Charles Geisst is stronger on the history of predatory lending than on the economics. By Peter Coy ILLUSTRATION BY BRANDON CELI A t what point does a lender (good) become a loan shark (bad)? The question has exercised philosophers—and unhappy borrowers—from antiquity to the present. In Loan Sharks: The Birth of Predatory Lending, finance professor Charles Geisst recounts the debate in the U.S. from the late 19th century through the Great Depression. The history illuminates today’s debates over, say, what the Consumer Financial Protection Bureau should do to control payday lenders, though Geisst is shy about drawing conclusions that might be useful to policymakers. Loan sharks thrive where traditional banking is absent. They fill an unmet need, albeit often in a heartless, exploitative way. But one thing you’ll learn from the book is that there’s never been consensus on what’s a fair limit for interest rates. “In Rome it was 12 percent, in Elizabethan England 6 percent, and in the United States, it has ranged from 6 percent to 40 percent,” Geisst writes. That said, a few principles seem to have been widely accepted over the decades. One: It’s fair to charge higher rates for riskier loans. Two: It’s less fair in cases where the borrower is judgmentally impaired or uninformed—say, a recent immigrant who may not understand what the words “floating interest rate” mean. In the U.S., the largely rural populist movement put up the first organized opposition to predatory lending. The populists favored high inflation, which would make high-interest loans easier to pay back over time. The members of the progressive movement, who succeeded the populists in the early 20th century, tended to be better educated, better organized, and more urban. They worried that high inflation would raise their cost of living. Recognizing that nature abhors a vacuum, the progressives organized kinder, gentler lending channels such as charities and various mutual-aid organizations, including credit unions, benevolent societies, and Morris Plan Banks, named after the lawyer Arthur Morris, who began making small installment loans to upstanding citizens of modest means. About this time, in 1907, the Russell Sage Foundation was formed “for the improvement of social and living conditions in the United States.” Recognizing that state usury laws capping interest rates at 6 percent or 7 percent were too restrictive for legitimate lenders to make a profit on small, risky loans, and therefore left illegal loan sharks to fill the gap, Russell Sage’s researchers devised the Uniform Small Loan Law. The model legislation allowed licensed lenders to charge as much as 40 percent interest a year as long as they provided ample disclosure of their terms to borrowers. By the 1940s, 31 states and the territory of Hawaii had enacted the law, helping put loan sharks out of business. Geisst blames poor lending practices—not loan-sharking precisely—for the stock market crash of 1929. Investors borrowed heavily from their brokers to buy shares, which happened outside the regulated banking system. “Broker loans had become a form of shadow banking, a term that became widely used eighty years later during another financial crisis,” he writes. When lending abruptly dried up, interest rates on loans shot to as high as 20 percent in a single trading day. The conclusion of many of the people Geisst features in his book is that the best way to fight loan sharks is not to outlaw them but rather to give borrowers cheaper and safer options. But Geisst himself, a former investment banker who now teaches at Manhattan College, never fully embraces this prescription. He sometimes describes high-interest lending as the disease itself, not just a symptom: “Loan sharking in its many forms has caused stock market panics, structural banking problems, and often has impeded economic recovery after severe economic downturns.” Loan Sharks has its flaws, but it’s valuable for the history alone. Unfortunately, Geisst ends his narrative at the Great Depression, without explaining why, and relegates the 80 years since to a five-page postscript, leaving himself in debt to readers with an interest in the present. If only there were some way for us to collect. 75 ! P U S s ’ f r u S oarding your ne w Make stand-up paddleb David Wolman leisure-time activity. By WHAT IS IT? Exactly what it sounds like: You stand up on a board and paddle around. Part of what makes paddleboarding so fun is that it’s not that hard. The boards are longer and wider than the ones for surfing, so they’re more stable. Sure, you may be a little wobbly at first, and beginners should steer clear of big waves. But for most people, a mellow float across a placid lake should be more than doable on Day One. WHAT STUFF WILL I NEED? For first-timers, all you’ll need is a bathing suit and some sunscreen—you should be able to rent everything else from your local sail/canoe/surf shop for $25 per hour, give or take. If you want to make paddleboarding a habit, however, consider buying your own gear. THE BOARD There are three main types: Foam: Versatile and sturdy, and you won’t have to dip into your kids’ college fund to afford one. Try California Board Co.’s 10'6" board ($550; keepersportsstore.com). Inflatable: These are great if storage is an issue. Look for ones that pump up tight (15 to 25 pounds per square inch) for maximum stability. We like Waterman’s 10'9" BK Pro ($1,199; c4waterman.com). Wood or fiberglass: The flashy stuff, best for tackling bigger waves or longer excursions. Go for Three Brothers Boards’ 11'4" Irish Twin ($1,249; threebrothersboards.com). Make sure to note the weight capacity, typically specified by the manufacturer, which will vary depending on the material, dimensions, and shape of your board. If you’re too big for your board, you’ll ride too low in the water, making it tough to move around. THE PADDLE Some boards come with a paddle—and sometimes with a leash, a fin, and a roof rack as a package deal, so pay attention when you’re buying. If you’re purchasing a paddle separately, aluminum or alloy is fine (Red Paddle Co. alloy, $140; redpaddleco.com), carbon fiber is better (Aqua-Bound Malta, $325; aquabound.com), and wood is way cool (Shaw and Tenney SUP, from $429; shawandtenney.com). THE OTHER STUFF Personal flotation device: This doesn’t have to be the bulky straitjacket you recall from childhood trips to the lake. The Dakine Waistbelt PFD ($100; dakine.com) clips on like a fanny pack. Leash: If—or, let’s face it, when—you fall, this will keep your board from shooting away and hitting an innocent bystander. Most board manufacturers offer some variety of leash, starting around $20. Roof rack: Have board, will travel with the Thule SUP Taxi ($270; thule.com). Sunglasses: These are essential—glare can get intense out on the water. You’ll want a pair that’s OK getting wet, such as the Oakley Flak 2.0 XL ($150; oakley.com) or the more stylish Smith Drake ($219; smithoptics.com). , “A ll th at ‘s it s a w ff stay’ stu th it ” to ta ll y w o r Sport Etc. HOW CAN I MAKE SURE I DON’T LOOK LIKE AN IDIOT? WHERE CAN I DO IT? Bend, Ore. Located on the southwestern edge of this outdoor-sportscrazy town, the elegant Tetherow resort offers easy access to the mountain lakes of Willamette National Forest, the Deschutes River, and a man-made whitewater park if you want to try your luck with some waves (from $179 per night; tetherow.com). Keeping stable on the board is all about using your core muscles, so think about doing some Pilates before you get out there, or at least banging out a few crunches. Once you’re on the water, get yourself situated in the center of the board, sitting with one leg on either side and your paddle laid perpendicularly in front of you. Now get on your knees: If you’re feeling tentative, paddle around like that for a while just to get the hang of it. To stand, push up slowly against the board while gripping the paddle. You’ll want your feet roughly shoulder-width apart, and your knees should remain slightly bent. Stay loose. Place your dominant hand on the top of the paddle’s shaft, with your other hand about halfway down—you want the curve of the paddle face bending toward the front of your board. Now stroke! And unless you’re one of those people who likes to be rescued, pay attention to the wind and the current, and stick close to shore. 77 Sausalito, Calif. The upscale-but-unpretentious Cavallo Point hotel offers easy access to Richardson Bay, off San Francisco Bay. Paddle among the houseboats, say hi to the sea lions, or cruise across to Tiburon for lunch at one of its bay-view restaurants (from $379 per night; cavallopoint.com). Chicago The chic Hotel Lincoln is perched on the western edge of Lincoln Park, just a short stroll from the shores of Lake Michigan, where the paddleboarding is plentiful (from $159 per night; jdvhotels.com). Kohala, Hawaii The Fairmont Orchid is tucked into quiet Mauna Lani Bay on the Big Island’s northwestern coast. It has sheltered waters for first-timers and access to the open sea for those who feel more confident (from $299 per night; fairmont.com). PHOTOGRAPH BY BOBBY SCHEIDEMANN FOR BLOOMBERG BUSINESSWEEK Austin Lady Bird Lake, smack in the middle of the city, is a favorite paddleboarding spot for Austinites. South Congress Hotel is in the heart of the nearby SoCo neighborhood, just south of the lake, and is a perfect spot for post-float people-watching (from $249 per night; southcongresshotel.com). HOW M A N Y P Burlington, Vt. The view from the Hotel Vermont, on the shore of Lake Champlain, can’t be beat. Just a 15-minute drive south, Oakledge Park is an ideal jumping-off point for an expedition (from $199 per night; hotelvt.com). EOPLE PADDLEBOAR D? 0.9 2.8 million in 2009 Naples, Fla. Naples Beach Hotel & Golf Club should suffice. Weave in and around Inner Doctors Bay or out into the Gulf of Mexico. Paddling south to Naples Pier and back is a great four-mile round trip (from $319 per night; naplesbeachhotel.com). million in 2014 he :T rce oor u So utd tion O da un Fo Etc. Survey y What’s Your Most Awkward Team-Building Experience? Watch where you point that paintball gun. By Katie Morell “At a previous job, our boss would sometimes take us bowling. This time, though, he wanted to go paintballing. I’m not a good shot, and I wasn’t aiming for him, but my paintball went awry. The next thing I knew, he was on the floor. The game was stopped, the ambulance came, and people started talking about potential liver rupture and damage to his kidneys. He was OK—a preexisting condition had flared up. After the event, he told me it wasn’t my fault, but I felt horrible and left the company six weeks later.” Christina Comben Content manager, Day Translations Inc., Valencia, Spain Pete Abilla Founder and chief executive officer, Find a Tutor Near Me, Salt Lake City “We took a group of 120 people, divided them into teams, and set them loose on a scavenger hunt around a theme park. Each team had a differentcolored bandanna, and they were running around completing missions when a security guard misinterpreted one bandanna for a gang symbol. He made that team follow him to a side alley, where he could ask them questions about what they were doing. They were allowed to continue but had to take off the bandannas.” Sharon Fisher CEO, Play With a Purpose, Orlando “We like to o combine o service elements into o our o teama building activities. In June ne 2015 my staff met at the Boston Harbor dock to board a boat to a nearby island to do some cleanup. While talking with a colleague, I stepped back and fell into the water, scraping my back on a post as I went down. I cut myself pretty badly, the water was freezing, and it was over my head. I was wearing jeans and a sweatshirt and felt weighed down. The thought of drowning came to mind, and I panicked. Thankfully, my team sprang into action and pulled me up.” Janet Kosloff CEO and co-founder, InCrowd Inc., Boston “At a previous company, I was participating in a manager-training meeting. We were divided into teams and tasked with hoisting each other through an imaginary window— basically, a rope stretched 3 feet off the ground—in an allotted time. One team had to lift an obese woman. Everyone in the room saw the struggle, and she ended up crying. Some people were kind to her, but most ignored the awkward situation and pretended it didn’t happen.” Seth Ollerton Content marketing manager, DecisionWise, Provo, Utah ILLUSTRATION BY PING ZHU 78 8 “I was working for a health-care company that had its team-building event at a Native American casino in Southern California. The company hired an outside consultant to facilitate the event, and they were doing a great job until one of the facilitators, a white guy with blond hair and blue eyes, came onstage dressed like a Native American. Many servers working the event were Native American and were offended. Casino management stopped the event and kicked us out.” What I Wear to Work What do you do for a living? I’m the co-founder of Aday, a clothing line that makes high-performance pieces that are also the most comfortable clothes in your wardrobe. Etc. Cool jacket. I love that it’s dressy but not too dressy. It’s got a silk lining, which I like because it’s a luxury just for yourself. LIZZIE FORTUNATO What do you keep in your backpack? I always have my laptop and passport and an overnight kit. I pack for emergencies. Who knows if I’m going away for the weekend? ISABEL MARANT Is that shirt from your brand? Yes. It’s a reinvented And you can work silk fabric out in that? from Italy. I wear it to go rock climbing a lot. People stare at me, of course. But it’s machine washable and dries quickly, so it works perfectly. 79 ISHARYA ADAY ADAY PHOTOGRAPH BY B. O’BRIEN FOR BLOOMBERG BUSINESSWEEK Tell me about your leggings. They’re our bestselling pair, made in Portugal at the same place Michael Phelps’s swimsuits were made for the Olympics. Tell me about your shoes. They have a cool textured surface that’s crocodile-y but not. They’re the right combination of statement-making and practical. EVERLANE MEG HE ADAY ALEXANDER WANG Who’s the dog? That’s Forrest. He’s a rescue, a toy Australian shepherd, we think. He’s pretty much the unofficial Aday mascot. 29, co-founder, Aday, New York Interview by Jason Chen BILL COBB President and chief executive officer, H&R Block Inc. Education “I suddenly started to view a larger world. It was my nonbusiness courses: sociology, Russian history. I realized that there is more to life than the New York area.” St. Rose High School, Belmar, N.J., class of 1974 The Wharton School of the University of Pennsylvania, class of 1978 Northwestern University Kellogg School of Management, Evanston, Ill., class of 1979 1979–83 With his father, William, on the Pizza Hut corporate jet, 1996 “These were the days of stuffedcrust pizza, and we did a fun ad with Deion Sanders and Jerry Jones about eating a slice backwards.” “I took a wrong turn. The Nasdaq was going crazy, and I jumped for money, which is the worst decision you can make. The product didn’t work, and it was one of those cut-your-losses [situations].” Product manager, Colgate-Palmolive 1983–86 Marketing director, Jeno’s Pizza Frozen Food 1987–95 Marketing director, vice president for new business, VP for colas, PepsiCo 1995–97 SVP and chief marketing officer for Pizza Hut, PepsiCo “The culture of Pepsi-Cola was defined by ‘We hate Coke.’ I did a bunch of Super Bowl advertising, including the one about the kid who got sucked into a Pepsi bottle on the beach. Pepsi had big budgets, and it was a lot of fun.” “That was my first international assignment, and I just loved it. I had to have a broader business perspective, and that has helped me greatly.” In a promotional shot for EBay, 2003 1997–2000 SVP for international marketing, Tricon Global Restaurants 2000 Head of sales and marketing, Netpliance 2000–08 With his wife and three sons in Bay Harbor, Mich., 2015 “I had no idea what anybody was talking about for the first two weeks. I said to myself, Look, you’ve had a successful career, you have confidence in yourself, you’re going to figure this out.” SVP of global marketing, general manager for international, president for North America, EBay 2011– Present President and CEO, H&R Block Life Lessons 2008–2010: Semiretired, joined the board of H&R Block “We’re looking to reinvent virtually everything we do. This tax season we’re introducing H&R Block With Watson, an in-store experience that ingests a client’s first conversation with a tax pro about recent happenings— home purchases, marriages, births— and highlights the tax implications.” lear n from it and fix it.” 3. “Communicate early, often, and broadly.” Work Experience g, At Wharton graduation 80 “I was 27. It was a $200 million company with national advertising, and I got to lead a team. Then it got sold to Pillsbury.” on 1. “There are so many leadership books on hiring, but it’s all about the chemistry you build on the team.” 2. “Have a no-blame culture. When things go wr Bloomberg Businessweek (USPS 080 900) April 10 – April 23, 2017 (ISSN 0007-7135) E Issue no. 4518 Published weekly, except one week in January, February, April, June, and August, by Bloomberg L.P. Periodicals postage paid at New York, N.Y., and at additional mailing offices. Executive, Editorial, Circulation, and Advertising Offices: Bloomberg Businessweek, 731 Lexington Avenue, New York, NY 10022. POSTMASTER: Send address changes to Bloomberg Businessweek, P.O. Box 332, Haywards Heath, West Sussex, RH16 3FP UK. Businessweek.email@example.com QST#1008327064. Registered for GST as Bloomberg L.P. GST #12829 9898 RT0001. Copyright 2017 Bloomberg L.P. All rights reserved. Title registered in the U.S. Patent Office. Single Copy Sales: Call 800 298-9867 or e-mail: firstname.lastname@example.org. Educational Permissions: Copyright Clearance Center at email@example.com. PRINTED IN BELGIUM CPPAP NUMBER 0414N68830 How Did id I G Get et H Here? Courtesy subject (5) Etc.