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November 20, 2017

THIS WAS AN ACT OF MAN”

“THIS WAS NOT AN ACT OF GOD,

Why the U.S. government ﬂooded a Houston neighborhood during Hurricane Harvey p52

November 20, 2017

DHIRAJ SINGH/BLOOMBERG

A silk-thread vendor in Varanasi, where Indiaâ&#x20AC;&#x2122;s cash ban is hurting the trade in gold and silver brocade

CONTENTS

Bloomberg Businessweek

November 20, 2017

IN BRIEF 10

○ Asian trade talks stall ○ Airbus beats out Boeing in Dubai ○ A general swoon for General Electric ○ G’day, gays!

REMARKS The unthinkable happens in Zimbabwe. But who will rise after Mugabe’s fall?

VIEW

BUSINESS

TECHNOLOGY

Hungary’s Viktor Orbán takes on George Soros in a war on academic freedom

FINANCE

Extra-special scrutiny for AT&T and Time Warner

A vow to end bro culture, from its former poster boy

Equifax mishandled your data—but it may not be liable

A shortage of $1.50 saline bags leaves U.S. hospitals on the brink of crisis

Endgame, the military’s No. 1 choice for cybersecurity

A good cause that makes good tax sense to hedge funds

26 20

What are the chaebol hiding behind their charities?

Making it easier to spend way too much on virtual gear

Farmers scrambled to raise cage-free chickens, only to ﬁnd the eggs aren’t going over easy

Innovation: Who needs a shrink? With Woebot, you can lie on your own couch

How the little-known Bank of Taizhou became China’s most proﬁtable lender

Dodd-Frank’s rulebook stands—regulators are just reading it differently

4 35

ECONOMICS

India’s quest to root out tax evaders crimps business

5 40

It’s not easy being Theresa May

California’s terrible housing policies—and epic commutes—thwart its strong climate laws

Economists are forecasting steady growth for Europe. Yes, you read that right

Putin puts the Baltics on notice with a new reactor in Belarus

Why lounge on a beach? Come tour the haunts of Medellín’s drug lords!

POLITICS

To fend off grass-roots opposition, fossil fuel giants roll out their own turf

FOCUS/ B-SCHOOLS

Programs today are happy to let students build their own MBAs

Our annual ranking of the best B-schools

A test that helps women think more of themselves— and do more for themselves

Bloomberg Businessweek

November 20, 2017

PURSUITS

FEATURES 79

The water is gone, but anger is rising in the Houston neighborhood sacriﬁced to Harvey

HR startup HiQ wants to keep its hands on LinkedIn’s data—and yours Centene’s surprisingly proﬁtable take-it-or-leave-it health insurance plans

Tour Taiwan by bicycle

Style: The family with a 20/20 vision

Critic: A new look at modern art’s socially mobile genius, Alexander Calder

The One: The Mark Levinson No. 515 turntable

Game Changer: NASA’s Victor Luo will send you into virtual orbit

How to Contact Bloomberg Businessweek Editorial 212 617-8120 Ad Sales 212 617-2900 731 Lexington Ave., New York, NY 10022 Email bwreader @bloomberg.net Fax 212 617-9065 Subscription Customer Service URL businessweekmag .com/service Reprints/Permissions 800 290-5460 x100 or email businessweekreprints @theygsgroup.com Letters to the Editor can be sent by email, fax, or regular mail. They should include the sender’s address, phone number(s), and email address if available. Connections with the subject of the letter should be disclosed. We reserve the right to edit for sense, style, and space. Follow us on social media Facebook facebook.com/ bloomberg businessweek/ Twitter @BW Instagram @bloomberg businessweek

Correction: “The Captive Prince” (Finance, Nov. 13, 2017) said Prince Alwaleed bin Talal has a zoo at his palace, but it’s actually at his resort on the outskirts of Riyadh.

Robert Mugabe

Justin Caldbeck

Dalia Grybauskaite

Federico Gutiérrez

Bloomberg Businessweek (USPS 080 900) November 20, 2017 (ISSN 0007-7135) H Issue no. 4547 Published weekly, except one week in January, February, April, July, 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 37528, Boone, IA 50037-0528. Canada Post Publication Mail Agreement Number 41989020. Return undeliverable Canadian addresses to DHL Global Mail, 355 Admiral Blvd., Unit4, Mississauga, ON L5T 2N1. E-mail: bwkcustserv@cdsfulﬁllment.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: busweek@nrmsinc.com. Educational Permissions: Copyright Clearance Center at info@copyright.com. Printed in the U.S.A. CPPAP NUMBER 0414N68830

Cover and top left: Photographs by Philip Montgomery for Bloomberg Businessweek

HOUSTON: PHOTOGRAPH BY PHILIP MONTGOMERY FOR BLOOMBERG BUSINESSWEEK. GLASSES: COURTESY MOSCOT. CALDER: ALAMY. MUGABE: JEKESAI NJIKIZANA/GETTY IMAGES. CALDBECK: MICHAEL SHORT/BLOOMBERG. GRYBAUSKAITE: PETRAS MALUKAS/GETTY IMAGES. GUTIERREZ: LUIS EDUARDO NORIEGA A/ZUMA

CONTENTS

IN BRIEF Asia ○ More than 500 Iranians and several Iraqis died in an earthquake that struck near the border on the night of Nov. 12.

Europe ○ Recent Asian summits have produced little progress on trade. Discussions of a new 11-country Trans-Pacific Partnership failed to yield a hoped-for framework, and China-led talks on a rival Regional Comprehensive Economic Partnership also concluded without an agreement.

○ Airbus sold

$50b worth of its A320neo planes in a deal at the Dubai Air Show, outdoing a $20 billion deal struck by Boeing.

○ For the first time since 1958, Italy’s national soccer team failed to qualify for the World Cup.

○ Poland’s Independence Day celebrations were marred by nationalist demonstrations. Tens of thousands marched with banners bearing slogans such as “White Europe of brotherly nations” and “Clean Blood.”

○ As she struggled to form a coalition government in Berlin, German Chancellor Angela Merkel defended her country’s use of coal at the United Nations climate meeting in Bonn citing jobs and “social questions.”

○ HSBC Holdings will pay

○ Emmanuel Macron invited Saad Hariri, the former prime minister of Lebanon, and his family to stay in France.

AUSTRALIA, ITALY: GETTY IMAGES. MYANMAR, AZAR, BARBIE: AP IMAGES. ZIMBABWE: REUTERS

○ Australian voters approved gay marriage, voting 61.6 percent in favor. Prime Minister Malcolm Turnbull called for Parliament to pass legislation by Christmas.

○ A North Korean soldier was shot ﬁve times while crossing the border to defect to the South. As of Nov. 15, he remained on life support.

○ Canadian Prime Minister Justin Trudeau visited Myanmar and discussed the ongoing expulsion of the Rohingya people with leader Aung San Suu Kyi, whose detractors say has done little to address human rights abuses against the embattled Muslim minority.

€300m ($354 million) to settle a probe by the French government into its tax compliance procedures.

Hariri resigned on Nov. 4 while in Saudi Arabia, citing an alleged assassination plot.

By Jillian Goodman and Dimitra Kessenides

Bloomberg Businessweek

November 20, 2017

Americas ○ After a year of underperforming the market, General Electric’s stock plunged further after new CEO John Flannery proposed a dramatic restructuring of the company. Change since Jan. 1, 2017 GE

S&P 500 25%

-25

-50 1/1/2017

11/14/2017

○ Republican leaders in the U.S. Senate added a repeal of the healthcare individual mandate to its tax bill, setting up a reprise of this summer’s fraught negotiations.

○ Mattel, which just announced a Barbie modeled on hijab-wearing Olympic fencer Ibtihaf Muhammad, enjoyed a stock price surge ge on the news of a possible takeover by Hasbrro. The dollmaker late er reportedly rebuffe ed the offer.

DATA: COMPILED BY BLOOMBERG

○ President Trump picked former Eli Lilly executive Alex Azar to head the U.S. Department of Health and Human Services. Drug prices will likely be a topic during his confirmation hearing: Trump has said pharmaceutical companies are “getting away with murder,” but Azar has echoed a common industry argument that other parts of the supply chain are to blame for rising costs.

○ Venezuela rolled out an actual red carpet for bondholders who showed up in Caracas on Nov. 13 to discuss restructuring the country’s

$60b debt. The same day, S&P Global Ratings declared the country in default.

○ “I have a huge deb to pay. I have to produce oil. I have to make money. That’s the way it works.” Petrobras CEO Pedro Parente in a Nov. 14 interview with Bloomberg, explaining why the Brazilian state-controlled company would not participate in OPEC-led production cuts.

Africa ○ The U.S. launched drone strikes in Somalia against al-Shabab and the Islamic State, in cooperation with the country’s government.

○ Tanks patrolled Harare, Zimbabwe’s capital, after the military detained 93-year-old President Robert Mugabe, who’s led the country since 1980. 12

○ Egypt delayed a planned Nov. 15 reopening of its border with the Gaza Strip.

â&#x20AC;&#x2030;REMARKS REMARKS

Who Will Be the Next Mugabe?

Bloomberg Businessweek

○ Military intervention won’t bring about democratic reform. It simply rearranges Zimbabwe’s leadership ○ By Howard Chua-Eoan As rebel, revolutionary, Machiavellian manipulator, and supreme leader, Robert Mugabe has been the face of Zimbabwe for so long that it’s almost impossible to imagine the country without him. Almost. The impossible finally began to happen on Nov. 14, when tanks rolled into the capital, Harare, and the armed forces took custody of Mugabe and his wife, Grace. Military spokesmen said they were “safe and sound and their security was guaranteed.” Mugabe has ruled for 37 years—the entire existence of Zimbabwe after the downfall of the white minority government of what was then called Rhodesia. In that four-decade period, the economy has deteriorated from resource-rich breadbasket to basket case. Violent repression made Zimbabwe’s leader a pariah to most of the world. Mugabe’s visage became a face loved only by fellow leftist autocrats and the commodity-hungry Chinese government. Indeed, Chinese trade to the southern African nation last year was worth $1.6 billion; Zimbabwe’s military maintains close ties with Beijing’s generals. More important, despite economic decline and international isolation, Mugabe was the undisputed master of Zimbabwe, outmaneuvering several would-be successors, including the co-leader of the uprising against white rule, Joshua Nkomo. His regime appeared to be getting ready for its third vice president in three years when the military took possession of the streets and the government television station. Mugabe, 93, had been expected to anoint Grace, 52, as the new vice president. The fall of Mugabe hasn’t led to dancing in the streets. It’s nothing like the developments in the late 20th century that resulted in the collapse of the Soviet bloc or the overthrow of Ferdinand Marcos in the Philippines, where people power stirred the promise of democratic revival and reform. The military action, which the generals refused to call a coup d’état, is the latest chapter of a bitter fight within Mugabe’s political regime, one that’s resulted in the president being caught in his own web of intrigue and betrayal. The leader of this uprising, General Constantine Chiwenga, commander of the armed forces, is a close ally of Grace’s fiercest rival, the deposed heir apparent, Emmerson Mnangagwa. A comrade-in-arms of the president during the fight against the white regime, Mnangagwa also used to run the country’s

November 20, 2017

fearsome security apparatus. His nickname is “The Crocodile.” As the military took over the state broadcaster, a spokesman insisted Mugabe wasn’t a target. “We are only targeting criminals around him who are committing crimes that are causing social and economic suffering in the country in order to bring them to justice,” Major General Sibusiso Moyo said. It remains to be seen if one of those enemies of the people will be Grace. A polarizing force, the first lady has never been shy about her ambitions or her enmity with Mnangagwa. In recent years, she’s become the center of the youth faction of Mugabe’s ruling party. To her husband’s annoyance, Mnangagwa’s allies repeatedly used this line against her: “Leadership is not sexually transmitted.” On Nov. 6, the president fired Mnangagwa, who fled the country saying he feared for his life. On Nov. 13, Chiwenga, who’d just returned from a trip to China, declared, “When it comes to matters of protecting our revolution, the military will not hesitate to step in.” The next day, it did. Mugabe’s rule hasn’t made it easy for democracy to sprout—even though the country has democratic institutions and a viable, if outmaneuvered, opposition party. Autocrats don’t inculcate democracy in their realms. Pressured into elections in the past, Mugabe has managed to subvert the results and remain in power, proving that democracy isn’t a fruitful path for anyone with real political ambitions in Zimbabwe. The military intervention does nothing to change that. The country, writes Bloomberg View columnist Eli Lake, “deserves better. It’s not too late for the military to prepare for a real transition to democracy and call for elections. But it’s almost certain the generals will not. For now it appears they have paved the way for the dictator to be replaced by one of his henchmen.” To understand the dynamic of the events in Harare, a comparison is best made to what happened in Egypt in 2011, according to Tony Karon, an anti-apartheid activist in South Africa who’s now an editor at Al Jazeera. While most people saw a popular uprising overthrow President Hosni Mubarak, the Egyptian military used the so-called Arab Spring to make sure Mubarak, whom they supported, didn’t get the opportunity to anoint his son Gamal as his successor—even if they had to detour their plans through a brief period of Muslim Brotherhood rule. Zimbabwe’s military, which has officers who’ve trained in Egypt as well as China, has apparently managed to outmaneuver Mugabe’s installation of his wife as his heir. Why not oust the president completely? That may yet occur. But Robert Mugabe is still the historic face of the revolution—and a face-saving transition may need to take place. The comparison this time is to China, where Jiang Qing and the rest of the Gang of Four were poised to take power after the death of Jiang’s husband, Mao Zedong,

ILLUSTRATION BY 731; PHOTO: TSVANGIRAYI MUKWAZHI/AP PHOTO

REMARKS

VIEW

Bloomberg Businessweek

the founder of the communist People’s Republic of China. After they were foiled and arrested, Hua Guofeng, a transition figure, was billed by government propagandists as Mao’s true ideological heir to explain why his very visible widow was now completely out of the picture. Deng Xiaoping, the real mastermind of Jiang’s overthrow, eventually took over the actual reins of power. In Zimbabwe, those reins are in the hands of Chiwenga and Mnangagwa. If the past is precedent, their ascent doesn’t promise institutional change. Mnangagwa has been tied to— though he’s denied being part of—a bloody purge in the 1980s of the Ndebele ethnic group in the southern part of the country. The genocide, perpetrated by a brigade trained by North Koreans, may have killed as many as 20,000 people. So terrifying were the forces unleashed that hardened operatives of South Africa’s intelligence services were said to fear falling into the hands of Zimbabwe’s security forces. When I was news director of another magazine, one of our correspondents went to Zimbabwe and was picked up by the police in a small town in the south for practicing journalism without permission. Only in the nick of time were we able to organize his escape before officials from Harare arrived to take over his questioning.

Mugabe is now at the mercy of his military protectors. He may yet manage to overcome them. He’s emerged from other seeming defeats before. But the president has health problems and is in his dotage. This may be the end of his long run. The fall of tyrants is always the stuff of morality plays—and Mugabe will provide history with variations on the ancient verities of absolute power. The more immediate question is: Will the new masters of Zimbabwe change the country? Again, according to Karon, the comparison is to Egypt. After overthrowing the Muslim Brotherhood, General Abdel-Fattah El-Sisi eventually assumed the presidency and, outlasting international criticism, became the acceptable face of the country, one that was more amenable to international investors as the military that supports him promised stability. Zimbabwe may try the same with Mnangagwa or another figure. That’s both a danger and an opportunity. It’s a danger because a broader international embrace of Zimbabwe’s leadership will bolster the military and security forces’ control of the country. It’s an opportunity because the global community can try to leverage its financial influence to force structural political reforms. For Zimbabwe, it may not matter— as long as the Chinese love the new face of the nation, whoever that will be.

To read Conor Sen on the pain ahead for retail chains and Tyler Cowen on the changing American art museum, go to Bloombergview.com

VIEW

Why George Soros Rattles Hungary’s Orbán ○ Academic freedom and civil society make it hard for the country’s prime minister to build a one-party state

Hungarian Prime Minister Viktor Orbán’s government likes to portray its conflict with Central European University as a mere bureaucratic dispute. It is not. Orbán’s campaign against the university and its founder, billionaire investor George Soros, carries a darker cast. Some background: In April, Hungary’s Parliament passed a law requiring that all foreign universities—CEU is based in Budapest but incorporated in New York state—also have campuses in their home countries. CEU has just such an arrangement with Bard College in New York, but the Hungarian government refuses to recognize it. In October, instead of certifying CEU’s compliance, the Hungarian

November 20, 2017

government extended the deadline to 2019. The university now faces a year of uncertainty over its future. This episode is the latest in the prime minister’s long campaign against opposition. Over the past seven years he’s taken on the constitution, press freedom, the rule of law, foreign scholars, the European Union, and international conglomerates. As next spring’s parliamentary elections draw closer and Orbán seeks a nemesis to motivate his base, his attacks are intensifying. One of his main targets is Soros, the Hungarian émigré and philanthropist. Orbán not only has set his sights on CEU, but he’s also directed Hungary’s

intelligence services to investigate Soros’s activities more broadly. An outspoken supporter of immigration and the humane treatment of refugees, Soros clearly rattles Orbán, who’s demonized immigrants and minorities, built border fences, and refused to abide by the EU’s internal agreement on refugee quotas. International criticism of Hungary’s opposition to CEU has been almost universal. In May the U.S. condemned the law, which it said “places discriminatory, onerous requirements on U.S.accredited institutions in Hungary and threatens academic freedom and independence.” Hungary should sign the agreement that allows CEU to continue to operate in Budapest (the Hungarian government, by the way, originally negotiated that agreement with New York). And Soros and other critics of Orbán should continue to press for more openness and freedom. The larger question of how Hungary came to this pass—how a once-stalwart U.S. ally and member of the EU and NATO came to resemble the repressive communist regime it once bravely overthrew—is for historians to ponder. Perhaps some of them might even be at CEU.

LOOK AHEAD

○ Stockholders of Washington utility Avista vote on a $5.3 billion bid by Canada’s Hydro One on Nov. 21

○ On Nov. 22 ﬁnancially ailing Sears Holdings reports its thirdquarter earnings

○ U.S. retailers will woo consumers with deals for Black Friday, one of the year’s biggest shopping days

The

B U S and the I SHORT N of HORIZONTAL E and S S

TALL

VERTI C AL

Mergers ○ The union of AT&T and Time Warner may not be a good idea. And that isn’t a political opinion

You don’t have to be an ally of President Trump to have problems with AT&T Inc.’s $85 billion bid for Time Warner Inc., the owner of CNN. Some of the strongest opposition to the merger is coming from groups that ordinarily oppose the president. Trump warned when the deal was proposed in October 2016 that if elected president he would block it “because it’s too much concentration of power in the hands of too few.” Trump has

continued attacking CNN since then, but he says he hasn’t pressured the U.S. Department of Justice to stop the deal. Organizations such as the Washington Center for Equitable Growth and the Open Markets Institute have little sympathy for Trump’s tweets attacking CNN. But they are concerned that the tieup would harm ordinary Americans by giving AT&T the power to raise prices and withhold content from rivals. The proposed merger would turn AT&T into the nation’s biggest entertainment company, with properties including HBO, TBS, TNT, Cartoon Network, and Warner Bros. Entertainment Inc. People familiar with the discussions told Bloomberg that officials at Justice’s antitrust division advised AT&T to explore alternatives such as selling Time Warner’s Turner Broadcasting and then forming a joint venture with the newly separated company.

November 20, 2017 Edited by James E. Ellis and Dimitra Kessenides Businessweek.com

Bloomberg Businessweek

November 20, 2017

The department is poised to file a lawsuit to stop the deal if it can’t reach an agreement with AT&T. The economics of the case revolve around the difference between horizontal and vertical mergers. A horizontal merger is between competitors that occupy the same spot in the value chain—say, two cable companies. They’re closely scrutinized by authorities because they tend to reduce competition, giving the combined company the opportunity to raise prices, reduce choice, or both. Vertical mergers have tended to get lighter treatment because they combine companies at different points in the value chain, such as a customer with its supplier, rather than uniting two competitors. Some have benefited consumers by improving efficiency and giving the combined company the incentive to sell more at a lower price. The Justice Department’s 1984 nonhorizontal merger guidelines drew on the laissez-faire approach of economist Milton Friedman, legal scholar Robert Bork, and others. They asserted that vertical deals, while not “invariably innocuous,” are less problematic than horizontal ones. As recently as 2011 the Justice Department waved through a deal very similar to the AT&T-Time Warner combination: Comcast Corp.’s purchase of 51 percent control of NBCUniversal. The agency did place restrictions on Comcast’s behavior, such as requiring it to license content to online competitors on the same terms that more established rivals get. Those constraints are already expiring; the last will go away next September. But the presumption that vertical mergers are good for competition has gradually weakened. Vertical mergers can allow the merged company to use its power at one stage of the value chain to gain leverage in other stages, says Steven Salop, an antitrust expert at Georgetown University Law Center. CNN and HBO, among other Time Warner properties, are must-haves for any video delivery system, and AT&T’s DirecTV is a video delivery system that programmers feel they have to appear on. One risk is that AT&T could raise the price of Time Warner content or withhold or restrict it from competitors of its DirecTV business, a practice known in antitrust circles as “foreclosure.” AT&T could also give Time Warner’s programming competitors inferior channel position on DirecTV

or deny them the viewer information they need to target their advertising. Some of those same concerns were behind Justice’s opposition in 2015 to Comcast’s $45 billion purchase of Time Warner Cable. The government said the combination “would make Comcast an unavoidable gatekeeper for internet-based services that rely on a broadband connection to reach consumers.” (The deal was abandoned.) Salop, who says he has consulted for a party concerned about the deal, disputes AT&T’s me-too argument that its merger should get the same treatment as Comcast’s NBCUniversal purchase got. “The very fact that the Comcast deal has occurred is a good argument for not letting through another merger,” he says. Even if the tieup did allow AT&T to bargain more effectively with another media giant—for example, in negotiating for each other’s content—it would harm smaller companies that aren’t vertically integrated, says Barry Lynn, executive director of the Open Markets Institute. Rather than anoint a new giant, he says, the government should go in the other direction and break up Comcast and NBCUniversal. In last month’s earnings release, AT&T Chief Executive Officer Randall Stephenson expressed confidence the deal would go through. He said it would “deliver a better entertainment experience for consumers and more effective targeted advertising.” But it’s no sure thing that AT&T would win if the case went to trial, says Jennifer Rie, a senior analyst at Bloomberg Intelligence. “The outcome would be super interesting both to the business world and to the antitrust community,” she says. “It would mark the first time in almost 40 years that an antitrust regulator sued to block a vertical deal.” If a judge did take the case, Trump’s tweets against CNN could haunt the Justice Department by creating the appearance that the government’s arguments were politically motivated, whether or not they actually were. Judges have taken Trump’s campaign vows to ban Muslim immigrants into account in weighing the administration’s attempts to restrict immigration from predominantly Muslim nations. AT&T is pressing hard for evidence of interference from the White House. It intends to seek court permission for access to communications between the White House and the Justice Department about the takeover, according to people familiar with the

○ Time Warner

Big Vertical Mergers, and Two That Failed 2011

2013

2015

2016

Comcast and NBCUniversal

General Electric Co. and Avio SpA

Comcast and Time Warner Cable

Lam Research Corp. and KLA-Tencor Corp.

○ Approved with conditions. The companies agreed not to interfere with internet subscribers’ web traffic and to share NBC programming with online rivals.

○ Approved with conditions. GE agreed not to interfere in Avio’s contracts to develop jet engine components for rival Pratt & Whitney.

Abandoned. Justice said the merger “would make Comcast an unavoidable gatekeeper for internet-based services that rely on a broadband connection to reach consumers.”

Abandoned. Justice alleged that Lam would be able to reduce its competitors’ access to KLA-Tencor’s inspection equipment.

Share price AT&T offer price $110

80 10/2/17

11/15/17

○ Stephenson

DATA: STEVEN SALOP, DANIEL CULLEY; PHOTO: GETTY IMAGES

BUSINESS

Bloomberg Businessweek

matter, who asked not to be named because the deliberations are private. For the country, though, approval of the AT&TTime Warner merger shouldn’t hang on whether Trump has a “personal vendetta” against CNN, says Mark Cooper, senior fellow at the Consumer Federation of America. “There’s a fundamental economic question about market power here.” —Peter Coy, David McLaughlin, and Sara Forden

scared of what’s next.” Hospital staffs across the country are living the same nightmare. “I find it shocking that in the richest country in the world we run out of fundamental, basic supplies,” says Martha Kuhl, an oncology nurse at UCSF Benioff Children’s Hospital Oakland. It’s a crisis that’s been years in the making. Lacking the appeal of the latest $100,000 wonder drug, basic hospital supplies with thin profit margins are low priorities for a consolidating pharma industry that has failed to modernize outmoded factories or ramp up supply. In August, Braun Medical instructed customers to seek alternatives in the wake of what it called “unplanned production interruptions” at its IV-solutions factories. That was three months after the FDA slapped the company with a warning letter for “repeat violations” after it failed to correct quality problems resulting in leaky and contaminated intravenous bags at its Irvine, Calif., plant. Braun didn’t respond to requests for comment, but in a letter posted on the FDA website it promised improvements “in the coming weeks and months.” Baxter says power has been restored at all but one of its Puerto Rico plants. The FDA says it’s working to alleviate shortages, allowing temporary imports and speeding up reviews for drugmakers seeking to make IV fluids, according to Valerie Jensen, an associate director at the FDA’s Center for Drug Evaluation and Research. That may not be enough. The shortages put the system “on the brink of a significant public health crisis,” the American Hospital Association warned in a Nov. 9 letter to Congress. A bigger shadow looms over the industry. The Justice Department has launched a criminal investigation into the business practices of saline bag producers. In April, following an earlier class action alleging price-fixing, Baxter disclosed it was subpoenaed in an ongoing government probe into shortages of intravenous solutions, including saline. The investigation follows a 2015 letter from a group of U.S. senators citing reports that prices had tripled during earlier saline shortages and calling for the Federal Trade Commission to look into possible price-fixing among Baxter, Braun, and Hospira Infusion Systems—Pfizer Inc.’s former saline and IV-fluids unit, now owned by ICU Medical. Baxter says it’s cooperating with the Justice Department probe. ICU Medical says it believes the investigation focuses on a time frame prior to its ownership of the business. Pfizer says it’s coordinating with ICU Medical to produce records for the Justice Department. It’s not just saline bags that are in short supply. Inventories are running low on 174 drugs, according to Erin Fox, director of the drug information service at University of Utah Health. That leaves little margin for error when an unforeseen event, like a hurricane, throws production into disarray. Other scarce hospital staples include syringes

THE BOTTOM LINE Long-held theories of what makes a merger beneficial to the overall economy may be tested by the proposed union of Time Warner and AT&T.

A Dangerous Shortage Of Saline Bags

PHOTO ILLUSTRATION BY 731; PHOTO: GETTY IMAGES

○ A crisis years in the making has gotten worse after factory disruptions in Puerto Rico

Small saline-solution bags are ubiquitous in modern hospitals, cost about $1.50 each, and are the preferred method for delivering everything from painkillers and antibiotics to chemotherapy and heart drugs. The Cleveland Clinic, a top academic medical center, uses the bags to administer 350 different medicines, typical for hospitals across the country. But supplies are running dangerously low. A long-standing problem, the situation worsened when Hurricane Maria slammed into Puerto Rico, knocking out power at factories that make the small bags for Baxter International Inc., the product’s biggest supplier. Another large maker of the bags, B. Braun Medical Inc., is having problems of its own—the U.S. Food and Drug Administration is looking into reports of leaky and moldy intravenous bags. And a third, ICU Medical Inc., hasn’t been able to keep up with the increased demand. The industry has also been swept up in a U.S. Department of Justice criminal probe of possible collusion and price-fixing. “What else is going to run out?” says Scott Knoer, Cleveland Clinic’s chief pharmacy officer. “I’m just

November 20, 2017

“I ﬁnd it shocking that in the richest country in the world we run out of fundamental, basic supplies”

Bloomberg Businessweek

of sodium bicarbonateâ&#x20AC;&#x201D;the ingredient in baking sodaâ&#x20AC;&#x201D;used for heart attack patients, and certain injected forms of morphine. Pfizerâ&#x20AC;&#x2122;s Hospira unit, which makes both types of products, has been plagued by factory qualitycontrol problems for years, leading to shortages of various drugs. The factories â&#x20AC;&#x153;are taking a little bit longer to remediate than we thought,â&#x20AC;? Pfizer Chief Financial Officer Frank Dâ&#x20AC;&#x2122;Amelio said on a recent conference call with analysts, promising to fix most of the issues by the end of 2018. As a result of the problems, Pfizerâ&#x20AC;&#x2122;s sales of injected hospital drugs declined 12Â percent in the third quarter. Finding alternatives to injectables isnâ&#x20AC;&#x2122;t easy. While some drugs can be taken orally and others administered through a syringe, itâ&#x20AC;&#x2122;s expensive and time-consuming to change hospitalsâ&#x20AC;&#x2122; operating procedures. The more a workflow is changed, the greater the chances of medication errors, nurses and pharmacists say. UW Health, the hospital system affiliated with the University of Wisconsin at Madison, is spending

$1 million on alternatives to Baxterâ&#x20AC;&#x2122;s saline bags, including renting hundreds of drug pumps that can deliver medicines via syringe and buying other drugs in premixed bags, says Philip Trapskin, UWâ&#x20AC;&#x2122;s program director for medication use strategy. Injected drugs are harder to produce than pills because they must be made under sterile conditions. They account for 72 percent of the countryâ&#x20AC;&#x2122;s drug shortages, according to a January report from Pew Charitable Trusts and the International Society for Pharmaceutical Engineering. The report cited factory quality-control problems and companies withdrawing from the market. â&#x20AC;&#x153;I canâ&#x20AC;&#x2122;t believe that one plant in only one place makes so much of a critical product that every hospital needs to function,â&#x20AC;? says Fox of University of Utah Health, referring to Baxterâ&#x20AC;&#x2122;s hurricane-hit operations. â&#x20AC;&#x153;We have all hands on deck every day. Itâ&#x20AC;&#x2122;s a logistics nightmare.â&#x20AC;? â&#x20AC;&#x201D;Robert Langreth and Cynthia Koons

Chaebol Foundations Face Scrutiny A tumultuous year for Samsung Group and other conglomerates threatens to get worse as South Koreaâ&#x20AC;&#x2122;s competition authority, the Korea Fair Trade Commission, probes whether their founding families use the cloak of charity to maintain power without having to pay billions of dollars in taxes. When the new conglomerates bureau of the commission starts operating in December, its first order of business will be auditing the family foundations of the countryâ&#x20AC;&#x2122;s biggest conglomerates, or chaebol. â&#x20AC;&#x153;If foundations are found to be abusing the purpose of their establishment, we will consider ways to regulate them,â&#x20AC;? says Kim Sang-jo, the commission chairman. Foundations created by Koreaâ&#x20AC;&#x2122;s corporate giants hold about 12.9 trillion won ($11.5 billion), according to national tax service data analyzed by Bloomberg. Questions have long swirled around the groups and their donations. Lawmakers say the organizations have allowed the wealthy and powerful families behind Samsung Group, Hyundai Motor Group, Lotte Group, and others to further enrich themselves while not doing enough for the public interest. Critics, including Kim, allege the families use the tax-exempt entities to accumulate shares in their own companies and secure multigenerational control without paying inheritance taxes. â&#x20AC;&#x153;We will look into what kind of assets they have, how much revenue they raise, and how much they are actually spending for public activities,â&#x20AC;? says

November 20, 2017

THE BOTTOM LINE Industry consolidation and other problems have caused a critical shortage in the U.S. of simple hospital necessities such as injectable drugs and bags of saline solution.

â&#x2014;&#x2039; South Koreaâ&#x20AC;&#x2122;s competition authority will start auditing the charities in December

Kim, a former economics professor and activist shareholder nicknamed the â&#x20AC;&#x153;chaebol sniperâ&#x20AC;? for his work targeting powerful companies. The businesses helped rebuild the nation in the decades after the Korean War but bred a culture of corruption in the process. Today the top 10 chaebol own more than 27 percent of all business assets in South Korea. Kim is President Moon Jae-inâ&#x20AC;&#x2122;s point man for reform. He was appointed chair of the Fair Trade Commission in May soon after Moonâ&#x20AC;&#x2122;s election and has committed to making good on the presidentâ&#x20AC;&#x2122;s anticorruption promises. In early November, Kim met in Seoul with leaders from five conglomeratesâ&#x20AC;&#x201D; Samsung, Hyundai, SK Group, LG Group, and Lotteâ&#x20AC;&#x201D; warning that his agency would soon start auditing

Kim, fourth from left, at a Seoul meeting with chaebol leaders on Nov. 2

SEONGJOON CHO/BLOOMBERG

BUSINESS

the foundations, as well as the businesses. He promised to scrutinize those that have received tax benefits and crack down on activities that go against the foundations’ stated missions. “They’re demonstrating that they really have the power to make life miserable for those guys,” Scott Seaman, director for Asia at the Eurasia Group in Washington, says of the government crackdown. “The charities are probably an excellent place to look for impropriety.” Last year, South Korea’s 40 biggest corporatebacked foundations gave a combined 641 billion won, or 4.9 percent, of their 12.9 trillion won to art museums, hospitals, schools, and programs that help North Korean defectors. That’s not enough support for charitable causes, says Park Yong-jin, a National Assembly member from Moon’s party. While not officially part of the conglomerates, the charitable groups are often run by family members or company executives, making them reliable allies against challenges from minority shareholders. The assets of most foundations consist largely of shares with voting rights in chaebol-affiliated companies. “Companies donate shares with voting rights to charitable foundations as a way to protect their management rights without paying taxes,” says Bruce Lee, chief executive officer of Zebra Investment Management in Seoul. Park, the lawmaker, has proposed legislation to strip the foundations of their voting rights. Nonprofit foundations have figured in recent political scandals that led to a conviction in August of Jay Y. Lee, co-vice chairman of Samsung Electronics Co., and the impeachment of former South Korea President Park Geun-hye in March. The ex-president had been charged with pressuring chaebol leaders to donate billions of won to foundations run by a confidante and friend in return for government favors. Samsung took part in the scheme, according to prosecutors, to win government approval of the 2015 merger of two affiliates. When regulators forced Samsung to sell shares of one of its units, a foundation chaired by Lee purchased the shares, keeping them under family control. Samsung has three foundations that had about 3 trillion won combined last year, according to tax office data. Their philanthropic contributions totaled about 48.1 billion won, or 1.6 percent of assets. By comparison, the largest U.S. foundation, the Bill & Melinda Gates Foundation, made gifts totaling $4.6 billion, or 11 percent, of its endowment last year. Samsung’s foundations didn’t respond to requests for comment. The chaebols’ charitable entities “are ‘public’ foundations in name only,” says Chung Sun-sup, CEO of corporate analysis firm Chaebul.com. —Sohee Kim, Yoojung Lee, and Bruce Einhorn THE BOTTOM LINE South Korea’s chaebol reformer is reviewing charitable spending by the foundations of the country’s biggest conglomerates.

Cage-Free Eggs

So much for socially conscious buyers. Demand for eggs from chickens with room to roam isn’t all it was cracked up to be.

After the likes of McDonald’s Corp. and Wal-Mart Stores Inc. in recent years pledged to switch U.S. outlets to cage-free eggs— laid by hens not conﬁned to tiny spaces—many farmers started building roomier coops (above). Eggs from chickens with room to spread their wings taste better by some accounts. They’re also a salve for shoppers interested in humane treatment of the animals headed for their kitchen tables.

Cage-free eggs needed 60b

Grocers Restaurants Distributors Food manufacturing

Other*

0 2016

2028

1 square foot per hen in cage-free multitiered aviaries

1.5 square feet per hen in singleﬂoor aviaries

21 Medium Domino’s pizza 67 sq. in. (recommended minimum for a caged hen)

But the self-imposed deadlines to complete the changeover for many of the biggest retailers and restaurants are at least eight years away. And many shoppers are drawn to cheaper products, given the current hefty retail premium—up to six times more than eggs from caged hens in the Midwest.

“It’s been bad,” says Marcus Rust, chief executive officer of Seymour, Ind.-based Rose Acre Farms Inc., the second-largest U.S. egg producer. The company spent $250 million over four years to upgrade conditions; today about 20 percent of its hens are cagefree. Now, Rose Acre is shutting down its construction program. Says Rust: “We are going to be in a holding mode until retail pays a warranted price.” —Shruti Date Singh

*INCLUDES CONVENIENCE STORES, DOLLAR STORES, HOSPITALS, AND TRAVEL; DATA: USDA, EGG INDUSTRY CENTER PROJECTIONS; CAGE SPACE GUIDELINES BY UNITED EGG PRODUCERS

GETTY IMAGES

Trends

LOOK AHEAD

○ Salesforce.com reports earnings, the ﬁrst test of its goal to lift revenue by at least 138 percent in ﬁve years

○ Hardware companies and banks descend on London for the annual FinTech World Forum

○ Earnings at hardware-focused HP Inc. are likely to keep outshining services-focused HP Enterprise

Serial Harasser.

Disgraced Venture Capitalist.

Motivational Speaker?

ICHAEL SHORT/BLOOMBERG

○ A few months ago, Justin Caldbeck went into hiding. He’s not most people’s ﬁrst pick for the college lecture circuit

Justin Caldbeck didn’t want to be this kind of pioneer. In June he resigned from his job running Binary Capital LLC after six women accused him on the tech news site the Information of unwanted sexual advances. Like many of the powerful tech and media men whose careers have imploded under similar circumstances in the months since, Caldbeck at first fought the allegations and even denied the initial news reports. Within a few days, though, he stepped down and began to express remorse. He was being serious, he says, when he changed his title on LinkedIn to read, “Head of Self-Reflection,

Accountability & Change,” a move that brought widespread derision. Since then, Caldbeck has mostly stayed home in Hillsborough, Calif., south of San Francisco, especially after a fellow diner at a local restaurant called him a predator to his face. He continues to enjoy a share of Binary’s profits as a co-owner of the venture capital firm, according to a person familiar with the matter. Close to five months since the news of the accusations broke, he’s still drafting letters of apology to the women who agreed to be named by the Information, plus five or six more. “I made more mistakes than the ones that were reported,” he says. Before sending any letters, however, Caldbeck is attempting a post-scandal comeback. The 41-year-old says he’s changed enough over the past few months to educate young men about the dangers of “bro culture” in the workplace, using a website he’s developing and a 51-slide PowerPoint presentation he delivered for the first time on Nov. 9 to 50 students in a finance class at Duke University, his alma mater.

T E C H N O L O G Y

November 20, 2017 Edited by Jeff Muskus Businessweek.com

TECHNOLOGY

Bloomberg Businessweek

November 20, 2017

The lecture was free, he says, the first stop on what he hopes will be a lengthy tour of colleges that can “create positive change for women by educating young men about how to be better.” Caldbeck’s named accusers declined to comment. Women who are working to tackle employment discrimination issues say they’re more than a little skeptical of his apology tour. “I’m not sure if what he’s working on is coming out of a place of deep reflection and wanting to improve the industry or wanting to reform his image enough to keep doing what he was doing before,” says Tracy Chou, a software engineer and co-founder of Project Include, an organization that promotes diversity within tech companies. (Chou says she wasn’t speaking on behalf of Project Include.) The accounts from Caldbeck’s six accusers include a broad range of sexual harassment. He’d ask professional acquaintances—including startup founders seeking Binary funding—about their sexual histories, grope them under the table during meetings, invite them to his hotel room, and proposition them for sex. Another entrepreneur told the New York Times that Caldbeck kissed and groped her after investing in her startup. (As with similar cases revealed in the past few months, law enforcement officials haven’t filed criminal charges against Caldbeck.) Shortly after the first wave of news reports in June, a former Binary employee sued the firm, saying Caldbeck and his business partner created a “sexist and sexual environment” and threatened her after she quit. Caldbeck hadn’t exactly found religion by then, either. The day the Information broke the news of the allegations against him, he texted the reporter, “Go f--- yourself” and publicly claimed to have unimpeachably professional relationships with women. In July, even after publicly acknowledging his history of harassment, he sent Niniane Wang, one of his accusers, a cease-and-desist letter telling her to stop making supposedly false statements about him. He now says he’s sought counsel from women, including feedback for his anti-bro-culture campaign, but he wouldn’t provide details. At Duke, Caldbeck told the finance students he’s lost tens of millions of dollars because he “wasn’t nearly aware enough of my position of authority” and “was behaving hurtfully, disrespectfully, putting women in tough situations.” While there are men in Silicon Valley and elsewhere whose sexual misconduct is malicious, he said, he was one of many who just didn’t understand what he was doing or how women felt, a pattern he traces back to college, where “dating lots of women was perceived as a good thing.” “There was no notion in college, in business school, really anywhere, of like, hey, this behavior, it’s really serious in the workforce,” Caldbeck said in an interview ahead of his Duke visit. Leaving aside the question of whether a 41-yearold man should know that it’s wrong to proposition potential business partners—or sexually assault anyone—Caldbeck’s presentation is missing several

key ingredients, according to women who work on employment diversity and discrimination issues. “You need to have men and women involved and on that stage,” says Lisa Wang, chief executive officer of SheWorx, a community for female entrepreneurs. Nicole Sanchez, who advises tech companies on human resources matters as the head of Vaya Consulting LLC, says meaningful change requires a lot more than broad statements about right and wrong. “It’s easy to say, ‘Stop perpetuating bro culture,’ but without saying how and what to put in its place, it’s not helpful,” she says. Eleanor McManus, an expert in crisis public relations at PR firm Trident DMG, says Caldbeck’s conversion sounds a lot like the stage-managed rehabilitation efforts of con men Jordan Belfort (The Wolf of Wall Street) and Frank Abagnale Jr. (Catch Me if You Can), men who had to be played onscreen by Leonardo DiCaprio to win a modicum of sympathy. “This is Crisis Management 101,” McManus says. “Once something horrible happens, you go and you take that issue and stand behind it, speak out about it.” Caldbeck says he hasn’t worked with anyone in crisis management and that he simply thinks talking about harassment is how he can do the most good. For now, Caldbeck’s other options seem limited. He and his Binary co-founder, Jonathan Teo, are in discussions with investors on how to replace them both, says the person familiar with the matter. (Teo hasn’t been accused of sexual misconduct.) That doesn’t mean Caldbeck will be poor. He’ll keep getting a share of the profits from the startups he backed at Binary and his previous firm, Lightspeed Venture Partners. Those companies include Stitch Fix Inc., an online personal-shopping service, which has filed for an initial public offering. Stitch Fix CEO Katrina Lake asked for Caldbeck to be removed as an observer on the board after his behavior made her uncomfortable, according to technology news site Recode. Lake declined to comment for this story. Similar allegations at other companies keep coming. On Nov. 13, Steve Jurvetson, a founding partner at venture firm Draper Fisher Jurvetson, left his job for unspecified reasons during a sexual harassment investigation. ( Jurvetson said on Twitter that he left to “focus on personal matters, including legal action against those whose false statements have defamed me.”) Whether you’re a technology professional or an aspiring venture capitalist, it remains difficult to see Caldbeck’s example as instructive, says Chou, the Project Include co-founder. There are others, she says, who could better use a megaphone. “Other people are completely locked out of a system that is so biased and structurally flawed,” she says. “It’s frustrating to think that someone who has done a lot of bad things gets a second chance.” —Ellen Huet

“I’m not sure if what he’s working on is coming out of a place of deep reﬂection”

THE BOTTOM LINE Caldbeck says he wants to give more lectures, but he has yet to write his apology letters, including to a handful of women whose harassment has gone unreported.

TECHNOLOGY

Bloomberg Businessweek

Designing a One-Stop Virtual-Item Shop

Gaming LLC. About 200,000 new people buy virtual items through OPSkins each month, but the site sells gear for online games with more than 125 million regular players. “This could be the perfect on-ramp,” says investor Scott Walker, who helped fund the “initial coin offering,” or ICO. Early investors are getting more WAX tokens for their money, but their value will become another variable once the exchange goes live in December. OPSkins doesn’t disclose its financials, but its revenue is growing at double digits annually, says CasSelle, previously chief technology officer at Tronc Inc., the former Tribune Co. Partly, he says, the WAX token strategy is a way to stave off competitors. Over the past few months, rivals including DMarket, KyberNetwork, and SkinCoin have held ICOs to launch or expand their services. So far, no other trader has the muscle to create the kind of intercompany exchange OPSkins is building. Starting next year, websites that install the WAX widget will get as-yet-undetermined fees for resulting sales. The volatility of the WAX token price may make it a poor place to hold money not being used for short-term item buying and selling. But OPSkins’ biggest potential roadblock is the maker of the games. Industry leader Valve Corp., which publishes CounterStrike: Global Offensive and the other big hits OPSkins exploits, has the power to ban sites from trading skins. Last year, Valve sent cease-and-desist letters to 23 online gambling sites to prevent them from using skins as collateral, a move aimed at reducing teenage gambling on professional video game matches. “Valve has certainly left the door open to an action in the future,” says Grove, the Eilers researcher. CasSelle says that the new exchange can work without Valve’s help, including as a way to acquire other virtual goods, and that OPSkins is looking to raise an additional $7 million in WAX tokens before it finishes its ICO on Nov. 28. (The company initially sought a total of $63 million but lowered that goal because the flurry of interest around bitcoin

DATA: OPSKINS, WORLDWIDE ASSET EXCHANGE; COURTESY OPSKINS

○ OPSkins’ team supplies digital tokens worth real cash to buy video game loot

Sam Alexander has spent days at a time in front of the three giant monitors hooked up to his PC in London, comparison-shopping for “skins,” decorations for virtual guns and knives. In games such as the popular shooter Counter-Strike: Global Offensive, the most sought-after skins confer the kind of prestige that a Rolex watch or Hermès bag would on the street— and can sell for more than $100,000 in real-world cash. But because there are dozens of skins marketplaces online, it can be tough to tell if you’re getting the lowest price; people like Alexander have made a brisk business comparison-shopping on behalf of rich clients. Alexander, 21, says he’s earned “more than an average person makes in a year” from commissions he negotiates with each buyer. “It’s difficult for them to find the exact items that they want—there’s no centralized database,” he says. His customers also struggle often with payment methods at the main online venues. “Many of the collectors with whom I work are located in China. It is difficult for them to transfer money out.” OPSkins, the largest skins site in the $50 billion market, may be about to put people such as Alexander out of business. The two-year-old company says it’s raised about $41 million by selling what it calls WAX tokens, a virtual currency that will become the default way to buy and sell skins on its intercompany skins marketplace, the Worldwide Asset eXchange. The idea is to simplify purchases for gamers from different countries and give everyone a clearer sense of what a particular item is worth, using the same kind of digital-ledger system as the cryptocurrency bitcoin. The company is betting that making its exchange accessible to rivals, who can then make a broader catalog available to customers, will expand its audience beyond the limitations of an individual website, says Chief Information Officer Malcolm CasSelle, who’s helping lead the WAX effort. In theory, there’s lots of room for new skins buyers, says Chris Grove, managing director at researcher Eilers & Krejcik

November 20, 2017

Rare “skins,” virtual paint jobs for guns in the game CounterStrike, can sell for more than $100,000 in realworld cash

Shaping the WAX The marketplace for the new cryptocurrency tokens lets buyers and sellers barter directly for virtual goods

① A player who has a virtual item, such as a rare decoration for a weapon in CounterStrike: Global Offensive, wants to sell it

② The seller lists the item on the exchange, its asking price shown in terms of WAX tokens

Transfer agent

Asset returned No

Seller

WAX

Virtual skin

Offer accepted?

③ A buyer or WAXapproved “transfer agent” spots the listing and contacts the seller ④ The blockchainbased exchange securely transfers both the item and the tokens to their new owners

Buyer

Yes Payment

Asset transfer

TECHNOLOGY

Bloomberg Businessweek

November 20, 2017

and its spiking value has diverted attention from ICOs.) Alexander, the personal shopper for virtual goods, says he thinks the exchange will be good for people like him in the short term, swelling the overall market for skins. “It makes the entire process effortless,” he says. “It is a massive pain dealing with the payment methods available at the moment.” But he’s hedging his bets, having returned to college to finish his degree in economics. He says he eventually wants to get a job in finance or start his own business. —Olga Kharif

nine-year-old company’s gear is sophisticated enough to detect hacking techniques that have never been cataloged by tracking minute upticks in computer processing power. Yet the platform is also meant to be foolproof, responding to voice commands as complex as “find all systems running Apache Struts 2 2.3.x”— the software exploited at Equifax—and as simple as “take those machines offline.” Software such as Endgame’s is having a moment because other tools have failed, says Lawrence Pingree, a research vice president at Gartner Inc. “Traditional providers lost some trust over the last five or six years because of the number of data breaches that were caused in part by the failure of malware detection,” he says. Gartner predicts that the EDR market, which more than doubled, to $500 million, in 2016, will top $800 million this year and $1.5 billion in 2020. That’s far faster than the single-digit growth of the $9.6 billion firewall market. Among EDR companies, Endgame is dwarfed by Carbon Black Inc. and CrowdStrike Inc. But its collection of government contracts, which are typically stable, stands out, Pingree says. That’s important in a hypercompetitive field likely to be winnowed down in the next few years through acquisitions and mergers. Endgame started out selling hacking tools to the feds. Selling offense was great training for playing defense, Fick says. He joined as CEO in 2012, when the company was remaking itself as a guardian of federal agencies. “Nobody is more attacked than the Pentagon,” he says. Last December the company nabbed the U.S. Air Force as a client with a $19 million deal. It recently won a $1 million contract with the U.S. Navy and is wooing the U.S. Army. Civilian clients include a financial-services firm and a health-care company. Endgame says its annual recurring revenue has more than doubled this year and will do so again next year, but it wouldn’t share more detailed figures. The company is moving beyond government contracts; more than half its clients are commercial. The Texas A&M University system, which spans 13 universities and state agencies and about 148,000 students, began using Endgame last year. Before that, A&M’s in-house security team of five full-time staffers and a handful of student workers had to rely on the IT help desk, entering a ticket to request a physical inspection of suspicious computers or servers, says Christopher De La Rosa, one of the staff security analysts. Now, he says, he can examine most systems remotely and keep his attention on high-risk data such as health or financial information. In some cases, De La Rosa says, the team can resolve problems twice as fast as it used to. “Instead of waiting for something to occur, we’re actively out there hunting and preventing attacks,” he says. “You only have so much time and so much manpower.” —Dune Lawrence

“Nobody is more attacked than the Pentagon”

THE BOTTOM LINE OPSkins has raised about $41 million to simplify the item-buying process for superfans of Counter-Strike: Global Offensive and other games.

The Military’s Cybercontractor Of Choice ○ In a hot security software market, Endgame has the Pentagon’s ear 26

Old-school firewalls and antivirus software try to block or at least detect hackers, but when those systems fail, they can’t do much to limit the trail of destruction. More often than you might think, corporate IT staffers are reduced to wandering around to physically tinker with infected machines to figure out the problem. And the most advanced security software can be undone by the dumbest of human errors. Equifax Inc. blamed the hack of 145 million Social Security numbers on an unnamed IT guy failing to install a security update. Even the U.S. Department of Defense has proved vulnerable to hackers, who are still making use of the National Security Agency cyberweapons that began leaking online last year. In the military, the gap between developer and user can be more profound, says Nate Fick, the chief executive officer of security-software maker Endgame Inc., which has built its business on Pentagon contracts. “When it comes down to the individual, you’re dealing with a 19- or 20-year-old operator on a 12- to 18-month duty rotation,” says Fick, a former U.S. Marine Corps commander in Iraq and Afghanistan. “You better build a product that’s easy to use.” Endgame is part of a growing slice of the security software industry known as “endpoint detection and response,” or EDR. An endpoint, in this case, is a particular computer or server that can be hacked. Endgame’s software is designed to stop an attack from spreading any further by remotely examining, quarantining, and fixing a hacked endpoint. The

THE BOTTOM LINE Endgame says it’s expanding beyond its military roots and more than doubling its annual recurring revenue as the broader EDR market rises by 60 percent.

Innovation

Woebot

This chatbot, which runs on Facebook Messenger, asks users to record their moods each day and offers to teach behavioral techniques meant to combat depression and anxiety. ① Chat

Type “Hey, Woebot,” and the software offers a sympathetic synthetic ear, asking, “Can you describe to me how you’re feeling?” and “So tell me, what’s your energy like? High? Middle? Low?” From there, it guides users through therapy exercises. ② Test The chatbot asks users to watch videos or take quizzes to help internalize the therapy exercises. In a 70-person trial of college students, chatting with the bot signiﬁcantly decreased participants’ depression scores.

Next Steps

Innovator Alison Darcy Age: 39 Chief executive officer of Woebot Labs Inc., a 10-employee company in San Francisco

Origin Darcy, a clinical research psychologist at Stanford University with a background in coding, began working on Woebot in July 2016 as a way to offer therapeutic techniques to people who lack access to traditional counseling.

Tweaks If you don’t like learning over video, tell Woebot, and it’ll stop sending video links and stick to chatting. Woebot can also track your moods over time and recognize emotional patterns.

Revenue Darcy experimented with a subscription model earlier this year and says she’s considering whether to make it permanent.

Support In October, Darcy named as Woebot Labs’ chairman Andrew Ng, the co-founder of online education company Coursera and former head of Google’s artiﬁcial intelligence project.

Darcy is seeking outside investment to speed the development of a standalone Woebot app. “It’s exciting because it shows the potential of bridging the access gap,” says John Torous, co-director of the digital psychiatry program at Boston’s Beth Israel Deaconess Medical Center. “It’s a way to scale mental health care and reach more people.” —Caroline Chen

LOOK AHEAD

○ Mondelēz CEO Irene Rosenfeld retires. She led the snack giant’s 2012 spinoff from Kraft Foods

○ Nebraska officials rule on a route for the controversial Keystone XL pipeline in that state

How Much Will Equifax

Pay?

○ Unlike many white-collar workers, U.S. stock traders get only half a day off the Friday after Thanksgiving

○ A law that protects consumers’ data was written before the age of hacking When a credit card is lost or stolen—or if the number gets exposed in a data theft—federal law makes it a pretty painless experience for consumers. Credit card holders are on the hook for no more than $50 if any fraudulent charges are made; debit card users have similar caps on losses as long as a problem is reported promptly. The account number is changed, a new card is sent in the mail, and life goes on. Contrast that with the confusing mess consumers were left to sort out when hackers broke into credit-reporting company Equifax Inc. and stole the personal identification information, including Social Security numbers, of almost half the American population. The incident left 145.5 million people facing a lifetime of higher risk for identity theft. Equifax offered free credit monitoring from its own service for a year. But the question of monetary compensation is still up in the air. It’s likely to be worked out in class-action litigation. Because the Equifax breach affected such a huge number of people and compromised some of their most sensitive data—thieves can use Social Security numbers to open accounts in someone’s name—legal experts predict a fierce fight, with plaintiffs likely to demand settlement figures in the billions of dollars. “You’re talking about the biggest breach in history,” says Nathan Taylor, a cybersecurity lawyer with Morrison Foerster in Washington, who represents companies involved in high-profile data breaches. If history is a guide, as Taylor predicts it will be, the final recovery may end up being rather less— perhaps $1 a head once legal fees are paid. Health insurer Anthem Inc. set that benchmark in June when it agreed to pay a record $115 million over a breach that affected 78.8 million people and also compromised Social Security numbers. Even if Equifax were to settle for more than $200 million, with almost twice as many victims as in the Anthem case, that could still be less than the company’s profit for the most recent two quarters. Equifax declined to comment on pending litigation but said it’s focused on helping consumers “to navigate this situation and providing the best customer support possible.” Serious settlement talks aren’t likely before both sides have investigated the evidence and tried out some of their legal arguments in court. Plaintiffs’ attorneys are likely to say this breach stands apart from earlier ones. “If anybody who’s collecting data should have state-of-the-art security practices, it’s these guys,” says Tina Wolfson, an attorney with Ahdoot & Wolfson in Los Angeles who filed two

F I N A N C E

November 20, 2017 Edited by Pat Regnier Businessweek.com

FINANCE

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of the 240 consumer class actions against Equifax. When consumer lawyers try to negotiate a deal, however, they may find that a once-promising line of legal attack has been closed to them. The federal law that’s meant to hold companies such as Equifax and its rivals Experian Plc and TransUnion LLC accountable predates the internet and wasn’t created with mass data breaches in mind. The 1970 Fair Credit Reporting Act, signed by President Richard Nixon, says credit-reporting companies may not furnish consumer data to unauthorized third parties and offers a remedy of as much as $1,000 for every affected consumer. It doesn’t require proof of identity theft or any outof-pocket losses. In theory that could be helpful to plaintiffs, because a big hurdle in data breach cases is showing how much consumers were harmed. Although lost data can leave many people at risk and forced to take precautions, it may prove harder to link it to identity thefts. But courts have repeatedly found that the FCRA doesn’t apply to data breaches because of the wording in the statute. That word “furnish” led a Los Angeles judge in December to dismiss FCRA-based claims against Experian after a 2015 data breach for failing to protect 15 million consumers whose personal information was hacked. “Although victims of theft might be the ‘source’ of the stolen goods, saying that the victims are furnishing their goods to a thief is counterintuitive,” the judge wrote. For Anita Taff-Rice, a California lawyer who specializes in technology and privacy, it’s maddening that companies that were never asked by consumers to gather their data could escape liability for such massive failures under the very law enacted to regulate them. Yet she agrees it’s a stretch to bend the “antiquated language” of the FCRA to fit a world in which hackers prey on the “modern reality of everything being interconnected by the internet.” Taff-Rice says the public would be better off if credit bureaus faced some kind of automatic liability when consumer data fall into the wrong hands. That’s similar to what the Fair Credit Billing Act does in limiting a consumer’s liability for credit card fraud to $50. “If you have a requirement like this, I believe the credit-reporting bureaus will do substantially more to protect your information,” Taff-Rice says. To Francis Creighton, president of the Consumer Data Industry Association, that’s a nonstarter because it singles out the credit bureaus his trade group represents. “This isn’t just a credit bureau problem, it’s a national problem of how we deal with breaches,” he says. Wolfson, who is also one of the lead lawyers for consumers in the Experian case, notes that the December ruling didn’t bar her clients from pursuing remedies under various state-level cybersecurity statutes and the common law of negligence. (Experian declined to comment on pending litigation.) Wolfson also says that in future cases, a

judge may be convinced that FCRA penalties do apply when credit bureaus fail to safeguard information from hackers if the circumstances are egregious enough. “It’s applying an old law to new facts, but laws are written to adapt to changing times,” she says. A decision on whether the FCRA claims can move forward in the Equifax litigation is months away. Taylor doubts a judge will throw them out early in such a big case. “The company isn’t going to completely avoid litigation because of something that people would characterize as a technicality,” he says. —Peter Blumberg, with Edvard Pettersson

November 20, 2017

○ Equifax stock price $150

120

90 11/11/16

11/14/17

THE BOTTOM LINE A federal law makes credit agencies liable if they don’t keep data private. But lawyers might find it hard to apply it to cases of theft.

Pleasing the Rich to Give to the Poor ○ Hedge funds have a big tax bill coming. One charity is ready for them

The closing of a giant tax loophole has been looming over U.S. hedge funds. A 2008 law required money managers who earned fees offshore and parked them there to declare the money and pay the taxes, but gave them until the end of this year. Although tax attorneys hunted for ways around this, they mostly came away empty. For many big-time investors, giving the cash away and getting a tax deduction may be the most attractive option. The Robin Hood Foundation is ready to help. The nonprofit, established by hedge fund billionaire Paul Tudor Jones to combat poverty in New York City, stands out for the strategic planning it’s done around the money managers’ tax reckoning. “It was not a discussion that was prevalent at most charitable organizations,” says Elizabeth Zeigler, chief executive officer of Graham-Pelton Consulting, which advises nonprofits on fundraising and management issues. “When you think of the million-plus nonprofits in the U.S., a healthy majority don’t have relationships with hedge fund managers. Robin Hood does.” On the fundraising side, Robin Hood is known for an annual celebrity-packed gala that generates tens of millions of dollars in donations and a conference at which hedge fund managers share their favorite investment ideas. Ticket proceeds from the conference go to Robin Hood’s antipoverty efforts, which include schools, job-training programs, and food pantries. The foundation’s board of directors includes well-known hedge fund managers David

○ Taxable revenue that might come from closing the loophole

$200b

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Tepper and David Einhorn. Robin Hood consulted with experts including tax advisers, lawyers, and hedge fund managers and eventually worked with Fidelity Investments and JPMorgan Chase & Co. to set up two so-called donor-advised funds, according to people familiar with the matter. They were designed with hedge fund managers in mind. Donor-advised funds essentially hold money and assets earmarked for giving, from which the donor can then direct grants to charities. They allow someone to get a large deduction immediately— generally up to a limit of 50 percent of adjusted gross income—even before choosing which causes get the cash. The granter gives up ownership of the money, but it can stay invested in markets. In the Robin Hood program, up to 90 percent can be invested in hedge funds, meaning it can remain in the firm of the person who gave it away. Robin Hood saw that this added flexibility could be valuable to money managers. They can keep power over big chunks of cash at a time when many clients are fleeing hedge funds because of poor returns. Even though they won’t earn fees or keep investment gains on the money, it remains part of their assets under management and potentially a way to flex market muscle. And they can remain involved in their giving instead of signing it away at once. The money can ultimately go to any charity, but Robin Hood encourages donors to make it one of their choices, according to those familiar with the matter. There’s a question as to whether donor-advised funds in general are a good deal for the public, says Ray Madoff, a professor at Boston College Law School who focuses on philanthropy. The funds provide donors with a significant tax break without as many rules as private foundations, such as an annual payout rate. Money could stay in a fund for

Bloomberg Businessweek

November 20, 2017

generations. “There’s clearly need for regulation to ensure that these funds are available for charitable use within a reasonable period of time,” she says. According to National Philanthropic Trust, in 2016 the funds as a group had $85.2 billion and gave away about 20 percent of assets annually. How much offshore money will be brought back and subject to taxes? It could be $200 billion, based on what tax advisers say after conversations with clients, brokers, and fund service providers. Investor George Soros has moved about $18 billion into his Open Society Foundations in the past seven years, with much of that coming from billions that had been accruing offshore. It’s possible that Connecticut, which faces a projected $2.3 billion deficit, could receive a bump, thanks to a handful of its hedge fund residents. Kevin Sullivan, commissioner of the Department of Revenue Services, says he’ll know more after April 15. “It will be 2018 before we see if it’s real,” he says, “or a wonderful dream we once had.” —Katherine Burton and Margaret Collins THE BOTTOM LINE The antipoverty Robin Hood Foundation, a favorite of hedge fund managers, built a giving program that will help them deal with the closing of a huge tax loophole.

DATA: COMPILED BY BLOOMBERG; ILLUSTRATION BY KURT WOERPEL

Don’t Lie to the Bank of Taizhou ○ A Chinese lender ﬁnds a way to make loans to businesses the giant banks ignore

At Bank of Taizhou Co., trainees are pushed to count money with lightning speed, mobilized to go after delinquent borrowers with the subtlety of an infantry battalion, and toughened up by former instructors from the People’s Liberation Army. The boot camp ethos would seem laughably bizarre if it weren’t for this: Bank of Taizhou is being called China’s most profitable lender. The little-known bank specializes in lending to entrepreneurial businesses ranging from small equipment makers to plastic molding companies

in the southeastern coastal province of Zhejiang. Its success shows it’s possible to lend to small companies—a sector that accounts for more than half of gross domestic product but is neglected by banks—and make good money doing it. There’s not a lender in China that beats Bank of Taizhou for profitability and asset quality, UBS Group AG concluded after picking over the financial statements of 237 banks across the country. “This bank just stuck out” on almost every metric, says Jason Bedford, the Hong Kong-based UBS analyst who led the study.

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November 20, 2017

When making loans, the bank uses a riskprofiling system brought in by a microfinance expert from Germany, Joern Helms, who was the bank’s first foreign recruit. The method is called IPC lending, after the German consulting firm that originated it, where Helms had worked previously, and it’s being held up by the World Bank as a guide for small-business financing. “I disagreed with the view that small businesses are difficult to assess and small businesses are risky,” says Helms, who stepped down as a vice president in 2014 after almost a decade with the Bank of Taizhou and now serves as a Shanghai-based adviser to the company. Big changes are coming to China’s financial sector. On Nov. 10 the government announced a plan to ease limits on foreign ownership of lenders and securities firms. Small-business lending isn’t likely to draw immediate foreign interest, though— even within China, it’s a bit of a backwater, with big banks preferring to concentrate on state-owned enterprises. The government has been trying to free up cash for banks to lend to businesses that typically have difficulty getting credit. But some of China’s smaller regional banks are more engaged in shadow financing than traditional lending, according to an August report by UBS. Unregulated loans have bloated the shadow banking industry to an estimated 122.8 trillion yuan ($19 trillion), according to Nomura Holdings Inc. Bank of Taizhou, with assets of about $23 billion, could be an example of how to keep transactions within the officially regulated banking system. Zhejiang province, especially the city of Wenzhou, where Bank of Taizhou has a branch, became

notorious for a shadow banking crisis in 2011 and 2012, when dozens of business owners went bankrupt or committed suicide after not being able to repay loans to underground lenders. This caused the government to increase funding for small businesses. While borrowing from shadow lenders remains an option, “the good businesses don’t have to go there,” Helms says. Bank of Taizhou’s loans average about $50,000, and its shareholders include carmaker Geely Automobile Holdings Ltd. Its approach to lending is labor-intensive and relatively costly: Of the bank’s 10,000-strong workforce, some 4,000 are account managers. “It works because they’re a local bank, they know what’s going on, and they have a lot of information about their customers,” says Oliver Rui, a professor at the China Europe International Business School in Shanghai. In IPC lending, salespeople ask a barrage of questions to determine creditworthiness. Instead of collateral, borrowers suggest a guarantor who can vouch for them. Helms says many small businesses don’t have reliable records, so account executives might ask the same question in different ways: What’s your monthly income? Then later: What’s your annual income? “They’re looking for a lie, an exaggeration, or a misconception,” says Helms. “It doesn’t have to be 100 percent accurate. It just has to be close enough to make a judgment.” Key figures might be checked with a relative or another employee. According to Helms, it’s hard for business owners to maintain a lie. Account managers may have as many as 300 borrowers at a time and keep up a brisk pace on visits around Taizhou, whose streets bustle with

“It works because they’re a local bank, they know what’s going on”

TAIZHOU: QILAI SHEN/BLOOMBERG; CORDRAY: ANDREW MANGUM/REDUX

New employees of the Bank of Taizhou learn to count bills

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trucks hauling components to assembly lines across town. Bank branches open as early as 7:30 a.m. and close at 7:30 p.m. in the summer, unlike the typical 9 to 5 of rivals, so that businesses can have access to funds before and after the workday. Managers not only handle clients’ banking needs but also can help them deal with parking tickets or even serve as matchmakers, a tactic that “increases customer stickiness,” says Bank of Taizhou President Huang Junmin. He says once customers get too big, the bank asks them to turn to larger lenders. One customer, Ruan Bochun, last year borrowed 500,000 yuan at an annual rate of 9.6 percent— more than double China’s benchmark rate of 4.35 percent—to start his business, sewing machine maker Feiyue Intelligence Technology. He says the bank’s representative has become a friend. On a recent visit they could be seen joking together like old pals. “I can communicate with him easily, otherwise I wouldn’t borrow money from him,” says Ruan, drinking tea beside hundreds of cardboard boxes and polystyrene shells. There’s little tolerance for missed repayments. If there’s even a hint of them being late, teams mobilize to phone the client, visit the business, and contact the guarantor or other people the customer knows, Helms says. If that doesn’t work, the bank will go to court, even for the tiniest amount. In the past, squads would roam an errant customer’s neighborhood wearing T-shirts emblazoned with “Risk-Fighting Unit” to shame the borrower into repaying, says Helms. The clear message: Pay your debts, and pay Bank of Taizhou before anyone else. With its reputation as a strict collector established, the bank no longer needs drastic tactics. An ethos of discipline among employees is honed by military-style training unheard of among Western lenders. At Bank of Taizhou’s training facility, people hired to be account managers and bank tellers spend up to three months learning the job. It’s part boot camp, part university: Trainees bunk down six to a room, practice customer service at mock branches, and are taught to count cash fast. Instructors, who must have had five years’ experience in the PLA, make students run 10 laps around the campus twice a day and teach them how to stand at attention and salute. “We need to make it clear it’s not a job in the office,” says Hu Xianpeng, a Bank of Taizhou senior economist in charge of the training program, dressed in Adidas exercise clothing at the facility. Despite the need to grill borrowers and stay on top of missed payments, the key to Bank of Taizhou’s business is that most small businesses repay their debts. “They don’t run away, they don’t do leverage, they just stay there,” Helms says. “It’s a low-risk thing.” —Alfred Liu, Angus Whitley, and Jun Luo

Changing Bank Rules, If Not the Law

THE BOTTOM LINE Deciding whether to lend to a small business is a labor-intensive task in China. You have to get out and meet the customers.

THE BOTTOM LINE Passing legislation to roll back post-crisis financial rules is a heavy lift, but President Trump is appointing regulators who can help rewrite parts of the rulebook.

November 20, 2017

○ Dodd-Frank lives, but Wall Street expects a softer touch on regulation

Randal Quarles was speaking to a standing-room-only crowd at a financial industry conference at the Pierre hotel in New York on Nov. 7, in the glow of Venetian chandeliers and bankers’ goodwill. The regulations that swept in after the 2008 financial crisis are ripe for an edit, said the Federal Reserve’s new vice chair for supervision, one of Wall Street’s watchdogs, and “everything is up for a fresh look.” President Donald Trump’s campaign promise to roll back financial regulation is making fitful progress on the legislative front. But his choice of Quarles for the supervision job highlights another way to deregulate: by changing the people in charge at key agencies. The former executive of private equity giant Carlyle Group added that the biggest difference he’ll probably make is “changing the tenor” of how the Fed interacts with banks. Trump is about to get a chance to change another agency’s tune. Richard Cordray said on Nov. 15 that he will step down as head of the Consumer Financial Protection Bureau, which was created by the 2010 Dodd-Frank Act. Appointed by President Barack Obama, Cordray continued to issue restrictions this year, including one on payday lenders. Still on Wall Street’s wish list is a softening of the so-called Volcker Rule put in place by Dodd-Frank. It prevents banks from making high-risk trades with their own money. But what counts as a prohibited investment is decided by five different agencies, including the Office of the Comptroller of the Currency. The OCC has sprung ahead of the pack by calling for bankers’ input on rewriting the rule. “Change is coming, and it will only increase over the next year,” says Keith Noreika, who was brought in by the administration to temporarily run the OCC. Trump’s permanent OCC pick is Joseph Otting, a former chief executive officer of OneWest Bank Group; he’s poised to take over an agency that once hammered OneWest over its foreclosure practices. The administration has also signaled its intent to give banks a break on a key capital rule. (Stringent capital requirements can protect banks in a crisis.) A meaningful change will require coordination by three agencies—the Fed, the OCC, and the Federal Deposit Insurance Corp. The FDIC is run by an Obama appointee whose term expires at the end of November. The White House is said to be vetting a replacement. —Jesse Hamilton

○ Cordray

LOOK AHEAD

○ Nigeria publishes third-quarter data on gross domestic product

○ South Korea releases ﬁgures on household debt on Nov. 21

○ U.S. durable goods orders will show whether an uptick in capital spending has ﬂamed out or not

Tied Up in Knots ○ Fear of the taxman has paralyzed India’s small businesses Twice in the past year, Mohammed Mohsin’s textile design business was buffeted by major economic policy changes: first, demonetization, then a new tax system. Mohsin is one of the half-million people involved in the sari trade in Varanasi, a city in northern India famed for its handwoven, brocaded silk textiles. The efforts by Prime Minister Narendra Modi to curb India’s vast informal economy—where cash transactions are the norm and tax evasion is rampant—mean that even micro-enterprises such as Mohsin’s fear running afoul of financial authorities. “It feels like the government is watching every move,” he says. Modi’s administration canceled high-value currency notes a year ago—forcing Indians to stand in long lines at banks to deposit their cash before it turned worthless. In July, it introduced a national goods and services tax (GST) to replace a collection of levies that it said were doing more to choke commerce than raise government revenue. The impact of those policies has reverberated across the economy. Growth slowed to 5.7 percent

in the quarter ended June 30, the first time it fell below 6 percent since early 2014. In the textile industry, which is India’s second-biggest employer after farming, growth dropped to 1.7 percent in the financial year ended March 2017, from 2.1 percent the previous year. The reason for the downturn is obvious, according to Mohammad Zubair, who sells silk yarn for weaving Banarasi saris, the finest of which can cost as much as 100,000 rupees ($1,500). He says the GST has wiped out almost all his profit margin, plus he now must pay a chartered accountant 1,500 rupees a month to prepare and file the separate monthly, quarterly, and annual returns authorities demand. “I have to pay the tax, but I can’t pass the charge on to most of my weaver-buyers, who are poor,” Zubair says. “So who bears the extra cost? Me.” Sachin Menon, a partner at KPMG in India, says the government could be doing more to help small businesses adapt. “They need hand-holding and training as far as technical knowledge is concerned,” he says. “And the government needs to provide them with those tools.” Even so, Menon adds, the measures are necessary. “Implementation of the GST is very important to expand the country’s formal economy,” he says. “You can’t stop taking medicines because of side effects.” From the government’s perspective, the meds are working: In October, combined federal and state revenue from the tax was

E C O N O M I C S

DHIRAJ SINGH/BLOOMBERG

A weaver in Varanasi

November 20, 2017 Edited by Cristina Lindblad Businessweek.com

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November 20, 2017

951 billion rupees, up more than 2 percent from the preceding month. Businesses are still finding ways to evade the tax. Zubair says he’s aware of informal agreements between yarn suppliers and trucking companies to falsify invoices to understate the value of goods being transported. Some are accepting fewer orders so as not to draw scrutiny from tax authorities, either because they were underreporting their income previously or because they’re cowed by Modi’s constant threats to root out tax cheats. “People are simply cutting down on their earnings,” says Suresh Kesari, who runs a fabric store in Varanasi. Zainul Abedin says his weaving business took a hit from demonetization, which forced him to idle 8 of his family’s 14 sari-making looms. But at least he

no longer has to hound customers to pay their bills: Many are now registered on a web portal called the Goods and Services Tax Network and are transferring money electronically to his recently opened account. Ashraf Ali, a weaver who, like one-fourth of Indians, cannot read or write, says small artisans like him find the new tax system intimidating. “We need help to fill forms, and the banks’ servers are often down when there’s no electricity,” says Ali, who’s had to open a bank account to get paid. “Maybe Modi ji should have waited for folks like us to catch up,” Ali says. “But he built a train before building the tracks.” —Archana Chaudhary THE BOTTOM LINE The sari-weaving economy in Varanasi has taken a hit, as businesses shoulder the increased cost of complying with the new goods and services tax.

Emerging From a Lost Decade ○ The euro zone is poised for an extended no-inﬂation growth streak

Buried amid gloomy headlines about deadlocked Brexit negotiations, Catalonia’s constitutional standoff, and anti-immigrant rancor along the Continent’s eastern flank is a bit of good news: Europe is no longer the sick man of the world economy. The 19-nation euro zone bloc is already enjoying the strongest growth in a decade, and, with nary a sign of inflation, momentum could well carry on for several years, economists say. “This is euro area growth at its best,” says Nathan Sheets, a former international economist at the Federal Reserve and U.S. Treasury. “Our friends on the Continent should enjoy it. It’s been a long famine.” The turnaround is striking for a region that plunged from the global financial meltdown into its own sovereign debt crisis, which threatened the very survival of the currency union. The European Commission recently revised its 2017 economic growth forecast to 2.2 percent, up from a 1.7 percent estimate in May. In a Nov. 13 report, the International Monetary Fund said growth across the European region—which includes the euro area as well as developing economies in Central and Eastern Europe—is having a positive spillover effect on the rest of the world. It also said those brighter prospects accounted for the bulk of the upward revision to its global outlook in October. Data released on Nov. 14 showed the euro area economy maintained its solid pace of expansion in the third quarter, advancing 0.6 percent. “More than four years into the current expansion, most indicators signal the euro zone economy is still somewhere around midcycle,” says Angel Talavera, an

economist at Oxford Economics in London. “Absent an unexpected shock, we should see several more years of economic growth.” Speaking at a panel in Lyon, France, on Nov. 9, European Central Bank policymaker Benoît Coeuré went so far as to say that in terms of balance and robustness, the euro area economy is in the best shape since the birth of the single currency in 1999, although he called on governments to implement more reforms to support it. The virtuous cycle is being underwritten mainly by the ECB, which fended off the debt crisis and locked in an ultraloose monetary policy. It was up to the Continent’s companies and households

European Renaissance Growth in the euro area is strengthening, but it still trails the U.S.

○ Euro zone annual GDP growth

○ Change in real GDP since Dec. 31, 2007 U.S.

Euro area

12%

Forecast 6 0

-6 -12

-5 2007

2017

12/31/07

3/31/17

DATA: EUROSTAT, EUROPEAN COMMISSION, INTERNATIONAL MONETARY FUND

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to do the rest. Corporate profits are beating estimates, and consumer confidence is at its highest level since 2001. Even at its current pace, expansion will lag behind the U.S. for the foreseeable future. Productivity growth is also nowhere near levels recorded at the start of the millennium. Almost a fifth of young people can’t find a job, and unemployment in the periphery of the euro zone still exceeds 10 percent. Inflation continues to track below the ECB’s target of just under 2 percent, a sign that wage growth remains muted. Although popular support for the single currency has been on the rise, it’s yet to reach the high-water mark of 2007. And so-called euroskeptic political parties have been gaining ground. The anti-euro (and anti-immigrant) Alternative for Germany party became the third-largest in the lower house after elections in September. In Italy, the populist Five Star Movement has racked up impressive gains in regional contests heading into next year’s general election. Other political earthquakes, such as Catalonia’s bid for independence from Spain, have the potential to cause further ruptures. As ECB President Mario Draghi has noted, international geopolitical shocks are a key source of risk. To insulate the economy, the ECB announced in October that it will continue to buy public- and private-sector debt for most of next year and won’t raise interest rates for a long time thereafter. With few signs of inflation picking up, economists surveyed by Bloomberg don’t anticipate a hike in the benchmark interest rate until the second quarter of 2019. Capacity utilization—a measure of slack in an economy—is creeping closer to historic cyclical highs, which bodes well for investment as well as jobs. Rising employment in turn should bolster private consumption, while exports are set to benefit from robust global trade. ECB Vice President Vítor Constâncio ventured recently that, judging from the latest indicators, “growth could be indeed stronger, and that would not surprise me.” Fiscal policy might have a role in extending Europe’s growth streak. With budget surpluses on the horizon, economists in Germany have been urging Chancellor Angela Merkel to lower social security contributions and cut income taxes during her fourth term in office. Goldman Sachs Group Inc. figures that policymakers across much of the euro area will recoup a bit of budget flexibility as growth picks up. “There’s good cause to think euro area growth can gather further strength in 2018,” according to economists at Credit Suisse Group AG, who recently raised their forecast to a 2.5 percent expansion next year. “And risks are to the upside.” —Jana Randow, with Samuel Potter, Cormac Mullen, and Blaise Robinson

A Russian Power Play In Belarus

THE BOTTOM LINE The European Commission has revised its 2017 growth forecast to 2.2 percent, up from a 1.7 percent estimate in May.

November 20, 2017

○ Lithuania says a new nuclear plant just across the border is a ploy to restore Moscow’s inﬂuence

Since breaking away from the Soviet Union in 1990, Lithuania has done its best to draw closer to Western Europe, joining NATO and the European Union, and adopting the bloc’s common currency. But less than 30 miles from the capital, Vilnius, looms a symbol of everything Lithuanians thought they’d left behind: the hulking concrete towers of a nuclear power plant being built with Russian money and expertise. The power station going up across the border in Astravets, Belarus, is creating a sense of déjà vu among Lithuanians, who fear not only a Chernobyltype disaster from a largely untested nuclear technology, but also a resurgence of Russian influence in the region. Lithuanian President Dalia Grybauskaite has called the plant a “nuclear monstrosity” and an “existential threat to European security.” Concerns over the plant intensified last year when authorities in Belarus failed to disclose that a 330-ton reactor encasement had slipped from a crane and dropped to the ground. The incident initially went unreported, and plans to replace the part were announced only after social media and independent online publications revealed details. “What’s worrying is the lack of transparency,” says Jonas Radlinskas, a retiree in Vilnius who says his neighbor died after working on the Chernobyl cleanup. Inspections by the International Atomic Energy Agency haven’t revealed any major flaws in the plant, but that’s done little to allay Lithuania’s concerns. The country of 2.9 million people was among the first Soviet republics to announce its departure from the bloc, and many see the nuclear plant as a ploy by Moscow to extend the region’s dependence on Russian energy. Like many of its Baltic neighbors, Lithuania has been working to loosen the grip of Gazprom, Russia’s state-owned gas company. The country already generates 26 percent of its electricity from renewable sources, according to the most recent available data. And in August it received its first delivery of U.S. liquefied natural gas. Belarus, a country of 9.5 million, whose main

“This is a way to keep the Baltics on their toes” 37

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exports include gasoline, tractors, dairy, and the fertilizer ingredient potash, relies on Russian gas to generate 95 percent of its electricity. Although the 2,400-megawatt nuclear power plant will allow the country to dial back on gas imports, it won’t do much to curb its dependence on Moscow, given that it’s being built by state-owned Rosatom Corp. and Russia is financing the lion’s share of the $11 billion cost. Astravets, which is scheduled to open in 2019, “is very clearly a means for Russia to try to remain influential,” says Antony Froggatt, an energy security researcher at Chatham House in London. “Nuclear energy will play an increasingly important geopolitical role in Russian strategy.” Officials in Belarus see the opposition to Astravets as sour grapes, because Lithuania was forced to shut down its own aging Soviet-era nuclear station in 2009 as a condition for joining the EU and later failed to attract investors for a new project near the site. President Alexander Lukashenko—who’s ruled Belarus virtually unchallenged since he was elected in 1994—has appealed to Lithuania to stop politicizing the issue. “Let us build this plant together and use it jointly,” he said in July. “Let us sit down together and resolve this dispute instead of making the whole world laugh at us.” Lithuanians have turned a deaf ear. In April the country passed legislation barring imports of electricity from the plant. Darius Degutis, a Lithuanian career diplomat appointed ambassador-at-large for Astravets, concedes the design of the two pressurized water reactors is similar to those of nuclear plants commissioned by EU members Finland and Hungary. His country, though, should have been consulted on the location, he says, since more Lithuanians than Belarusians live in the vicinity. “We’re not against Belarus building a power plant. Every country has that right,” Degutis says. “But the location is very wrong.” Officials in Belarus have said geology was one of the principal factors in choosing Astravets. Even though Belarus suffered more from Chernobyl than any other Soviet republic, many there view the new reactors with a mix of curiosity and pride. The plant, whose cooling towers rise as high as a 40-story building above log house villages and sugar beet fields, has brought rapid development to the tiny provincial town of Astravets. Since 2010, row upon row of pastel-colored apartment blocks, schools, and offices have cropped up to accommodate an expected 2,300 employees, their families, and all those seeking jobs amid the nuclear-powered boom. “Isn’t it impressive?” says Eduard Svirid, a press official at the plant, sweeping his hand across the landscape. “Seven years ago there was nothing, just an empty field.” In Belarus, a country where political opposition is stifled, Stanislau Shushkevich is one of the prominent critical voices. In his study in a modest Minsk apartment, where books line the walls from floor to ceiling, he says Belarus needs a nuclear plant, but

not at the cost of spoiling relations with its neighbors. The 82-year-old former physics professor, who in 1991 became the first head of independent Belarus, calls the spat “unproductive” on both sides. He believes the plant’s location may have been influenced by Russia’s desire to reinforce the message that it remains the dominant power in the region. “This is a way to keep the Baltics on their toes,” says Shushkevich, who oversaw the withdrawal of Soviet nuclear warheads from Belarus before losing to Lukashenko in 1994. “It’s purely political, but Lithuania will have to live with it, as the plant is not going away.” —Ladka Bauerova

November 20, 2017

THE BOTTOM LINE Belarus’s failure to report an accident at the construction site of a nuclear reactor reinforced Lithuania’s concerns about safety at the $11 billion project.

Pablo Escobar Slept Here ○ Medellín’s mayor fumes over the popularity of guided trips through the drug lord’s old haunts

Aram Balakjian, a 33-year-old Londoner, had a great time on his seven-month trip to Colombia last year. He toured the countryside on a motorbike, taking in sights such as the Chicamocha Canyon, and polished his Spanish at a school in Medellín. He also took part in a raucous game of paintball at a decrepit lakeside villa that once belonged to Pablo Escobar. There, he and about a dozen other tourists ran around blasting one another with paint pellets. Balakjian got to play the drug kingpin himself. Holed up on the second floor and running low on ammo, he was taken down in a sneak attack by a pretend U.S. Drug Enforcement Administration agent. It’s all fun and games to travelers streaming into Colombia seeking a real-life connection to the hit Netflix series Narcos, which depicts Escobar’s transformation from small-time dealer to drug lord with a net worth of more than $2 billion in 1987, according to Forbes. Tourists can check out his grave and the now abandoned apartment building where his Posing for photos at the cartel leader’s grave

FABIOLA FERRERO/BLOOMBERG (2)

ECONOMICS

family lived. They can also pay hundreds of dollars to schedule visits with Escobar’s relatives and members of his entourage who promise an inside look at the cartel leader’s life, which ended in a Dec. 2, 1993, shootout with security forces. As many as 1 in 10 international visitors to Colombia are lured by TV shows or movies that feature the country, according to TCI Research, a Brussels-based agency. Many Colombians who lived through two brutal decades of bombings, assassinations, kidnappings, and drug-fueled corruption are upset to see a coldblooded killer elevated to celebrity status. “For us as a society, it was still too soon. We weren’t ready,” says Adriana Valderrama, who heads the Museo Casa de la Memoria, a local museum devoted to the various conflicts that have ripped through the region and the country. “It’s a painful past, and it’s relatively recent,” she says. Medellín’s mayor, Federico Gutiérrez, scolded Puerto Rican reggaeton singer J Alvarez last year for showing up at a public function wearing a T-shirt emblazoned with the words “The Cartel” on the front and Escobar’s name on the back. He also chided Wiz Khalifa in March after the rapper posted a photo of himself on Instagram standing in front of Escobar’s tomb. In an interview with local media, Gutiérrez called him a “scoundrel” and demanded he apologize to the city. Of course, Medellín wouldn’t be the first town to cash in on the notoriety of its hometown criminals. In St. Paul, Minn., gangster tours recount the exploits of John Dillinger, Ma Barker, and Baby Face Nelson; Gibsland, La., has the Bonnie & Clyde Ambush Museum; and Fort Sumner, N.M., and Hico, Texas, both have exhibits devoted to Billy the Kid. But in Colombia, where more than 200,000 people have died in conflicts over the past halfcentury, the wounds are still fresh. Moreover, the boom in narco-tourism comes at a time when the country is trying to remake its image. According to the latest data from the World Bank, Colombia’s homicide rate in 2015 was less than half what it was in 1995. The signing of a peace accord last year that required the largest left-wing guerrilla group to disarm has also improved the security situation. That’s opened a swath of Colombia’s hinterlands to nature lovers, including bird-watchers who’ll gladly fork over as much as $4,600 for weekslong tours into the jungle to view toucans, macaws, and other exotic birds. “Colombia is a paradise that the world wants to get to know,” tweeted President Juan Manuel Santos in response to a favorable article published in a U.S. travel magazine this month. The message appears to be getting through: The country logged 2.9 million foreign visitors last year, a 57 percent increase from 2012. In the mountains of Medellín, Roberto Escobar, Pablo’s brother, caters to tourists seeking a different type of thrill. He leads tours that show off memorabilia including cars riddled with bullet holes, a jet

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November 20, 2017

ski the kingpin owned, and the table where the capo had his last meal, which is recounted in detail, down to a spilled glass of wine. Narcos fans will catch references to events depicted in the series, such as a photo of Escobar wearing a tie he borrowed at the last minute, so he could be admitted to the halls of Congress on his first day as a lawmaker. The tour’s organizers say some 80 to 100 people a day pay $30 for the experience. “People want to know the real stories,” Roberto says during an afternoon tour. “We have the stories.” Mayor Gutiérrez has been critical of those who make their living hawking the city’s lurid past and has proposed razing one of the remaining Escobar sites to turn the area into a memorial park for victims of the violence. “It’s a booming business for many,” he said in a local radio interview. “For any person that wants to come to Medellín and wants to know the real history of drug trafficking, what happened with Pablo Escobar, what we did— OK, come. But we’re going to tell the story ourselves, as a city.” Valderrama says the museum she oversees wants to devote more space to victims’ stories during the worst of the drug violence, from the 1970s through the 1990s. “What happened here is a tragedy, and the idea is for people not to leave thinking that Pablo Escobar is this mythical character they see in TV series,” she says. “That they understand that what happened here was almost a genocide.” Balakjian, the tourist from London, says that as he spent more time in Colombia he began to feel a bit uncomfortable about having taken part in an activity that made light of a dark moment in the country’s history. “For them it’s like, ‘I don’t want anyone to feel like it was an exciting thing, because it really wasn’t,’ and you have to respect that.” —Christine Jenkins

Manuela Ranch, Escobar’s lakeside villa, hosts paintball games for tourists

THE BOTTOM LINE TV series like Narcos are drawing tourists to Medellín, the onetime home of cartel leader Pablo Escobar, complicating Colombia’s efforts to leave its violent past behind.

“It’s a painful past, and it’s relatively recent”

LOOK AHEAD

P O L I T I C S

○ Top Russian officials gather in Sochi to allocate $316 billion in military spending

○ Brazilian President Michel Temer is said to be preparing a cabinet shuffle as alliances in his coalition government shift

○ Round 5 of the increasingly contentious Nafta negotiations wraps up in Mexico City on Nov. 21

The Strife Of the Party

Few people take Theresa May seriously as prime minister anymore. But the Tories are divided over Brexit, the economy—and who’ll replace her

November 20, 2017 Edited by Jillian Goodman Businessweek.com

Asked who would be the best prime minister this month, British voters put “not sure” in first place. On this, if on nothing else, the country is in agreement with Conservative lawmakers. The Tories have lost confidence in their leader, Prime Minister Theresa May. The problem is they don’t know who should replace her. May’s authority has been hanging by a thread since the evening of June 8, when the snap election exit poll revealed she’d squandered an apparently impregnable lead over the opposition Labour Party and lost her parliamentary majority. In November alone, May has seen two cabinet ministers resign over separate scandals and her gaffeprone Foreign Secretary Boris Johnson again stick his foot in his mouth on the subject of a British citizen imprisoned in Iran.

All of this would be easily fixed but for a much larger complication. That, of course, is Brexit. It’s not simply that Conservatives can’t agree on the right strategy for Brexit. They can’t even agree on the destination. Is Britain’s economic future best served by close proximity to the European Union or by distance? Splits over Europe, sex scandals, and sudden ministerial resignations are all evocative of the Tory government of John Major, which in 1997 lost power with the party’s worst election result in a century and a half. “To those looking in, I fear this must look at times very like the pre-1997 crisis,” says George Freeman, a Tory lawmaker who chairs the party’s Policy Forum, although he draws a crucial distinction. “Then the parliamentary party was exhausted, burned out, and behaving badly. Now we have a

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parliamentary party bursting with talent, ideas, and energy. But the cabinet is locked down in the almost impossibly difficult task of negotiating a Brexit deal.” The aim of David Cameron, May’s predecessor, when he announced a referendum on EU membership, was to settle the issue within his party. His hope was that a decisive vote to stay in the bloc would silence those Conservatives who had made life so difficult for Tory leaders over previous decades. Instead he ended up empowering them, splitting the party, and destroying his own premiership. Even among the so-called Brexiteers, who backed leaving the EU, there’s division on the shape of the future. For some senior Tories, the appeal of leaving the EU is the opportunity they see to turn Britain into a lightly regulated and taxed country that’s open to the world. But the campaign for Brexit, needing support from lower-income voters, promised more money for the state health service and tighter controls on immigration. Now, as they search for the trade deals they promised, Brexiteers are being challenged over whether to accept what opponents say are lower standards of food safety, for example, and looser requirements for toy manufacturers. But the Brexiteers at least agree that Brexit is a good idea. Far more fundamental is the problem faced by those Conservatives on the other side of the argument—chief among them the prime minister. May, like half her cabinet, including her deputy and her chancellor of the exchequer, has as the central goal of her government a policy that 18 months ago she opposed—one that, in her pre-referendum words, would damage “Britain’s security, prosperity, and influence in the world.” In October, May was asked whether, having campaigned against Brexit last year, she would vote for it now if there were another referendum. She was unable to answer. This contradiction could help explain why the Conservatives struggled in June’s election. Labour was led by Jeremy Corbyn, an old-school socialist who’d exhausted his party’s patience. He had a long record of friendliness with groups including extremist Irish Republicans and Hamas. And yet May’s warnings about Corbyn sat uneasily next to her determination to deliver Brexit—something that both the British business class and her own Treasury warned would damage the economy. The Conservatives, having decided to adopt a revolutionary policy, were looking a lot less conservative. “Central to the Conservatives’ success among working-age graduate professionals in 2010 and 2015 was their reputation as a safe pair of hands on the economy,” says Matt Singh of Number Cruncher Politics, a wonky U.K. blog. “Brexit, and the consolidation of the vote around the two main parties, meant a conflict between retaining existing supporters looking for security and continuity, and attracting new voters looking for radical change. To pull it off would have required a very strong campaign.”

That wasn’t what the Conservatives had. May’s awkwardness—she’s stiff in social situations, and even her staff adopted the nickname “Maybot,” originally bestowed by journalists—and her aggressive tone toward those who questioned the wisdom of Brexit didn’t help. Neither did the unexpectedly strong campaign run by Corbyn. Having made herself the focus of the campaign, she had no one else to blame when it only barely avoided defeat. Since then, May’s political life has become about surviving short periods: making it to the end of the day or the end of the week or the end of the month. At one point during her party conference at the start of October, it looked as if she might not even make it to the end of her own keynote speech as she succumbed to a disruptive cough and the interruption of a prankster. In what is likely to become the metaphor for her time in office, she croaked on, while behind her pieces of the set began to fall onto the stage. There are ways in which May’s weakness helps her. When she announced earlier this year that she would like to lead the Tories into another election, her lawmakers just laughed. They’re sure she doesn’t mean it, and in any case they won’t let her, so there’s no great urgency to unseat her. Instead, some see her role as absorbing as much of the unpopular news about Brexit as possible—that, for instance, it will cost, rather than save, Britain money—before she’s thrown overboard. Britain’s parliamentary system means that the fall of May needn’t mean the fall of the Conservative government. Even if Labour demands another election, Conservatives are under no obligation to agree. They can go until 2022 before facing voters again. Tories hope this will give them time to finish up Brexit. But even if it does, it may not mean Brexit will be finished with them. It’s now eight years since Britain was last in recession, and a slowdown might arrive soon. If one comes in the next four years, it’s likely to be blamed on Brexit, justly or not. And then there’s the cultural problem: By making themselves the party of Brexit, the Conservatives magnified their existing position as the party of older people. “Age has replaced class as the great dividing line,” says Robert Colvile, director of the Centre for Policy Studies. “The young are burdened with debt, their wages are stagnant.” This is a big problem for the Conservatives, according to Singh. “Going forward, the number of graduates will increase, and younger cohorts will take the place of older generations,” he says. “It’s like a trading position with very negative carry.” Colvile has been working with newly elected Tories to find ways of overcoming this divide and sees reasons to hope. “What’s striking is genuinely how many of them now see housing as the big issue— bigger than Brexit in many cases,” he says. That’s an opportunity for the Tories: The shortage of housing affordable to young people is at least a problem a determined government can solve.

November 20, 2017

○ Even if Labour demands an election, the Tories could delay it until

2022 41

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Bloomberg Businessweek

There are other reasons many Tories remain optimistic. They point out that, despite their challenges, they’re still polling very close to Labour. It’s also possible Corbyn has hit his ceiling. In four years the Conservatives will have a new leader, and Corbyn’s novelty will have worn off. The Labour leader seems to be the one thing Tories agree on. Against Corbyn, “the Conservative Party is absolutely united,” Freeman says. “We recognize that we have to deliver a Brexit that works for the whole country—or risk the unimaginable consequences of a hard-left government.” —Robert Hutton

growth,” says Patrick Kallerman, research director at the Bay Area Council Economic Institute, a nonpartisan think tank based in San Francisco. “The highest-income folks can afford to live wherever they want,” he says. “It’s the middle- or lower-income folks who can’t.” The state needs 180,000 new housing units each year, but fewer than 100,000 are built, according to Governor Jerry Brown’s office. “Each year that it goes on, things get worse,” Kallerman says. Lack of accountability is one reason. California tasks regional agencies with developing sustainable community planning strategies, which include reducing sprawl. But when communities fail to meet their own goals, there are no mechanisms to penalize them, he says. One disincentive for builders is the fiscalization of land use: Housing raises less tax revenue for local governments than retail. For Cabrera, the incentives are even more twisted. She works as a mortgage loan processor for a bank near Hollywood. Her $72,000 yearly salary is heavily dependent on commissions, which are determined by real estate prices. Were she to swap her job for one in Palmdale, she’d earn less money and revert to living paycheck to paycheck. So it goes for many Californians: When cost of living is accounted for, census data show that the state has the nation’s highest poverty rate, at 20.6 percent. Brown has embraced the role of counterweight to the do-nothing climate deniers in Washington, most recently at the United Nations Climate Change Conference in Bonn, Germany. A Democrat in his fourth and final term in office, he’s championed the passage of the strictest emissions laws of any state. But residents’ continued reliance on cars is getting in the way. Transportation accounts for almost 40 percent of greenhouse gas emissions in California, more than any other sector, compared with 27 percent nationwide.

California’s Climate Ambitions Get Stuck On the Freeway ○ Lack of affordable housing is to blame 42

The high cost of housing in California isn’t just hurting the state’s economy, fueling homelessness, and exacerbating economic inequality. It’s imperiling its reputation as a global leader in emissions reductions, too. Lila Cabrera’s move last year to Palmdale, a city of 160,000 in the high-desert region of Antelope Valley north of Los Angeles, illustrates the connection. As a renter in Sylmar, Calif., “I was overdrawn every month,” says the single mom of three. “I just couldn’t see it turning around.” Now, a $1,370 mortgage payment gets her family more space for less money. It also gets her a 51-mile commute, which, in typical bumper-to-bumper traffic, takes an average of two hours each way. As residents like Cabrera move farther from their employment in search of affordable homes, the state’s progress toward its climate goals is slowing. In 2015, the most recent year for which data is available, the state’s greenhouse gas emissions dropped at less than half the rate of the previous year, according to an August report from the San Franciscobased nonprofit Next 10. Low gas prices and a lack of affordable housing prompted more driving and contributed to a 3.1 percent increase in exhaust from cars, buses, and trucks, the report says. Census data show that more than 635,000 California workers had commutes of 90 minutes or more in 2015, a 40 percent jump from 2010. “California has failed to build [housing] in the communities where we’re seeing the largest job

The Long Road Home $2,200

Average commute time and median monthly housing costs, 2005 to 2016

San Jose San Francisco 1,500 California

Oakland U.S.

Los Angeles Long Beach 800

24 minutes

DATA: U.S. CENSUS

THE BOTTOM LINE Theresa May’s hold on the prime minister’s seat is weak, but while Conservatives figure out how to put Brexit behind them, she’ll probably remain in it.

November 20, 2017

The state legislature made the housing crisis a focus of this year’s session, passing 15 related bills. One seeks to expedite construction by accelerating the approval process for affordable housing. Another could raise as much as $250 million annually for subsidized housing—enough to build just 750 homes, given the $332,000 per unit estimate from Brown’s office. Another places a referendum on next year’s ballot asking voters to approve

$4 billion for low-income housing and home loans for veterans. “They’re good, they move the ball forward,” Brown said before signing the measures into law in October. “Have they ended the need for further legislation? Unfortunately not.” —Esmé E. Deprez

The morning commute to Los Angeles

THE BOTTOM LINE California risks losing the lead in the fight against climate change if it can’t reduce its citizens’ commutes. To do so, it’ll need more housing.

Who’s That Hiding Under the Astroturf?

GALLERY STOCK

○ The roots of corporate-generated advocacy groups can be difficult to uncover

James Short, a retired deputy fire chief, is the founder of an organization called Protect Our Pensions. At least that’s what it says on the group’s website. But ask Short about his role at Protect Our Pensions, which opposes efforts to push endowments, foundations, and pension funds to divest their holdings in fossil fuel companies, and he has a different take. Standing in the doorway of a brick bungalow in southeast Washington, D.C., in August, he refused to answer questions before shutting the door. A follow-up call elicited this response: “That is not me. I do not know who is putting those blogs out.” While Short’s name and those of other coalition members show up in letters to state legislators and newspaper opinion pieces, much of the writing is

actually done by public affairs firms operating in the shadows, according to documents and emails obtained by Bloomberg News. Far from being an active collection of public servants and pensioners eager to discuss an important issue, most of the 41 people listed on the Protect Our Pensions website didn’t respond to emails and phone calls. Some said they were proud to support the cause, but a few couldn’t even remember signing up. Grass-roots lobbying—the creation of groups of ordinary citizens to advocate for political causes— has been around for decades. But when corporations hide their involvement or recruit members indifferent to the objective, tactics known as astroturfing, it can provide an appearance of public support that doesn’t exist.

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The internet only makes such subterfuge easier. Anyone can set up a website and start a social media campaign while disguising who’s behind them. As Congress and federal investigators probe how such tactics helped spread disinformation during the last U.S. presidential election, Protect Our Pensions shows how similar strategies can be used to generate an artificial veneer of public support for policies that stand to benefit corporations. “When industry groups or wealthy donors masquerade this way, it allows policymakers to take actions that primarily support the well-heeled patrons funding the effort,” says Edward Walker, a professor of sociology at the University of California at Los Angeles who wrote a book about the grassroots lobbying industry in 2014. Protect Our Pensions appeared in March 2016 as institutional investors, including university endowments and pension plans, considered cutting ties with fossil fuel companies. More than 800 institutions have agreed to at least a partial divestment of their fossil fuel holdings, including the Rockefeller Brothers Fund, Norway’s sovereign wealth fund, and Syracuse University. But the funders behind Protect Our Pensions remain concealed. Exxon Mobil Corp., the American Petroleum Institute, and four other industry groups all say they’ve played no role in the organization. There are clues pointing to the involvement of DCI Group LLC, a Washington public affairs firm known for its work with the energy industry and for building grass-roots coalitions that sometimes obscure their funders. The website helpprotectourpensions.org is linked to the same IP address as DCI’s corporate website, according to reverse IP lookup tools. Shared IP addresses can sometimes be a coincidence, but of the 11 other sites connected to that address, at least eight are related to DCI clients. Craig Stevens, vice president for media affairs at DCI, declined in an email to either confirm or deny that his company did work on behalf of Protect Our Pensions. But he said that linking the campaign to DCI through its IP address “seems like conjecture.” He also said DCI “would never work with someone without their express agreement,” and he offered a general defense of the work his and other public affairs firms do. “Our democracy is stronger,” he said, “when citizens act and inform the government of how legislation, regulations, or judicial rulings impact Americans’ lives and provide policymakers with ways—if necessary—to improve them.” For a typical grass-roots coalition, a national firm like DCI will manage the contract and hire regional public affairs specialists to recruit members and place op-eds in newspapers. For Protect Our Pensions, much of this work has been carried out by two such firms—FSB Core Strategies in Sacramento and Mac Strategies Group Inc. in Chicago—both of which have worked with DCI in the past.

One of Protect Our Pensions’ supporters in Chicago is Shalom Klein, who hosts a weekly radio show called Get Down to Business with Shalom Klein and is the founder of a group called Jewish B2B Networking. When Bloomberg first spoke with Klein in August, he said he’d grown concerned about divestment after hearing about it from some friends in academia. “Social statement aside, it’s a bad business move,” he said. Months later, he acknowledged in an email that he’d been hired by Mac Strategies to recruit Protect Our Pensions members. Several of those have close ties to Klein, including his mother-in-law and a former employee of Klein’s father’s accounting firm. Three other Chicago-area members said they couldn’t recall joining. One, Marc Brown, a former trustee of West Deerfield Township in Illinois, was so perplexed when contacted by Bloomberg that he stopped by Mac’s office in Chicago for more details. Ryan McLaughlin, chief executive officer of Mac Strategies, said in an email that his firm “was engaged to build a grassroots coalition in Illinois of like-minded stakeholders who oppose the politicization of public pension investments.” He said all the company’s recruits signed up willingly and agreed with the mission, but he declined to comment on the source of Protect Our Pensions’ funding or his firm’s relationship to DCI. Despite the obfuscation, Protect Our Pensions has had little trouble getting its op-eds published. Often, these are written almost entirely by the public affairs firms. In January, according to correspondence obtained through a public-records request, FSB emailed Tim Shaw, mayor pro tem of La Habra, Calif., a draft of a piece the firm wanted to submit to Governing magazine in his name. “We can edit some language or passages if it’s not quite reflective of your views in some places,” an FSB employee wrote. Shaw didn’t alter a word. “Looks great!” he replied. The article ran online a month later. Shaw says he didn’t suggest any changes because he agreed with the contents. He says he isn’t sure who’s paying FSB. FSB CEO Jeff Flint said in an email that everyone it recruited for the group believes in its cause. “We’re proud of the work we do in getting citizens engaged in discussions on important issues,” Flint said. He declined to answer questions about who was funding Protect Our Pensions or whether DCI was involved. Brown, the former West Deerfield trustee, likens his involvement with Protect Our Pensions to that of someone who signs a petition without paying attention to what the issue is. While he says he’s opposed to divestment, he’s still disturbed that no one will say who’s footing the bill. Something, he says, “seems not kosher.” —Ben Elgin and Zachary Mider, with Jeff Green THE BOTTOM LINE So-called astroturfing groups—whether political or corporate—create seemingly organic support while concealing who’s really funding them.

November 20, 2017

○ The number of institutions that have pledged to at least partially divest their fossil fuel holdings stands at more than

800

Business B Schools When One Degree No Longer Fits All Schools are adapting to give MBA students the specialized programs and ﬂexibility they want Business schools are in an enrollment slump. Applications for full-time, two-year Master of Business Administration programs in the U.S. have declined since 2015. Last year 64 percent of U.S. full-time MBA programs received fewer applications, according to the Graduate Management Admission Council’s 2017 Application Trends Survey Report. “There has been a general contraction in industry MBA programs,” says Claire Preisser, associate director of the Aspen Institute Business and Society Program, an arm of the think tank that studies trends in business education. That’s due in part to a strong U.S. economy and

higher employment rates. Also, with outstanding student loan debt at an all-time high—$1.4 trillion— and fewer employers willing to foot the bill for an MBA degree, the costs are even more daunting than in previous years. This has students seeking out more specialized and flexible programs, which in turn, Preisser says, has led “more schools to look at their curriculums and adjust them to fit market pressures.” Jerry Davis, an associate dean at the University of Michigan’s Ross School of Business, agrees: “We don’t want to be a generic provider of an MBA degree.” One response by Harvard Business School to the market demand was to create a Master of Science/MBA joint degree program with its engineering school. “Our MBAs are going into technology-based companies, and we are constantly looking for ways to build out their technology management skills,” says Tom Eisenmann, professor of business administration at HBS and one of the faculty members behind the program. Such programs are an attempt to stay relevant and cater to what students and employers are looking for. For the third year in a row, Harvard topped Bloomberg Businessweek’s annual ranking of traditional two-year, full-time MBA programs, which polls recent graduates, alumni, and employers on topics such as academics, job placement, and pay growth. (The ranking excludes alumni who received joint degrees or pursued a part-time program; the complete ranking and full methodology is available at bloomberg.com/bschools2017.) Harvard faculty and administrators raised the idea of a joint program earlier this year, and it will be offered to students starting in August. Most of the first year will consist of MBA-required

F O C U S 47

November 20, 2017 Edited by Dimitra Kessenides Businessweek.com

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Bloomberg Businessweek

courses; the second year includes electives at both schools. â&#x20AC;&#x153;You can hire somebody who understands technology, and you can hire someone who understands business, but we are trying to put it all into one head,â&#x20AC;? Eisenmann says. The University of Pennsylvania Wharton School of Business, which jumped up four spots from last year to No.â&#x20AC;&#x2030;2, is feeling the same market pressures. â&#x20AC;&#x153;Students have been asking for more specialized and personalized degreesâ&#x20AC;? to ensure their coursework will advance their careers, says Deputy Vice Dean Maryellen Reilly. In addition to several interdisciplinary programsâ&#x20AC;&#x201D;the ďŹ rst of them, a three-year Juris Doctor-MBA run with Pennâ&#x20AC;&#x2122;s law school, started in 2009â&#x20AC;&#x201D;Wharton is training its academic advisers to help students customize their degrees. Technology factors into many of the individually tailored programs and is central to recently added courses in data and analytics, entrepreneurship, digital marketing, and e-commerce. One buzzed-about topic among MBA students that has caught the attention of schools is data analytics. A survey by Kaplan Test Prep published in February points to a growing number of business schools adding courses in big data. At Michiganâ&#x20AC;&#x2122;s Ross School of Business, big data analytics, big data management, and mobile innovation development are popular courses that ďŹ ll up quickly. Thatâ&#x20AC;&#x2122;s no surprise, says Davis, considering that global companies are demanding job candidates with tech skills. â&#x20AC;&#x153;Amazon is one of our biggest recruiters, and we want to make sure our students are equipped with the right skill sets when they graduate,â&#x20AC;? the associate dean says. This yearâ&#x20AC;&#x2122;s ranking again surveyed employers about the skills they seek in MBA hires and which schools best prepare their graduates for jobs. Harvard was the top pick of the more than 600 recruiters who responded to this yearâ&#x20AC;&#x2122;s poll. Dennis Tseng, a talent manager for SYPartners, a San Francisco-based business strategy and innovation consulting ďŹ rm, says data courses speak to the skills employers are seeking. â&#x20AC;&#x153;Skills like product development, data and analytics, and supply chain management are in demand now,â&#x20AC;? and that will only continue to increase, he says. Several written comments provided by survey respondents

November 20, 2017

emphasized the importance of data science expertise. â&#x20AC;&#x153;The students who have familiarity with this have been able to get to their key roles more quickly,â&#x20AC;? one recruiter noted. Michiganâ&#x20AC;&#x2122;s Ross also recently launched a business experience seminar in which students work for a real company to test ideas. Initially a pilot last spring, ďŹ ve second-year MBA students spent seven weeks working in product development at Shinola LLC, the Detroit-based leather goods and watch company. Their real-life test case considered whether the company should introduce menâ&#x20AC;&#x2122;s shaving accessories. Reporting directly to Shinolaâ&#x20AC;&#x2122;s chief executive officer, Tom Lewand, the students examined every aspect of the business, from supply chain to marketing. The students and Shinola ultimately decided against investing in the new product line. â&#x20AC;&#x153;This isnâ&#x20AC;&#x2122;t an internship,â&#x20AC;? says Davis. â&#x20AC;&#x153;Students are coming up with business models and are actually running businesses.â&#x20AC;? The course now includes Ford Motor Co. and NRP Group, a Cleveland-based real estate development

Top 30 U.S. Schools Rank

Change in rank 2016-17

School

Employer survey rank

Alumni survey rank

Harvard

Pennsylvania (Wharton)

MIT (Sloan)

Chicago (Booth)

Stanford

Duke (Fuqua)

Dartmouth (Tuck)

Northwestern (Kellogg)

Columbia

Rice (Jones)

UC at Berkeley (Haas)

Michigan (Ross)

Cornell (Johnson)

Carnegie Mellon (Tepper)

Washington (Foster)

Yale

Waning Interest

Virginia (Darden)

Relative change in applications for full-time, two-year MBA programs

NYU (Stern)

UCLA (Anderson)

Texas at Austin (McCombs)

Emory (Goizueta)

Texas A&M (Mays)

2005

Brigham Young (Marriott)

North Carolina (Kenan-Flagler)

Penn State (Smeal)

Notre Dame (Mendoza)

Indiana (Kelley)

-1

Georgia Tech (Scheller)

2017

Michigan State (Broad)

DATA: GRADUATE MANAGEMENT ADMISSION COUNCIL

USC (Marshall)

FOCUS / B-SCHOOLS

Bloomberg Businessweek

Top Industries for Grads Class of 2016 Technology

17.8%

Financial services

16.8

Consulting

16.6

Health care

8.1

Consumer products

7.9

Manufacturing

6.1

Energy

3.2

Real estate

2.7

Retail

2.4

Media/entertainment

1.6

Nonproﬁt

1.2

Transportation/logistics

1.2

Government

1.1

Hospitality

0.5

Other

10.9

DATA: COMPILED BY BLOOMBERG

Student survey rank

Job placement rank

Salary rank

Ranking index score

91.17

90.04

90.03

89.75

89.42

89.19

87.94 87.06

100.00

85.81

85.49

84.19

83.67

82.17

81.39

81.36

81.28

80.06 78.34

78.27

76.82 75.94

75.02

73.40

72.49

72.33 70.27

70.12

70.09

69.17

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company, as partners; three more companies, which the school declined to name, will join in the spring of 2018. Some schools are making more fundamental changes. Simmons College, struggling with falling enrollment, considered whether the time had come to end its MBA program. From 2010 to 2015, enrollment dropped from 195 to 105, says Provost Katie Conboy. “The MBA has been in decline everywhere, except for the top 1 percent of schools.” Simmons’s MBA program, which was the only one in the country exclusively for women, followed the example set by several other graduate programs and moved the curriculum online in the spring of 2016. Conboy says the change has paid off. “We now have 107 students in our MBA program, and we expect those numbers to grow,” she says. Much of the gain likely will come from male students, which Simmons now is open to. “We have a niche—gender and power dynamics— and the move allowed us to bring that theme to a much larger market,” Conboy says. Part-time programs are another way schools are trying to be more ﬂexible. North Carolina’s Wake Forest University School of Business phased out its full-time MBA in the fall of 2015 and started a part-time program the next spring. Students take classes in the evening and on weekends. There are 315 students enrolled at both the Winston-Salem and Charlotte campuses. “Fewer students want to take a full-time day approach, and employers want to keep high performers from walking away to earn an MBA,” says the business school’s dean, Charles Iacovou. According to comments shared as part of the survey, students and alumni value the Methodology experience and matuBloomberg Businessweek’s ranking rity that part-time stuof full-time U.S. MBA programs is dents can introduce in based on ﬁve components: (1) employer survey (35 percent a classroom. Many are of total score), in which more than older and have estab600 recruiters named the programs lished careers. that best deliver the skills they seek in MBA hires; (2) alumni survey MBA programs will (30 percent), in which almost continue to evolve, says 10,000 alumni who graduated from SYPartners’ Tseng. He’s 2008 to 2010 told us how their degrees affected their careers, observed more intertheir compensation over time, est from companies and their job satisfaction; (3) student for MBA students with survey (15 percent), in which 2017 graduates (9,461 responses) rated design and innovation their programs; (4) job placement backgrounds, he says. rate (10 percent), or how many MBAs “Companies are asking seeking full-time jobs get them within three months of graduating; for people with more (5) starting salary (10 percent), or specialization in creative how much recent MBAs make in their innovation,” Tseng says. new jobs, adjusted for industry and regional variation. Data from the 2016 “And it’s not just a Silicon ranking were added to the survey Valley thing—I’m seeing components to diversify feedback. this across industries For more on the methodology and the rankings for all 85 U.S. B-schools, go around the country.” to bloomberg.com/bschools2017. —Mary Ellen Egan THE BOTTOM LINE Last year 64 percent of U.S. full-time MBA programs received fewer applications, which have been declining since 2015; business schools want to reverse the trend.

*INDUSTRY DATA MAY NOT ADD UP TO 100 PERCENT. DATA DISPLAYED REPRESENT THE 15 MOST COMMON MBA INDUSTRIES OVERALL AS REPORTED BY RANKED SCHOOLS.

FOCUS / B-SCHOOLS

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November 20, 2017

Leveling the Playing Field Asking women about core values improves their performance

The business school Insead had a perennial problem with its MBAs: The grades of female students consistently lagged those of men. So one professor decided to run an experiment. She had all students at both the France and Singapore campuses—male and female—take a test to affirm their core values. During orientation, incoming students were asked to pick three values among a list of 10 and to explain why the values are important and how they factor in their daily lives. The result: Women’s grades improved 89 percent; the men’s grades were unchanged. Simply reflecting on who they are and what’s important to them boosted women’s confidence and performance. The test, says Zoe Kinias, its author and a professor of organizational behavior at the Singapore campus of Insead (originally an acronym for the Institut Européen d’Administration des Affaires), provided the women with what she calls an “invisible shield” against feeling undervalued in environments where men are a majority. Now one large Singapore-based bank is adapting the test for new hires, and a pharmaceutical company is looking at doing the same. “Thoughtful introduction of this type of intervention has potential to improve gender balance anywhere women are underrepresented and there are beliefs that men are more suited to the job,” Kinias says. The test helps improve performance by building self-esteem. No significant cultural or geographical differences have turned up in the five years since it was introduced, she says. The gap between the average GPAs of men and women, 3.2 to 2.8 out of 4, narrowed significantly. It “levels the playing field in terms of assertiveness and confidence in the beginning of our program,” says Timothy Van Zandt, Insead’s dean of faculty and research in France. Business schools, he says, have a responsibility to help women “feel equally respected and empowered.” Kinias was inspired to create the test after reading a study from Stanford University that detailed the benefits of self-affirmation for black students in the U.S. Underrepresented groups often have a fear known as stereotype threat, or “a concern about confirming one’s stereotypes about one’s group,” she says. Exercises such as the one at Insead help reduce the demotivating impact of that fear. That frees up students’ minds so they can better focus, study, and learn.

Members of underrepresented groups, such as the 34 percent female student body at Insead, experience more self-doubt when entering a new social system, Kinias says. For example, a 28-year-old woman “knows what it means to be a woman in business, but she’s stepping into this new scene, and she’s looking around and trying to figure out, Am I valued here? Do I belong here?” Kinias says. “That’s where the self-doubt comes in.” “I think sometimes people imagine looking in the mirror and saying, ‘You’re good enough, you’re smart enough, and people like you,’ which can have its benefits,” Kinias says. “But this is deeper than that. It’s getting to, ‘I am a person who does things that I think are valuable.’ ” Insead, which was No. 2 in Businessweek’s 2016 ranking of international schools (the 2017 ranking will be published at Bloomberg. com on Dec. 11), declined to make students available to be interviewed. Among the values in the test, relationships with family and friends are consistent top picks. Almost half the graduating class of 2018 also prize “enjoying life/living in the moment.” Other choices include health and fitness, protecting the environment, helping people in need, and spirituality or religion. Women make up larger proportions of discouraged job seekers and those outside the labor force, according to the World Economic Forum 2016 annual report on gender. Completely eradicating the economic gender gap would take from 47 to 1,951 years, according to the report. In Singapore, 10 global financial institutions surveyed by Insead and the Financial Women’s Association found that although women hold almost half the jobs, men are five times more likely to become managing directors. Organizations polled included local offices of BlackRock, ING Bank, Nomura Holdings, and National Australian Bank. The Singaporean bank that adapted the Insead test is using it to help women achieve greater career results, says Low Chin Loo, events chair and a former president of the Financial Women’s Association of Singapore. The bank declined to be identified. Kinias says her team at Insead is in early discussions with the pharmaceutical company. “One common refrain we hear from women is lack of self-confidence and how that impedes their ascent to the top echelons of corporate life,” Low says. “We’re seeing a larger push and awareness in Singapore society about the need to look at this issue and to address it.” —Livia Yap and Sheridan Prasso THE BOTTOM LINE A test developed at Insead to help women boost their grades is being adapted by companies to help female hires improve their self-confidence and performance.

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Unnatural Disaster

November 20, 2017

What happened when the U.S. government flooded one of Houstonâ&#x20AC;&#x2122;s wealthiest neighborhoods to save everyone else

By Shannon Sims Photographs by Philip Montgomery

“Next contestant, come on down.” On Oct. 6, in a bright courtroom in downtown Houston, Susan Braden, chief justice of the U.S. Court of Federal Claims, opens a preliminary hearing with a joke, beckoning a lawyer forward. Braden has flown in from Washington to oversee disputes involving the homes and businesses flooded in West Houston after Hurricane Harvey made landfall over Texas in late August. She has summoned attorneys interested in suing, to get their thoughts on how the proceedings should unfold. Almost 100 lawyers are present, combed and buzzing in anticipation of what promises to be some of the most complex and expensive litigation ever brought against the federal government. Observers speculate that thousands of plaintiffs could eventually join in, and that the total damages claimed could reach $10 billion or more, especially if the big energy and oil companies— whose presence in one section of West Houston gave it the nickname the Energy Corridor—sue over their flooded headquarters. Eighty suits, 11 of which are seeking class-action status, have been filed by homeowners against the federal government, though many of the Energy Corridor’s approximately 9,500 residents are still weighing their options, speed-dating lawyers by phone and at community meetings. Few have had time to visit a lawyer’s office. Two months after the storm, they’re still digging out, their days filled with mold inspections, debris hauls, meetings with the Federal Emergency Management Agency, fights with contractors, and visits from the moisture-meter man. Some are waiting to see whether the state government will create a relief fund to help them recover the losses on their pricey homes. A legislative solution could be preferable to drawn-out litigation; the upcoming cases are being compared to the long-running suits over the levee failures in New Orleans during Hurricane Katrina. When a lawyer makes this link in court in Houston, Braden, who oversaw the Katrina cases for almost a decade, recalls how long it took to get that litigation organized. “I don’t want to wait 14 months to do something,” she says. “No one is living in those homes.” The lawyers in attendance are from all over the country: New Jersey, New

November 20, 2017

Orleans, Washington, D.C. “It’s clear the court is incredibly focused on this case,” Jay Edelson, a class-action attorney known for challenging the titans of Silicon Valley, observes afterward. He flew down from Chicago with a few of his firm’s lawyers for the hearing. Everyone is mindful that, with extreme weather pushing the country’s infrastructure to the limits, the decisions made by Braden’s court could, as after Katrina, set important precedents for the federal government’s liability in the wake of disasters. This situation, though, has two key differences. In New Orleans, economically disadvantaged communities, some of them historically black, bore the brunt of the loss, with hundreds, perhaps thousands, of deaths. The victims in West Houston include white, wealthy, Republican-voting energy executives. They live in neighborhoods where the main employers are BP Plc and Royal Dutch Shell Plc, the median income is triple that of the rest of the city, and second homes and weekend-spin sports cars aren’t unusual. Their debris piles include wine fridges, coffee table books about Renoir, and Chinese bar carts from overseas assignments. The West Houston cases are unlike the Katrina cases in another way, too: Rather than make a legal argument about official neglect, they speak to what happened when the federal government intentionally flooded one of the richest areas of a city to save everyone else.

Thistlewood Drive was everything Anji and Josh Moore dreamed it would be. Evenings, Anji would wait for Josh to return from his job with an oil industry contractor, feeding baby Luke while 5-year-old Nathan played soccer in the street. The family’s one-story home in the Thornwood neighborhood, modest for the block, featured a backyard patio perfect for grilling, framed by tall pines with puzzle-piece bark that cicadas would cling to as they screamed down the dusk. Neighborliness prevailed: Husbands would help with one another’s home repair jobs. Sugar was borrowed and returned doubled. As the storm moved in on the weekend of Aug. 26 and 27, Josh kicked into action. He’d seen the backyard flood during heavy rains, and if this one was as bad as the forecasts said it would be, the water could creep into the house. There were new floors to be concerned about, blond cypress. And so, over Anji’s protests, Josh got out a shovel and started building a moat, ripping out patio bricks and digging a foot beneath them as the rain soaked through his shirt. One street over on Langwood Drive, Robert Haines was anxious. The retired 71-year-old stockbroker had been watching the weather reports from his living room recliner for hours. He’d served in the 82nd Airborne Division during the Vietnam War and lived through a dozen Gulf Coast hurricanes, experiences that should’ve helped him remain calm. But the forecasts looked scary on the coast, 45 miles south, where Kyle Haines, his

To prevent a deadly reservoir failure, the U.S. Army Corps of Engineers released water from these dams and inundated Buffalo Bayou

Houston

Addicks Reservoir 10 Energy Corridor Dam

Barker Reservoir

Thornwood

B U F F A L O

Estimated maximum flood extent

B A Y O U

500-year flood plain

2 mi.

GRAPHIC BY BLOOMBERG BUSINESSWEEK. DATA: FEDERAL EMERGENCY MANAGEMENT AGENCY, U.S. GEOLOGICAL SURVEY, HARRIS COUNTY FLOOD CONTROL DISTRICT

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husband and partner of 15 years, had gone a few days earlier. The storm was crossing right over the hotel where Kyle had holed up. Robert called Kyle’s cell, crying. Kyle was 35 years younger, and Robert often acted as his protector. “Please come home,” Robert said, imploring Kyle to return to their white brick, one-story ranch house, where it surely wouldn’t flood. Saturday night, over on Kickerillo Drive, Dave Johnston couldn’t sleep. The retired Exxon Mobil Corp. geophysicist was prepared enough: He and his wife, Linda, both in their mid-60s, had spent the day hauling furniture upstairs. Now Dave had a bag packed and his shoes on in case the couple needed to flee. At around 2 a.m., he spotted shadowy figures beside his front windows—his neighbors, braving the driving rain, walking the high ground near the houses with their most important possessions wrapped in garbage bags and held above their heads. Dave and Linda discussed leaving. The situation was clearly getting dire, but staying might be safer. Water was already flowing in the street, and the house was still dry. They decided to wait out the night and leave the next day. On Sunday, debates inside homes grew tenser, as residents weighed their reluctance to leave against their fear of the unknown. The geologists, physicists, MBAs, lawyers, and engineers living in the Energy Corridor consulted the tools they’d set up to measure the deluge: yard flags, measuring sticks, charts, and photographs. That evening, the Harris County Flood Control District held a press conference at which it announced that the U.S. Army Corps of Engineers would begin controlled releases at the Addicks and Barker dams surrounding West Houston. The two massive reservoirs retain water that gathers in the prairie west of the city, forming Buffalo Bayou, which runs down the Energy Corridor, through downtown, out the Houston Ship Channel and, finally, into the Gulf of Mexico. The water behind the dams was rising more than 6 inches an hour, and the flood control district said residents should be prepared to leave the next morning. But the water level rose even faster than expected that night—Harvey brought 51 inches of rain, all told. The Army Corps won’t confirm exactly

November 20, 2017

Anji and Josh Moore with their youngest son, Luke

when the releases began, but legal complaints and residents say the floodgates opened at about 1 a.m., sending a rush of water toward Buffalo Bayou while many people were sleeping. Just after 1:30 a.m. the Corps posted a press notice on social media stating that the dam releases would amount to 8,000 cubic feet of water per second. “If we don’t begin releasing now, the volume of uncontrolled water around the dams will be higher,” Colonel Lars Zetterstrom, the Corps’ Galveston district commander, was quoted as saying. “It’s going to be better to release the water through the gates directly into

Buffalo Bayou.” The danger was that the water would flow uncontrolled into homes located upstream from the reservoir, crest the reservoir walls downstream, or crack a section of the Barker dam that was under repair. Had either dam failed, the Houston Chronicle later wrote, West Houston would have been left with “a week of corpses by the mile.” Buffalo Bayou quickly overflowed, washing over the surrounding area. The several dozen West Houstonians I spoke with portray the reservoir water as mixed in with bayou funk, distinct from the rains. “That rainwater ran clear,” one says. “This water stank.” Another resident,

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November 20, 2017

The floodgate of Barker Reservoir

who lives a block from Buffalo Bayou, describes a muddy wave blasting open his back French doors. By Tuesday, the water was being released at a rate of 13,000 cubic feet per second. With their measuring equipment inundated, people assessed the water filling their homes against their bodies: belt, then chest, then neck. Elderly people reported waking up confused, believing they were in waterbeds. For most, evacuation became the only option. Medians turned into boat launches. Dads hopped in bass-fishing boats or on air mattresses to lead rescues of people, pets, documents. Some residents who’d left in a panic returned, at their peril, to recover what they could. One man died after being electrocuted as he tried to retrieve a cat. By Friday, Sept. 1, with water still gushing through the floodgates, conditions in the Energy Corridor had worsened to the point that Mayor Sylvester Turner issued a voluntary evacuation order there. “I know people are staying because they want to protect their

property,” he said. “But if you are living in a home today with water in your home, that situation is not going to change for 10 to 15 days.” Frustrated that residents were struggling to save their things, Greg Travis, the district’s city council member, managed to call in five high-water vehicles and start a patrol. Residents who’d left signed up for boat rides home, where they’d get 30 minutes to retrieve what they could. On Saturday, as floodwaters elsewhere in Houston were receding, Turner had no choice but to make the evacuation mandatory for the 4,600 Energy Corridor dwellings “already flooded by water.” Three hundred people, his office said, had remained in their flooded homes. Turner also cut off electricity to the area and established a midnight to 5 a.m. curfew to help police isolate anyone looting evacuated homes. “Put your own personal safety above your property,” he said in the order, explaining that “the floodwaters there are caused by the U.S. Corps of Engineers’ controlled releases of water.” (In a later interview with the Texas

Tribune, he accused the Corps of not communicating clearly about “the magnitude or the effect of them releasing that water.” Turner’s office declined to comment for this story.) Only on Sunday, nearly a week after the releases began, did the Corps slow the rate. The next day, they hosted another press conference, at which they showed time-lapse maps of the flooding. The surrounding areas were all still blue; it would take six more days, until Sept. 10, for the water in West Houston to finally subside. A few weeks later, I find Tim Fitzpatrick, a cabinet maker and football coach, sweating and shirtless in front of his home. He’s dragging moldy chunks of drywall across his dead yard. Muckcovered trophies, sports gear, and picture frames are piled on top of folding tables, as though for a toxic-wreckage garage sale. “Hell yeah, I’m pissed,” he spits. He says he’s still deciding whether to sue. “This was not an act of God, this was an act of man. They pushed us onto a grenade to save the rest of the city.” He crushes a beer

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can in one hand and tosses it aside, then picks up a sledgehammer and brings it down, hard, on a ruined cabinet. In the 73rd-floor offices of the Buzbee Law Firm, Texas swagger prevails. The door handles are custom-made, footlong silver sharks. The bar is stocked with expensive bourbon, and signed Houston Astros jerseys hang on the walls. Framed newspaper clippings celebrate multimillion-dollar verdicts and a successful defense of former Texas Governor Rick Perry against felony abuse-of-power charges. Marble floors lead to massive windows overlooking almost every building in the country’s fourth-biggest city and Buffalo Bayou curving below. Tony Buzbee, a trial attorney of some 20 years, regrets only that he’s not on the top floor, right above. “They won’t sell to me,” he says with a puckish smile, leaning back in his chair. He’s in a checked, cornflower-blue blazer with a scarlet handkerchief stuffed in the pocket, explaining his confidence in the West Houston litigation. “It’s a humdinger of a case,” he crows. “We know when the decisions were made, we know who made them, and we know that when they made them they knew which subdivisions would flood.” A young lawyer handling one of the files is called in and excused. Buzbee watches him leave with a look of satisfied wonder. “He’s so nervous around me,” he says, laughing and taking a gulp of Muscle Milk. Buzbee has made a career of righteous crusades, though not necessarily on behalf of the poor or the meek. He was one of the first lawyers on the scene in the Energy Corridor, making his pitch to residents of the Thornwood neighborhood on Sept. 5, while the water still stood in their kitchens. It seems to have worked: He’s signed almost 400 clients. “Eventually I will have 1,000,” he promises. Indeed, his name tumbles freely from the mouths of frustrated residents. He’s become the default for those too weary to research or too angry to wait. Other lawyers say the residents shouldn’t litigate in haste. Maybe the government will step up and “do the right thing,” I hear repeatedly. “I haven’t taken thousands of cases,” says Rene Sigman, a local attorney who specializes in flood insurance claims and has several West

November 20, 2017

Houston clients. “You want people to try to work things out with their insurance claims as much as you can.” Buzbee waves off such caution. “If you have your case on file and have litigated your case, you will always have better standing than someone who is sitting on the sidelines,” he says. His approach to the West Houston suits is based on a fascinating legal argument, one that taps at a core Texan belief: The government should leave you the hell alone and pay you back if it doesn’t. The takings clause of the U.S. Constitution’s Fifth Amendment forbids the federal government from seizing citizens’ property without paying for it: “[N]or shall private property be taken for public use without just compensation.” Attendant case law holds that when a government “takes” property for the public good without going through eminent domain proceedings, the owner can claim that an “inverse condemnation” has taken place, arguing that property was unfairly taken, damaged, or destroyed, and that payment is due. Until 2012 the government successfully argued that it wasn’t legally responsible for decisions made in response to temporary flooding. That year the Supreme Court laid out a new multifactor test that could establish government liability in such cases. The majority opinion, written by Justice Ruth Bader Ginsburg, held, for example, that the government

Buzbee in his office

“They pushed us onto a grenade to save the rest of the city” should compensate a property owner for a taking if it has interfered with a “reasonable, investment-backed expectation.” That is, if it was reasonable to expect that a home you invested in wouldn’t flood, but it does, and a court finds the government responsible, then compensation could be due. State Senator Joan Huffman, who’s also a former judge, says, “I’m not here to point my finger at the Corps, to say you should have done it or shouldn’t have done it. But they did it, and that act resulted in a taking.” For Sigman, it’s also pretty clear: “When I look at the case law, and I look at what happened here… if this isn’t a takings case, then what is?” Legal experts located farther from the emotional swirl of Houston’s recovery have a colder view of the plaintiffs’ case. John Echeverria, a professor at Vermont Law School who specializes in takings law, and Robert Meltz, special counsel for the environmental group Defenders of Wildlife, wrote an article about the Harvey cases in which they question whether some of the plaintiffs will be able to meet the various standards laid out by the Supreme Court. They also point out that the Corps’ decision “raises the issue of how the takings clause should apply when the government has nothing but bad options.” Lynn Blais, a professor at the University of Texas School of Law in Austin who also specializes in takings claims, says that perhaps the most convincing argument the federal government could use in court would be to assert that “these homes would have flooded if the reservoirs were never constructed in the first place.” The reservoirs were, she notes, built for “flood control, not flood prevention.” The Addicks and Barker reservoirs were constructed in the aftermath of flooding that killed eight people in 1935. By the 1960s, developers like Vincent Kickerillo had started building neighborhoods such as Thornwood on what was largely prairie land, just downstream from the dams; Kickerillo’s company alone has built 15,000 homes in 40 West Houston communities. And as the oil and energy industries boomed, major headquarters—Exxon, ConocoPhillips,

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Aramco—moved to West Houston. From 2005 through 2016, property values in the Energy Corridor quadrupled. The wild prairie land inside the reservoirs, which is usually dry, became the site of kids’ sports events and weekend bike rides. This land and many of the homes to the north and west of the dams are located in what’s known as the flood pool—the upstream portion of the reservoirs. In some cities, developers are prohibited from building in these areas, but in Houston there are no such restrictions. Many homeowners west of the Barker dam claim they didn’t know they were in a flood pool, that they hadn’t spotted the fine print on the bottom of some of their subdivision maps. (“Who looks at a subdivision map?” one resident asks.) The text of one such map reads, “This subdivision is adjacent to Barker Reservoir and is subject to extended controlled inundation under the management of the U.S. Army Corps of Engineers.” At the first hearing in federal court, many of the lawyers involved in the litigation asked Braden to separate claims

November 20, 2017

from the north and west areas—the upstream ones—from downstream ones, to the south and east. Buzbee, for one, says of the upstream claims, “I won’t touch them.” It’s a hard case to prove— you build in the flood pool, you flood in the flood pool. Most lawyers agree that the downstream cases stand the best chance of winning a takings claim. Many of the homes there—even some lying just feet from the bayou—have endured since being built by Kickerillo in the ’60s, not flooding during major weather incidents such as Hurricane Ike and last year’s Tax Day floods. That history explains why many residents I spoke with would angrily utter the word “shouldn’t” as they glanced around living rooms of strippedout drywall and cement-slab floors. “My home shouldn’t have flooded,” they’d say. Now they’ll need to prove causation in court: that but for the releases, their homes wouldn’t have flooded, even during a hurricane like Harvey. The Department of Justice, which is representing the Army Corps of Engineers in the lawsuits, declined to comment for

A meeting of Thornwood homeowners on Oct. 12

this article. The Corps wouldn’t grant an interview with Colonel Zetterstrom but did set up a call with Edmond Russo Jr., deputy district engineer for programs and project management. Russo wouldn’t elaborate on the specific decisions leading up to the releases, but he did say that the Addicks and Barker dams were designed to impound water and let it out slowly after the rain passes: “That’s what saves the city from devastating floods.” Four of the top 10 record dam levels, he points out, occurred in the past decade. “In less than a week we got more than a year’s worth of rain,” he says. “That’s epic. I don’t think anyone could have imagined that could occur.” Years ago insurance companies mapped out the susceptibility of Houston neighborhoods to flooding, a key indicator for lenders. A few of the downstream homes are located in what’s called the 100-year flood plain, which means they have a 1 percent chance of being flooded each year; mortgage-holders there are required to get flood insurance. Thistlewood Drive, Langwood Drive, and Kickerillo Drive,

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November 20, 2017

“They should have busted doors down and said, ‘The reservoir’s going, you gotta get out’ ”

my interviews with residents, I bring up the hovering question of climate change. Almost uniformly, they demur. “I’m not a climate scientist,” geophysicists and environmental engineers say, “so I can’t tell you one way or the other.”

where the Moore, Haines, and Johnston homes are located, lie in the 500-year flood plain, which has a 0.2 percent chance of flooding each year. Only about half the homes in the 500-year flood plain were insured—many residents saw it as a wasted $450 a year. Blais isn’t sure that even the 500year flood plain homeowners will be able to make their case in court. “If you are close to the coast in hurricane country, and you build a house downstream from a reservoir and near a bayou, and everything around you is called ‘bayou’-something, what are your reasonable expectations of being flooded?” she asks. “You probably should have thought of that.” Council member Travis, himself a lawyer, is also pessimistic about his constituents’ chances of recouping their losses, even if they win their cases. “You’re not going to get dollar to dollar,” he says. “You’ll just get a settlement, and 40 percent of it will go to the attorney, and you’ll only get it 7 to 10 years down the road. But, hey, good luck.” There are also concerns that, if the cases succeed, they could create a daunting precedent for the government. Ginsburg’s 2012 opinion tried to assuage fears that a broader takings standard would lead to a “deluge” of claims, but Echeverria and Meltz write that this could be exactly what happens. The takings clause could, they say, become “a kind of social insurance program for risk associated with climate change.” The notion of “historic flooding” inscribed in the 500-year flood plain standard won’t mean much if climate change scrambles that math. What’s more, they write, “successful takings litigation may actually impede initiative to take steps to avoid the worst effects of climate change.” Why build a dam, after all, if operating it could cost you billions of dollars in lawsuit payouts? The issue of climate change is especially complicated in the Energy Corridor, where companies often deemed complicit in global warming are the neighborhood employers. At various points in

Thornwood was once a beautiful neighborhood. I know this because I grew up down the street. I swam competitively against the Thornwood Sharks, the kids of homeowners there. My birth certificate was stored in the bank behind Anji and Josh Moore’s house, in a safety deposit box that pooled with toxic water for more than a month. My family’s home didn’t flood, but we were just blocks from the waterline—a fluke of topography that led our neighbors to start referring to my parents and the few other families spared by the reservoir releases as “the lucky ones.” When I ride my bike through the neighborhood a few weeks after the flooding, I remember how it used to look: the tidy white shutters, the large front lawns, the faux-gaslit lamps. Now the shutters are stained with brown waterlines, and the swim team signs have been replaced by ads for contractors. At night, the streets are dark and the sheared wires of the lanterns, torn from their posts, reach into the air. Anji and Josh Moore are still trying to pick up the pieces when I visit them. They have an ozone machine running—“It’s supposed to get out all the toxic chemicals that the water left in the walls,” Anji says. They evacuated the day after Josh dug his moat, when a stranger knocked on the door and offered a boat ride. They waded back a few days later, before the mandatory evacuation order, to try to salvage what they could. “When I opened that door, it was the worst moment of my life,” Anji recalls. Snakes swam alongside the children’s toys. On Kickerillo Drive, Dave Johnston is still waiting on flood insurance payments, stopping by the house in his spare time to prep it for new drywall. He and Linda are considering selling the house, if anyone will buy it. “I don’t understand why they had to have such a massive release,” he says, shaking his head. “I don’t know why they didn’t start releasing at a lower level earlier.” He’s still debating whether to pursue litigation, but says, “The idea of

compensation for the condemnation of my property makes sense to me.” Langwood Drive is a ghost street. There are no streetlights, no people, no sounds. The flooded homes sit empty, their doors open and windows broken, despite pleas in the homeowners association newsletter to board them up. At night, Langwood is patrolled by possums, and only falling acorns cut the silence. One ranch house stands out, its white brick exterior covered with multicolored graffiti scrawl and rainbows. At first it looks like vandalism. Then you read the words: “My husband Captain Robert Haines of the 82nd Airborne Division perished in our home during Hurricane Harvey.” Kyle says that by the time the dive team recovered Robert’s body, after multiple attempts, it had been floating in the bathroom for almost two weeks. Just feet away, above the waterline, was their dog, Paddy, thin and shivering but alive. The coroner’s office called the number on the dog’s tag and reached Kyle. Robert must have put Paddy up high, Kyle figures. He found old photos stashed above the waterline, too. Kyle comes to the house every day around sunset. He brings a can of Foster’s beer, Robert’s favorite, and pours it into the bushes, in a kind of tribute. “I don’t really know why,” he says. He speaks in a sped-up stammer, zigging and zagging through the timeline of those 13 days. The death certificate says Robert drowned, but Kyle speculates that his husband, cut off from communication with the water rising, may have panicked and had a heart attack or a stroke—“or maybe he was electrocuted.” “I’m 100 percent certain Robert died because of the dam releases,” Kyle says. “It was because of their irresponsibility that they didn’t force people to get out before they released the water. I think they should have busted doors down and said, ‘The reservoir’s going, you gotta get out now.’ ” He plans to join his neighbors in filing suit. Unlike them, he’ll also file for wrongful death. Buzbee is his lawyer. “One of the funny things is … well, not funny, but … we paid flood insurance up until July,” he says over the cicadas, brushing mosquitoes off his arm. “Bob just didn’t think it was going to flood.” He looks back into the darkened house. “You never expect your loved one to drown in your own home.”

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B I G B R OT H E R VS . L I T T L E B I G B R OT H E R

BY DRAKE BENNETT I L L U S T R AT I O N B Y RICHARD A. CHANCE

November 20, 2017

LINKEDIN’S C O U R T B AT T L E W I T H A N H R S TA R T U P WILL DECIDE WHO GETS T O M I N E YO U R O N L I N E A C T I V I T Y— AND SELL IT T O YO U R B O S S

n May 23, an email landed in the sales inbox of a San Francisco startup called HiQ Labs, politely asking the company to go out of business. HiQ is a “people analytics” firm that creates software tools for corporate human resources departments. Its Skill Mapper graphically represents the credentials and abilities of a workforce; its Keeper service identifies when employees are at risk of leaving for another job. Both draw the overwhelming majority of their data from a single trove: the material that is posted—with varying degrees of timeliness, detail, accuracy, and self-awareness—by the 500 million people on the social networking site LinkedIn. The email HiQ received was from LinkedIn Senior Litigation Counsel Abhishek Bajoria. “It has come to LinkedIn’s attention that hiQ Labs, Inc. has used and is using processes to improperly, and without authorization, access and copy data from LinkedIn’s website” in violation of LinkedIn’s user agreement, it read. Bajoria called on HiQ to cease and desist from visiting LinkedIn’s site and to destroy the data it had culled. The email set off a feud that led, a month later, to the two companies meeting in federal court, with HiQ suing LinkedIn and LinkedIn accusing HiQ of violating state and federal law. A small number of the world’s most valuable companies collect, control, parse, and sell billions of dollars’ worth of personal information voluntarily surrendered by their users. Google, Facebook, Amazon.com, and Microsoft—which bought LinkedIn for $26.2 billion in 2016—have in turn spawned dependent economies consisting of advertising and marketing companies, designers, consultants, and app developers. Some operate on the tech giants’ platforms; some customize special digital tools; some help people attract more friends and likes and followers. Some, including HiQ, feed off the torrents of information that social networks produce, using software bots to scrape data from profiles. The services of the smaller companies can augment the offerings of the bigger ones, but the power dynamic is deeply asymmetrical, reminiscent of pilot fish picking food from between the teeth of sharks. The terms of that relationship are set by technology, economics, and the vagaries of consumer choice, but also by the law. LinkedIn’s May 23 letter to HiQ wasn’t the first time the company had taken legal action to prevent the perceived hijacking of its data, and Facebook Inc. and Craigslist Inc., among others, have brought similar actions. But even more than its predecessors, this case, because of who’s involved and how it’s unfolded, has spoken to the thorniest issues surrounding speech and competition on the internet. The courtroom clash in July drew some of the biggest names in the American litigation bar and split some of the web’s high-profile civil liberties watchdog organizations, with the Electronic Frontier Foundation coming out in support of HiQ and

November 20, 2017

the Electronic Privacy Information Center writing an amicus brief for LinkedIn. Depending on whom you talk to, the sides are arguing about free speech or privacy, the scourge of data scraping or the danger of digital monopolies. The outcome will determine who gets to control the wealth of information about ourselves that, often unwittingly, we’ve put at the disposal of anyone with a professional curiosity and an internet connection. “People analytics” is a new term, but the concept is as old as the office job. Psychology had barely been founded before its practitioners were identifying the traits of a good streetcar driver or telephone switchboard operator. In 1917 a group of prominent psychologists was asked to evaluate and sort the hundreds of thousands of young men being drafted into the U.S. Army to fight in Europe. The ensuing decades saw the American military and intelligence agencies become centers of research for psychological evaluation and aptitude testing; after World War II, many of their scientists were hired to head personnel research departments at AT&T, General Electric, General Motors, and other iconic corporations. There they subjected armies of salesmen, bankers, engineers, and middle managers to surveys and aptitude tests, simulations and roleplaying games. Still, in practice the selection and retention of talent remains more art than science—and often primitive art, at that. At most companies, HR isn’t where the most interesting thinking is happening. But that’s changing, as the data scientists who brought us Amazon recommendation engines, online ad auctions, and dating algorithms apply predictive analytics to how we think and act at work. The goal is to go beyond traditional but little-examined practices—for instance, the job interview (often useless) and the raise (not always the best way to retain talent)—to subtler metrics and methods. Big companies are growing more interested as the cost of replacing valued workers becomes clearer. Credit Suisse Group recently estimated that reducing attrition by 1 percentage point saves the bank from $75 million to $100 million a year. That’s where HiQ comes in. The company was the brainchild of Darren Kaplan, a former ad man who saw that sites such as monster.com, glassdoor.com, and, above all, LinkedIn had upended the balance of power between employers and employees. LinkedIn’s founding in 2002 had given workers a new platform for marketing themselves and made it easier for recruiters (not to mention business journalists) to find and woo them. Its economic model is built, in large part, on charging for special recruiter memberships—they run about $9,000 a year, and companies often buy more than one—that help with finding and contacting potential poaches. Kaplan envisioned a technological Verrilli, defense against the forays of recruiters, representing an early warning system that would LinkedIn assist companies in identifying restless

PHOTOGRAPHS BY JARED SOARES FOR BLOOMBERG BUSINESSWEEK

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November 20, 2017

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workers so their bosses could entice them to stay. (“Predictive attrition insights” is the term HiQ has come to use.) In January 2015, the company rolled out Keeper, in which variables such as “independence from employer brand,” “mobility history,” and “external footprint” are displayed on a color-coded dashboard and combined to calculate a worker’s “flight risk.” Skill Mapper was released earlier this year, not long after the company hired Mark Weidick as chief executive officer. An engineer and entrepreneur who’s worked at Cisco Systems Inc. and AT&T Inc., Weidick has the graying crew cut and earnest intensity of a high school debate team coach. “I can’t help keeping track of time,” he says apologetically, after our conversation strays from the presentation on the conference room screen beside us. He describes HiQ’s limited offerings as the first building blocks of a workforce analytics arsenal. Investors evaluating a prospective merger would pay good money, he argues, to know who’s likely to stay at a company and who might leave. “Imagine you had the wherewithal to see that autonomous vehicle experts were migrating out of Google into Apple before it became public,” he says. Cisco and other software companies already perform this sort of analysis when they’re scouting offices, surveying the talent landscape in candidate cities to see which is the best fit. HiQ’s pitch is that it can offer clients something comparable through data science backed by off-the-shelf software and tailored consulting. Reviews have been good. “My experience working with them has been fantastic,” says an HR executive at a HiQ customer with more than 20,000 employees. (Like other clients, he was leery of being quoted by name while the case was going on.) “They are really smart about the data and about presenting it so that it’s used to improve business and employee outcomes.” Weidick had been on the job for only three months when LinkedIn sent its cease-and-desist letter, and his first thought was that there had been a misunderstanding. Many of HiQ’s 26 employees came from LinkedIn, and one of the startup’s co-founders, Rob Desantis, had been an early LinkedIn investor and board member. LinkedIn staff regularly attended an annual people analytics conference HiQ hosted. Two weeks after receiving the letter, Weidick wrote a bewildered email to LinkedIn’s general counsel, likening himself to “a dolphin that got caught in the tuna net.” Others at HiQ were less surprised. Even as LinkedIn employees mingled at HiQ’s conferences, its software engineers were implementing measures to block data scrapers, setting off a Gupta, cat-and-mouse game with representing HiQ’s engineers. “LinkedIn HiQ had been ag gressively

complaining about what they considered unfair scraping practices for quite some time,” recalls Dan Miller, HiQ’s chief technology officer. “They went through a lot of trouble technically to make it difficult to collate that data. We obviously think they’re dead wrong to do that.” In other words, as far as LinkedIn was concerned, HiQ was the tuna. When the larger company’s lawyers made that clear to Weidick, he hired the law firm Farella Braun & Martel. Deepak Gupta, a partner there, thought the case might interest his former professor, Laurence Tribe. Tribe, who teaches at Harvard Law School, is a constitutional law luminary and a liberal icon for arguing Supreme Court cases that expanded First Amendment protections and sought to overturn state antisodomy laws. He has also advocated for Peabody Energy Corp. in its fight against greenhouse gas regulation, however, and his expansive definition of free speech has led him to argue against net neutrality on behalf of Time Warner Inc. He estimates that he receives 20 or 30 appeals for legal help a day. “I usually just shrug them off and say, ‘I’m busy,’ ” he says. Among other things, he’s writing a book, teaching a new law school course, and suing President Trump for corruption. Tribe has a weakness for certain internet law questions, though. In a seminal 1991 talk, he sought to delineate how the Constitution, written in the language of physical space and boundaries, should apply in the virtual reaches of cyberspace. What were the public squares and private rooms of the web? Who got to determine access? Should data be protected as speech? If so, how? Back then the internet was an exotic geek playground, but even though it’s now a global marketplace where trillions of dollars change hands, the courts have only begun to answer Tribe’s questions. When Gupta called, talking about a battle over control of social media data, Tribe says, “my constitutional nostrils flared.” On July 27 he took a seat next to Gupta and another Farella partner in a federal courtroom in San Francisco for the

Weidick, HiQ’s CEO

November 20, 2017

second hearing in the case. HiQ had conclude, “to send a letter instruct“ W E CA N ’ T sued LinkedIn for unfair business pracing HiQ and its camera- clad minions tices and violating the smaller compato stay out of its fair.” S I T H E R E T O D AY ny’s right to free speech under the state constitution, which has broader speech Surveillance is a loaded word, one HiQ AND POLICE protections than the U.S. Constitution. doesn’t like. But the pitch such comEVERY POSSIBLE The startup wasn’t seeking damages, panies make is that they can pick up only asking Judge Edward Chen to issue faint signals in public data that would BUSINESS a preliminary injunction that would otherwise go unnoticed. Those signals force LinkedIn to let HiQ use its data. can reveal things that weren’t actuM O D E L T H AT S O M E Arguing LinkedIn’s case was Donald ally intended to be public: the tastes Verrilli, who served as solicitor general and tendencies evinced by our web ENTREPRENEUR search patterns, the medical condiunder President Obama, and others from the firm Munger, Tolles & Olson. tion revealed by our buying history, IN SILICON The demand LinkedIn had made in its our growing boredom with our job. cease-and-desist letter to HiQ rested Last year the American Civil Liberties VA L L E Y M I G H T largely on the Computer Fraud and Union discovered that an analytics Abuse Act (CFAA), which makes it a company called Dataminr Inc. was COME UP WITH” federal crime, with a potential punishallowing law enforcement and domesment of 10 years in prison, to access tic intelligence analysts to use special a computer without authorization. The 1984 law has been keyword and location search tools to track people through amended multiple times, but its earliest version was meant to Twitter, which partially owns the company. (Dataminr has protect against a WarGames-style hack of government main- since discontinued the practice.) Data-scraping bots are only one of the technologies forcing frames. LinkedIn was contending that, although people who posted on the site owned their own data, that data was stored us to rethink privacy protections. In 2012 the Supreme Court on LinkedIn servers, and HiQ was trespassing. ruled in United States v. Jones that when the police affixed a HiQ’s data scraping not only violated LinkedIn’s user agree- GPS tracking device to a car, they were invading the privacy ment, it also threatened the “privacy interest of LinkedIn’s of the driver, even though it would have been perfectly legal members,” Verrilli told Judge Chen, “and the integrity of to gather the same information by following the car around. LinkedIn’s trust relationship with its members, which is essen- Verrilli, the solicitor general at the time, lost that case, but tial to its business.” Keeper, Verrilli added, let companies snoop speaking by phone in early October, he praises the decision. on LinkedIn members in ways they hadn’t signed up for and “What the court said, and it’s directly applicable here, is ‘No, wouldn’t want: “It’s an anonymous surveillance of their behav- no. This is a difference in kind, not merely in degree,’ ” he ior, to rat them out to their employers.” says. “It’s a level of intrusion and a level of surveillance that Gupta countered that Verrilli was mischaracterizing HiQ’s you could not as a practical matter ever accomplish absent methods and products. LinkedIn the use of this super-high-powered members have the option to mark technology.” The expense and labor their profiles entirely private or of old-fashioned surveillance imposed entirely public, with gradations in practical limits on its use, but just as between. HiQ made use only of the today’s cops—provided they can get data LinkedIn members had indicated a warrant—need not physically tail they wanted visible to everyone on someone to know where he spends the internet. his time, people analytics professionFor LinkedIn, however, the key als need not rely on a battery of tests distinction wasn’t between public and role-playing games to get inside and private or visible and invisible, employees’ heads. The easier it gets to but between a person browsing a harvest and analyze information, the website and a bot brigade copying more actively that information has to data at scale. LinkedIn’s lawyers offer be protected. That, Verrilli argues, is an analogy in one of their briefs: The what LinkedIn is trying to do. site is like “a massive job fair, held It’s LinkedIn, after all, not HiQ, that at a convention center and open has the relationship with the members to all comers.” Into this gathering who have posted the information. HiQ sends a metaphorical swarm “We’ve made promises in our privacy of interns wearing body cameras policy, and we have to work with regso it can track the movements of ulators worldwide who hold us to our every attendee and sell the resultpromises,” says Blake Lawit, LinkedIn’s Tribe, ing information to their employers. vice president for legal. “We’re not representing “LinkedIn would be well within its under the radar, right? If we do someHiQ rights,” Verrilli and his colleagues thing creepy with privacy, we’re going

PHOTOGRAPH BY JARED SOARES FOR BLOOMBERG BUSINESSWEEK

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to hear about it from the FTC and the Irish Data Protection Commissioner and et cetera.” In other words, LinkedIn might be big and know lots about us, but with great power comes regulatory scrutiny, and with that comes a kind of responsibility. If that argument is only somewhat reassuring, HiQ’s argument is effectively that we’re on our own, and that this is the price we pay for today’s internet. “There’s probably lots and lots of applications that might make someone feel a little queasy, right?” Gupta told Judge Chen. “But the thing is, we can’t sit here today and police every possible business model that some entrepreneur in Silicon Valley might come up with. It’s public information. It’s the marketplace of ideas. It’s the engine of our country’s growth.” The reason Google can put the entire internet at our fingertips is because, like HiQ, it scrapes public data. That includes LinkedIn pages, which is why they tend to be among the top results if you Google a noncelebrity (unlike HiQ, Google has LinkedIn’s explicit permission to collect data). Still, even those who might prefer that someone act as the guardian of our data might not cast LinkedIn for the role. The company doesn’t have the size or sway of Facebook, but as a business networking site it has no real competition, and like Facebook its dominance is built on the wealth of data it controls. This summer, Bala Iyer, Mohan Subramaniam, and U. Srinivasa Rangan wrote an article in the Harvard Business Review arguing that the rise of Facebook, Google, Amazon, and the like necessitated a rethinking of the idea of a monopoly. “Tomorrow’s monopolies won’t be able to be measured just by how much they sell us,” the authors wrote. “They’ll be based on how much they know about us and how much better they can predict our behavior than competitors.” The old considerations—Is pricing competitive? Does the consumer have alternatives?—haven’t gone away, but they’ve been augmented by new questions. Companies that control data capable of predicting their customers’ choices could, for example, figure out how to constrain those choices, making such dominance all the more durable. As HiQ’s lawyers were at pains to point out, LinkedIn itself is in the data-mining business and is thus a competitor to HiQ. The larger company offers a service called Update Me as part of its premium membership for recruiters. As its name suggests, the product alerts recruiters when particular people change their LinkedIn pages, mark a work anniversary, or do something else that might signal a recruitable moment. Keeper, by contrast, updates its risk profiles only monthly, not in real time. Gupta made sure in court to carefully highlight the hypocrisy of a sentence from LinkedIn’s promotional pitch to recruiters: “And don’t worry—they don’t know you’re following them.” In his telling, LinkedIn wasn’t trying to prevent its members’ data from being mined and analyzed: it was just trying to muscle out a smaller competitor so it could have a new market to itself. Like most legal disputes, the one between LinkedIn and HiQ is a battle of analogies, and near the end of the proceedings on July 27, Verrilli introduced one more. The information in your local library is public, but that doesn’t mean, he argued, “that you can break into the library with a crowbar at 2 in the morning because you’re seized with a desire to read Moby-Dick.” Libraries can impose reasonable limits on public information, and so, he said, can LinkedIn.

November 20, 2017

A few minutes later, Tribe rose to speak for the first time. When he was growing up, he recalled, library books had “a little tag inside that would tell you how often the book was taken out, and when.” Imagine, he went on, that someone wanted to collate that information to see what books were most popular. “For the government to make it a crime for me to make use of that information because they want to be the, perhaps, exclusive distributors of information about what’s popular to read would, of course, be unconstitutional.” That calculation didn’t change, Tribe argued, if it was a corporation rather than the government establishing the ban. “If LinkedIn has this power, so does Facebook, and the entire universe of cyberspace can be gobbled up by a small number of private owners,” he said. “That can’t be what the law of an open, democratic society with the First Amendment means.” On Aug. 14, Judge Chen issued his ruling, and it was in favor of HiQ. He emphatically rejected LinkedIn’s interpretation of the CFAA, which would, he wrote, give a private company the power to choke off access to public data, with prohibitions “weaponized by the potential of criminal sanctions.” And although Chen was skeptical of some of Tribe’s broader First Amendment arguments, he thought HiQ had raised serious questions about antitrust violations. He arched a rhetorical eyebrow at how LinkedIn, purported guardian of its members’ secrets, enthusiastically marketed data-mining capabilities of its own “in a way that seems to afford little deference to the very privacy concerns it professes to be protecting in this case.” Chen also took the extraordinary step of enjoining LinkedIn from putting in place any measure, technological as well as legal, to prevent HiQ from accessing its site, and he ordered the company to remove any barriers already in place. Speaking a few weeks after the ruling, Lawit, LinkedIn’s vice president for legal, still seemed blindsided: “When did it happen that companies who have data are forced to provide all of it with no conditions to anyone who wants it?” At HiQ, the mood was predictably cheerier—“high-fives all around,” in Weidick’s description. Still, the costs of the litigation had been substantial. Precious startup capital had been spent on lawyers, and countless man-hours had been devoted to trying, unsuccessfully, to come up with a business model that wouldn’t depend on LinkedIn. LinkedIn swiftly announced that it would take its case to the 9th U.S. Circuit Court of Appeals, which, in the past, has been favorable to companies invoking the CFAA against data scrapers. The soonest the case would be heard by the appeals court is in early 2018, and a Supreme Court decision, should the case make it that far, wouldn’t come for a few years. That’s an eon for a tech startup: By then, HiQ might actually be the analytics powerhouse its CEO, Weidick, envisions, or it might be defunct and remembered only as a cautionary tale. The publicity around the case has led to more potential customers reaching out, Weidick says, but in recent months HiQ has also lost most of its employees, as more than a dozen data scientists, designers, and programmers, calculating the odds, have left for jobs at places not shadowed by an existential legal battle. That much attrition would be painful for any company, but it’s particularly galling for one in the attritioninsight business. “The irony is not lost on me,” Weidick says. “Not at all.”

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November 20, 2017

THE BETTER-THAN-NOTHING HEALTH PLAN t the start of 2016, nine companies offered health insurance in Georgia through the federal Patient Protection and Affordable Care Act, aka ACA, aka Obamacare. Eightyfive percent of residents signing up could choose from among four to eight carriers, depending on where they lived. One by one, though, companies stopped selling insurance through ACA exchanges—they were spooked by uncertainty about the market’s future, or were paying more for care than they were collecting in premiums and other payments, or both. As 2017 dawned, only five companies remained, and almost half of Georgia’s ACA population was choosing from one or two insurers. Then, in August, Anthem Inc. Blue Cross Blue Shield announced it would pull out of ACA marketplaces in 74 of Georgia’s 159 counties, leaving all but 14 counties with a single carrier for 2018. “We were beside ourselves,” says Melissa Camp, who directs a program to help people sign up for ACA benefits at the nonprofit InsureGA. In came Centene Corp., a relatively obscure but swiftly growing insurer based in suburban St. Louis. Centene, which had sold Medicaid coverage in Georgia for longer than a decade, had moved cautiously into the ACA market. But as Anthem prepared to flee, Centene told state regulators it would expand into 20 more counties, including 17 in rural southwest Georgia that are home to some of the poorest, unhealthiest people in the U.S. Centene also said it would offer ACA policies next year across

Nevada, filling in rural counties that were destined to lack any such insurers. It proposed to sell plans in Indiana, Missouri, and Ohio counties that otherwise would have gone without. It also will sell plans next year in new areas in Florida, Kansas, Texas, and Washington state and, after exits by other carriers, is poised to be the sole Obamacare provider throughout Mississippi. Centene is the rare insurance company that really has made a fortune from Obamacare, to borrow President Donald Trump’s phrase. The ACA is only one factor in the company’s growth, but since Centene took its first wary steps into these marketplaces in 2014, its stock price has tripled, annual revenue has climbed from $10.9 billion to more than $40 billion, and net income has swelled more than threefold, despite thin margins. Chief Executive Officer Michael Neidorff last year was awarded $22 million in compensation, more than his peers at UnitedHealth Group, Aetna, and Humana. One of his biggest headaches these days is finding office space for all the people Centene has to hire to handle new business. In his office at Centene headquarters, Neidorff says the company is doing what it’s done since he became CEO in 1996: courting the tens of millions of Americans who have trouble affording health insurance. Compared with most employer- provided plans, through which a majority of working Americans are covered, his company’s are stingy. To view it through a Wall Street lens, the value proposition

How do you get rich from Obamacare? Centene does it by limiting access to providers, focusing on its unhealthiest clients, and being the only game in town BY BRYAN GRULEY, ZACHARY TRACER, AND HANNAH RECHT PHOTOGRAPHS BY SUSANA RAAB

Some of the is that Centene’s plans are better than nothing. later joined Coordinated Care as CEO in June 1996. people who turned A decade ago, Centene was one of several Medicaid The company managed Medicaid coverage in two up at an ACA managed-care companies taking heat for limiting cusWisconsin counties and part of one in Indiana. enrollment event this month at Phoebe tomers’ access to hospitals, doctors, and drugs. Now Neidorff renamed the company Centene for a French Sumter Medical Center the company’s tactics are more than welcome in such centime he found in his pocket after a trip to Europe. in Americus, Ga. places as Georgia. “We’re just so grateful that they’re In 1997, he moved Centene to Clayton, Mo. Centene will offer the only ACA coming in here,” InsureGA’s Camp says of Centene. Medicaid, a federal-state program, supplies plans in Sumter County “We hope they make a lot of money and stay.” health care to almost 70 million Americans, includin 2018. From President Trump last month halted $7 billion in left: Jacqueline Storey, ing the poor, pregnant, disabled, and blind. In Aaron Wellons, the 1990s, states increasingly sought to offload annual ACA subsidies that reimbursed insurers that Steve Short, the costly, complex task of managing Medicaid offer lower-income customers discounted copayThomas Haugabook, care. Neidorff liked the business because state ments and deductibles. A federal judge upheld Toni Christian, Janay Williams Trump’s order; a court challenge continues. Neidorff, contracts offered the chance to gain large groups though, likes to say that Centene, descendant of a of customers—some healthier than others—in one health plan started in the basement of a Milwaukee hospital swoop. “I never wanted to be accused of skimming” the in 1984, has weathered the twists and turns of six administra- healthiest customers, he says. “We wanted them all.” tions. At his desk, surrounded by photographs of him with Some doctors declined to treat customers of Centene and several past presidents (and one with Dolly Parton), he says its managed-care peers because reimbursements for their serTrump’s effort to undo President Obama’s signature legislation vices were low. States signed the companies up anyway. By is nothing Centene can’t handle. “We will figure out how to 2009, the year before Obama signed the ACA into law, Centene work with it,” he says. “We are not victims, we are managers.” was handling Medicaid contracts in nine states. The company bolstered its Washington lobbying as the ACA bill took shape— Neidorff is a physician’s son who gave up on becoming a it tallied more than $1 million in total lobbying expenses in doctor after a tough organic chemistry course in college. He 2009 and 2010 after spending less than half that in the prior ran a UnitedHealth subsidiary in St. Louis for a decade and three years combined, according to OpenSecrets.org.

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Individuals who buy their own policies represent less than 10 percent of the market, even accounting for the 12 million people now covered by plans purchased on ACA exchanges. The big money has always been in providing packages to employers. Prior to Obamacare, the individual market could be profitable, too; the key was to attract reasonably healthy customers who paid their premiums and didn’t run up six-figure hospital bills. Insurers could charge more or refuse coverage altogether to people who were already injured or sick. Tens of millions of unhealthy or lower-income people were effectively locked out of the health insurance market. Obamacare remade the individual market by immediately outlawing the refusal of coverage to people with pre-existing physical or mental conditions. The companies would have to deal with a lot of sicker, more expensive customers without billing them more than healthier ones. (This applies as well to people who buy individual plans outside the exchanges, as about 5 million people do.) Still, most big insurers jumped into the ACA exchanges with gusto. Some priced their plans too low and got burned. Centene moved slowly, entering limited areas in only nine states, getting the lay of the land and gathering information on the new clientele. It became clear to Centene that success or failure in these markets hinged on keeping costs low, which it considered an area of expertise. “In the Medicaid space, you don’t get to raise prices on people who are expensive,” says Nathan Landsbaum, who runs Centene’s Missouri health plan. “You have to use medical management to decrease the cost.” Centene leans on data it has compiled from customers’ past ACA claims, including doctor and hospital visits, prescription drug use, and laboratory tests. Because many of Centene’s clients rotate into and out of Medicaid as their economic situations fluctuate, the company often has past information on them, and when Centene picks up Medicaid clients, it can get state data on them as well. The company also aggregates anonymous, publicly available data from a variety of sources ranging from county health rankings developed by the Robert Wood Johnson Foundation to Centers for Disease Control information on tobacco and alcohol use. Taken together, the data tell the company what to expect even from brand-new clients who fit certain age, income, and other demographic profiles. “We’ve been in so many states caring for so many populations that we can approximate what will happen from past data,” says Ken Yamaguchi, Centene’s chief medical officer. The trick is to identify those who appear most likely to suffer such costly conditions as diabetes and cardiovascular disease and intervene before small problems become big ones. Research shows that 5 percent of an insurer’s population can account for as much as 50 percent of its costs. One Centene software tool,

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TruCare, sifts customer data to generate patient to-do lists that are updated every 24 hours and shared with Centene’s 3,000 case managers. The system, for example, might alert a case manager that a client’s potassium levels have spiked, signaling the potential for a life-threatening kidney problem. The caseworker then can contact the client to help her schedule a doctor visit or make sure she’s taking prescribed meds. The use of predictive analytics in health care remains an imperfect science: Electronic medical records systems are often incomplete and unable to talk to one another, and physicians don’t always like to be told what to do by algorithms, according to an essay published in June by Harvard Business Review. But health providers are coming around, says Eric Just, senior vice president for product development at Health Catalyst, a firm that helps providers use data. Most major insurers employ analytics, but at Centene, Just says, “they were talking about it before it was cool.” Many of Centene’s newer ACA customers have never had a regular doctor—they go to the emergency room or go without. That’s notoriously expensive. Centene tries to goad clients into healthier habits with cash rewards for doing such things as getting a flu vaccine, completing a wellness survey, or attending prenatal doctor appointments. The rewards, which differ from state to state, can be used for health-related expenses such as transportation to doctors’ appointments. The thinking behind this is on display even in the company’s employee cafeteria, where a cheeseburger sells for $5 but a veggie burger is $1.50. Centene told investors in June that under one of its Medicaid plans, it’s reduced emergency room visits over the past five years by 5 percent. Wall Street would love to see more of that. Investors sent the company’s shares lower in October after Centene’s third-quarter medical spending climbed a single penny, to 88¢ for each dollar of revenue from premiums. Ninety percent of Centene’s ACA marketplace customers earn little enough to qualify for federal tax credits that reduce their monthly premiums. Many also qualify for reduced copays and deductibles, which Centene must continue to provide even after the recent cutoff of reimbursements. Subsidized clients are vital to Centene’s success. While only 8 percent of the company’s 12.3 million customers have marketplace coverage, that slice accounts for 15 percent of earnings, according to Ana Gupte, an analyst at Leerink Partners. Tawanna Peterson is a client smack in the company’s sweet spot. She’s 60, not experiencing severe health problems, and good about seeing her primary care physician and taking her prescriptions for blood pressure, high cholesterol, and arthritis. She

“I WANT TO GO TO MORE OF AN UPSCALE ENVIRONMENT”

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lives in Columbus, Ga., with her husband, who’s on Medicare. Peterson qualifies for the tax credit because her household earns less than 400 percent of the federal poverty level. She bought a policy sold under Centene’s Ambetter brand last year after losing her job at a call center. She pays $62.28 a month after the tax credit. “I don’t know what I’d do without it,” she says. Some Centene customers complain about not being able to visit the doctors and hospitals they prefer. Centene’s networks are narrow, or limited—they offer fewer doctors and hospitals than other networks in a given area. Plans with narrow networks can be 16 percent cheaper than otherwise similar plans with broad networks, according to research published in September in the journal Health Affairs. The most likely reasons are that providers in narrower networks agree to lower reimbursements and perform only the most necessary services. Over the past two years, traditional insurers have engaged fewer narrow networks while Medicaid specialists such as Centene have used more of them, says Daniel Polsky, executive director of the Leonard Davis Institute of Health Economics at the University of Pennsylvania. It’s unclear whether these networks offer poorer care. A study published in July in the Journal of Clinical Oncology concluded that some narrow networks in 2014 allowed less consumer access to oncologists at high-quality cancer centers. But research published in May 2015 in Health Affairs suggested these networks don’t necessarily offer care of lesser quality and sometimes may provide better care. Centene has received mostly middling grades for the quality of its Medicaid care and service in many states, according to the nonprofit National Committee for Quality Assurance. No such comprehensive ratings for the ACA market have been published yet, but California and Washington state rankings give the company below-average grades. Neidorff counters that 80 percent of Centene’s ACA customers last year renewed for 2017. Of course, some would have had no alternative short of going without coverage. As for the company’s provider networks, he says, “You may not get the exact doctor you want, but you’ll have access to good doctors.” Neidorff also argues that Centene’s predominantly poor clients actually appreciate not being able to go to certain hospitals for cultural reasons. For example, he says, a pregnant teen covered by Centene might prefer a neighborhood clinic to, say, Manhattan’s Lenox Hill Hospital (where Beyoncé delivered her baby in a private suite). “This young girl doesn’t want to sit in some upscale obstetrician’s office having people look down on her,” Neidorff says. Former Centene customer Meaghan Latifi Amini in Austin begs to differ. Some of the doctors she could see were at lower-end community-care clinics, and “I want to go to more of an upscale environment,” she says. Amini and her husband left Centene for employer-based coverage on Nov. 1. Centene tends to build its ACA networks around Medicaid providers it’s worked with in the past. Company executives won’t discuss specifics of what Centene pays its doctors and hospitals, but Missouri executive Landsbaum says there’s a “wide gap” between what providers usually seek—standard commercial rates, or what most private employers pay—and where Centene starts negotiations, which is closer to Medicaid levels. Commercial plans probably pay twice as much as Medicaid on average, according to data from the Congressional Budget Office and the Kaiser Family Foundation. Some providers refuse to work with Centene. The company has greater leverage in places

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where it’s the sole marketplace provider, as in the clutch of southwestern Georgia counties it’s entering on Jan. 1. Median household income in seven of the counties where Centene is expanding is below or just above the poverty level for a household of four, and health is generally poor. “We see the train wrecks,” says Sarah Lang, CEO of Valley Healthcare System Inc., a federally funded care provider with three clinical facilities in and around Columbus. “They have multiple illnesses and because of the cost will wait until the last possible minute to seek care.” Centene is familiar with the territory, having managed Georgia Medicaid clients under its Peach State Health Plan brand. Last year the company started talking with southwestern Georgia’s dominant hospital network, Phoebe Putney Health System, about serving Centene’s policyholders next year. Phoebe Chief Financial Officer Brian Church says he was glad to hear from Centene because it’s been a “good partner” in Medicaid and “we saw it as the perfect complement to Blue Cross.” Then Blue Cross said it was ending ACA coverage in counties where Phoebe does business, leaving Centene the lone insurer. Church won’t discuss specifics of what Centene will pay, but says, “I could be in a better position a year from now with Centene or I could be in a worse position.” The Phoebe system wasn’t required to join Centene’s network. But if it hadn’t, it would still have to eat the cost of treating uninsured people, which was $65 million in the fiscal year ended July 31, 2016. Centene is “doing what business does, which is look at the rulebook and say, ‘How can we make a profit?’ ” says Jim Beck, a former Georgia deputy insurance commissioner now running for commissioner. Two boom cranes hover over a construction site across the street from Centene headquarters, at work on a 27-story tower that will house 2,000 Centene employees. When the company closes its $3.75 billion acquisition next year of Fidelis Care—New York state’s largest Medicaid provider—on top of its $6 billion purchase of Health Net Inc. last year, Centene says it will be the largest Medicaid provider in the four most populous states. It’s gradually expanding into the lucrative market for private health insurance for seniors known as Medicare Advantage Plans. But political threats loom over its Obamacare business. Without the subsidies Trump recently stopped, premiums across the country will rise. As of Jan. 1, Centene’s premiums are scheduled to climb 46 percent on average in Florida, 36 percent in Indiana, and more than 50 percent in Georgia. As these go up, though, so will applicable tax credits, so that 80 percent of HealthCare.gov enrollees will be able to buy a plan for $75 or less per month. Assuming Obamacare survives in its current form, those tax credits will cost the government $194 billion more over the next decade than if Trump had done nothing, according to the CBO and the Joint Committee on Taxation. The greater threat to Centene is Congress and Trump finally repealing Obamacare altogether. An end to the ACA market for individuals or the ACA expansion of Medicaid could cost the company millions of customers. Neidorff dismisses the political back-and-forth as “headline noise.” The company is considering where it will expand in 2019. “Most people never thought we’d be where we are today,” he says. “We’re a Fortune 66 company this year. We’ll be a Fortune 50 in ’19. It’ll take a while to become a Fortune 25. That’ll probably be somebody else’s opportunity, not mine.” —With Anders Melin

TAKING IT SLOW IN TAIWAN Crossing 150 miles in four days on two wheels—and almost zero Mandarin By Matt Gross Photographs by Brad Torchia

P U R S U I T S 84 The Moscot scion with 20/20 style 86 Mobile master Alexander Calder 87 Mark Levinson’s dream turntable 88 The virtual virtuoso at NASA

Bloomberg Businessweek November 20, 2017

Cycling Route 1 through the flooded rice fields of Hualien

Edited by Chris Rovzar

TRAVEL

here comes a moment during every great endurance adventure when, no matter how fit you are, no matter how experienced, a simple, penetrating question arises: Why? During a 150-mile bike trip up the rugged east coast of Taiwan, there are times when this question becomes my mantra, hummed under my breath like a Zen koan. The four-day journey takes me from rocky beaches to lush mountaintops, from lazy hills to vertical slogs, all in temperatures that, at their predawn lowest, barely dip below 80F. Taiwan is no one’s first thought when it comes to a cycling trip—more popular are weeklong excursions with stops at fivestar resorts in France’s Burgundy wine country or, for real Tour de France fans, ascending Mont Ventoux guided by ex-pro cyclists. And with good reason: Taiwan, about the size of Scotland, is cut off geographically and diplomatically from much of the world, and there’s scant information, at least in English, about where to sleep and what to eat on your adventure. But over the past 20 years, I’ve visited the island many times, often staying for weeks with my in-laws in the capital of Taipei. (My wife, Jean, grew up there.) Everywhere I’ve been in the country of 23 million people I’ve found not only excellent food and eye-popping scenery but a uniquely friendly population. There’s a chill amiability to interactions, even when I’ve struggled to make myself understood in Mandarin. Life is good, take your time, enjoy the small things—that’s the mood. And while Taiwan may be overlooked in the world of cycling, it’s known to some as the “Bicycle Kingdom”: The island is home to Giant Manufacturing Co., the world’s largest bike maker and a billion-dollar manufacturer for brands such as Schwinn and Trek. (In 2014 it sold 6.6 million bikes.) Other cycling-related companies abound, ranging from artisans such as Quoc Pham, whose handmade leather shoes are stylish and comfortable enough to wear anywhere, to Wohobike, which lets travelers borrow pioneering bags that fit right into a bike’s frame. Dedicated moped and bicycle lanes are everywhere. Bike-share programs operate in major cities such as Kaohsiung and Taichung. Taipei has legalized riding on 240 miles of sidewalk and is in the process of adding 120 miles to its network of bike lanes. On weekends, hordes of riders cruise alongside the Tamsui River

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for exercise, taking breaks for the occasional cigarette. And at the end of 2015 the country opened Cycling Route 1, a 500-plus-mile network of bike paths that runs along the perimeter of the island. I’m more of a hardened runner than expert cyclist, but what was I waiting for? A full circuit takes about 10 days, more than I could commit to. Instead, this July I chose to ride from Taitung to Hualien, a stretch that friends and strangers alike told me was among Taiwan’s most beautiful: the Pacific Ocean on one side, mountains on the other, and some gorgeous hotels The pool at the Silence Manor in Hualien County

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and fresh seafood restaurants along the way. For my endpoint, I drop a Google Maps pin on the Chihsing Tan Katsuo Museum, a colorful fishing museum. By car, my 150-mile trip would be less than half a day’s work. But Taiwan is a land of subtleties—to drink it in, you have to go slowly. The freedom of a bike trip allows you to indulge in refreshing little stops, to more closely observe local curiosities, and to absorb the vastness of the views. A place that’s both big and small like Taiwan is where bikes are at their best. The fun of a cycling trip, though, relies

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on a complicated and contradictory calculus: When things are too easy, you feel you’re not earning the rewards; when it’s hard, you regret ever having emerged from the hotel’s air conditioning. Why? is a deliciously vicious cycle. And so it goes for me. When I arrive in the afternoon in Taitung, a four-hour train ride from Taipei, the summer sun blazes over the low buildings. Wohobike has lent me a 9-speed with wide gravel tires, while my photographer, Brad, picks up a 27-speed FastRoad SLR 2 with lights, tools, and panniers from a local Giant office. (The company’s islandwide network offers point-to-point rentals.) Our rides secure, we coast into town to grab lunch at the Green House, a rickety restaurant known for its set meals: crispy mackerel, stir-fried bitter melon, thinly sliced pork belly topped with soy, nuggets of garlic, and a thatch of shredded ginger. This is the kind of food I associate with Taiwan—flavorful but not flashy, delicious even when it’s not deluxe, aboveaverage but unconcerned with being A-plus. It’s food I want to eat every single day. Afterward, we wait out the heat with matcha slushies and mango waffles at Café Rebecca, a coffee shop located in a cypress-wood house that dates to 1947, when Taiwan was emerging from 50 years of Japanese colonial rule. Every day, we figure, will go like this. Ride in the ever-so-slightly cooler mornings, break for a lunch that could last hours, and then, around 4 p.m., finish our rolling journey as the sun sinks behind the mountains.

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Dinner at Tou Mu Local Seafood, Fengbin Township

day’s challenge. We ride through villages where surfboards are propped next to hostels and pause at a fruit vendor’s stall for fresh coconut juice. Sometimes we stop just to admire the dependably irregular vistas, where the sea meets the mountain meets the sky. Occasionally, I spot other cyclists, though I imagine in cooler months—November through March—there are many more. As we pass, we chant, “Jia you! Jia you!”—a Mandarin cheer that roughly means “Let’s go!”

Taiwan is a land of subtleties—to drink it in, you have to go slowly. The freedom of a bike trip allows you to indulge in refreshing little stops, to more closely observe local curiosities, and to absorb the vastness of the views When we finally set off, Pacific waves on our right crash into beaches strewn with tetrapods, the jacklike concrete structures that fight erosion. To our left, clouds snake through the steep green foothills of the Hai’an Range. Ahead, smooth, well-marked roads rise and curve with enough slope for a first

November 20, 2017

As the sun begins to set, we relish the cooler temperature, then start to worry. Shouldn’t we be at the Baonon Ocean Villa by now? We are tired and sweatsoaked. Text messages from the hotel’s manager blip on my phone: “Are you arriving soon?” Yes, but “soon” turns from 6:00 to 6:30 to 7:00. By 7:30, we

are circling the pin on Google Maps. Why? Until—the entrance! A wooden door leads to a stately modern villa with a coffee station, stocked with pour-over devices and siphons, on the ground floor. Upstairs is a two-bedroom suite where the air conditioning is cranked to high. The manager has left a note directing us to the village’s only restaurant, Sea of Clouds, which specializes in lobster. I choose a big one—our waitress, Ms. Li, warns us it’s pricey, at NT$1,000 a kilogram ($33 for 2.2 pounds)—which the kitchen hacks into sixths and stir-fries with intensely flavored scallions. There are also crispy chunks of fried fish, stickysweet spare ribs, and morning glory stirfried with garlic. We fetch tall bottles of Taiwan Beer from a cooler and fill little glasses. An elderly grandma toasts us and guzzles a glass of red wine. When I ask Ms. Li if the restaurant has any kaoliang, the high-proof sorghum liquor that is Taiwan’s national drink, she hands me a bottle to take home without charge. The next three days follow a similar formula: Depart at 6:30 a.m. in the cooler morning air, ride 15 or 20 miles, then stop for a breakfast of scallion pancake with egg and Mr. Brown canned iced coffee. Then another couple hours of riding. As we climb—1,000, 2,000, 3,000 feet—so does the temperature, until we

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A room at Noosa Coast B&B in Fengbin Township

can bear it no longer and take a break. Once, we find a stand selling pineapple, sweet as candy and served with a mound of salt. Take-fives like this keep us going—keep us alive. Our bikes are sturdy and hold up fine, though Brad is always worried he’ll hit a bump and pop a tire with all the gear in his panniers. I’m glad to have Woho’s bags, which keep the bike balanced. We seek lunch where we can find it. On one lonely stretch of coast, there’s but a

single cafe serving stewed ground pork on rice, sweet and savory beef noodle soup, and other Taiwanese classics. Another day, we descend into Yuli Township in the East Rift Valley, which separates the Hai’an Range from the more massive Chungyang Mountains. We discover, thanks to a train station clerk, that the township has its own signature noodles: yuli mian, yellow egg noodles in a clear broth, with thin slices of pork and, as always, loads of juicy scallions. Yuli mian aren’t that different

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from other Taiwanese noodle dishes, but they have an unadorned purity I admire. “We are noodles,” they seem to say. “Enjoy us as we are.” By late afternoon on the second day, we find ourselves riding up to a recently built hotel. Just across the Red Leaf River, down small roads that twist through jackfruit and pomelo orchards, lies the stark and peaceful Silence Manor, 14 miles north of Yuli in Ruisui. Instantly, I fall in love with its soft, grassy lawn, its views of the mountains, and especially its pools, a small one fed by a hot spring and a larger one where I float for an hour staring at the fish and insects cavorting at the surface of a nearby pond. For the first time in perhaps months, I truly relax. Closer to Hualien, we stay at the Noosa Coast B&B, run by a young, cool Taiwanese couple who spent time in smalltown Australia and rural India before opening this place a year ago. Perched above a sandy beach where cows traipse through in the morning, the Noosa is striking in the way its angular concrete lines frame the ocean in light and shadow. The loft suites have unique personalities: Mine is decorated with antique cameras, an old bicycle, and a leather couch, like some bohemian Tokyo pied-à-terre. Each of these lodgings is better than I’d hoped for: well-managed, beautiful, supercasual. And each morning, as we pedal away, I wish I could stay longer—eat more, relax more, explore more. In fact, I wish I could stop everywhere, learn everything. The east coast has a large aboriginal population—people who’d lived on Taiwan for more than 5,000 years before immigrants from mainland China began arriving in the 17th century. We see signs of their culture from the road—intricately carved wooden posts in Tafalong, a girl embroidering colorful fabric next to the highway in Xinshe. These details underscore how little time I have to experience the region, even on a bike. The slower I go, the more it becomes clear that I have so much to see. Some of the tourist landmarks along the route are entertainingly minor. On a bike bridge across the Xiuguluan River, we find a plaque explaining the plate tectonics that created the East Rift Valley. In one adorable village, we examine a 300-year-old well where tribal festivals were held. For maybe three minutes, we circle a monument that marks the Tropic of Cancer. The most memorable stop is at

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100 mi. Mainland China

Taipei, Taiwan

Hualien Full bicycle route Yuli

The author’s journey

Taitung

an aboriginal hunting school, where we fire bamboo arrows at targets and miss. As we approach Hualien, a city of 100,000 that functions as the gateway to the east coast, I fixate on the Chihsing Tan Katsuo Museum, a former Japanese bonito flake factory that tells the history of the city’s fishing industry. It’s our final day riding, and Brad and I bike through

a beachy neighborhood with laid-back resorts, a bustling FamilyMart grocery, and a small Buddhist temple behind a grandiose gate. We round the corner toward the museum, but before I see it, my nose twitches with the smell of a wet campfire. Uh-oh. Before us, where the museum should have been, is an utterly burned-out, empty lot. Nothing has survived the fire that, some guys at a nearby noodle stand tell us, consumed the building a week and a half before our arrival. I fall to the ground and begin to laugh. Why? Is there anything more ridiculous than to ride 150 miles to reach something that no longer exists? As I collect myself, I remember it’s almost lunchtime, and we’ll soon be eating at nearby Mu Ming, an incredible aboriginal restaurant that serves roast fish, grilled pork wrapped in lettuce, and good, funky craft beer from local breweries. And soon after that, we’ll hop the train back to Taipei, our muscles sore,

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our bellies full, our minds blazing with the struggles and successes of a delightful, delicious expedition. Those memories— whether a sweet pineapple or a simple downhill cruise—will outlast the lactic-acid buildup in my muscles. The taste of those mangoes, and the pork and shellfish and passion fruit, still lingers on my taste buds. Would they have tasted as good without the effort that went into getting there? One vivid memory provides a possible answer. Once, when we stopped to rest at an old farmhouse, the owner emerged to pour us cold drinking water from a natural spring, which he told us was from higher up the mountains. Atop one pass, we actually found the spring the farmer had described. The feeling of that icy mountain water on the back of my neck was worth every straining, sun-soaked Why? that led to it. Because I’d earned it. Bike itineraries can be arranged through an Asian adventure provider such as Remote Lands; remotelands.com

A brief stop north of Taitung at a park along Cycling Route 1

STYLE

Moscot uses his companyâ&#x20AC;&#x2122;s archives as a reference for new designs

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November 20, 2017

STYLE

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November 20, 2017

Seeing Into the Future

PHOTOGRAPH BY VICTORIA HELY-HUTCHINSON FOR BLOOMBERG BUSINESSWEEK; GLASSES COURTESY MOSCOT

Zack Moscot is challenging his family’s century-old eyewear brand to ride the millennial wave. By Troy Patterson

ZACK MOSCOT WAS NOT YET 8 YEARS old when he had a screaming tantrum about his professional future. “I don’t wanna join the business!” wailed the fifth- generation member of the family behind Moscot, the venerable New York eyewear company. His great-great- grandfather Hyman Moscot founded the shop in 1915, turning a pushcart stocked with ready-made glasses into an optical landmark known for its bright yellow sign and low-key style. “I didn’t know what I wanted to do,” Zack says, looking back. “I always just created things.” In middle school he spent weekends working the company phones as a customer-service rep. When he was in high school, his late uncle Kenny, who oversaw design for the brand, showed him “this other side of the business.” Zack studied industrial design at the University of Michigan and graduated in 2013. Today the 26-year-old is the brand’s chief design officer. He’s charged with ushering the family business into its second century and continuing to charm celebrity clients such as Leonardo DiCaprio, Demi Moore, and Jake Gyllenhaal, who regularly snap up pairs of the company’s $350 shades. The competition is stiff, well-armed, and largely cheaper: The eyewear landscape is dominated by Luxxotica Group, a maker of frames and sunglasses, and if a $53 billion merger with ophthalmic lensmaker Essilor International SA is approved, the company will control a quarter of the global market. Meanwhile, e-commerce companies such as Warby Parker—which recorded 500 percent growth in 2016—are solidifying their place in the consumer mind as hip. Moscot operates on a smaller but higher plane: Its glasses are better quality and therefore more pricey. (Warby frames start at $95; Moscot’s at $260.) The brand doesn’t chase trends, relying instead on its long history of making eyeglasses to offer the styles people want at any given moment.

And while it sells online, it’s also committed to brick-and-mortar outlets despite the retail apocalypse that larger chains are facing. “There’s no need to visit shops anymore,” Moscot states plainly. “You want to make it something worth taking a train to, something experiential.” For Moscot, the brand’s key appeal lies in its city heritage. A new location, in Manhattan’s Chelsea Market, is Moscot’s fourth standalone outpost in the city and its eighth worldwide. Sitting in a conference room above the company’s Lower East Side flagship, Moscot ticks off the brick walls, tin ceilings, and other interior-design details that communicate the charm of pregentrified New York. There are also the bells and whistles that distinguish the Moscot in-person experience. The company is the first to hire a full-time doctor—at the new location—who specializes in computer-vision syndrome, an affliction especially relevant to Moscot’s target clientele, the digitally savvy employees at the nearby offices of Google and YouTube. And a novel gizmo called a “Tint-a-Majig” falls somewhere between a display tool and a delirious toy: Step inside, turn the handle, and

Yente

Zolman

Marilyn

test 18 different colors—from denim blue to candy corn—on your face. “It’s kind of steampunk-meets-amusement-park industrial,” Moscot says. Currently, he’s finishing designs for spring—narrowing a group of 20 frames, all designed by him and inspired by the company’s archives, down to a collection of five that can coexist with long- standing favorites such as the tortoiseshell Miltzen and the Yukel, a riff on horn-rimmed designs. He also manages collaborations with downtown Manhattan brands defined by their casual approach to urban cool, including Mr Porter, Common Projects, and Freemans Sporting Club. There’s a Moscot concession at Dover Street Market New York, the avant-garde superstore operated by Comme des Garçons, where monthly exclusives include custom tint and frame color combinations. The common denominator in all these endeavors is to sell a piece of Manhattan, whether it’s close-tohome design language or marketing that assures overseas customers “they’re truly wearing a piece of New York.” Even model names derive from old family in-jokes: The Lemtosh, a “rounder, nerdier” style, got its name from a made-up Yiddish-ism the family uses to tease one another. A new model getting attention this season is the Yente, which Moscot says was named in honor of his gossipy great-aunt Etta. Other designs of his that are “a little more streamlined and contemporary,” as he puts it, have been unexpectedly strong sellers in middle-of-the-road American markets, where shoppers are more conservative. Europeans favor chunkier frames, whereas fashion types tend toward classics that could have come from Hyman’s pushcart a century ago. “There might be a period where more people are wearing one particular frame,” Moscot says. But the longterm goal is that a frame “doesn’t go out of style.”

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Social Mobility 86

A new biography of Alexander Calder follows the curious rise of one of the 20th century’s top-selling artists. By James Tarmy The artist Alexander Calder died 41 years ago, but today he seems more famous than ever: In 2017 he’s been featured in four solo exhibitions, and in November no fewer than 31 of his colorful mobiles, massive sculptures, prints, and paintings will be auctioned at Christie’s and Sotheby’s. According to Artnet, his art has gone under the gavel more than 10,400 times; his record sale was set in 2014 at Christie’s in New York, when a hanging mobile went for almost $26 million. A biography by the art historian and critic Jed Perl, Calder: The Conquest of Time, attempts to explain how a single artist could come to so completely dominate the field of American modernist sculpture. The writing practically hums as Perl describes Calder’s work, which he clearly adores, and the text has reams of novel insights: We learn about Calder’s indebtedness to the painter Piet Mondrian—not an obvious connection—and that it was Marcel Duchamp who suggested Calder describe his hanging sculptures as mobiles, a term that came to connote an entire artform. The book’s most illuminating portions highlight how closely interwoven the artist’s social life was with his professional success. Through his connections and his efforts to market his own work, he helped to create, then cement, a type of artistic fame that persists to this day. Calder was born in 1898 in Lawnton, Pa., into a family of artists. His grandfather, Alexander Milne Calder, sculpted the 37-foot-tall statue of William Penn that sits on the dome of Philadelphia’s City Hall. (We’re told he was haunted until his death by the conviction that the builders had mounted it in the wrong direction.) A. Stirling, Calder’s father, a famous

November 20, 2017

fin de siècle artist, sculpted, among other things, the figure of George Washington that adorns New York’s Washington Square Arch. Calder himself backed into a career as an artist rather than pursuing one outright—he went to university to study engineering and, only after dragging his heels following graduation, studied at the Art Students League of New York. In 1926 he would move to Paris. Soon after his arrival, in an attempt to earn some money, he made his Cirque Calder, a miniature stage set starring tiny circus performers that he could manipulate with wires and strings to do tricks. (The original is in the permanent collection of the Whitney Museum of American Art in New York.) He held performances in his studio and, eventually, in fashionable drawing rooms in the U.S. and Europe. Socialites would invite him and a coterie of friends, including the sculptor Isamu Noguchi, to operate the Cirque during cocktail parties. Calder’s star began to burn even brighter in 1931, when he married Louisa James, a wealthy grandniece of the author Henry James. Her trust fund largely supported the couple for the next decade. Perl notes, delicately, “The fact that Louisa’s family was well set financially couldn’t have been a matter of indifference to Calder.” By 1933 the couple had moved into a spacious apartment in Paris. While the rest of the world was plunged into the Depression, Calder and his wife were “coming into their own as hosts,” comfortably entertaining the disparate, immensely important interwar milieu that would shape the world of art and culture for the rest of the century. Over the years, they became friends with Alfred Barr Jr., the first director of the Museum of Modern Art in New York; Martha Graham, the modern dancer and choreographer; the artist Joan Miró; the playwright Arthur Miller; and dozens of other luminaries. It’s here where Perl’s book feels particularly thin, clearing Calder of anything as unscrupulous as ambition. He thus brushes aside the possibility that the artist could have been canny enough to use his connections to further his quest to establish a serious position in the art world. So while Perl carefully details Calder’s social gifts and role as expansive host and charming houseguest at English country estates, he discounts any impact it might have had on the artist’s career. “Variations on this portrait of Calder as a sly opportunist reappeared throughout his life,” Perl writes. “The accusations were unfounded.” The book ends in the early 1940s, when Calder had officially made it. (A second volume, scheduled for publication in November 2019, will address the rest of his life.) By then, his massive mobile, Lobster Trap and Fish Tail, had been installed in the stairwell of MoMA; the Rockefellers had commissioned a candelabra. Later, banking scion Paul Mellon bought cuff links made by Calder. Perl quotes a contemporary who says, “In those days, ‘all the right people’ wore Calder jewelry.” It takes more than just “the right people” to sustain a 50-year career, of course, and anyone who’s had the pleasure of standing beneath one of Calder’s mobiles can understand the genius it took to transform abstractions into three dimensions. But his transition from a lighthearted tinkerer to ringmaster of Calder Inc. took a lot of help and a surfeit of goodwill. Perhaps Perl’s next volume will make a point to give credit where credit is due.

ILLUSTRATION BY MATIJA MEDVED

CRITIC

THE ONE

Bloomberg Pursuits

Mark Levinson No. 515 Turntable

November 20, 2017

The hi-ﬁ audio maker’s ﬁrst record player is an investment-worthy deck Photograph by Janelle Jones

PR PROP PRO PR ROP RO O OP P ST TYL TYLI TYLIS TYLIST TY YL S : ALEX Y ALEX EX X BRANN B IAN AN N

THE CHARACTERISTICS

THE COMPETITION

THE CASE

Founded in 1972 and acquired in 1990 by Harman International Industries Inc., Mark Levinson is synonymous with high-end sound. Its eponymous founder, an aspiring musician said to have built a stage mixer at Woodstock, jump-started the craze for premium home audio equipment. To commemorate its 45th anniversary this year, the brand teamed up with another top-rated manufacturer, turntable maker VPI Industries Inc., to create its first record player, the No. 515. A 20-pound platter rotates on an inverted bearing to make it the most precise deck on the market. The reinforced base tamps down resonance to create a warm, clear, analog sound.

At $10,000, the Mark Levinson No. 515 has been measured to be 0.01 percent better at reproducing pitch than VPI’s own top-shelf $6,000 Prime Signature turntable. Both have a massive aluminum alloy platter and layered plinth design, but flourishes such as a 3D-printed tonearm and Levinson’s trademark black anodized chassis give the 515 more polish. McIntosh Laboratory Inc. makes the platter for its $6,500 MT5 out of 5 pounds of glow-in-thedark silicone, but aluminum’s fidelity, over time, tends to be better. Technics, the Panasonic brand behind the SL-1200, a durable DJ favorite, is expected to release a new player next summer.

Fans of Mark Levinson amplifiers such as the 523, 526, and 585.5 who’ve wanted an end-toend, vinyl-focused, hi-fi stereo system now have a turntable to match. The uncompromising engineering and VPI’s impeccable craftsmanship produce some of the most neutral sound possible in a phonograph. It’s a system that values the record-playing experience, delivering rich sonics that trounce the clinical tones created by digital files—whether you’re rediscovering Paul McCartney’s ingenious bass lines or Miles Davis’s Birth of the Cool, which Levinson himself remastered. Mark Levinson No. 515 turntable; marklevinson.com

Bloomberg Pursuits

November 20, 2017

GAME CHANGER

Victor Luo

“WE’RE IN THE VHS STAGE science from the University of Southern California, Luo of VR—the brick-phone stage,” says Victor Luo, with interned at Boeing Co. before a laugh. He’s the lead project getting a job at NASA in 2008, manager for the OpsLab writing code that simplified at NASA’s Jet Propulsion and improved operations for Laboratory in Pasadena, Calif. the Mars Curiosity Rover. He Luo works on the space agency’s eventually found a home in the virtual- and augmented-reality OpsLab, where he was quickly proprojects, enabling engineers here moted, taking charge of the operaon Earth to design virtual space shuttion this year. tles in 3D and then assist astronauts on the Luo’s work might sound far-fetched, real shuttles orbiting outside the atmosphere. but Skip Rizzo, a research director at USC’s In 2013, Luo was instrumental in rolling out NASA’s Institute for Creative Technologies who’s used VR first console video game, and he consults regularly on Hollywood to help veterans overcome trauma, is on board. “It’s a natural projects. Not bad for only 32 years old. direction to give people visualizations for things they can’t Born in Beijing to engineer parents, Luo left the mainland be there for and interact with,” he says. “Think about aviafor Hong Kong when he was 4, then moved to Indiana a year tion simulation: There was a gigantic drop in crash landings later, where his father studied for a master’s degree. When he with people learning to fly by instrument. We’re at another was 9, the family moved to Silicon Valley. tipping point here.” The one constant in his life was space, which he found endIn addition to his VR work, Luo has begun stepping up recruitlessly fascinating. Aerospace engineering, however, proved a ment among tech types, who are more likely to picture themharder sell in college for Luo, who was much better at abstract selves in Silicon Valley than at Cape Canaveral. “People think tasks such as computer programming. “I switched of NASA as this kind of archaic institution that can’t move quickly,” he says. “We like to challenge that.” to aerospace for a semester—I thought I needed that b. 1985, Beijing for NASA,” he says. “The chair of the department Funding is always an issue at a government agency, said, ‘You don’t have to be in aerospace to be in the but Luo is optimistic about NASA’s future backing. Has completed space industry.’ It was a lightbulb moment, and I “Space is really hip right now,” he says. “These types astronaut, scuba, and pilot training went back to computers.” of technology are going to enable a new generation of After earning a degree in computer engineerspace exploration. It won’t just be astronauts landing Built shelters in on Mars. It will be everyone on Earth. This tech will ing from California Polytechnic State University Nepal after the 2015 earthquake enable that immersion. That’s the vision.” at San Luis Obispo and a master’s in computer

ILLUSTRATION BY SAM KERR

NASA’s virtual-reality wunderkind writes programs that send people into space without ever leaving Earth. By Adam Popescu