April 10 April 23, 2017 | bloomberg.

com
SPECIAL DOUBLE ISSUE

North of the Border, South of the Wall

What the U.S. has to lose by cutting off Mexico
p62
 WE DONT LOSE LIBERTY

IN THIS COUNTRY

BECAUSE SOMEBODYS SOFTWARE

IS NOT WORKING.

1
IT JUST ISNT RIGHT

p44
PHOTOGRAPH BY HANNAH WHITAKER FOR BLOOMBERG BUSINESSWEEK

Time Not only did we

have this commonality
Weve exposed a
myth that Germans want
of startups, but to be with Germans
is brain we both loved Jesus and Brits with Brits
p34 p56 p18
 Cover
Trail
April 10 April 23, 2017
How the cover gets made

Opening Remarks Whats behind so many Wall Street pitches: Tortured data 8 We have a photo essay that
examines the area around a
Bloomberg View The ANCs misguided loyalties A fair EU approach to Brexit talks 10 55-mile stretch of the current
Mexican border fence.
Movers A Spotify-Universal Music duet Pepsis Kendall Jenner ad falls at 13
Soon to be replaced by a big,
beautiful wall.
Global Economics
Perhaps.
While all eyes watch the Fed, the Fed watches the Street 15
Guadalajara pitches itself as Silicon Valleys sanctuary city 16 I have a thought: Maybe we
should put a picture of the fence
A print-only satirical weekly strikes fear into French politicians 17 on the cover.
All together now, Thomas Cook tells its multinational travelers 18
Your creativity never ceases
to amaze me.
Companies/Industries
Putting a price on miracle drugs 21
Shipyards may bustle again as demand picks up for LNG tankers 23
Whos to blame for sluggish U.S. car plants? SUV buyers 24
With new brands, H&M goes after older, more affluent shoppers 26

Politics/Policy
Russiagate: The Senate pieces the parts together 28
A change of mission for ICEs community-relations officers 30

Technology
2 Lucrative hackathons help elite coders avoid the job grind 33
Why is a treatment for stroke victims slow in reaching most Americans? 34
Changing its name, Taser sells police on its body cams 35
Chinas DJI rules the air with its civilian drones, but it may need more lift 36
Innovation: Synthetic cartilage that could transform joint replacement 37

Markets/Finance
Eyeing $100 million in savings, North Carolinas treasurer res fancy money managers 38
In Torontos hot property market, many buyers dont wait for inspections 39
Active fund managers try a new twist on ETFs 40
Wall Street chatterers love disappearing messages 41

Features
COVER AND COVER TRAIL: PHOTOGRAPH BY KIRSTEN LUCE FOR BLOOMBERG BUSINESSWEEK

Buying Trouble Post-it creator 3M has struggled in the high-stakes ankle bracelet business 44

Plane Drain The F-35 ghter jet might be the U.S. militarys most expensive mistake 50

Entrepreneurial Spirit One of Americas fastest-growing churches nurtures startups, too 56

A Walls Limits A look at life and commerce along 55 miles of border fence in Texas 62

Etc.
The designer behind the revolutionary Nest thermostat has been tinkering with the camera 71
Fashion: Consider the white sock. Seriously 74
The Critic: The very long history of loan-sharking 75
Sport: All the stuff youll need to give stand-up paddleboarding a go 76
Survey: What could possibly go wrong during a team-building activity? 78
What I Wear to Work: Aday co-founder Meg He wears her clothing lines silk shirts for rock climbing, too 79
How Did I Get Here? H&R Block CEO Bill Cobb went from marketing stuffed-crust pizza to helping us with our taxes 80
 Index
People/Companies

P T
Page, Carter 29 T-MobileUS (TMUS) 46
Parish Home Inspections 39 Taser International(TASR) 35
76
SUPing in
Patrick, Tim
Payless ShoeSource
37
13
Tesla(TSLA)
Thomas Cook Group
13

Austin Pence, Mike 29 (TCG:LN) 18

PepsiCo(PEP) 13 3M(MMM) 44
Persson, Karl-Johan 26 Toyota Motor(TM) 24
Play With a Purpose 78 Trump, Donald 13, 15, 16, 24,
PNC Financial Services 29, 30, 52
Group (PNC) 58 Trusheim, Mark 21
Precidian Investments 40 21st Century Fox(FOXA) 13
Primark Stores 26 Twitter(TWTR) 29
Procter & Gamble (PG) 33, 58 Two Sigma Investments 8
Putin, Vladimir 17, 29

U
Q Uber 33
Qualcomm (QCOM) 72 UBS (UBS) 40

R V
Ralph Lauren(RL) 13 Vanguard 8
RBC Capital Markets 24 Verizon Communications(VZ)
Renaissance Technologies 8 13, 46
Research Affiliates 8
Rogers, Matt
Roku
72
72
W
Rosengren, Eric 15 Warburg Pincus 38
Royal Dutch Shell (RDS.A) 23 Warner, Mark 29

A Clinton, Hillary
Cobb, Bill
29
80
GlaxoSmithKline(GSK)
GlobalData
21
26
K Royal LePage West Real
Estate Services 39
Weiss, Scott
WhatsApp
58
41
Abilla, Pete 78 Cohen-Watnick, Ezra 28 Goldman Sachs Group (GS) 41 Kawasaki Heavy Industries Wizeline 16
ACA Compliance Group
Aday
41
79
Columbia Threadneedle
Investments 40
Google(GOOG) 33, 46
Google Ventures (GOOG) 72
(7012:JP)
Keller Williams Experience
23
S
Airbnb 58 Comben, Christina 78 GoPro(GPRO) 72 Realty 39 Safariland 35
Aite Group 40 Comey, James 29 Gordhan, Pravin 10 Kelly, John 30 Salesforce.com(CRM) 33
AlixPartners 24 Correct Tech 46 Gorkov, Sergey 28 Keppel (KEP:SP) 23 Samsung Heavy Industries
4 Allstate(ALL) 13 Grannan, Dave 72 Kiessling, Will 58 (010140:KS) 23
Amazon.com(AMZN) 26, 33
Andrews, Martin 21 D Greenspan, Alan 15 Kosloff, Janet
Ku, David
78
37
Sandoval, Aristteles 16
Satellite Tracking of People 46
Apple(AAPL) 16, 36, 41 D.E. Shaw 8
H Kushner, Jared 29 Saxo Bank 17
AQR Capital Management
Arnott, Rob
8
8
Daewoo Shipbuilding & Marine
Engineering (042660:KS) 23 H&R Block(HRB) 80
L
Schiff, Adam
Sears Holdings(SHLD)
28
33
28
Sally

MAIN: BOBBY SCHEIDEMANN FOR BLOOMBERG BUSINESSWEEK: HEWSON: ALBIN LOHR-JONES/BLOOMBERG; YATES: PETE MAROVICH/GETTY IMAGES
Asness, Clifford 8 Day Translations 78 Hainan China Agriculture & Seeed Studio 36 Yates
AT&T(T) 46 DecisionWise 78 Flight Service 36 Lacker, Jeffrey 42 Signal Digital 41
Autodata 24 Deutsche Bank (DB) 41 Hana Financial Investment Laroia, Rajiv 72 Sikhounmuong, Somsack 13
Axon 35 Dimensional Fund Advisors 8
DJI 36
(086790:KS)
He, Meg
23
79
Le Pen, Marine
Legg Mason(LM)
13, 17
40
Smith, Lamar
Smith, Rick
30
35 XYZ
B Dodge(FCAU)
Dudley, William
24
15
Heinz, David 52 Li Shufu
Liberty Interactive(QVCA) 13
24 Socit Gnrale(GLE:FP) 26
Sovcomot 23
Xerox(XRX)
Yates, Sally
33
28
Bank of America (BAC) 41 Dunford, Joseph 13 Light 72 Spark Therapeutics(ONCE) 21 Yellen, Janet 15
Bannon, Steve 13 Lockheed Martin (LMT) 52 Starwood Capital 38 Zhejiang Geely Holding Group
Baumhauer, Judy
Bayer(BAYN:GR)
37
13
E Logitech International (LOGI) 72
Lyons, Jenna 13
State Street(STT)
Stryker(SYK)
40
34 Zuma, Jacob
24
10
Berkshire Hathaway(BRK/A) Eaton Vance(EV) 40

Bienaime, Jean-Jacques 21
38 Edmunds.com
EHang
24
36 M
BioMarin Ekko Title 39 Ma, Max 36
Pharmaceutical(BMRN) 21 Ellis, Michael 28 Macron, Emmanuel 13, 17
Black, Diane
BlackRock(BLK)
30
38, 40
ETrade Financial(ETFC) 40
50 Manafort, Paul
Marrazzo, Jeff
29
21
How to Contact
Marillyn Bloomberg Businessweek
Blackstone Group(BX)
Boeing (BA)
38
52 F Hewson Mattis, James
May, Theresa
52
18
Bogdan, Christopher 52 Facebook(FB) 17, 29, 33 McCabe, Daniel 40 Editorial 212 617-8120 Ad Sales 212 617-2900
Bould, Fred 72 Fadell, Tony 72 Hennes & Mauritz(HMB:SS) 26 McCain, John 29, 52 Address 731 Lexington Ave., New York, NY 10022
Brunswick(BC) 46 Fanatics 33 Hewson, Marillyn 50 Medtronic(MDT) 34 Email bwreader@bloomberg.net Fax 212 617-9065
Bryan, Garnier & Co. 26 Fankhauser, Peter 18 Honda(7267:JP) 24 Mercedes(DAI:GR) 13
Subscription Customer Service URL
Buckingham Strategic Fifth Third Bancorp (FITB) 58 Horeau, Louis-Marie 17 Meyers, Jim 21
Wealth 40 Fillon, Franois 17 HP(HPQ) 16 Microsoft(MSFT) 16, 33
businessweekmag.com/service
Buckley, George 46 Fillon, Penelope 17 Hyundai Heavy Industries Mitsubishi Heavy Industries Reprints/Permissions 800 290-5460 x100 or
Buddi US 46 Find a Tutor Near Me 78 (009540:JP) 23 (7011:JP) 23 email businessweekreprints@theygsgroup.com
Buffett, Warren 38, 58 Fisher, Sharon 78 Moreno, Lenn 13
Letters to the Editor can be sent by email, fax, or
Burr, Richard 29 FlipKey
Flynn, Michael
58
29 I Morningstar(MORN) 24, 40
Mortgage Wellness Group 39 regular mail. They should include address, phone
C Folwell, Dale
Ford (F)
38
13, 24, 58
IBC Advanced Alloys (IB:CN) 52
InCrowd 78
Muilenburg, Dennis
Musk, Elon
52
13
number(s), and the email address if available.
Capital Lending Centre 39 Foust, Lyden 58 Inditex(ITX:SM) 26
Connections with the subject of the letter should
be disclosed, and we reserve the right to edit for
Carson Dunlop
Carter, Ashton
39
52
Foxconn Technology
(2354:TT) 72
InfoTrends
Intel(INTC)
72
16 N sense, style, and space.
Carticept Medical 37 FPV Style 36 International Business Nest Labs(GOOG) 72
Cartiva 37 Freedman, Charles 15 Machines(IBM) 16, 33 Nunes, Devin 29
Century 21 Leading Edge Frost & Sullivan 36 IPro Realty 39 Corrections & Clarications
In A Miracle Drug Big Pharma Doesnt Want
Realty 39
O
Chapin, Steve
Charles River Ventures
46
72
G J Obama, Barack 30
(Companies/Industries, April 3-April 9, 2017), the
per-person price that Parsemus Foundation
Cisco Systems(CSCO) 16 Gartner(IT) 36 J.Crew 13 Ollerton, Seth 78
Citigroup (C) 41 General Electric (GE) 58 Jabil Circuit(JBL) 16 Oracle(ORCL) 16
expects to charge for its male contraceptive
Clarke, Stephen 40 General Motors(GM) 24 Jefferies Group (LUK) 41 Owl Labs 58 Vasalgel in low- and middle-income countries was
Clearasil (RB:LN) 58 Gilead Sciences(GILD) 21 Jenner, Kendall 13 OReilly, Bill 13 incorrect. It should be $10 to $20.
 Early
E y in Ja anuary
a y in a Chicago hote e
el,
O g Campbellb ll Harvey
presidentia
p d
H y gave a rip-snortiiing
al address
dd to the
h Americccan
g

Remarks Finance Ass

s
society
n
nomics.
sssociation, the worlds leading
y forr research on financial eco-
To
o get published in jjournals, he
o-
g

s
said, there e
es a p powerful temptation
p to
to
torture h data
th
he a a until it confessesthat
o f a

s, is, to cond duct

d

to be statistically
round after round of tests
in search of a finding g that can be claimed
y significant.
cant.
t Said Harvey,
y,

Damn a professor at Duke Universsitys

School
S h l off B Business:
y Fuqua
siness Unfortunately,
Unforttunately our
standard testing methods are often ill-
equipped to answer the questions that

, we pose. He exhorted the group: We

are not salespeople. We are scientists!
The problems Harvey identified in

c academia are as bad or worse in the

investing world. Mass-market products
such as exchange-traded funds are being
concocted using the same flawed statis-

Statistics
By Peter Coy
tical techniques you find in scholarly
journals. Most of the empirical research
in finance is likely false, Harvey wrote
in a paper with a Duke colleague, Yan
Liu, in 2014. This implies that half the
financial products (promising outper-
formance) that companies are selling to
clients are false.
Most of us have a vague sense that
8 were being ripped off by investment
firms that charge hefty fees while
producing results that are no better
than youd get throwing darts at a page
of stock listings. Its troubling nonethe-
less to find out were correct. And its
important to understand the mechanics
of what has gone wrong.
The core of the problem is that its
hard to beat the market, but people
keep trying anyway. An abundance of
computing power makes it possible to
test thousands, even millions, of trading
strategies. The standard method is to see
how the strategy would have done if it
had been used during the ups and downs
of the market over, say, the past 20 years.
This is called backtesting. As a quality
check, the technique is then tested on
a separate set of out-of-sample data
i.e., market history that wasnt used to
create the technique.
In the wrong hands, though, back-
testing can go horribly wrong. It once
found that the best predictor of the
S&P 500, out of all the series in a batch of
United Nations data, was butter produc-
tion in Bangladesh. The nerd webcomic
Its hard to beat the xkcd by Randall Munroe captures the
depend on the flavor of jellyj bean. So
th statistician tests 20 fl
the flavors. Nineteen
s
show nothing. Byy chance theres a high
correlation between jjelly bean consump--
t
tion and acne breakouts for one flavor.
T
The final panel
p of the cartoon is the
front page of a newspaper: Green Jelly y
B
Beans Linked to Acne! 95% Confidence.
Only y 5% Chance of Coincidence!
Its worse for financial data because
researchers have more knobs to twist in
ssearch of a prized anomalya y subtle
pattern in the data that h llooks k like it
could be a moneymaker. They can vary
the period, the set of securities under
consideration, or even the statistical
method. Negative findings go in a file
drawer; positive ones get submitted to
a journal (tenure!) or made into an ETF
whose performance we rely on for retire-
ment. Testing out-of-sample data to keep
yourself honest helps, but it doesnt cure
the problem. With enough tests, eventu-
ally by chance even your safety check
will show the effect you want.
Harveys term for torturing the
data until it confesses is p-hacking, a
reference to the p-value, a measure of
statistical significance. P-hacking is also
known as overfitting, data-miningor
ILLUSTRATION BY 731

ethos perfectly: It features a woman data-snooping, the coinage of Andrew

market, but theres claiming jelly beans cause acne. When Lo, director of MITs Laboratory of
always a new product a statistical test shows no evidence of Financial Engineering. Says Lo: The
that tries anyway an effect, she revises her claimit must more you search over the past, the more
 Also known as data-mining
or overfitting, p-hacking is
the technical term for forcing
data to bend to your will

and chief investment officer, Clifford

Asness, is a billionaire. Rob Arnott, a
rival whos CEO and founder of Research
Affiliates in Newport Beach, Calif., says,
I think Cliff has done some outstanding
work over the years, but adds that hes
insufficiently skeptical about the perva-
siveness of data-mining and its impact
even in the factors he uses. uses.
Asness responds d by emaill that
h thereh
i little evidence so far that AQRs q
is qual--
ity-focused
y fund is performing g differently y
now from how it did in backtesting. But
t
thats not much of a claim, says y Robert
Novy-Marx,
y a professor at the University y
o Rochesters Simon Business School
of
who once consulted for f AQR Q and now
consults for another group, Dimensional
F
Fund Advisors. Even if it p performed
really
lly poorly,ly yyou wouldnt
ld k know. Theres
h
j
just not enough out-of-sample -s p time to
make any y claim one way y or another.
T
The old adage applies: If asset
likely
y it is you are
e going to find exotic pat- t- special-sauce ingredients
g such m
managers g f
and finance f
professors
ternss that you happen to like or focus on. as quality (on the theory that a
are super-smart, why h aint they h y 9
T se patterns arre least likely
Thos y to repeat. ll
well-managed d companies tend d to s
super-rich? h The h b big money is b being
Suuch tricks wwerent necessary y when o p
outperform in the stock market).. m
made by fi firms that ignore fi finance
W l Streeters could make a good
Wall T
Trouble is, fund managers have theory. y Renaissance Technologies
l
livingg charging for
f their stock-selection
-s g
gotten too creative in the competition
c p ii o n Long g Island is dripping g with
sk lls. That gig became
skill b scarcer when h f investors dollars. To quote
for q the m h
mathematicians andd physicists
hy
i be
it ecame clear that a ffew could
o o s-
consis- b l
burlesque strippers in Gy Gypsy,y, yyou but will not hire a ffinance Ph.D.
t tly beat a low
tent w-cost index fund f that ggotta get a gimmick: k There
h are Two Sigma Investments is run by
trackks, say, the S&P
S 500. EETFs ffor more than a thousand computer scientists and d mathema-
h a-
In
ndex funds a are cheap p because their n d
new indexes. Creativity, alas,l ti i
ticians. D.E. S Shaw was founded by ya
sp nsors dont n
spon need d to h hire expensive
p ddoesnt equall success. Vanguard, d c
computational l biologist.
b l And d so on.
stockpickers, bu
stoc ut they y arent perfect.f th b investment manager, cal-
the big l- Reflecting g mathematicians disdain for
Stocks in the ind ndex are weighted h d by cculated
l d in 2012 that h ETFs did d d great s
sloppiness in finance, a 2014 essay y in the
market value, so Apple l is 3.7 percent o h
on their b k
backtests, o f
outperforming g Journal of the American Mathematical
of the S&P 500 w while Rupertp Murdochs th
the marketk b by 10 p percentage points i Societyy referred to backtest overfitting g
News Corp. is jusst 0.008 percent. When a year on average in the five f years a pseudo-mathematics
as p m and finan- n-
a stock gets hot fofor whatever reason, the b f
before they went live, but then c al charlatanism.
cial ha la a
index fund has tto buy y even more of it, underperformed the market by y 1 per- H a r ve yy, w h os s i n c e c o m -
which may not b be the wisest choice. c
centage point a year
y in the five years
y pleted
p his term as president
p of the
Wall Streets answer is todays d y most a
afterward. The most complex p strat- t- American Finance Association,,
stylish investme yl smart b
ent style: beta. egies
eg suffer the biggest
gg drop-off from h written that finance lags
has g other
At the end of February, more than th backtests,
their b k according
d g to an article l in f
fields, including g ggenetics, in
$500 billion wa as invested d in equity the Journal
J of Portfolio Management. t. m
making certain that its findings are
exchange-traded f
d funds in the U.S. that Fg
Fights have broken out over who s
statistically y valid. Many y in our
use smart beta sstrategies, according d to is or isnt coming g up with h spurious f
profession, including g me, have
data compiled by b Bloomberg.
l b Beta is investment concepts. AQR Capitall s j
subjected data to inadequate tests
lingo for the retu urn on investment you Management off Greenwich, Conn., i the past, he said in Chicago.
in
get from owning a slice off the entire stock w
which started as a quant hedge fund, f Th
That speech h disgruntled
d g l d some
market, as in a co onventional index fund; h
has grown rapidly dl by
b managing other h r p
people, l h he says now, b h
but thats
the smart partt refers to breaking g the peoples money in smart beta funds. f OK. To push the field further, y you
link with market value. Stocks in a smart I focuses on factors such as quality
It y s
sometimes have to be willing g to be
beta index may be b weighted h d by anything
yh g and momentum that it says y lead to reli- i- very y unpopular.  With Saijel j
from company sales s or book value to a
able outperformance.
p f AQRs founder
f K
Kishan and Dani Burger g r
 Bloomberg
View
Patience Is Running
Out in South Africa
The ruling African National Congress must
choose country over President Zuma
South Africas ruling African National Congress has a choice:
10 It can help President Jacob Zuma or it can help the country.
The partys survival as a respected national force depends on
its doing the latter.
Support for the ANC has fallen amid charges of corruption
and incompetence. Now, Zuma is embroiled in a struggle with
his former finance minister, Pravin Gordhan, and other cabinet
members, claiming that Gordhan and his allies are seeking to
undermine him. Zumas firing of Gordhan on March 31 rattled
investors, sparking a downgrade of South African bonds to
junk statusa setback that raises the countrys debt burden
and could deter badly needed foreign investment.
Underlying this recent volatility is a deeper malaise.
Economic growth under Zuma has been anemicless than
1 percent last yearand South Africas already high level of
unemployment has risen from 23.6 percent in 2009, when
he was elected, to almost 27 percent today. The national debt
has doubled. State companies and agencies are in disarray.
Business confidence has fallen, and the country has slumped
in global rankings of competitiveness.
Lately the plume of scandal thats followed Zuma from his
first days in office has billowed into an all-encompassing cloud.
Last year, for instance, South Africas top court ruled that his
failure to repay taxpayer funds spent on upgrading his home
violated the constitution. South Africas former graft ombuds-
man reported Zuma may have dispensed favors and sweet-
heart contracts to friends who do business with his son. Still
to come is a possible judicial reinstatement of 783 charges of
corruption, racketeering, fraud, and money laundering.
Zumas response has been to fire up supporters with a toxic
brew of populist proposalseverything from strengthening the
power of the president and banning foreigners from buying
agricultural land to outright expropriation.
South Africa doesnt need a stronger president. It needs
To read Eli Lake on the
Trump wiretapping
controversy and Barry
Ritholtz on the reality
of investing, go to
Bloombergview.com
to safeguard the integrity of its institutionsits parliament,
judiciary, and central bank. It needs to dismantle the patronage
networks that sap its economic strength. It needs to tackle a
dysfunctional educational system that puts unqualified teachers
before struggling students. It needs to reform labor regula-
tions that make it harder to hire workers and that privilege
well-connected unions. It needs to maintain its free press and
nourish a vibrant civil society that holds politicians to account.
Almost eight years of misrule suggest that neither Zuma
nor anyone close to him is up to these tasks. Voters may be
coming round to the same idea: They delivered a warning in
municipal elections last summer, rewarding the opposition
with unprecedented gains. The government had better pay
attention before voters patience is exhausted.
Europes Firm but Fair
Approach to Brexit
Without room for compromise, the talks will
be doomed almost from the start
With talks on Britains exit from the European Union finally
about to begin, one procedural issue looms large: Do the
negotiations on three big subjectsexit terms, transitional
arrangements, and a future comprehensive agreement on a
U.K.-EU partnershipmove in parallel or in entirely separate
stages? An understanding on how the talks should proceed is
needed at the start, and a formula suggested by the European
Council offers grounds for optimism.
The EU is concerned, in the first instance, that Britain settles
its liabilities and meets its other obligations to the EU when it
leaves. The U.K. wants that discussion to happen alongside talks
on future arrangements, so concessions in one area might be
traded against concessions in another. The problem is that the
European Commission has proposed an exit bill of as much as
60billion ($63.9billion), a figure one British minister has called
absurd. If the EU presents these terms on a take-it-or-leave-it
basis, and the British government is unable to justify them to
its citizens, the talks could fail almost before theyve begun.
The European Council, the body representing EU govern-
ments, issued draft guidelines to its negotiators. The overall
posture is firm but fairand on this issue of sequencing, the
council isnt ruling out compromise. Describing the first phase
of talks, the guidelines say the council will determine when
sufficient progress has been achieved to allow negotiations to
proceed to the next phase.
Sufficient progress is sufficiently vague to allow negotiators
to move on to other matters before exit terms are signed and
sealed. The greater the scope for compromise, the better the
ROGAN WARD/REUTERS
prospects of a successful, mutually advantageous result. The
chances of Brexit ending well are poor. But if Europes leaders
adopt these guidelines, theyll deserve some credit for choos-
ing not to cripple the talks from the start. 
 Stormy weather in
Movers
By Kyle Stock Shortville
Removing a
major obstacle
to its IPO,
Spotify inked
JAB Holding
agreed to buy Panera
Bread for
a licensing deal

2017
498k
Tesla CEO Elon Musk mocked
short-sellers in a tweet as his companys
market value surpassed that of Ford.
with Universal
Music Group. $7.2b,
a 20 percent
The arrangement nt
lets Universal keeep premium to its market
new music off value. JAB has slowly
New York Citys amassed a cupboard
1987 er
Spotifys free tie
Eleven Madison Park of beloved brands,
15k Liberty for two weeks.
topped the annual including Krispy
Interactive list of the Worlds Kreme Doughnuts,
50 Best Restaurants, Caribou Coffee, and
Hummus fever is agreed to
sweeping the country published by Jimmy Choo shoes.
buy General Amazon.com
as U.S. farmers are Restaurant magazine.
struck a
expected to plant Communication, Osteria Francescana
53 percent more
acres of chickpeas
Alaskas largest
phone operator,
in Modena, Italy
which is still pretty
tastyslipped to
$50m
deal with the NFL to
On April 4,
Staples shares
surged almost
this year than in
for $2.7 billion. stream 10 Thursday
2016. Consumers
and snackmakers are
gorging on plant-
Liberty will use
second.
night games in
the upcoming
Lenn Moreno,
Ecuadors former vice
president and ruling
15%
as the company
based proteins.
the deal to help A federal regulator season. They will shopped for a private
party leader, was
it reorganize, ordered Wells be available to equity buyer. The
declared the winner
Fargo to rehire Amazon talks come less
combining its cable assets with Primes
of a close presidential
the manager who
MUSK: HECTOR GUERRERO/AFP/GETTY IMAGES; BREADBOWL: JAIMIE DUPLASS/HEMERA/GETTY IMAGES; MORENO: MARIANA BAZO/REUTERS; LYONS: MIREYA ACIERTO/GETTY IMAGES; BANNON: NICHOLAS KAMM/AFP/GETTY IMAGES;

election. Hes slated than a year after a

its QVC-led home-shopping reported the banks 60 million federal judge blocked
to take office on
business, two units that now widespread practice subscribers. the companys
May 24, though
trade separately. of secretly opening Morenos opponent, $6.3 billion takeover
unwanted accounts conservative of Office Depot.
for customers. Wells Guillermo Lasso, has
Fargo also has to pay refused to concede
the whistle-blower and is demanding a

Ups $5.4m
in damages, legal
vote-by-vote review.

fees, and back pay.

13

J.Crew Executive Creative
Downs Director Jenna Lyons is
Di
leaving the struggling retailer
le
after
a 26 years. Sales at
comparable stores have fallen
c
ffor three consecutive years.

Verizon
Communications s
LLyonss deputy, Somsack
says it will combiine Sikhounmuong, will become
S or
Trump removed his chief strategist, Steve Bannon, from the
NORTE: JOSE LUIS GONZALEZ/REUTERS; PEPSI: YOUTUBE; ILLUSTRATIONS BY OSCAR BOLTON GREEN; CHICKPEA DATA: USDA

AOL and Yahoo!, two hief design officer.

ch principals committee of the National Security Council weeks after
recent purchases s, intelligence officials criticized his participation. Marine Corps General Joseph
under the name Oath.
O Dunford, chairman of the Joint Chiefs of Staff, was reinstated to the group.
e
If Twitter jokes are
French presidential candidate Emmanuel Bannon will retain the highest-level security clearance.
any indicator, the Macron criticized far-right candidate Marine Le
rebranded businessess is Pen in a tense debate on April 4 in advance of the
already in trouble.
Norte, a daily newspape er
April 23 vote, saying, What you are proposing is
in northern Mexico,
nationalism.Nationalism is war.
abruptly closed after
U.S. auto sales

Eight states and New York City 27 years, citing recent
killings of journalists from
in March fell far
sued the Trump administration
PepsiCo yanked an
for delaying energy-efficiency other news organizations. short of analyst
ad from YouTube in
standards on consumer products which model Kendall
estimates, as lavish
such as ceiling fans. The rules are Jenner hands a incentives failed
now scheduled to take effect six soda to a riot officer.
Ralph Lauren will
months later on Sept. 30. close its New York to sway drivers.
The spot drew
widespread criticism agship Polo Consumers

More than store and cut an
for trivializing the are on pace to
40 brands, including unspecied number
Black Lives Matter buy 16.6 million
Mercedes, Allstate,

400
movement. of jobs in a bid to save
and Bayer have $140 million a year. vehicles in 2017,
pulled ads from The fashion house down from the
21st Century Foxs is also abandoning
OReilly Factor, after a plan to build its 17.6 million cars
the New York Times own e-commerce and trucks they
reported the network platform. bought in 2016.
paid $13 million to
settle ve sexual More  p24
harassment

Number of stores that Payless ShoeSource plans to close, claims against star
according to its bankruptcy protection ling. Payless is the ninth Bill OReilly.
major retailer this year to seek Chapter 11.
 Global
Guadalajara nds
G Le
L Canard
d doesnt
do s
a way aroundd duck
d k controversy 17
the
th wall
ll 16
6

Economics mingle
mi l on M
? Brits
What Brexit?
Germans are happy
Mallorca
ll
s andd
y to
18

April 10 April 23, 2017

Th F d K p I Eye on 15

Swing
Janet Yellen may be
b leaning
g toward the idea that Wal
Animal spirits in nan
ancial markets wax and wane
William Dudley, president of the he
Federal Reserve Bank of New York, rk,
has long believed that Fed policy-
makers should pay more attention
to stock market swings. Now, with
the Fed lifting rates for the first time
in almost 10 years, Dudley, who also
serves as vice chairman of the Feds
Open Market Committee, has a chance
PHOTO ILLUSTRATION BY 731; PHOTO: SHANNA BAKER/GETTY IMAGES
S ck Market
Wall Street can be an early economic indicator
wa
rket swings can make
Yet mark
tors feel poorer or richer, influ-
investo
ncing their willingness to spend
enci
money. Because that may give an
earlier signal on the direction of the
economy than statistics such as con-
sumer spending, Dudley thinks the
Fed should factor what happens on
Wall Street into its monetary policy
of Monetary Policy on March 30.
The movements in many financial
markets following last years presiden-
tial election are a notable example of
this phenomenon.
In the 1990s, while serving as chief
economist at Goldman Sachs Group
Inc., Dudley became intrigued with
work done at Canadas equivalent of

to put his ideas into practice.
The Fed has a dual mission: to keep
unemployment low and prices stable,
which it tries to accomplish mainly
by making changes in a key lending
rate, the federal funds rate. To assess
the economy, it examines data such
as monthly reports on the job market
and consumer spending. It doesnt
put a lot of weight on stock prices,
which can be volatile, plunging and
soaring from day to day, sometimes
for no apparent reason.
deliberations. If it doesand with the
stock market up more than 10 percent
since Donald Trumps electionthe
Fed could raise interest rates higher,
or more quickly, this year than other
statistics might indicate.
Animal spirits in financial markets
wax and wane, pushing asset values
up or down in a manner that can more
than offset the effects of movements
in short-term interest rates, Dudley
said in a speech titled The Importance
of Financial Conditions in the Conduct
the Federal Reserve. The countrys
central bankers had a communications
problem: Capital flows in international
financial markets were leading to
swings in the Canadian dollar, affect-
ing the ability of businesses to export
goods and services to the rest of the
world. Those shifts could overwhelm
the Bank of Canadas attempts to guide
the economy using its traditional tool
tightening or loosening monetary
policy by raising or lowering the short-
term interest rateaccording to
 Global Economics
Charles Freedman, deputy governor
of the bank from 1988 to 2003.
Canadian businesses benefiting from
a weaker exchange rate, for example,
might not get the message the bank
was trying to send by raising rates.
To get that point across, we devel-
oped a monetary conditions index,
which basically put the two channels
together, so the public could compare
the economic effects of interest rates
with those of swings in the currency,
says Freedman, whos now a scholar-
in-residence at Carleton University
in Ottawa. Someone could look at
that measure and say, Interest rates
havent moved, but the exchange rate
did move, and therefore market and
monetary conditions have easedor
tightened depending on which direc-
tion were going, he says.
The idea caught on fast on Wall
Street, including at Goldman Sachs. In
an October 1996 speech at Princeton,
Dudley argued that Fed officials should
evaluate carefully the implications of
changes in financial asset prices on
the performance of the real economy,
16 according to a summary of his remarks.
He cited indexes that Goldman econo-
mists developed to track interest rate
and currency developments in several
countries. Those monetary conditions
indexes owed a big debt to the path-
breaking work of the Bank of Canada, in
general, and Chuck Freedman, in par-
ticular, he said.
In February 1998, after congressio-
nal testimony by then-Fed Chairman
Alan Greenspan, Dudley and his
Goldman team went a step further.
Greenspan told Congress that though
inflation-adjusted interest rates had
risen, in virtually all other respects
financial markets remained quite
accommodative and, indeed, judging
by the rise in equity prices, were pro-
viding additional impetus to domestic
spending. Those comments spurred
Dudleys team to add a stock market
measure to their monetary conditions
index, transforming it into a financial
conditions index.
Dudley still relies on the index, and
there are signs Fed Chair Janet Yellen
is paying attention. Following the
FOMCs March 15 rate hike, Yellen told
reporters the higher level of stock
prices is one factor that looks like its
likely to somewhat boost consump-
tion spending, citing some of the
more prominent analysts and indices
that have showed overall financial
conditions are improving, despite
recent rate increases.
One of the analysts she was refer-
ring to was almost certainly Jan Hatzius,
who worked for Dudley at Goldman,
helping him to refine the financial con-
ditions index and succeeding him as the
banks chief economist in 2005. Hatzius
says if the index continues to indicate
improving market conditions in the face
of Fed rate hikes, officials may decide
to speed up the pace of increases. The
concern is that financial conditions
are quite easy and we are generating a
sizable positive impulse to growth at a
time when the economy seems to be at
full employment and inflation is close to
the Feds target, Hatzius says.
Some members of the Feds rate-
setting committee, such as Boston
Fed President Eric Rosengren, are
already making that case. He said in a
March 29 Bloomberg TV interview that
we dont want to grow so much faster
than potential at this point and sug-
gested the situation warranted four rate
increases in 2017.
Ultimately, the Fed will have to see
whether the boost in the mood of the
markets translates to an actual acceler-
ation in consumption, Freedman says.
Stock markets go up. That in itself is
not relevant, he says. What is relevant
is its effect on peoples willingness to
spend. Matthew Boesler
The bottom line If the Fed factored the stock
market into its inflation debates, the current
swings would argue for more rate hikes.
Mexico
Give Us Your Coders
Yearning to Be Free
 Trumps visa scare inspires Jalisco
to promote itself as a tech haven
 Were tolerant and inclusive and
think talent has no borders
Poor Mexico, so far from God and so
close to the United States, the Mexican
dictator Porfirio Daz once lamented.
But Aristteles Sandoval, the gover-
nor of the northwestern state of Jalisco,
believes that often uncomfortable
Silicon Valley del Sur
Foreign direct investment
in electronics and high-tech $300m
in the Mexican state of
Jalisco, in U.S. dollars
$200m
$100m
$0
2014 2015 2016
DATA: JALISCO GOVERNORS OFFICE
proximity creates a unique opportunity
in the time of Donald Trump. Sandoval
has been courting tech companies in
the U.S., telling them that if the new
administration wont issue visas to the
foreign engineers and coders they want
to hire, hell gladly find cubicles for
them in Guadalajara, the state capital.
Were tolerant and inclusive and think
talent has no borders, says Sandoval,
sleeves rolled up and hair slicked back,
as he sits at his desk in Casa Jalisco, the
governors mansion. Brilliant minds
will always have a place here.
That should be interpreted as a dig
at PresidentTrump, whosalarmed
the tech industry with orders to ban
immigration from some mostly Muslim
countries and freeze the expedited pro-
cessing of H-1B visas for skilled workers.
Sandoval, who toured San Francisco
and Silicon Valley in February, says he
talked with more than 40 executives,
from companies including Microsoft
Corp., who were very interested. The
companies declined to comment.
After being elected governor in 2013,
Sandoval set up a state Ministry of
Innovation, Science, and Technology to
promote Jaliscos capital as a technol-
ogy hub. As much as 40 percent of the
workforce in Guadalajara, which has a
population of 1.5 million, is employed
in the industry. Several U.S. tech com-
panies already have research centers,
factories, or satellite offices in the pic-
turesque city, which is a four-hour flight
from San Francisco.
Foreign direct investment in elec-
tronics and other tech segments totaled
more than $271 million in 2016, up from
$75 million the previous year, according
to data collected by Sandovals office.
We have academia, private businesses,
and government. Theres an excellent
relationship among all. This commu-
nication allows us to plan better and

Intels campus in
Guadalajara
receive more investment, says Cesar
Castro, the Guadalajara-based logis-
tics director at Jabil Circuit Inc., a
company based in St. Petersburg, Fla.,
that designs and manufactures electron-
ics in Mexico, as well as in Singapore
and China, for Apple, Cisco Systems,
and HP, among others.
U.S. companies started setting up
factories in Jalisco in the 1970s to take
advantage of lower laborwages are
about a third of those in Silicon Valley
and government subsidies for con-
struction licenses and property taxes.
Much of the activity is still in export-
oriented assembly and manufacture,
HECTOR GUERRERO/BLOOMBERG (2)
but some software makers, including
International Business Machines and
Oracle, have campuses rivaling those
up north. Intels 25-acre engineering
center is its largest in Latin America,
employing 1,400 workers.
Sandoval hasnt released details of his
Software maker
Wizeline employs
182 in the city
plan to turn Guadalajara into a Silicon
Valley satellite, and its unclear just
how it would work. The governors
openness is headed in the right direc-
tion, says Jess Palomino, who runs
Intels Guadalajara design center. The
message is excellent, but how to go
about it will be a challenge.
Mexican immigration laws wouldnt
pose an obstacle for someone from,
say, India who wants to work in
Guadalajara for a company headquar-
tered in Seattle, says Edgar Mayorga,
an immigration lawyer at Goodrich,
Riquelme y Asociados AC.
Bismarck Lepe, founder and chief
executive officer of Wizeline Inc., a
business applications and software pro-
vider based in San Francisco, says he
opened a Guadalajara office in 2013
because the U.S. had gotten way too
expensive. It was a return to his roots:
Lepes Mexican-born parents came
Global Economics
to America as migrant fieldworkers.
The 182 people on Wizelines payroll
in Guadalajara hail from more than
10 countries, including Egypt and
France. The open-plan office has a
Silicon Valley vibe, with pingpong and
foosball tables. Employees get around
on scooters and enjoy free meals.
Sandoval will brag about Guadalajara
for as long as anyone cares to listen.
We have everythinggreat universi-
ties, golf courses, excellent shows, you
name it, he says. The surfing paradise
of Sayulita is a four-hour drive west, and
theres no shortage of tequila, which
has been made for centuries from the
agave plants that blanket fields not far
from the city limits.
The governor could be onto some-
thing, says Gary Burtless, a senior
fellow at the Brookings Institution who
researches labor markets. If he can
siphon some of those would-be immi-
grants from the U.S., thats great news
for Mexico. Andrea Navarro
The bottom line A Mexican governor is telling U.S.
tech companies to open offices in Guadalajara to
get around Trumps immigration ban.
17
Elections
The Duck That Clipped
Fillons Wings
 Pariss top newsbreaker is satirical
weekly Le Canard Enchan
 Our job is to inform and distract
readers with newsprint and ink
Political discourse around the world
tends to be driven by sober media
stalwarts like the Washington Post,
the Times of London, or Germanys
Frankfurter Allgemeine Zeitung. In
France, the star of the show is an
eight-page weekly that features excru-
ciating puns for headlines, irreverent
cartoons depicting political grandees
as dwarves or devils, fake news such
as imagined diariesand real scoops
that have laid low countless power
brokers over the decades. On Tuesday
nights, before Le Canard Enchan
(the Chained Duck) hits the streets,
political and media elites across Paris
flock to the papers offices just a few
steps from the Louvre to get an
 Global Economics
early bead on scandals
taking flight.
Mixing facts, half-truths,
and off-color jokes, Le Canard
(as everyone calls it) presents
details of behind-the-scenes
machinations that readers per-
ceive as more accurate and
less filtered than whats pub-
lished by its mainstream
rivals. As campaigning has
picked up for presidential
elections this spring, the
paper has broken dream-
shattering stories week after
week. In January it reported that
conservative presidential candidate
Franois Fillon had employed his wife
in a no-show job for yearssending his
campaign into a tailspin and his poll
numbers into the dumpster. Playing
no favorites, Le Canard has also pub-
lished details of a taxpayer-funded trip
to Las Vegas by center-right candidate
Emmanuel Macron during his tenure
as economy minister, and targeted
nationalist leader Marine Le Pen, most
recently with an April 5 report on inves- revealed that a Lebanese tycoon had
18 tigations of an associate for alleged
misuse of public funds. Le Canard is
neither right nor left, but rather in the
opposition, says editor-in-chief Louis-
Marie Horeau. Weve never been the
vassal of any party.
Le Canards power is all the more sur- tongue-in-cheek stories and illustra-
prising in an era when online upstarts
such as Politico, the Huffington Post,
and BuzzFeed have an increasingly pow- a network of tipsters reaching into the
erful voice. While Le Canards closely
watched Twitter feed, with almost
400,000 followers, lights up every
Tuesday with a handful of teasers on
that weeks stories, anyone wanting to
read them must visit a newsstand. The
century-old paper does have a website,
but just barely: The landing page fea-
tures its logo with the slogan A palm
in the cyber-seabut only one and
little more than links to images of front
pages on which you can read headlines, a long record of political and busi-
but not articles. Our job is to inform
and distract readers with newsprint
and ink, the website says.
The papers reportstypically sprin-
kled with political gossip and details of
private conversations such as Fillons
questioning by a judge about renova-
tions at a chteau he ownsare increas-
ingly credited with moving markets.
As the Fillon story gained steam in
February, the spread between interest
rates of French 10-year sovereign
bonds and Germanys bench-
mark bund hit a four-year high
amid growing concern about
a potential victory for Le Pen,
whos questioned Frances mem-
bership in the European Union
and threatened to revive the
ffra
anc as the national currency.
we have to check Le Canard
Do
every Wednesday? asks
Pierre Martin, a trader at Saxo
Bank A/S in London. Yes.
Undoubtedly.
Fillon Going into this election season,
the biggest concern of the French
political establishment was that fake
news might overrun Facebook and help
propel Le Pen to a populist triumph.
Instead, Le Canard has garnered atten-
tion with investigative stories that have
hobbled the candidacy of the erst-
while favorite Fillon. The publication
followed its scoop on Fillons wife,
Penelope, with another alleging that
his children had similar arrangements
in the Senate. And in March, Le Canard
paid Fillon $50,000 for an introduction
to Vladimir Putin.
The newspaper has something of
the sensibility of the Onion in the U.S.,
hammering away at the foibles and
failings of the rich and powerful with
tions. But Le Canard does more than
spoof: Its 30 editors and reporters milk
highest echelons of French society.
The staff-owned weekly carries no
advertising, and controversial stories
are often unsignedmaking it harder
for the elite miscreants exposed
each week to exact revenge. With a
weekly circulation of about 400,000
copies selling for 1.20 ($1.30) each,
Le Canard in 2015 reported 25 million
in sales and profit topping 2 million. that showed that most Cook clients
Founded in 1915, the paper has
ness scoops. In the 1920s it took aim
at Banque Oustrica shady collection
of shaky investments assembled by a
tycoon named Albert Oustrichelping
push the bank into insolvency and
taking down a finance minister impli-
cated in the affair. In 1979 the paper
reported that conservative President
Valry Giscard dEstaing had accepted
diamonds from the African dictator
Jean-Bedel Bokassa, helping scuttle
Giscards candidacy two years later.
In 1993 socialist Prime Minister Pierre
Brgovoy committed suicide after
Le Canard reported that hed gotten a
1 million-franc interest-free loan from
an industrialista scandal that led to
the partys defeat in parliamentary
elections. Fortunately, Le Canard is a
weekly, President Franois Hollande
said at a February cabinet meeting
according to the paper itself. If it were
a daily, imagine the situation wed be
in. Alexandre Boksenbaum-Granier
and Geraldine Amiel
The bottom line Le Canard Enchan can lay low
Frances rich and mighty with satire, bad puns,
and aggressive investigative reporting.
Travel
A German, a Swede, and
A Brit Walk Into a Hotel
 Thomas Cook ends segregation
by nationality on package tours
 Most people are now willing to
mix if the mix is right
For decades, Thomas Cook Group Plc
had a policy of assigning each
European nationality its own hotels at
popular destinations such as Spains
Canary Islands and the beaches of
Greece. On March 28, Britains biggest
tour operator announced the rule
is history, just hours before Prime
FROM TOP: PHOTO ILLUSTRATION BY 731; PHOTO: PATRICK KOVARIK/AFP/GETTY IMAGES; ILLUSTRATION BY 731
Minister Theresa May formalized the
U.K.s decision to quit the European
Union. From now on, Cook said,
Britons, Germans, Swedes, and other
continentals will be bunking together
while on holiday.
The change is the result of a survey
would be happy to vacation with a
cross-section of travelers. Weve

exposed a myth that Germans want
to be with Germans and Brits with
Brits, Chief Executive Officer Peter
Fankhauser told reporters in London.
*CUSTOMER NATIONALITY DATA IS FOR 2016; DESTINATION DATA IS FOR THE 2016 SUMMER SEASON ONLY; DATA: THOMAS COOK
Most people are now willing to mix if
the mix is right.
Cook, which has units in Belgium,
Britain, Germany, and Scandinavia,
found that 90 percent of the custom-
ers it polled have no problem rubbing
shoulders with sun seekers from
other countries. The company plans
to ensure that no single nationality
accounts for too great a proportion of
the occupants of most hotels, sprin-
kling in Nordic travelersviewed as the
most congenialto lighten the mood
where needed. The move suggests that
Britons have become less fretful that
early-rising Germans might lay claim to
the best sun loungers with strategically
placed beach towels and that continen-
tal tourists no longer view U.K. travel-
ers as boorish beer swillers. For Cook,
the shift will likely help fill empty
rooms in destinations in the western
Mediterranean where it boosted capac-
ity too much following terror attacks in
MBA
Programs
Full-time
Part-time
Executive
grad.business.uconn.edu
Despite Brexit,
Thomas Cook is
pushing for more Global Economics
unity in Europe
Turkey, says Stuart of vacationers from the U.K. And Cook
Whos Booking Gordon, an analyst will continue to steer non-Germans
at Berenberg Bank away from hotels across the bay in
Germans 9m (est.) in London. Playa de Palmasometimes called
Britons 5.8m As part of the 17th German state and known
Scandinavians 1.6m the change, the for Oktoberfest-style beach tents.
Other Europeans 4.2m 176-year-old The policy shift doesnt mean Cook
tour operator is isnt unaffected by Britains plans to
And Where to* expanding the quit the EU. The slump in the pound
target audience following last years referendum has
Greece 17% for packages sold increased hotel costs, which Cook is
Balearic Islands 16% via two Nordic trying to pass on to the customer,
Canaries 14% brandsfamily- says Christoph Debus, who heads the
Turkey 13% oriented Sunwing groups airline operations. With fewer
Other 40% and adults-only euros to spend once they get overseas,
Sunprimeas it some Britons who would once have
seeks to lure wealthier clients. Since booked a two-week break are vacation-
Sunprime opened the Monsuau Hotel ing for 10 days instead, he says. Brexit
on Spains Mallorca to travelers from has had an impact, Debus says.
Britain and Germany two years ago, But it has been more in travel habits,
the 109-room hotel has garnered rather than people staying away.
customer feedback scores that are Christopher Jasper
among the groups best. Fankhauser,
The bottom line Britains biggest tour operator
though, says there are limits to open- says most vacationers dont mind rubbing elbows
mindedness. Magaluf, a Mallorca with people from other cultures on holiday.
resort known for British bachelor
parties, fish-and-chips shops, and Irish Edited by Cristina Lindblad and David Rocks
pubs, will likely remain the province Bloomberg.com
I know my degree
will set me apart
in the corporate
competitive
landscape.
Leonard Borriello 18 MBA
 Companies/
Liqueed natural gas Trump wants more
is keeping shipbuilders auto plants, but sedan
aoat 23 sales are skidding 24

Industries H&M grows up and

adds brands 26

April 10 April 23, 2017

Sofia Priebe, 14, is slowly going blind.

Her parents were devastated when
they were told theres no treatment
for the genetic mutation thats causing
her retinas to deteriorate. For the
dozen years since Sofia received that
diagnosis, her mother has lived every
parents nightmarebeing powerless to
help her suffering child.
Now a gene therapy for a similar
form of blindness is expected to receive
U.S. Food and Drug Administration
approval this year, and Laura Manfre,
Sofias mom, is holding out hope that
her daughter may soon get treatment
as well. We dont really care what it
costs, she says.
But how much is a miracle really
worth? A million dollars? Five million?
More? And who will pay and how?
Its one of the most vexing challenges
confronting drug and insurance com-
panies as modern medicine advances,
spurred by research on the human
genome. Spark Therapeutics Inc., 21
which developed the gene therapy to
cure a rare form of childhood blind-
ness called RPE65-mediated inher-
ited retinal disease, is among the
first to face this question. Sparks
treatment, voretigene neparvovec,
delivers a functioning piece of DNA
directly to the eyes to preserve
remaining sight and even restore some
vision. Other companies, including
GlaxoSmithKline Plc and BioMarin
Pharmaceutical Inc., have also been
grappling with the pricing problem.
Some new treatments, such as
Sparks retina drug, are intended to
work with just one shotpromising
a lifetime cure from a single, costly
treatment. Insurers dont dispute the
worth of cures in the pipeline but

Ho M ch Is
say theyre not equipped to pay one
large sum upfront. The U.S. health-
PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (3)

care system is built around manag-

ing symptoms with prescriptions

? that insurers pay reimbursements

for monthly: For example, medicines
such as cholesterol-lowering Lipitor
or acid-reflux drug Nexium are often
taken over a period of many years and
New one-shot med
edic
icines could eliminate years
ic rss of costly care
e dont deliver a permanent fix.
Insurers are used to paying rent
So $1 million upfrontthats not much, if theyre healed for life for health, and were asking them to
buy a houseful of cure, says Mark
 Companies/Industries

Trusheim, a visiting scientist at MITs for life, Bienaime says, adding that vice president for global commercial
Sloan School of Management whos BioMarin hasnt decided how to price operations. The price was in the ball-
leading a working group to explore its drug, which is going through trials. park of existing treatments, and
financing models for upcoming drugs, MITs Trusheim is considering there wasnt a payer we spoke to in
drawing from examples in the housing more radical payment plans, such market research that felt a price in
market and activist hedge funds. as having the U.S. government buy the $80,000 to $85,000 range wasnt
Spark Chief Executive Officer Jeff an entire company instead of paying acceptable, he says.
Marrazzo sees his companys pricing for its drugs. The government could The drug proved immensely
decision as precedent-setting, as it sell off the research and develop- popularfar beyond Gileads
would be the first gene therapy Why is it that there ment arm of a company, like expectationsthanks to a quick
approved in the U.S. Spark are not more cures? a Carl Icahn, he says, refer- endorsement by the American
has spent about $400 million Its not because ring to activist investors Association for the Study of Liver
there are bad actors.
to create the treatment and Its an industry full who take over corporations, Diseases. About 3 million Americans
now wants to be compensated of people who often selling off units that have hepatitis C, and many wanted
for the efforts and huge risks react to incentive they deem peripheral. The the cure immediately. We started to
structures.
it took during the research Spark CEO idea is to then have the feds see a flow of patients well above what
and development phase. How Jeff Marrazzo provide the drug to Medicare any of us anticipated, and a price that
the payment debate plays and Medicaid patients and made eminent sense to payers suddenly
out will determine not only charge commercial insurers didnt make sense, Meyers says.
whether patients will be able to gain a cheaper price than they likely Rather than winning kudos for
access to these treatments but also how would have paid to a for-profit private treating an intractable malady,
hard drugmakers will push to develop company. Gilead quickly became a poster child
other transformative medicines. Why Other ideas that his group is inves- for high drug prices, an image its
is it that there are not more cures? tigating include government grants fought to shed for the past two years.
Marrazzo says. Its not because there or prizes to developers of cures, or Meyers warns that the backlash has
are bad actors. Its an industry full of volume-purchase commitments such as already spooked others. What I
people who react to incentive struc- those used by the Bill & Melinda Gates hear is that they call it the Gilead
tures. If compensation could be rede- Foundation in developing nations, HCV experience, and by that they
22 signed to reward one-time treatments which guarantee manufacturers that mean everything that it entails: the
over chronic treatments, thats where a minimum amount of a drug will be publicity, scrutiny, the payers first
people would play, he says. bought if they successfully develop it. accepting then reacting, the Senate
One idea under consideration is Trusheims group plans to publish its Finance Committee, says Meyers.
to spread payments from insurance recommendations by early next year. Ive heard, Why bother?
companies to drugmakers over years, When designing payment models, Such market realities may already
like an annuity. Another is to have a the size of the patient population be reflected in new-drug prices. When
money-back guarantee, so if a drug or matters: The larger the potential GlaxoSmithKline brought its Strimvelis
treatment stops working for a patient, impact, the more the system will strain gene therapy to market in Europe
the manufacturer is on the hook to to deal with the huge cost of one-time last year for the bubble boy disease
refund part of the cost to the insurer. cures. Thats what Gilead Sciences that leaves children without an effec-
Payback contracts, or value-based Inc. learned in 2015, when it launched tive immune system, it picked whats
pricing in pharma industry parlance, a cure for hepatitis C at $84,000 for a arguably a bargain price: 594,000
are already used in Europe. In the U.S. three-month regimen, or $1,000 a pill. ($634,000) for the one-time treatment,
theyre trickier to execute, because For anyone facing the prospect equivalent to two years of the enzyme
there isnt a single payer with which of liver cancer or a liver transplant, replacement therapy that patients
to negotiate and patients frequently that $84,000 is a very good value, previously had to take for a lifetime.
switch insurance plans throughout says Jim Meyers, Gileads executive Martin Andrews, Glaxos senior
their lives. Jean-Jacques Bienaime, vice president for rare diseases, notes
CEO of BioMarin, proposes creating that the drug could have been valued
legislation requiring patients to carry Leadiant Biosciences pricey long-term higher, but he says the company
the reimbursement obligation with drug, Adagen, has an annual cost of about had to bow to economic realities,
them when they change jobs or insur- including the big deficits in European
ers, to ensure drugmakers continue
to be paid. BioMarin is working on a
gene therapy for the blood disorder
hemophilia, which Bienaime argues
is easily worth millions of dollars per
$320k
to treat the bubble boy disease, while the
Strimvelis gene therapy by GlaxoSmithKline runs
governments health budgets. We
didnt want to have the worlds most
expensive therapy that nobody ever
used, he says.
Spark has a few more months to put
patient for a cure. a price tag on reversing progressive
The average cost of severe hemo-
philia A is about $500,000 a year, so
$1 million upfront would cover two $634k
yearsthats not much, if theyre healed for a single-shot treatment.*
vision loss. Employees are researching
court cases involving the value of sight.
How has our judicial system awarded
for damages in the case of patients who
 Hyundai
Heavy
Industries
have lost their vision? asks Marrazzo.
Thats basically everyday Americans
sitting on a jury and answering this
question in a way that you cant purely
do with hard and fast economics.
Whether that will help its drug reach
the market without consumer or gov-
ernment blowback remains to be seen.
Caroline Chen
The bottom line Spark Therapeutics has spent
$400 million developing a blindness cure. Whats
unclear is how to price the breakthrough.
SEONGJOON CHO/BLOOMBERG; *COST INFORMATION FROM GLAXOSMITHKLINE. STRIMVELIS ONLY AVAILABLE IN EUROPE
Shipping
Finally, Some Good
News for Shipyards
 Demand for vessels to transport
natural gas is expected to jump
 Gas is going to be the bright spot
for shipbuilders
The global shipyard business has
fallen on hard times as Chinas trade
has grown more slowly and demand
for offshore drilling platforms and oil
tankers has declined with the halving
of oil prices in the past three years.
Shipbuilders cut more than 20,000 jobs
in the last year alone. But now builders
20k
Shipbuilding industry jobs lost in the last year
of oceangoing vessels are seeing a
glimmer of hope from an unlikely
corner of the energy world: natural gas.
Contracts for vessels to transport
liquefied natural gas are picking up
amid an abundance of shale gas in the
U.S. and increasingly stringent global
curbs on pollution that are pushing
utilities and transportation operators
toward the clean-burning fuel.
LNG is made by cooling natural
gas until it becomes a liquid, which
can be carried over long distances in
specially built ships with insulated
tanks. Annual global LNG production
capacity is expected to increase
39 percent, to 377 million tons by 2019
from 272 million last year, according
to Bloomberg New Energy Finance.
Shipments of LNG could rise as much
as 5 percent a year from 2015 to 2030,
Royal Dutch Shell Plc estimates.
To move the fuel, the world may need
180 more vessels, which would benefit
shipbuilders with LNG expertise such
as Hyundai Heavy Industries Co.
and Daewoo Shipbuilding & Marine
Engineering Co., says Hana Financial
Investment Co. in Seoul. Gas is going
to be the bright spot for shipbuilders,
says Park Moo-hyun, a Hana analyst.
We might see a spurt of orders as early
as in the second quarter.
Asia is the largest destination for LNG,
with much of it bound for China and
India. Chinas gas demand is expected
to more than double, to 450 billion
cubic meters, by 2030, according to 23
Shells LNG Outlook. Earlier this year,
China said it plans to halt, delay, or
eliminate no less than 50 gigawatts of
coal-fired power projects as part of its
move to clear the smog choking cities
from Beijing to Xian.
The worlds three biggest shipyards,
all based in South Korea, have as much
as 80 percent of the LNG tanker market,
Park says, but the entire industry could
use the help from growing demand for
gas. Declining orders for other types
of vessels and offshore rigs have led
to losses or profit drops at shipyards
including Hyundai Heavy, Samsung
Heavy Industries, and Singapores
Keppel, forcing them to trim produc-
tion capacity and slash employment.
Japans Mitsubishi Heavy Industries
Ltd. is considering spinning off its ship-
building operation, and Kawasaki
Heavy Industries Ltd. said its review-
ing whether to continue in the busi-
ness. Daewoo Shipbuilding, the worlds
largest shipyard, is waiting for a second
conditionallifeline from its two biggest
creditors to complete work on pending
orders and to help stay afloat. The
lenders say theyll provide loans and
swap some debt for equity only if other
creditors and bondholders agree to
restructure their own debt exposure.
 Companies/Industries
Better times could be ahead.
In March, Hyundai Heavy agreed to
build one LNG ship for a Norwegian
customer, and Daewoo Shipbuilding
secured a 414.4 billion won
($369.4 million) order from a European
client to build two LNG carriers, with
an option for two more. These are in
addition to orders for six such vessels
that Hyundai Heavy and Daewoo
Shipbuilding won last year.
Along with boosting the market for
tankers, the LNG boom has helped
shipyards gain contracts to build small
offshore facilities known as floating
storage and regasification units.
Demand is even picking up for LNG
tankers that run on LNG. In March,
Hyundai Heavys Hyundai Samho
unit received a $240 million con-
tract from Russian shipping company
Sovcomflot OAO to build four crude
tankers powered by LNGthe first
carrier ships powered by the fuel.
One reason for such innovations: The
International Maritime Organization
has cut limits on sulfur in marine fuels
to 0.5 percent from 3.5 percent, effec-
24 tive 2020. LNG emits virtually no sulfur.
We are just now entering the boom
era for LNG carriers, Park says. Not
all shipyards will benefit. Shipbuilders
that can deliver vessels that can help
operators lower costs will be the
winners. Its all about cutting costs.
Kyunghee Park, with Dan Murtaugh
The bottom line The ailing shipbuilding industry
cut more than 20,000 jobs last year. Demand for
vessels to carry natural gas could ease the pain.
Autos
The Real Cause of the
U.S. Car Slide: SUVs
 The consumer shift means more
U.S. car plants arent necessary
 Higher incentives have pushed
demand about as far as it can go
Ford Fusion: down 37 percent.
Chevrolet Malibu: down 36 percent.
Toyota Prius: down 29 percent. As
those grim sales numbers suggest, the
U.S.auto industry was blindsided in
March by just how fast sedans have
fallen out of favor with Americans
Year-to-date change in sales
Top-selling SUVs in the U.S., as of March
Nissan Rogue
Honda CR-V
Ford Escape
Toyota RAV4
Ford Explorer
Top-selling sedans in the U.S.
Honda Civic
Honda Accord
Toyota Corolla
Nissan Altima
Toyota Camry
DATA: AUTODATA
enthralled with roomier sport utility
vehicles. The swerve in consumer taste
is just one of the forcesalong with
slumping used-car values and a pull-
back in subprime auto lendingchang-
ing the equation for automakers as
President Trump leans on the industry
to build plants to boost hiring. That
will be hard to pull off, though: A
glut of both new and used vehicles
on the market has sparked an incen-
tives battle, meaning new factories
particularly for sedansare the last
thing the nations carmakers need.
Automakers set a record in the U.S.
last year, with 17.6 million vehicles sold.
Analysts had projected the annualized
sales pace in March to hit 17.2 million
vehicles. Instead, adjusted for sea-
sonal trends, it came in at 16.6 million,
according to researcher Autodata
Corp. It shouldnt be a surprise, says
Morningstar Inc. analyst David Whiston.
Once you hit peak sales, it seems like
you only have bad news ahead.
Ample discounts have failed to spur
demand for such aforementioned
models as General Motors Co.s
Malibu and Ford Motor Co.s Fusion,
which are being surpassed by SUVs
as the vehicle of choice for American
families. Toyota Motor Corp.s Prius
sedan model continued its slump
despite a thorough makeover in late
2015 that improved the esteemed
hybrids ride.
It was a markedly different story for
big SUVs and their smaller crossover
brethren, which are keeping the indus-
trys profits afloat. In March, sales
of crossovers including the Honda
CR-V, Chevrolet Equinox, and Dodge
Journey were up 11 percent, according
to Autodata. With an average sticker
price of more than $38,000, a truck or
SUV costs about $10,000 more than
the average car. The incentives needed
47% to sell them amount to an 8.8 percent
32% discount, compared with 11 percent
6.6% for cars, according to researcher
5.8% Edmunds.com Inc.
1% Still, dealer inventories are high in
the U.S., and even SUVs increasingly
need more and more discounts to
6.5% keep sales moving, as many brands try
9.4% to stay close to 2016s record results.
9.7% Higher incentives have pushed
13% demand about as far as it can go,Joe
13% Spak, an auto analyst with RBC Capital
Markets, wrote in a recent report.
While industry sales probably wont
fall by much, profits could slip as auto-
makers cut production, causing them
to operate factories less efficiently. So
Trump will have a hard time getting
manufacturers to pony up for the
investment hes been demanding, even
with consumer confidence strong and
unemployment low. Youre not going
to see the U.S. get new plants,says
Mark Wakefield, who heads the auto-
motive practice for consulting firm
AlixPartners. The market went from
pull to push nine months ago. We dont
see it going upward from here.
Since last year, GM has been
making cuts at passenger car plants
in Michigan and Ohio, eliminating
more than 3,000 workers who build
Chevy Cruze compacts and Impala
sedans. In January, after deciding it
didnt need to boost output of its Focus
compacts, Ford canceled plans to build
a $1.6 billion factory in Mexico.
Wakefield projects overall sales will
slip by about 300,000 vehicles this
year, as a cyclical decline of 15 percent
to 20 percent begins. When it drops, it
drops sharply, he says.
That may be why Trumps call for a
resurgence of auto plants in the U.S.
to fuel his new industrial revolution
is finding its biggest support from an
unlikely source: foreign carmakers
still building their U.S. presence. Volvo
Cars, the premium brand long known
for Swedish style and safety thats now
owned by Chinese billionaire Li Shufus
Zhejiang Geely Holding Group Co.,
is erecting in Charleston, S.C., its first
U.S. assembly plant. Starting with
2,000 workers next year and creating
more than 8,000 jobs in the area, it
plans to make S60 sedans and another
model, with half of them for export.
 Companies/Industries
Volvos U.S. sales have grown
53 percent since Geely bought it from
Ford in 2010. But like its U.S. counter-
parts, Volvos growth has come from
SUV models, which saw sales increase
31 percent last year, while its car deliv-
eries fell by 7.1 percent. David Welch
and Jamie Butters, with Melinda Grenier
The bottom line U.S. auto sales could slide by
300,000 vehicles this year, dimming Trumps hope
that car plants will be opened.
Fashion
The Taming of a
Teen Emporium
 Seeking a broader customer
base, H&M is creating brands
 Hitting a point where it becomes
challenging to keep up growth
At the H&M store on Boulevard
Haussmann in Paris, teens comb racks
26 packed with velour tank tops as tourists
load up on cheap jeans to a soundtrack
of bouncy pop music. While the bustle
and bargains once appealed to Pierrick
Beringer, at age 35 he prefers quality to
quantity, so these days hes more likely
to turn the corner to a store called COS,
where the pace is far calmer. I like
the shape, the hairstylist says, pulling
a thick-cotton T-shirt from a display.
And its less well-known, so you dont
see it everywhere.
For H&M, thats not a problem,
because both establishments are
creations of Hennes & Mauritz AB.
Faced with falling profit amid com-
petition from rivals such as Zara and
Primark Stores Ltd., as well as online
players like Amazon.com Inc., the
Swedish retailing juggernaut is beefing
up its portfolio of niche brands. H&M
is betting outlets such as COS can help
expand its appeal beyond budget-
conscious young shoppers. The plan
is to add 80 stores from the companys
half-dozen smaller brands this year, vs.
350 more H&M outlets. That includes a
new concept called Arket, a higher-end
shop with clothing, home goods, and
a cafe serving Scandinavian-inspired
dishes. The first Arket storethe name
means sheet of paper in Swedish,
a reference to starting with a blank
slateis scheduled to open this fall on
Londons Regent Street, followed by
branches in Brussels, Copenhagen, and Cdric Rossi says sales from the smaller
Munich. This isnt like anything else
we have, says H&M Chief Executive
Officer Karl-Johan Persson. Its a com-
pletely different expression.
The push beyond the flagship brand
comes as H&Ms margins have been
narrowing. Goods from Asian suppliers, or near Europe, Inditex can respond
priced in the strengthening U.S. dollar,
have become more expensive, pushing
net profit down to 9.5 percent of sales
today, vs. almost 26 percent in 2007.
And with increasing competition, H&M
has had to resort to deeper discounts
to clear its shelves. The companys
shares in March fell to their lowest
level in four years after H&M reported
inventory levels were up 30 percent
year-on-year. When youve got a very
mature brand, you reach a point where be addressed more quicklyreducing
it becomes challenging to keep up
growth, says Maureen A COS store, more
Hinton, an analyst minimalist than
at GlobalData Plc in H&M and targeting a been in logistics, says CEO Persson.
different niche
London. Youve got to
find new markets and new customers.
That has spurred the multibrand
effort, which largely emulates a strat-
egy the worlds No.1 fashion retailer,
Inditex SA, has pursued since 1991.
The Spanish company owns Zara
and seven other brands including the
Italian-themed Massimo Dutti, teen-
focused Bershka, and Oysho lingerie
stores. While Zara continues to account start at 55 ($59), compared with 10
for two-thirds of Inditex revenue, it
comprises just one-third of the com-
panys 7,300 stores. H&M, by contrast,
only started diversifying in 2007, when
it created COSor Collection of Style.
It added three more youth-oriented
concepts in 2008 with the purchase of
a Scandinavian retail group, then intro-
duced the premium womens wear line
& Other Stories in 2013. Those brands
today make up less than 10 percent of
the companys almost 4,400 stores.
While H&M doesnt break out its
revenue, Bryan, Garnier & Co. analyst
brands account for about 5 percent of
the total.
The new concepts arent a bad idea,
Rossi says, but its more important to fix
the flagship brand. He says Zara is more
fashion-focused, and with factories in
faster to runway trends than H&M,
which ships most of its goods from
Asia. Whats absolutely necessary is to
return to growth in existing locations
at H&M, Rossi says. Without this, the
business isnt sustainable.
H&M says its working to reduce lead
times so fresh products get to stores
more quickly. And it says its automat-
ing warehouses and improving data col-
lection so shortages and overruns can
the need for margin-busting mark-
downs. We havent been as precise,
exact, and flexible as we could have
We see big improvement potential.
Longer-term, though, its smart to
also find a broader customer base,
says Anne Critchlow, an analyst at
Socit Gnrale SA in London. With
COS, & Other Stories, and now Arket,
the company can target different
niches at the top endwhere custom-
ers have more resources and prices
are higher, she says. Dresses at COS
at H&M, while the cheapest jeans at
COS are 69, vs. 20 at H&M. Young
value fashion has become extremely
crowded, Critchlow says. Lifestyle
retailers have less competition.
Robert Williams, with Anna Molin
The bottom line As competition heats up and
margins narrow, H&M is emulating the multibrand
store strategy of its rival Inditex.
COURTESY COS
Edited by James E. Ellis and David Rocks
Bloomberg.com
 Politics/
Policy
April 10 April 23, 2017 The The
Hack Investigators

How In December, President Obama

ordered the CIA, FBI, and NSA to
conduct a review of hacking that took
The FBI continues to dig into the extent
to which Trump associates had contact
with Russia. The Senate Intelligence

Will
place during the 2016 election. In Committee is pushing on with its inquiry
January they released a report that into Russian interference and whether
pointed directly to Russia. Trump associates played a part.

Took $45K to sit with Putin at a 2015 gala

They
House Intelligence Committee
mir Put Mired in partisan squabbling over whether or not
adi in
Vl to focus the probe in part on alleged misuse of
intelligence by Obama administration officials

Schiff (D-C es
Nun (R-C
m in

Know,

al
al
a

v
Ad

De

if.)
if.)
Chair
C

And
According to the
intelligence report,
the Russian president Senate Intelligence Committee
ordered an operation The two committee leaders vow not to politicize what
28 they pledge will be a thorough probe
to inuence the U.S.
election in Trumps
arner (D- urr
rd B (R-N
kW
favor and undermine

When
V ha
the democratic process
r

.C
a.)

Ric
Ma

.)
Will Fake news
stories
DNC
hack
Federal Bureau of Investigation
Chair

In March agency chief Comey conrmed the

existence of an ongoing investigation of Russias role
and Trump campaign contacts with Moscow

They
State- Co
owned RT
Guccifer
mes mey
network
2.0 Ja

The hacker name

under which

Know
the DNC emails
Russian were released
trolls

The FBI director may be

asked to testify before
the Senate as part of its
investigation

It?
Twitter
WikiLeaks
bots

The U.S. Senate seeks to discover whether Trump associates knew of Russias interference
This is not fake news. This is actually what happened to us
 ICE community
relations jobs are being
turned upside down 30

lly Yates
The Russian Sa

Connections? Inside a secure room at CIA headquar-

ters in Langley, Va., about 11 miles from
Capitol Hill, there are several thick
Since House Intelligence Chair Democrats want to
binders filled with thousands of pages
hear from the former
Devin Nunes canceled some House acting attorney general, of highly classified documents. It is this
hearings, theres uncertainty over who warned the White intelligence, which likely includes tran-
when key gures will testify. The ael Flyn House over Flynns
ich n discussions with
scripts from phone calls intercepted
Senate has scheduled interviews M
Russian Ambassador by the National Security Agency, that
with some 20 people so far. Sergey Kislyak formed the basis of the report issued in
January by the U.S. intelligence commu-
nity concluding that Russian President
Vladimir Putin covertly ordered his
Brought into the government to intervene on behalf of
White House by Flynn
Forced out as national Donald Trumps presidential campaign.
security adviser over For the past several weeks, as part
Russia contacts, wants
immunity to testify of dueling investigations by the House
Ezra and Senate into Russian interference
Cohen- in the election, teams of congressio-
Watnick
Showed
nal investigators have made regular
eff
Session gey Kisly trips to this room to pore over the
Nunes intel on
Works on the er ak
J

surveillance documents, which contain some of

National Security
of Trump
associates,
Council at the the nations most sensitive secrets.
White House
according Sometimes theyre joined by law-
to reports makers, including the chairmen of
Attorney general Russian ambassador
Michael
recused himself from who had contacts with both the House and Senate intelligence 29
the investigation Trump associates committees. The work is laborious
Ellis
because of his contact during the campaign
with Kislyak during and the transition and decidedly low-tech. No phones,
A lawyer in the
the campaign cameras, or recorders are allowed
White House inside. Weeks into the probe, investi-
gators were still reading through the
an
ul M afort Kushn documents, and Senate staffers were
red er
Pa Ja negotiating with the CIA about putting
gey Gork a computer in the room.
er
ov
S

All of this comes against the back-

drop of an ongoing FBI investigation
into links between Trump associates
on
ald Trum
Chief of Russian
and Russia, including whether crimes
were committed. It began even before
D

p
Former business partners

bank subject to U.S.

Former Trump Trump son-in-law
campaign chair with with growing foreign-
sanctions. Met with the election was over and, along with
Kushner, reportedly
extensive ties to policy role. Senate
at Kislyaks request
the congressional investigations, casts
Russia and Ukraine wants to speak to a cloud over the nascent administra-
has offered to testify Kushner about his
before the House meetings with Gorkov tion. Its not clear if any of this will
and other amount to a presidency-shattering
Russian contacts
rter Page Watergate scandal, or calcify into the
Ca
kind of lingering Whitewater probe
that lasts for years without taking
ger Stone Briey an adviser
anyone down.
Ro to the Trump
campaign What is clear is that this has the
makings of the kind of investigation that
Washington hasnt seen in decades
Energy consultant and its not likely to end anytime soon.
reportedly targeted Armed with subpoena power, con-
by Russian spies for gressional investigators are looking to
recruitment as
Trump lobbyist in 1980s. a source answer a familiar Washington question
Though no longer with about Trump and his associates: What,
the Trump campaign, he
hinted in 2016 of coming if anything, did they know, and when
hacks of Democrats By Dune Lawrence and Dorothy Gambrell did they know it?
 Politics/Policy
The questions begin with what
the government says was a massive
Russian effort to undermine Hillary
Clintons campaign and, in turn, boost
Trumps. The next question is whether
anybody in Trumps orbit colluded
with Russian attempts to influence the
elections. The real political dynamite
would be evidence that Trump himself
was involved. And then, as with any
Washington inquiry, there will be ques- former acting attorney general fired
tions about whether anyone tried to
cover it up.
Theres already been a request for
immunity from Trumps short-tenured
national security adviser, Michael
Flynn, the retired U.S. Army lieuten-
ant general fired for misleading Vice
President Mike Pence about conver-
sations with the Russian ambassa-
dor. The House Intelligence probe is
facing its own credibility crisis after
Devin Nunes, a California Republican
who served on Trumps transition
team, breached the panels protocols
by briefing Trump directly on intelli-
gence given to him by people inside
the White House. This is not
30 The Senate com- innuendo or false
mittee, by default, allegations.
Senator
has become the main Mark Warner
event. Republican
Chairman Richard Burr
of North Carolina and top
Democrat Mark Warner of Virginia
are trying to maintain a bipartisan
approach to an investigation they
both say is among the most important
work theyve done in their careers.
The duo have vouched publicly for
each other, and despite pressure from
Republicans (and Trump) to have the
probes focus more on leaks and the
conduct of the Obama administration, cooperate with the probe, in part to
Burr, who supported Trump, insists
hell abide by his duty to investigate.
Seven Senate staffers are working
on the probe, one of the biggest in
Burrs memory. But early hopes of a
speedy conclusion have been dashed,
amid a continuous drip of disclosures
about contacts between Russians and
that can be done quickly, Burr told
Trumps associates. Its not something investigate ties between Trumpland
reporters on March 29.
Senate staffers have requested inter- Intelligence hearing on March 20.
views with 20 people, starting with
the intelligence officers who com-
piled the Jan. 6 report. Lawmakers
eventually want to interview the
web of Trump associates and White
House officials over their contacts
with Russians, including Flynn,
former campaign chief Paul Manafort,
onetime campaign adviser Carter
Page, son-in-law and senior White
House adviser Jared Kushner, and
self-styled political dirty trickster and
Nixon aficionado Roger Stone. They
also want to hear from several Obama-
era officials, including Sally Yates, the
by Trump, who reportedly warned the
White House that Flynn could be at
risk of blackmail from Russia.
The committee already has received
briefings from top intelligence officials
behind closed doors but plans to hold
public hearings as the investigation
evolves. Thats tricky and potentially
time-consuming as it tries to figure out
what can be discussed in public. But
the senators say such hearings are key
to building public trust. We simply
mustand we willget this right,
Warner said at a March 30 hearing,
where cybersecurity experts from
outside the government detailed some
of Russias hacking operations.
Warner said its clear Putin
ordered a multipronged attack,
including hacking Democratic
email accounts, with the stolen
data weaponized through leaks,
and a massive propaganda and
fake news campaign aided by thou-
sands of internet trolls pushing fake
stories on Twitter and Facebookall
of it intended to help Trump and hurt
Clinton. This is not innuendo or false
allegations, Warner said. This is not
fake news. This is actually what hap-
pened to us.
Republicans have an incentive to
stave off repeated callsfrom Senator
John McCain and othersfor either a
select committee or an independent
commission to investigate. Launching
that kind of effort from scratch would
take months just to get the necessary
security clearances, lawmakers say.
In the meantime, the FBI continues to
and Russia, as first publicly disclosed
by Director James Comey in a House
Burr said they will be sensitive
to the overlapping investigations.
Warner, ominously, noted the prec-
edent for simultaneous criminal and
committee probes: Watergate. The
goal will be to produce a bipartisan
report that puts to rest what could be
an existential question overshadow-
ing Trumps presidency: Does any-
thing link him directly to Russias
interference? We know that our chal-
lenge is to answer that question for
the American people, Burr said.
Steven T. Dennis
The bottom line Amid multiple probes, the Senate
investigation into Russias interference in the
election has become the main act.
Immigration
ICE Agents Go From
Advocate to Adversary
 Trump plans to publicize crimes
by undocumented immigrants
 All its going to do is amp up the
chilling effect
Over the past decade, Rudy Bustamante
spent a lot of time driving around
Phoenix, meeting immigrants any-
where they felt comfortableschools,
churches, coffee shops. As a community
relations officer for U.S. Immigration
and Customs Enforcement, hes had
the difficult task of trying to build trust
BILL CLARK/CQ ROLL CALL/GETTY IMAGES. PREVIOUS SPREAD: AP PHOTO (1); GETTY IMAGES (15). *DATA: MIGRATION POLICY INSTITUTE
between immigrants and the federal
agency in charge of deporting those
who are here illegally.
Part of Bustamantes job has been
to persuade immigrants to help ICE
find serious criminals while assur-
ing them that they and their families
wont face deportation for traffic viola-
tions or other minor offenses. Building
that trust hasnt always been easy, as
in 2010, when Arizona passed a law
requiring immigrants to carry regis-
tration documents and giving police
broad leeway to question people.
Rudy Bustamante
met with all the
820 thousand
different immi-
grant groups,
says Michael
Nowakowski, a
Phoenix city coun-
Number of
unauthorized cilman. That dia-
immigrants logue really helped
considered to during those crises
be removable
criminal aliens* moments.
Bustamantes

job is about to change. On Jan. 25,
President Trump signed an execu-
tive order calling for the creation of a
department within ICE, the Victims of
Immigration Crime Engagement, or
Voice, office. The almost two dozen
ICE community relations officers
across the U.S. will now be responsi-
ble for highlighting crimes committed
by members of the community theyve
spent years trying to strengthen.
This is all part of Trumps broader
strategy to focus on criminal aliens,
or bad hombres as hes called them
since he first announced his presiden-
tial bid in June 2015. Throughout the
campaign, he made cracking down
on undocumented immigrants who
commit crimes a key part of his plat-
form, despite research showing that
undocumented immigrants are less
prone to crime than U.S.-born citizens.
A new analysis of census data by the
Cato Institute estimates an incarcera-
tion rate among undocumented immi-
grants of 0.85 percent, compared with
1.53 percent for U.S.-born citizens.
By focusing on acts of crime, the
Voice program could undo years of
work building relationships between
ICE and immigrant communities, says
John Sandweg, former acting direc-
tor of ICE under Obama. When you
now task these guys with going around
trying to scare the general public, all
youre doing is reinforcing the message
to those groups, Dont you dare call
ICE, because they think theyre going
to deport you, Sandweg says. All its privacy rights to undocumented immi-
going to do is amp up the chilling effect
and make it that much harder for ICE
agents to do their job.
Although Voice hasnt been rolled
out yet, the broader shift in tone has
already started. In March, ICE began
releasing its first weekly list of crimes
committed by undocumented immi-
grants and the sanctuary jurisdictions
that refused to detain them on immi-
gration charges. Voice will eventually
provide quarterly reports about the
effects of crime by the undocumented.
In a report released on March 20,
the Department of Homeland Security
listed the 10 largest sanctuary jurisdic-
tions, including Los Angeles, New York,
and San Diego, along with the names
of undocumented immigrants released
and their notable criminal activity,
such as domestic violence and burglary.
To ensure victims are notified
Quoted
There were no agreements
tonight, and no agreements
in principle.
Freedom Caucus chairman, Representative Mark Meadows,
after an April 4 meeting between key House GOP members,
Vice President Mike Pence, and other White House officials
to salvage the Republican health-care bill
when an offender is deported or
released into the community, DHS
is planning to put into operation a
system designed under Obama but
never formally launched, called the
Victim Information and Notification
Exchange, which will send victims
of immigrant crime updates via text
message and email.
Until now, victims had no way of
knowing whether ICE had deported a
perpetrator or released him into the
community. Part of the problem has
been a lack of funding, says Sandweg,
who says he backed the creation of
a notification program while at ICE.
The other issue has been complexi-
ties with privacy laws that limit interac-
tion between certain state and federal
databases. As part of Voice, the Trump
administration will no longer extend
grants, breaking with past interpreta-
tions of the 1974 Privacy Act.
ICE declined to say how much the
program will cost or where the funding
will come from. In a Feb. 20 memo,
DHS Secretary John Kelly directed that
any and all resources that are cur-
rently used to advocate on behalf of
illegal aliens be reallocated to Voice.
Obama set up an English and
Spanish toll-free hotline for detained
immigrants and established the posi-
tion of public advocate within
ICE to serve as an access point for
people in immigration proceedings
and for immigrant advocacy groups.
Immigration hardliners, such as Diane
Black, a Republican representative
from Tennessee, criticized the public
advocate as an illegal alien lobby-
ist. Texas Republican Representative
Lamar Smith said it was further proof
Politics/Policy
that the Obama administration puts
the interests of illegal immigrants
ahead of the interests of Americans.
Congress eliminated the public advo-
cate position in April 2013.
Jessica Vaughan, director of policy
studies at the Center for Immigration
Studies, which advocates for less immi-
gration, thinks eliminating these types
of services could free up funds for
Voice. These resources were being
used almost exclusively on behalf of 31
people in this country illegally, she
says. Whereas people harmed by the
actions of people in the country ille-
gally were getting almost no help.
Jacinta Gonzalez, field director at
advocacy group Mijente, worries that
Voice will mean that community rela-
tions officers will no longer be a point
of contact for people detained. If
theyre not even going to be pretend-
ing to talk to the community, it just
goes to show that they dont really care
at all about the impacts their enforce-
ment is going to have, she says.
Nowakowski, the Phoenix council-
man, holds out hope that the new role
for community officers like Bustamante
will still involve finding common
ground. Thats where Rudy could be
that mediator to help somebody who
may have lost a loved one and thinks
all Mexicans are murderers, he says.
Its having a person there whos level-
headed who can actually tell both sides
of the story and help people heal.
Lauren Etter and Darius Rafieyan
The bottom line Under Trumps Voice initiative, ICE
community relations officers will now publicize the
crimes of immigrants they once helped.
Edited by Matthew Philips
Bloomberg.com

April 10 April 23, 2017
Hacking the Need
For a Full-Time Job
A small group of competitive coders make most of their living on prizes
I have my time to myself and the freedom to work on whatever it is I want
Peter Ma is looking around his San
Francisco condo and realizing he won
just about everything in it. His TV, home
theater system, 3D printers, phones,
tablets, computers, furnitureall were
either prizes or bought with prizes, like
the Amazon gift card that paid for his
leather couch. Stashed under Mas sofa
is a thick stack of 2- or 3-foot-long card-
ILLUSTRATION BY BRANDON CELI
board novelty checks, kept as trophies.
The only non-swag I have are shoes,
the 33-year-old says.
With his close-cropped goatee and
gray hoodie, Ma may look like thou-
sands of programmers roaming the city,
but hes part of an elite corps. He and
about a dozen friends travel the nations
circuit of hackathons, marathon coding
sessions that challenge contestants, typ-
ically, to create software. Often these
are corporate-backed team events offer-
ing winners serious cash. Competition
is fierce, and caffeine is plentiful.
Some hard-core hackathoners
have full-time jobs. Most are trying
to build a startup and use their win-
nings to supplement contract gigs, or
vice versa. The best can win tens of
thousands of dollars a month, though
much comes in the form of the swag
A cheap stent thats The skies are getting
hard to nd, but really crowded for the No. 1
works 34 drone maker 36
Down with Taser, up Innovation: Fake
with Axon, and here, cartilage that makes
have a camera 35 joints good as new 37
33
that lines Mas condo. They say the
trade-offs in pay and stability are
more than worth it.
I have my time to myself and the
freedom to work on whatever it is I
want, Ma says during a long water-
front lunch on a sunny Tuesday. He
says hes considered full-time offers
from Google, Facebook, and Uber
Technologies but prefers living on
contract work and contest winnings,
as he has for three years. Hes entered
more than 100 hackathons, chosen by
the money at stake, proximity to the
Bay Area (unless flights are covered),
 Technology
whether a contest will teach him new
skills, and which friends will be there.
Brian Clark, 27, is working on his
fourth startup idea and has supported
himself with hackathons for more
than two years. A mobile gifting app
he made for a hackathon sponsored
by Kmart and Sears Holdings Corp.
won him $6,000 for less than four
hours of work. Another time, when he
was broke and sleeping on a friends
couch in Oakland, he entered a hack-
athon out of desperation. It was win
it or apply for a job, he says. In a
contest sponsored by a laundry list of
tech companies, Clark and a partner
spent about a day coding a trouble-
shooting tool for app developers.
They beat 800 other teams and won
$33,000 in venture funding.
Corporations backed more than 1,000
hackathons in the U.S. last year, accord-
ing to Devpost, a site for developers that
tracks the events. For companies such
as Microsoft Corp. and Amazon.com
Inc., the events are chances to show
off their latest virtual-reality headset or
voice-control software to talented engi-
34 neers. The more developers interested
in working with a companys tools, the
more successful those tools.
International Business Machines
Corp. alone holds hundreds of hack-
athons a year, online and in person.
We know it feeds revenue some-
where down the line, says chief devel-
oper advocate Willie Tejada. IBMs
Watson AI XPrize, a three-year online
challenge to solve a problem of the
entrants choosing with AI technology,
carries a $3 million grand prize for
the team whose work is judged most
important in 2020.
A few days before each hackathon,
Ma spends a half-hour or so check-
ing that his programs and gadgets are
up to date. Thats a habit he learned
after a glitch at a hackathon in Las
Vegas cost his team hours. He brings
his computer, iPhone, two Androids,
an internet-connected chipboard, and
sensors for temperature, humidity, and
touch, in case theyre needed for the
event. He doesnt pack a toothbrush.
You know how a soldier
goes to battle with a
sword? Our weapons
are our laptops
I bring the basics, he says. You know
how a soldier goes to battle with a
sword? Our weapons are our laptops.
Clark packs his favorite blue fleece
blanket and a small pillow into a back-
pack along with his laptop. (He, too,
skips the toothbrush.) He preps by
writing a pitch for the project he plans
to build, tailored for the sponsors and
the technology theyre promoting.
In March, Ma and some friends
went to a pretty typical 48-hour
hackathon in Redwood City, Calif.,
hosted by Procter & Gamble Co. to
promote internet-connected plug-in
Febreze dispensers. (Clark skipped
it.) Sponsors included Google and
Amazon, both interested in connect-
ing the dispensers to their respective
smart-home gadgets, Nest and Alexa,
as well as PARC, the famed Xerox
Corp. innovation lab. For a chance at
a $5,000 grand prize and other awards
that included PARC internships,
dozens of teams worked all weekend
to devise useful applications for the
Febreze units.
Hackers ate Chinese food and drank
Red Bull past midnight, napping under
tables or in corners in shifts for an hour
or two while their teammates kept
working. Some brought sleeping bags;
others rested their heads on backpacks.
Ma and his team used a methane
sensor to activate the Febreze plug-in
when it detected a certain amount of
gas. They lost. Ma says he overthought
the technical work and underthought
the idea. We had three guys building
a fart app, he says. Ninety percent of
the customers are all women.
P&Gs winners connected the scent
dispenser via Wi-Fi to a smartphone
app, allowing users to control Febreze
release along with other smart-home
functions, such as temperature and
lighting. Hackathons allow us to have
access to some of the sharpest minds,
says spokeswoman Lauren Thaman,
adding that P&G plans to do more.
Living off hackathons may be
getting tougher. Massive awards are
less common as companies such as
Salesforce.com Inc. shift from luring
developers with competitions toward
free online learning programs that keep
them in touch with participants.
Of course, some coders give up
hackathons for jobs, spouses, or
their health. Jay Zalowitz, a devel-
oper at online sports apparel retailer
Fanatics Inc. in San Francisco, says
he spent his mid-20s using contest earn-
ings to fund a startup but cut back once
he got a full-time job. It usually takes a
couple of days to recover from a hack-
athon, he says, and given a full-time
salary, the money isnt worth it.
Ma says he has no plans to give up
the freedom of the hackathon circuit.
I can always get a corporate job, he
says, slicing into seared branzino. I
dont need to. Thats the backup plan.
Lizette Chapman
The bottom line Semipro hackathon entrants
dont make what their employed peers do, but they
have a lot more time to work on their startups.
Medical Devices
Nice Stent If
You Can Get It
 Stroke-clearing clot retrievers
can be tough to nd
 I was 95 percent back the next
day. It was miraculous
Lee Bekemeyer collapsed on the driving
range at Stoneybrook West Golf Club
one morning in 2015, a massive stroke
choking off the flow of blood to his
brain. The 86-year-old real estate broker
couldnt get up, move his right side, or
speak. One in eight patients with such
acute strokes dies within months, and
two in three suffer lasting complica-
tions such as paralysis, slurred speech,
and trouble walking or caring for them-
selves. Bekemeyer wasnt one of them.
He was rushed 15 miles to Florida
Hospital in Orlando, a comprehensive
stroke center. After a CT scan, doctors
threaded a metal stent through an
artery into his brain, then expanded it
to snare and extract the clot, allowing
blood to flow freely again. The entire
process took less than two hours.
Iwas walking to the bathroom that
night, and I think I was 95 percent
back the next day. It was miraculous,
Bekemeyer says. Not every hospital
has a team that does this.
In the field of stroke treatment, the
maxim is time is brain, because every
minute with a clot costs a patient mil-
lions of brain cells. By that standard,
Florida Hospital is exceptional. Last

Blood Clot,
Begone
A doctor threads
the metal stent into a
patients clogged artery
The stent expands,
trapping the clot in
its mesh
The doctor removes
the stent, taking the
clot with it
year 81 percent of its stroke patients
were treated within two hours of
arrival, up from 22 percent in 2013,
according to Indrani Acosta, the
director of stroke care. Many who
might have been sent to a nursing
home went to a rehab center
instead, she says, while people
who would have gone to a rehab
center could go straight home.
Thats due in part to clot-retrieving
stents such as the one used on
Bekemeyer. Theyre sold for about
$8,000 by companies including
Medtronic Plc and Stryker Corp.,
and according to a 2015 study published
in the New England Journal of Medicine,
60 percent of stroke patients treated
with a stent retriever functioned inde-
pendently after three months, com-
pared with 35 percent of those given
drugs alone. About 240,000 of the
700,000 Americans who suffer strokes
each year have blockages in arteries
large enough to be treated with these
kinds of clot-retrieving stents. But only
about 28,000 were treated with one last
year, says Stacey Pugh, vice president
of Medtronics neurovascular unit.
The stents, while relatively cheap
in hardware terms, are rare outside of
the roughly 150 specialized facilities
in the U.S. known as comprehensive
stroke centers, because they require an
in-house neurosurgery unit, minute-
saving training, and space. As a result,
the devices have become a bit of a flash-
point among doctors who say more
FROM LEFT: COURTESY STRYKER CORP.; COURTESY AXON
facilities around the country should be
equipped to handle extreme cases like
Bekemeyers. The procedure just isnt
available in many parts of the country.
These treatments need to be avail-
able in the community, and access
needs to be fair, says Lee Schwamm,
chief of stroke services at Massachusetts
General Hospital and a professor of
neurology at Harvard Medical School.
We need them to be more equitably
distributed. Many are packed in big
cities, and there arent enough in sub-
urban communities and strategic loca-
tions in less populated areas.
Among Americas 1,100 or so hospi-
tals equipped to deal with more minor
strokes, the priority is speedy injection
of a drug called tPA, which over the
past two decades has become the stan-
dard of care to break up smaller, less
accessible clots. If a paramedic thinks
a patient is suffering a stroke more
minor than what Bekemeyer experi-
enced, it may not be worth passing
a couple of hospitals to head for a
bigger pool of stroke experts, as
Bekemeyers paramedic did.
I can see the desire to open
more comprehensive stroke
centers, and we are moving
in that direction, says Acosta of
Florida Hospital. But our field is not
as big as the cardiology field, which
numbers about 30,000 doctors in the
U.S. There are fewer neurologists by
farroughly 16,000.
Efforts to bring the stents into the
mainstream have also been sidetracked
by the failures of early versions, which
cleared clogged arteries but also
resulted in some uncontrolled bleed-
ing in the brain and some deaths. Three
major trials of those earlier techniques
failed as recently as 2013. Since the
2015 NEJM report, however, a flurry of
five positive studies, the most recent
one published in March, has led more
doctors to push for wider adoption.
Medtronic says its research shows
that stent-based clot removal also cuts
health-care costs. Initial treatment
including a clot retriever runs $45,761,
vs. $28,578 for treatment with drugs
alone. For the next 90 days, however,
those patients generate $5,000 less
in medical expenses, and over the
patients lifetime, Medtronics Solitaire
retriever could save $23,203.
A stroke patient was a stroke patient
until two years ago. There was one
thing you could do for them, and that
was to give them tPA,
says Medtronics Pugh.
The health-care
system is evolving to
come into alignment
with the data. It needs
to evolve faster.
An additional 350 U.S.
medical facilities are
equipped to perform
Axon Body 2
Technology
the stent procedure and are working to
receive certification as comprehensive
stroke centers. And a pending Stryker
study suggests that the stent treatment
may be effective as long as a full day
after the onset of a stroke, potentially
making it much more accessible for a
wider range of people.
Bekemeyer recommends it. He was
golfing again within a month of his
stroke and, at 88, continues to hit the
links several times a week. He navigates
a 19-step circular stairway to get to his
bedroom every night. And he allows
himself to marvel. I would have
thought if I had a massive stroke the
way I did, I would be finished for the
rest of my life, he says. I would have
rather gone on out than to never fully
recover. Michelle Cortez
The bottom line Stents appear to double the
recovery rate for some stroke patients, but most
Americans dont have access to them.
Policing
Forget the Taser, 35
Says Taser
 With a new name, the company is
giving away body camera gear
 Oh, sure, there will be some legal
challenges
Taser International Inc. has become
by far the leading U.S. supplier of police
body cameras, which departments have
rushed to adopt since the shootings in
Ferguson, Mo., and elsewhere led to
public demands for greater account-
ability. Interest in the cameras, and
the management of their footage, has
pushed the worlds best-known maker
of stun guns into cloud computing and
digital devices, sold under the Axon
brand. Now that business is becoming
the face of the $1.2 billion company.
The whole place will
be called Axon, and
b
as of April 6 the TASR
ticker on the Nasdaq
exchange is AAXN.
The Taser brand is a
product brand, says
Chief Executive Officer
Rick Smith. People
dont think of cloud
 Technology
Police buy in
About two-thirds of cops say they favor
the use of body cameras
82%
of police chiefs and
Oppose other administrators
33% say they want them
Favor
66%
some more than others
Officers from certain backgrounds were
more likely to say body cameras would
help curb inappropriate police behavior
White 46%
Black
Hispanic 53%
DATA: PEW RESEARCH CENTER
software or sensor devices and the
many things we now do. Hes trying
to solidify Axons position and deepen
ties to local departments with a splashy
offer: a year of free cameras for any U.S.
police agency.
Body cameras and software to
manage footage marked Tasers first
36 successful initiative to expand beyond
stun guns after years of failure. In 2011
almost all of its revenue came from
Tasers, but last year Axon made up
a quarter of sales. Axon says its won
contracts with 36 of the 41 major city
departments that have body cameras.
To guide its evolution, Taser brought
tech leaders onto its board. In 2013 it
bought a Seattle startup that became its
research hub. The Seattle office houses
115 employees, and Axon plans to triple
its space there. This year it bought two
artificial intelligence teams, which for
now are focused on automating the
labor-intensive redaction of body cam
videos for public release. But Smith
says the companys long-term goal is to
automatically extract the video infor-
mation needed to fill out police reports.
This could free officers from paper-
workand make Axon a required tool
for any department, replacing its tra-
ditional record management system.
We are licking our chops at this idea,
Smith says.
Rachel Levinson-Waldman, senior
counsel at the Brennan Center for
Justice, says police technology should
balance automation with human judg-
ment. We know that people get things
wrong, but so do computers, she says.
Smiths first step is to give more
DJI Agras-MG1
cops cameras. About two-thirds
support using body cams, according
to a January study by Pew Research
Center, but Smith estimates only
about 20 percent have them. Hence
the one-year free trial, software
included: Its partly a PR stunt, partly
a bid to end-run often baroque pro-
curement processes.
The idea for the free trial grew
out of a loss. Last fall the New York
City Police Department, the nations
largest, chose Tasers top challenger,
Seattles Vievu LLC, to supply its first
5,000 cameras. Losing the contract
sent Tasers stock down 18 percent.
71% (It hasnt rebounded.) Taser howled
at the decision, saying the NYPDs
field trials were too small and offered
the department 1,000 cameras and
licenses as a gift.
Safariland LLC, which owns Vievu,
called the Taser offer a desperate
attempt to circumvent the process
designed to ensure fair treatment of all
vendors. It added, If the NYPD had
wanted vendors to supply 1,000 free
cameras or any other provisions, the
NYPD would have spelled out that
requirement in the request for propos-
als. The NYPD declined the deal.
Smith says Axon expects critics to
call the latest offer anticompetitive,
too. Oh, sure, there will be some legal
challenges, he says. Luckily we have
plenty of lawyers from our Taser side of
the business. Karen Weise
The bottom line Taser, now Axon, is offering police
a year of free body cameras and related software,
an effort to make the gear irreplaceable.
Drones
How Long Can DJI
Rule the Sky?
 The leading quadcopter maker
specializes to survive
 We have our own factories and
can do our own prototyping
As dawn broke on Chinas southern
Hainan Island, Yang Daozhu clambered
up a metal stepladder for a better view
over the cornfields, remote control in
hand. Wearing a blue surgical mask
and rubber boots, the 30-year-old was
soon steering a 120-pound DJI drone
back and forth above the yellow-tipped
stalks, flipping a switch to spray them
with a mist of pesticide. About 100 feet
away, a co-worker did the same from
the ground, occasionally climbing onto
a blue truck. By noon theyd covered
the same stretch of field it would have
taken four or five workers a week to
spray with traditional crank-operated
backpack dispensers.
This is a typical day for Hainan
China Agriculture and Flight
Service, a year-old company with
about 50 employees thats sprung
up to fill a niche. Its harder to find
people to spray pesticides in the
old way, says Zhang Yourong, the
farmer who manages these cornfields.
Young people want to leave the farms
and find better jobs in cities now.
Yangs boss, former realtor Liang
Lvsheng, says hes also interested in
using drones to map farms from the
sky, a way to spot pests or other prob-
lems more quickly.
Zoom out a little more, and a
broader business plan starts to come
into focus. Drones are becoming less
of a casual hobby and more like com-
mercial and industrial equipment,
and DJI, the worlds leading maker
of the little buggers, is working a lot
harder to make sure it can meet the
markets changing wishes. DJI makes
the Agras-MG1 drones spraying the
fields on Hainan, Matrice 200 drones
for industrial surveying, and Inspire
drones for high-end filmmaking, and
its got 25 percent of its 8,000 staffers
working on research and development
and engineering to make sure potential
rivals dont spot an area its missed.
Our iteration cycle is about six
months, says Paul Pan, senior product
manager at DJI. We can completely
control the supply chain. We have
COURTESY DJI (1); COURTESY CARTIVA (2)
our own factories and can do our
own prototyping.
Eleven-year-old DJI more or less
invented the modern civilian drone
industry when it introduced its first
Phantom in 2012. Valued at $10 billion,
the Chinese company makes 60 percent
to 65 percent of all nonmilitary drones
 Technology

shipped around the world, according to

researcher Frost & Sullivan. Its main-
tained its lead partly through smart
branding and partnerships, getting
Innovation
photography-focused Phantom models
into more than 400 Apple Stores.
But its tough to maintain momentum
with hardware alone. Even Apple Inc.
Synthetic Cartilage
is focusing more on software and ser- Form and function Innovator David Ku
vices, such as music streaming and Cartiva implants are made of polyvinyl alcohol, Age 61
its app store. And as with the smart- the main ingredient of contact lenses, and mimic Professor of mechanical
phone industry, high-end drones such natural cartilage to treat arthritis. Unlike the engineering and engineering
current standard of caremetal plates fused
as DJIs may be vulnerable to cheaper with jointsthey allow for a full range of motion.
entrepreneurship at Georgia
Tech; surgeon
or more focused rivals, especially in
China. On the upper end, EHang Inc.
is working on people-carrying drones Origin Research
that resemble George Jetsons ship. on blood ow
On the low end, startup FPV Style is required Ku and his
students to create
refining $100 indoor drones for kids. material for articial
FPV founder Max Ma says his proto- blood vessels. The
type weighs less than an ounce, and the company they
formed to further
finished product will be lighter. develop the material
DJI has been brilliant at making 1. was acquired by
Carticept Medical Inc. Funding Cartiva has
flying cameras, but thats not all that raised $35 million
in 2008 and spun off
drones are or can be, says Eric Pan (no Open After opening a
as Cartiva Inc. in 2011. from New Enterprise
relation to Paul), head of Seeed Studio, patients joint to be treated, Associates,
an orthopedic surgeon bores Windham Venture
a Shenzhen hardware accelerator. a hole in one of the bones of Partners, and private
As a drone guides itself back and the joint. investors.
forth across a soccer field near DJIs 37
gleaming Shenzhen headquarters,
surrounded by skyscrapers, Paul
Pan is thinking about what comes
next. Hes been refining the Agras-
MG1s ability to fly a preset path and
adjust for wind. Even for a farmer
with minimal training, this makes it
very easy to use and to spray evenly
and consistently, he says. DJI is
also working with data services that
stitch together data from GPS and the
2..
drones sensors to create 3D maps
of fields, allowing the programmed
paths to account for hills. Market U.S.-based
The market for drone hardware will orthopedic surgeons
hit $6 billion this year and $11.2 billion can use a $4,500 kit
from Cartiva to treat
by the end of 2020, estimates arthritis in the big
researcher Gartner Inc. The market toe. The kit includes
for software and services is expected a -inch implant, a Plant The surgeon inserts
drill, and tools for a compressed Cartiva
to grow a lot faster. So DJI is also compressing and implant into the hole, where
pushing developers to dream up new inserting the implant. it expands to remain rmly in
apps and uses for its drone operating place without fasteners.
system, says Michael Perry, director of
business development. The company Next Steps
says its not making its OS available for Its certainly transformative, says Judy Baumhauer, an orthopedics
rivals drones. Christina Larson professor at the University of Rochester Medical Center. With this advance,
we have an implant that doesnt wear out or cause more troubles. Cartiva
The bottom line Chinas DJI says 25 percent of
its workforce is in R&D as it tries to extend its Chief Executive Officer Tim Patrick says the company is seeking Food and
dominance of the civilian drone business. Drug Administration approval to implant the cartilage in thumbs, and Ku is
working on other applications for his implants, including as replacement
Edited by Jeff Muskus blood vessel valves. Michael Belore
Bloomberg.com
 Markets/
Finance
April 10 April 23, 2017

Folwell
campaigning
on his
motorcycle

38

A big pension fund is ring pricey money managers but is stuck in some long-term deals
We dont own alternative investments. They own us
If you had $90 billion to invest, how strategy he proposed: Instead of $100 million a year in fees by the end of
would you do it? For Dale Folwell, its a paying money managers big fees, the his four-year term.
serious question. As the newly elected state should use a slim menu of cheap, Its not emotional. Its not politi-
treasurer of North Carolina, hes by mostly indexed investments and cal. Its mathematical, says Folwell,
law the one person who gets to decide manage them in-house when possible. a certified public accountant and
how to manage the state pension fund The state paid $600 million in former state legislatorwhos also
for government employees, the worlds outside managers fees, incentives, been a mechanic and a national dirt-
26th-largest pool of public money. and related costs last year, seven times bike racing champ. His calculation is
Folwell, 58, became the states first more for every dollar under manage- simple: Expenses come right off the
Republican treasurer in 140 years partly ment than it paid in 2000. Folwell envi- top of returns, and money managers
on the strength of a simple investment sions saving the fund a minimum of as a group struggle to beat the market

after their fees. For example, in the
decade through June 30, 2016, about
85 percent of large-cap U.S. stock funds
trailed the S&P 500 index, according to
S&P Dow Jones Indices.
Folwell has already unloaded six
actively managed stock funds that
controlled $3 billion for the state and
charged combined fees of $17 million
in the fiscal year through last June. But
a wide-scale firing of Wall Street wont
be easy, he says, because his two most
recent predecessors signed long-term
contracts with some private equity
and hedge funds. Such investments
are often called alternatives. Funds
operated by Blackstone Group LP,
Warburg Pincus, and Starwood
Capital Group are among those listed
in the pension systems holdings.
We dont own alternative invest-
ments. They own us, Folwell says. I
think they increase complexity and
reduce value. Folwells most recent
predecessor, Janet Cowell, declined
to comment. The treasurer who came
before her, Richard Moore, didnt
respond to requests for comment.
One might think a public fund with
billions of dollars to put to work would
have some leverage to negotiate a dis-
count. Not so simple, Folwell says.
Money managers he talks to keep citing
most-favored-nation clauses in their
contracts that say they cant offer a
break to one client without providing
the same break to others. Even if he
wasnt stuck in long-term contracts, it
might be difficult to unload huge stakes
quickly without needlessly incurring
fire-sale losses, because the funds tend
to hold illiquid assets.
In the election, Folwell won the
endorsement of the State Employees
Association of North Carolina, which
represents 55,000 public employ-
ees. He doesnt carry water for his
party, says Ardis Watkins, a lobbyist
for the group. It had fought the plunge
into costly investments and advocated
making the terms of the deals with
managers public.
COURTESY DALE FOLWELL
In February, Warren Buffett gave
a boost to Folwells argument. The
longtime Berkshire Hathaway Inc.
boss wrote in his annual shareholder
letter that pension funds and other
supposedly savvy investors had wasted
$100 billion over the past decade on
high-priced money managers.
North Carolinas pension fund used
to have lower costs. In 2000 the state
was paying fees of just 0.1 percent of
assets, compared with 0.7 percent
now. Then it pushed into alternatives.
The underlying investment can include
everything from stakes in private com-
panies to derivatives linked to barrels
of heating oil and bushels of wheat. I
have $900 million worth of timber,
Folwell says. In theory, such invest-
ments can provide a hedge against
inflation and the volatility of equities.
And at a time when bond yields have
been historically low, many big institu-
tional investors have been eager to find
investments that might provide some
extra return to help meet their obliga-
tions. The U.S. stock market has had
a good run, but its likely to be unsus-
tainable in the long haul, notes Josh
Lerner, a Harvard Business School pro-
fessor. For pension funds, he says,
private equity in particular may seem
like one of the few ways to get a lift.
If North Carolina had owned a
vanilla stock-and-bond index port-
folio instead of shifting into alterna-
tive assets, it would have earned an
additional $20 billion over the seven
years through June 2016, estimates
Ron Elmer, an accountant and index-
ing advocate. Elmer ran unsuccessfully
in the Democratic primary for North
Carolina treasurer last year before
throwing his support behind Folwell.
Four-fifths of the fees paid by North
Carolinas pension fund last year went
to private equity, hedge fund, and other
alternative assets that accounted for
about one-fifth of the states invest-
ments. Investing in alternatives also
includes extra costs for such things as
sending state employees to annual fund
meetings, according to Folwell.
Since taking office, hes been calling
money managers to ask about perfor-
mance, costs and whether theyd work
for less. During one call, he says, Robert
Kapito, president of BlackRock Inc.,
which manages about $15 billion for
the state, tested Folwell on his claim to
be a mechanic by asking where the gas
goes into a 1951 Cadillac coupe. Folwell
How to make an active
fund more like an
ETF 40
Wall Streeters ock to
messaging apps for a
little privacy 41
says when he replied that the fill pipe
is in the taillight, the BlackRock boss
said the treasurer had passed his test. I
said, We may talk with an accent, but
we dont think with one, says Folwell.
The purpose of these phone calls was
for the managers to pass our test, not
for us to pass theirs. Neil Weinberg
The bottom line The newly elected treasurer in
North Carolina thinks his retirement fund can do
better with simpler investments.
Real Estate
Buy Today. Take a
Close Look Tomorrow
 Homebuyers in booming Toronto
decide to forget the inspection
 You dont know what could be
behind the walls 39
When a real estate market gets really
hot, buyers can feel like they have to
roll the dice. In Toronto, some are so
desperate to win bidding wars that
theyre rushing to make offers without
even getting an inspection.
The average price for a
detached home in Canadas largest
metropolitan area jumped to
C$1.21million($905,473) in March, up
a third from a year earlier. In the same
period, Toronto-based home inspec-
tion company Carson Dunlop saw
a 34 percent drop in volume. Murray
Parish, president of the Ontario
Association of Home Inspectors, says
hes seen a 30 percent decline at his
company, Parish Home Inspections.
The bottom line is we are in
a shortage of supply, says Tasis
Giannoukakis, a Century 21 Leading
Edge Realty Inc. broker based in
Toronto, adding that its not uncom-
mon to see bids of as much as
C$200,000 over the asking price.
That pressure is whats causing
everybody to remove the conditions
on an inspection, he says.
Home price increases in North
Americas fourth-largest city and its
suburbs have outpaced growth in
 Markets/Finance
Manhattan, San Francisco, Seattle,
and Vancouver, raising concerns that
a correction may be coming. Robust
demand in Toronto is bumping against
the lowest supply of homes in more
than a decade. Buoyed by low inter-
est rates, the bidding wars have caused estate market until Toronto took that
many shoppers to leave once-standard
clauses out of their purchase offers,
such as a professional home inspection half of 2016, says Adil Dinani, an agent
and financing contingencies.
Giannoukakis notes that home-
buyers are generally savvier when it
comes to repairs and renovations than
they were a decade or two ago, thanks
to information on the internet and the
popularity of home-related TV shows.
Still, the removal of conditions such
as an inspection isnt due to volun-
tary risk-taking but is 100 percent
a byproduct of multiple offers on the
same property, he says.
An inspector views
When you are the only offer the boiler of a
on the table, you can submit home in Toronto
a conditional offer, says Lorand
Sebestyen, an agent with IPro Realty
Ltd. in Toronto, adding that he coun-
sels clients on the risks of skipping an
40 inspection. But when competing with
several other offers, you dont have
that luxury, he says.
Even for do-it-yourself types, the
potential pitfalls are manyfaulty
pipes, eroding foundations, and
termite infestations. Some are more
surprising. Alan Carson, co-founder
of Carson Dunlop, says his team once
found a bathroom that seemed func-
tional, but none of the plumbing was
connected. Then there was the house
that came with a loaded rifle and a
large bag of jewelry in the attic, as well
as a very sooty raccoon jumping
from a fireplace damper, he says.
You dont know what could be
hiding behind the walls, says Shubha
Dasgupta, owner of Capital Lending
Centre, a Toronto-based mortgage
brokerage. A move away from
inspections isnt unique to Toronto.
Vancouver, Canadas hottest real
mantle last year, saw a surge in uncon-
ditional purchase offers in the first
in the area with Royal LePage West
Real Estate Services.
When problems emerge after a pur-
chase, the financial burden typically
falls to the buyer who opts to skip an
inspection. Because the buyer sup-
posedly has the ability to see problems
and ability to negotiate either a lower
price or for work to be done, the law
doesnt see any reason really to protect Investing
you, says Michael Lamb, a real estate
lawyer and professor at the
University of Western Ontario.
Removing the inspection
clause is a sign that speculation has
entered the market, says Marcus
Simon, an attorney and owner of Ekko
Title in McLean, Va. The last time
he saw a marked increase in waived
inspections in his region was around
2007, before the U.S. housing crash.
Even so, mortgage providers dont
seem to see much of a problem with
the decline in inspections in Toronto.
Banks are far less concerned about
costly repairs that may arise later than
they are about the appraised value of a
property, says Dasgupta, the mortgage
broker. The home inspection is really
more for consumer protection, he
says. From a home value standpoint,
the appraisal is really the key indicator
for the bank. most of which passively replicate
The decline in inspections has
spread to other parts of Ontario. The
city of Barrie,
about 105 kilo-
meters (65 miles)
north of Toronto,
has gone nuts
in the last three
months, says
Peggy Hill, a
local broker with
Keller Williams
Experience
Realty. She says
80percent to
90 percent of
the offers she
sees have no
conditions, compared with 10 percent
to 20percent previously.
Nicholas LEcuyer, a managing
partner at Barrie-based loan broker-
age Mortgage Wellness Group, says
he doesnt see skipping inspections as
a red flag for the market but as a neces-
sary evil for buyers in bidding wars. It
doesnt matter if inspections are inex-
pensive. For about $400, everybody
wants to do it, he says. But they know
they cant. Kim Chipman
The bottom line Torontos housing boom is
eclipsing those in San Francisco and Vancouver.
Buyers are feeling the pressure.
Trying to Make Active
Funds Cool Again
 Will investors ock to new funds
that look more like ETFs?
 Active ETFs unnecessarily blur
the lines
Daniel McCabe, chief executive
officer of Precidian Investments, is
trying to create a new kind of fund,
one he thinks will help active money
managers survive the unrelenting rise
of exchange-traded funds. Its been an
uphill battle.
With $10 trillion in assets in the
U.S., actively managed mutual funds
are big business, but theyre losing
market share. For years investor
money has been flowing into ETFs,
market indexes. Index ETFs had assets
of $2.5 trillion at the end of 2016, up
from $420billion a decade earlier,
according to Morningstar Inc.
Precidians plan is to wrap active
MARK SOMMERFELD/BLOOMBERG; ILLUSTRATION BY KURT WOERPEL
management into something that looks
more like an ETF. In doing so, it wont
replicate one of the key things many
people like about ETFsthat theyre
index funds, which over time tend to
beat most active managers. McCabes
bet is that investors who still want to
hire an active manager will be drawn
to Precidian by the other features of an
ETF, such as the ability to trade them
like a stock at any time of day. ETFs
also have operating-cost and tax advan-
tages over traditional mutual funds.
 Market performance
kept assets high,
but investors withdrew
$350 billion in 2016
A Growing Rivalry
Net Assets
Actively managed
mutual funds
Passively managed
exchange-traded funds
1997 2016
DATA: MORNINGSTAR INC.
But Precidian faces a formidable
competitor in 100-year-old, $364billion
asset manager Eaton Vance, which
beat it to the punch with a rival
product called NextShares. Precidian
also has to persuade the U.S. Securities
and Exchange Commission to sign
off on its novel approach. We recog-
nize that anything like this requires the
regulators approval, McCabe says.
Hes been trying for three years with
Precidian. Eaton Vances NextShares
won SEC approval in December 2014.
The tricky problem for anyone trying
to make active funds that work like
ETFs is transparency. Say you want to
buy 100 shares of State Street Corp.s
popular SPDR S&P 500 ETF at 11:59a.m.
To determine a fair price for those
shares, market participants
need to know the value
of all the funds under-
lying assets at that time.
Thats not a problem,
because this ETF simply
owns the stocks in the
S&P 500 index.
But most active funds
like to be more discreet about their
holdings. They select stocks or bonds
to try to beat the market and dont
want to give other traders a way to get
the jump on them. It can be harmful
to the investors, says Stephen
Clarke, president of the Eaton Vance
subsidiary behind NextShares.
Eaton Vance adopted a workaround:
NextShares funds get the tax and cost
efficiencies that come with trading
on an exchange, but their price is cal-
culated at the end of the day, as with
regular mutual funds. Precidians solu-
tion involves hiring agents who can
see a funds holdings to calculate and
verify its underlying value. That value
would be made public every second of
the trading day, even though portfo-
$10t lio holdings would be revealed only a
few times a year. In April 2015 the SEC
$8t told Precidian that it needed to solve a
long list of concerns about its approach
$6t
before it could get approval.
Eaton Vance wasnt shy about point-
$4t ing out its rivals difficulties. It used
theFreedom of Information Act to
$2t obtain a letter the SEC sent about its
concerns to McCabes lawyerand
$0 published it. During a call with indus-
try analysts, Thomas Faust Jr., Eaton
Vances chairman, used it to ques-
tion the viability of Precidians struc-
ture. Nobody has ever done this in our
industry before, McCabe says. At the
time, Faust said the company made the
letter public to help the market make
an informed judgment about potential
alternatives to its product.
Eaton Vance expects to spend about
$10 million this year on the NextShares
business, adding to about $16 million
spent over the past two years. Its also
on the line to pay $9 million to creators
of patents underpinning the funds, reg-
ulatory filings show. The funds have
less than $100 million in assets.
Precidian amended its SEC filing
and is awaiting approval. On April 4,
it unveiled eight funds it hopes to sell.
Whatever the regulator decides, the
new funds will have to prove
theyre more than a mar-
keting twist. The trend
is clearly toward passive,
and ETFs are part of that
trend, so theyre jumping
on that bandwagon, says
Larry Swedroe, director of
research for Buckingham
Strategic Wealth LLC.
And even when theyre traded on
an exchange, active funds still pay
someone to pick investments, so
theyll cost more than index funds.
One NextShares fund charges 0.65 per-
centage points per year, a third more
than the average U.S. ETF. Active ETFs
unnecessarily blur the lines and can
create undue confusion, says Rich
Messina, senior vice president for
investment product management at
ETrade Financial Corp.
Even so, Wall Street companies
are willing to give the idea a shot.
UBS Group AG and Columbia
Threadneedle Investments
have rallied behind Eaton Vances
structure, with UBS announcing
Markets/Finance
last year that advisers in its network
could offer the funds. Asset manager
Legg Mason Inc. bought a stake in
Precidian last year. BlackRock Inc.,
the worlds largest money manager,
has requested regulatory approval to
sell funds using Precidians model.
The market hasnt picked a clear
winner, says Spencer Mindlin,
an analyst at Aite Group LLC. Or
whether there will be any winner.
Rachel Evans and Annie Massa
The bottom line Investors like being able to trade
ETFs all day, but thats tough to do with funds that
need to keep secrets.
Wall Street
Traders New Favorite
Way to Swap Secrets
 WhatsApp and Signal make
conversations hard to track
 Temptations and the rewards are
just too great 41
Dirty jokes and not-safe-for-work GIFs.
Snaps of unsuspecting colleagues on the
trading floor. Screen shots of confiden-
tial client trading positions. All that
and, on occasion, even legally dubious
informationis increasingly being traf-
ficked over the new private lines of Wall
Street: encrypted messaging services
such as WhatsApp and Signal.
Traders, bankers, and money
managers are embracing these apps
to circumvent compliance, get around
the human resources police, and keep
bosses in the dark. And its happening
despite the industrys efforts to crack
down on unmonitored communi-
cations, according to conversations
with employees at more than a dozen
Wall Street companies. On March 30
a former Jefferies Group banker
was fined in the U.K. for sharing
confidential data on WhatsApp.
Youre really able to operate outside
of the bank, says William McGovern,
a former branch chief of the Securities
and Exchange Commission who now
works at the law firm Kobre & Kim.
We have seen in our investigations
that the ground is shifting under every-
one, and technology changes are
driving a lot of it.
 Markets/Finance
The U.S.
I did not refuse or express
Department of
Justice and
the FBI conducted
an inquiry into
my inability to comment
the leak
and the interview continued.
Jeffrey Lacker, in a statement on his April 4 resignation as president of the Federal Reserve Bank of Richmond.
He wrote that in a 2012 conversation with an analyst from Medley Global Advisors, he unintentionally conrmed
condential information the analyst had about theFeds policy options.
U.S. financial companies need to
keep records of all written business
communications, no matter how innoc-
uous, say the SEC and the Financial
Industry Regulatory Authority. In some
cases, calls are recorded.
Representatives for Wall Street
banks, including Bank of America,
Citigroup, and Goldman Sachs
Group, say they have various poli-
cies in place to prevent unmonitored
42 communications and unauthorized
access to confidential information.
They routinely check emails and chats
on company devices, restrict personal
phones and messaging services on
trading floors, and require employees
to sign agreements prohibiting unmon-
itored communications for work. In
January, Deutsche Bank AG banned
text messages and services such as
WhatsApp and Apple Inc.s iMessage
on company phones globally.
Nearly two dozen financial indus-
try employees say those policies are
routinely ignored, and the use of per-
sonal phones for work is a fact of life.
No one would speak on the record
for fear of losing their jobs. The SEC
declined to comment on the wide-
spread use of unauthorized apps.
Wall Streeters say theyve turned to
messaging apps because theyre tired of
having their every wordwork-related
or notingested into vast databases
and scrutinized for tone and taste as
well as legal red flags. Some clients also
prefer to use those apps to communi-
cate; ignoring the messages would be
bad for business. Financial companies
have long grappled with new technolo-
gies and the need to comply with secu-
rities laws. (Bloomberg LP, which owns
Bloomberg Businessweek, offers message
Quoted
and chat services that enable firms to
set up alerts and restrictions to help
enforce compliance.) But its gotten
harder for compliance to keep up.
At companies that ban personal
phones, trading desk employees will
sneak into hallways or stairwells to use
them. Popular texting apps, such as
iMessage, route conversations around
most monitoring systems. Others such
as Confide, Dust, and Signal can auto-
matically delete messages once theyre
read. How messaging is used varies
widely on Wall Street. At big banks,
employees often use the apps to share
gossip and communicate with clients. A
dont ask, dont tell mindset prevails.
Several employees at one
multibillion-dollar hedge fund set up
a WhatsApp group chat to exchange
market intelligence with one another,
according to a person with direct
knowledge of the matter. The app
is particularly useful if theres a big
market move and for money managers
traveling to far-flung places who need
to be reachable at a moments notice.
Occasionally messaging on per-
sonal phones has enabled conduct that
could be legally problematic, compli-
ance experts say. At least one invest-
ment bank has debt salespeople who
routinely send screen shots of chats
showing one hedge funds positions
to another client in an attempt to win
more orders, a person with direct
knowledge of the matter said. At other
firms, traders send screen shots of
client lists and profit-and-loss state-
ments to prospective employers.
If you look the other way on this,
its only going to get worse, says
Warren Small, who teaches a program
at Middlebury Institute of International
Medley provides
intelligence
on macroeconomic
policy for hedge
funds and other
investors, according
to its website
Studies for students seeking careers
investigating financial crimes. With
financial transactions, temptations and
the rewards are just too great.
In the Jefferies case, U.K. regulators
said they fined Christopher Niehaus
about $46,000 for sharing confidential
client information via WhatsApp as he
boasted to a personal acquaintance and
a friend about deals he had pending.
The messages came to light after an
unrelated complaint led him to volun-
tarily hand over his phone to Jefferies,
a person with knowledge of the situa-
tion said. Richard Khaleel, a spokesman
for Jefferies, and Niehauss attorney
declined to comment. Authorities said
none of the parties in the Jefferies inci-
dent traded on the information.
Banks have implemented soft-
ware to immediately flag phrases
in company email and messaging
systems such as check your phone,
sent you a text, or take this
offline. Technology can only go so
far, however. Jack Rader, a manag-
ing director at ACA Compliance
Group Holdings LLC, which sets up
monitoring systems, says he some-
times encounters pushback from the
heads of sales and trading desks. That
raises a host of thorny questions,
says Erik Gordon, a professor at the
University of Michigans Ross School
of Business. Are the firms really
doing whats reasonable in trying to
stop this? he muses. Or are they sort
of wink-winking? Laura J. Keller
ANDREW HARRER/BLOOMBERG
The bottom line Some mobile apps can make
messages permanently disappear, which may
help rogue traders.
Edited by Pat Regnier
Bloomberg.com
 W EN 3M BOUGHT INTO
WH

THE AN
TH ANKL
KLE
E MONITOR BUSINESS,

IT
T ACQUI
CQ IRED
D TR
T OU
OUBL
BLEE

44

HOTOGRAPH ILLUSTR
PHOTOG
PHO
P H TT
ATION BY CREDIT
ILLUSTRATION
AT TK
 4
45

B LAU
BY AURE
URE
REN
N ETTE
ETTE
ET ER
LLUSTRATION
ATION CREDIT TK
BY CREDIT

PHOT
PH O OG
OT OGRA
RAPH
RA PH
H BY HA
HANN
NNAH
NN AH WHI
AH H TA
TAKE
KERR
HOTOG
PHOTOG
OT AP ILLUSTR
RAPH I
 he law enforcement community in Massachussetts
T had a deal. In 2012 the state entered into a con-
tract with the leading manufacturer of electronic
ankle monitors, the small GPS devices strapped
over the socks of parolees and people awaiting
trial to make sure they didnt skip town or otherwise show up
THERE WAS NO
in places they werent supposed to.
There were problems from the beginning, according to
corrections officials, offenders, and attorneys. For example,
the battery on the bracelets was prone to dying suddenly and ORWELLIAN FANTASY HERE.
without warning. The internal antenna didnt always perform
well underneath certain clothing or in certain buildings. The
devices sometimes relayed inaccurate navigational coordi-
nates, leaving offenders in technical violation of the con- THIS WAS A MARKET...
ditions of their release. Some offenders found themselves
having to walk outside in the middle of the night or stand in
the middle of a street to establish a satellite connection and
prove to authorities that they were where they were supposed THAT WE THOUGHT WE COULD
to be. A July 2015 article in Massachusetts Lawyers Weekly
recounted a criminal defense attorneys tale of his clients
device showing that he had walked across a lake. ADD INNOVATION TO
Whats unusual
about this chapter in FIG. 3
Massachussetts law
enforcement history
is not the heavy reli-
ance on ankle mon-
itors, which are in
wide use around the
world, or even that
there were some 1970s
46 glitches in the technology. Whats especially Nixon announces the
notable is that the devices themselves were war on drugs. to track Gefhrder, or potential terrorists.
made by 3MCo. Yes, that 3M. The Post-it Notes Prison populations 3Ms operations and sales in 200 countries have
and Scotch tape company, a Fortune100 begin a long rise. allowed it to draw on deep networks to win government
mainstay with a market value of $115 billion, 350K contracts and move quickly into the top ranks of the
is also one of the worlds largest makers of $6 billion offender-monitoring business, as its called.
300K
GPS ankle monitors, a field it entered in 2010. But theres evidence the companys reach has at times
Corrections agencies around the world 250K exceeded its technical capabilities, with sometimes disas-

are desperate for cost-effective alterna-
200K
tives to overcrowded prisons, which is why
125,000 people are being monitored with 150K
ankle devices in the U.S. alone. Peru is
considering putting ankle bracelets on more
than 20,000inmates. In Norway, the Ministry
of Justice and Public Security is examining
the use of ankle monitors for asylum seekers.
Germany recently passed legislation allowing them to be used
A BRIEF HISTORY OF
OFFENDER TRACKING
FROM TOP: THE RICHARD NIXON PRESIDENTIAL LIBRARY AND MUSEUM; COURTESY U.S. PATENT OFFICE; COURTESY ROBERT S. GABLE
trous results. Parolees and people awaiting trial have
been sent to jail because of false violation alerts gener-
ated by 3M monitors; equally troubling, authorities are
1970 1980
sometimes so overwhelmed by alerts that they cant tell
whos in violation and who isnt. You dont have to be a
coddler of criminals to understand that this is a problem.
3M says its finally gotten a handle on it, but the
struggle to master this business has left the company
bruised. The company says it cant comment on spe-
cific cases in which wearers claim their bracelets
falsely placed them in violation. In a written state-
ment, it adds, while many offenders violating the
terms of their probation claim innocence, their
guilt, along with the effectiveness of the system,
1969
has been proven in various violation of parole
Ralph Schwitzgebel hearings almost every day.
is awarded patent We have a great business and a wonderful
No.3,478,344
technology, says Raymond Eby, public security
DATA: BUREAU OF JUSTICE STATISTICS;

a Behavioral
Supervision System business director at 3Ms Traffic Safety & Security
with Wrist Carried Division, which oversees the electronic monitor-
Transceiver. FIG. 2 ing division. But its complicatedits probably
the most complicated thing that 3M does, to be
honest with you.
FIG. 1 And also the thing with the highest human
stakes. Its one thing to turn out simple but

FIG. 1: ROBERT GABLES BELT-MOUNTED TRANSCEIVER, CAPABLE OF SENDING AND RECEIVING TACTILE SIGNALS. FIG. 2: FROM U.S. PATENT 3,478,344, BEHAVIORAL SUPERVISION SYSTEM WITH WRIST
 ingenious solutions for consumers and businesses. People love
you for that. Its quite another to be at the center of matters
of public safety and civil liberties. When people go to jail with
your product bound to their bodies, you attract an entirely dif-
ferent kind of attention.
Long before 3M employee Arthur Fry delivered to the world
the sticky note in 1980, 3M had endured several near-ruinous
mistakes. In the early 1900s the founders almost bankrupted
the company by mistakenly digging up anorthosite, for which
they had no use, instead of corundum, a tough-as-diamonds
mineral they planned to sell for grinding wheels. Then the
1980s
Jack Love, a company imported 200 tons of
New Mexico judge,
Spanish garnet to manufacture
markets a radio-
frequency tracking
sandpaper, but discovered the
device inspired rock had been rendered useless
by a Spider-Man after a load of olive oil spilled
comic. on it during an ocean crossing.
Eventually a factory superinten-
dent discovered that the oil could be roasted off, salvaging
the shipment and redeeming the company.
Even Frys sticky note materialized only after a colleague
was unable to find a purpose for a not-so-sticky adhesive.
Fry, the oft-told story goes, was looking for a way to keep
slips of paper from falling out of his hymnal at church. It
turned out the adhesive was the perfect solution, and Post-it
Notes were born.
This quality of renewal and a proud embrace of failure
became central to 3Ms identity. Encouraging tinkerers and
dreamers became so ingrained in the 3M culture that in 1948
the company introduced its 15percent program, in which
employees are encouraged to use company time to pursue
risky ideas. The concept is now widely used in corporate
Americathink GoogleInc.s 20percent time.
All of this has made 3M an archetype of inno-
vation, featured in Harvard Business School case
studies and lauded by management gurus. So when
George Buckley, an engineering Ph.D. and former Prison overcrowding
reaches crisis level.
head of boats-and-billiards maker Brunswick State spending
Corp., took over as 3Ms chief executive officer in on corrections has
December 2005, he was dismayed to learn that tripled in just
the company he called an engineers heaven was three years.
floundering. 3Ms New Product Vitality
Index, an internal measure that tracks FIG. 4
the share of sales that come from prod-
ucts introduced in the previous five years,
was at about 20 percent, down from about
30 percent in the 1980s, Buckley recalls.
Five months after taking the job,
Buckley stood before analysts at the
Waldorf Astoria in New York City. He
vowed to breathe 3M imagination back
ANDREW LICHTENSTEIN/CORBIS/GETTY IMAGES
roots at 3M. In the 1970s the company introduced its magne-
tized Tattle-Tape strips, which were tucked inside the spines
of library books to prevent theft. In the early 2000s, 3M devel-
oped radio-frequency identification tags, or RFIDs, to track file
folders, buried utility lines, and other assets. It had also toyed
with fleet-tracking software, installing it in the cars of some
company salespeople. Buckley believed so strongly in the future
of tracking and tracing the worlds things that he preached to
investors gathered at the Waldorf: It is my belief that within 10
years, every single thing of value on the surface of the Earth is
going to be tracked and traced, including you, your dog, your
children, your car, and anything that you own which is of value.
Almost three years later, 3M was staggering through the
recessionfourth-quarter profits fell almost 40 percent in
2008, and the company laid off 4,000employees. Buckley
turned to the Markets of the Future reports prepared annually
by the companys strategic planning group. Ideas generated
for the report have included a smart device for dispensing
pills, reflective bicycle tires, reusable plastic Post-its, and
anti-fatigue shoes, according to an internal 3M presen-
tation. In one of the reports, Buckley noted a trend: We
concluded that security is unlikely to get better, so border
crossings, tracking of criminalsyou can make rough esti-
mates of where markets are going, he says.
Offender monitoring had come of age by then. In 2010
authorities in the U.S. were electronically monitoring almost
twice as many accused and convicted offenders as they
had just five years earlier, according to the Pew Charitable
Trusts. Some were being monitored by RFID devices, but
more were wearing GPS monitors, which typically comprise
an ankle-affixed device with a built-in wireless modem pro-
grammed to record and store an offenders location points 47
at selected intervals. The modem wirelessly transmits the
information to a data centeressentially by placing a wire-
less phone callwhere its downloaded and analyzed by
corrections officers or contractors.
More and more states began passing laws allowing for
1990
judges to release pretrial detainees or parolees if
they wore a monitoring device. The Department
of Homeland Security began electronically moni-
toring immigrants to ensure they would show up
for court hearings. Some people, mainly
sex offenders, were sentenced to wear an
ankle monitor for the rest of their lives.
Groups along the political spectrum, from
the American Civil Liberties Union to the
Heritage Foundation, embraced the use of
ankle monitors. Advocates argued that the
devices gave defendants freedom to work
and raise their families while under court
supervision; they would also reduce the

into the company and boost R&D spend- more than $50billion in annual costs asso-
ing. And, saying that no company can ever ciated with mass incarceration.
be the sole fount of ideas, he promised to make complemen- Inside 3M, executives grappled with whether tracking people
tary acquisitions, a tool hed used to turn around Brunswick. was ethical and whether it conflicted with the wholesome brand
He also identified a set of new emerging business oppor- 3M had cultivated for a century. They decided the technology
tunities that aligned with what 3M called the mega trends of ultimately made society safer and fit nicely within the companys
society, including energy extraction, pollution control, and food track-and-trace and security businesses.
safety. Early on as CEO, Buckley identified as uniquely prom- There was no Orwellian fantasy here, says Buckley,
ising a trend he called track and trace. It already had deep who stepped down as 3Ms CEO in 2012 after reaching the

CARRIED TRANSCEIVER. FIG. 3: PRESIDENT RICHARD NIXON ANNOUNCES THE WAR ON DRUGS. FIG. 4: A FORMER GYM AT THE DEUEL VOCATIONAL INSTITUTION IN TRACY, CALIF., CONVERTED TO HOUSING.
 mandatory retirement age of 65. This was a market that was
growing, that was attractive, and that we thought we could add
innovation to. This is a typical 3M approach, and it is what 3M
is very, very good at.
In August 2010, 3M announced the $230million acquisition
of Tel Aviv-based Attenti Holdings SA. Founded by three former
Israeli Air Force pilots, the company was one of the worlds
largest manufacturers of GPS trackers; its devices were used in
Israel, the U.S., and several other countries, including Australia,
Singapore, and Sweden. This acquisition will posi-
tion our track-and-trace business as a leader in the
high growth electronic offender monitoring market,
3M said in a news release announcing the deal.
On an investor call two months later, a stock
analyst questioned Buckley on how exactly Attenti
fit into the DNA of 3M, saying the newly acquired
company seemed far from the material science-
related companies that have been the core strength
and bailiwick of 3M. Buckley reminded the analyst
of his track-and-trace philosophy. You might
remember that we got that library equipment busi-
ness that tracks library books, he said. This is kind of in a way a unable to connect viola-
lateral extension of thatinstead of tracking a book, youre track- tions, as the state probation
ing a person. So theyre not that different as you might think. office calls them, became so
Except they were.
In 2011 the California Department of Corrections and
Rehabilitation began conducting a series of field tests on 3Ms
devices as part of a search for a single contractor to electronically
monitor 8,000 parolees. Even though 3M came in as the lowest
bidder, at $23.2million, corrections officials notified the company
48 that it lost the bid due to its GPS equipment failing to meet state, but the number of alerts in Massachusetts has far
state requirements, according to court records. Among other
things, the state found that the device too often failed to obtain
a GPS signal, was unable to map offender locations accurately,
frequently ran out of battery power, and was easily manipulated
by wrapping the device in foil. 3M sued, saying the awarding of
the contract to Houston-based Satellite Tracking of People
in allactive GPS-trackers being shut off simultaneously.
But nowhere have the deficiencies of 3Ms monitors been as
acute as in Massachusetts. One of the most serious flaws with
the 3M device, according to numerous law enforcement officials
and attorneys, was that it was originally designed to work only
on T-Mobile and AT&T 2G networks, and it became even less
reliable as carriers upgraded their networks to 3G. Because it
wasnt designed to work with Verizons network, offenders were
left wearing a state-sanctioned monitoring anklet that couldnt
communicate on the network
FIG. 6
of one of Massachusetts
largest and most effective
wireless providers. If an
offenders device was unable
to connect to a network, that
would trigger an alert. These
1998
Pro Tech Monitoring
becomes an early
user of GPS for
offender monitoring.
numerous that it became dif-
ficult for authorities to deter-
mine whether an offenders device was simply being booted
off the cell network, or the offender was interfering with
the signal to avoid detection.
The sheer amount of data generated by GPS-tracking
devices creates problems across the industry and in every
exceeded the norm, experts say. Documents reviewed by
Bloomberg show that in the 12 months ended in October
2015, 3M bracelets produced 612,492 violation alerts in
Massachusettsmore than 50,000per month, from about
2,800 individuals wearing the devices. Almost 40 percent
of the alerts were due to a device

1994
The U.S. militarys
LLC, known as STOP, FIG. 5 GPS system not being able to connect to the network
was illegal. After more is completed. or the GPS not being detected. Roughly
than two years of litiga- The government affirms 1percent of alerts resulted in an arrest
tion, the parties reached that it will be warrant being issued. Tom Pasquarello,
available for
a settlement. The terms former director of the electronic moni-
commercial use.
havent been disclosed. toring program for Massachusetts, esti-
In 2014, 3M won a mates that half those warrants were
contract in New Zealand potentially based on faulty or incomplete data. That would be FROM TOP: SCOTT KEELER/TAMPA BAY TIMES/ZUMA PRESS; COURTESY NASA

worth a reported
$80 million. Within a year
dozens of offenders had
been able to cut off the devices, including some who went on
to commit serious crimes. After 3M replaced the straps with
supposedly stronger ones, a man cut through a new strap with
scissors on a TV news broadcast. New Zealands prime minister
called the situation ludicrous. 3M says the companys brace-
lets are designed to be cut off in emergencies.
In Germany, a report co-funded by the Criminal Justice
Programme of the European Union concluded that the
3Msoftware used for the countrys electronic monitoring
devices was too inaccurate and resulted in false alarms
or false zone transgressions. The report also found that in
2014, a firmware installation error on behalf of 3M resulted
roughly 3,000 warrants. There were people that were pulled
from their house in the middle of the night, that lost their kids,
people that lost their job, he says.
The problem of glitchy ankle monitors became so pronounced
that the Massachusetts probation department set up an after-
hours office in the lobby of a Boston police station so offend-
ers could bring in their bracelets when problems occurred or
batteries died. In August 2015, Massachusetts Superior Court
Judge Heidi Brieger became so frustrated with the devices that
she vowed to stop sentencing anybody to them. It is simply
administratively improper to run a system in this fashion, she
said, according to a court transcript. We dont lose liberty in
this country because somebodys software is not working. It
just isnt right.
Last May, nearly six years after entering the business,

FIG. 5: GPS SATELLITE ARRAY. FIG. 6: PRO TECH MONITORINGS DATA CENTER IN PALM HARBOR, FLA. FIG. 7: THE BUDDI US ANKLE MONITOR
 multiple calls a night from probation officers because the unit
would lose its signal, she says. At around 2 a.m. on March4,
Nelson answered a knock at the door and found two police
officers. They said, We have a warrant for Tylers arrest,
she recalls. The officers woke her son, handcuffed him, and
booked him into the Ash Street Jail in New Bedford. The
THERE WERE PEOPLE state of Massachusetts says an alert was generated because
Holdsworth had earlier entered an exclusion zone.
The next day he was found hanging in his cell. I believe
that killed my son, Nelson says. Everything the bracelet
THAT WERE PULLED FROM THEIR
put him through.

The electronic monitoring business has proved perilous

HOUSE IN THE MIDDLE even for companies with deep roots in corrections. Many
of the bracelets on the market can be slipped off without
detection. Some offenders will risk triggering an alert by
cutting it off, or theyll wrap it in aluminum foil to mask
OF THE NIGHT, THAT LOST THEIR the GPS signal. Hackers can spoof a monitoring device
cause it to report that the wearer is one place when he or
she is actually somewhere else. But the most vexing issue
is the unmanageable number of alerts. Officers dont want
KIDS, THAT LOST THEIR JOB
to be too lax in responding to them, because any given
alert might be the signal that the offender is committing a
crime. But they dont want to respond so frequently that it
becomes a nuisance to the offender or a civil liberties vio-
lation. Theres also the concern that the sheer volume of
alerts emboldens criminals, who might know that author-
3M began rolling out a new ankle monitor, the ities struggle to distinguish meaningful alerts
Tracking Device4, or TD-4. Its designed to be from noise.
compatible with multiple cellular networks, 2010 Many of the most innovative attempts to
including Verizons, and has better battery life 3M enters the business. improve location accuracy and bring down the
and improved location accuracy. 3Ms Eby says the frequency of violation alerts come from smaller 49
company moved as quickly as it could. Virtually companies. Buddi US LLC, run by Steve Chapin,
everything we make, we have a reputation for
the highest quality and always standing behind
our products, he says. It also means, unfor-
200k
people worldwide have
who was the CEO of Pro Tech when 3M bought the
company and stayed with 3Ms electronic moni-
toring division for two years, sells a bracelet that
tunately, we test, test, double-test, triple-test worn 3M ankle bracelets. remains charged for as long as five days and in
before it goes out the door. The product rollout some instances can track the wearer underground.
in Massachusetts was completed in December; Buddi recently signed a contract with the govern-
the state says 91 percent of the units in the field are TD-4s. ment of Colombia. Other companies have started using cell
Probation Commissioner Edward Dolan says hes pleased phones as a GPS-tracking platform, combined with Bluetooth,
with the new product. Before the upgrade, he says, I remote video, biometrics, or voice recognition to verify a per-
couldnt distinguish whether an unable-to-connect was sons identity and location.
you affirmatively doing something to disrupt the signal, or Eby says its one thing to develop a whiz-bang new tech-
it really was a signal issue. Now unable-to- nology and another to scale it, sell it to a
connect is a nonissue, and only every once government agency, and place it on thou-
in a while we have one. The agency says FIG. 7 sands of people who want no part of it. If
unable-to-connect alerts have fallen to less the standard is you only want to use technol-
than 2 percent of all alerts and resulted in ogy that has no limitations in terms of cellu-
only eight arrest warrants in February. lar connectivity and GPS, youre not going
And yet Tyler J. Holdsworth was wearing to be able to have electronic monitoring at
a 3M bracelet when he died. Holdsworth, all, he says. Theres not a technology that
whod been a student at Franklin Pierce will always stay connected to cell networks
University, was ordered by the Massachusetts and will never have a GPS problem.
Superior Court in 2015 to wear a 3M ankle 2017 Other people say that doesnt sound
monitor until he could face trial for rape like a great American innovator talking,
Monitoring companies
charges. (He denied the charges.) He encoun- not with stakes this high. Every business
now incorporate
tered constant technical malfunctions, including Bluetooth, remote video, has hiccups, says George Drake, a former
at least one that resulted in him being jailed. He biometrics, and voice corrections officer and president of consult-
had to walk around the neighborhood for three recognition to verify a ing firm Correct Tech LLC in Albuquerque.
hours because they couldnt locate him, recalls his persons identity But when it happens with an offender-track-
COURTESY BUDDI

and location. Buddi US

mother, Cynthia Nelson, of South Dartmouth, Mass. has a bracelet
ing company, the consequences are magnified.
He quit a warehouse job because the monitor that can track in some If these people were making shoes, it wouldnt
couldnt locate him inside, and he often received subway stations. have made a difference to anybody. 
DANGER
By Paul M. Barrett
 THE F-35 FIGHTER JET HAS
SENSORS THAT SEE ENEMIES
OVER THE HORIZON, A
VR-STYLE HELMET FOR ITS
, AND DONALD TRUMPS
ULL ATTENTION. IT ALSO

ZONE
MIGHT BE A TRILLION-
DOLLAR MISTAKE
 pointy-beaked F-35B Lightning II idles
noisily on a runway at Naval Air Station
Patuxent River in southern Maryland.
Suddenly the plane roars to life and sprints
a mere 300 feet before abruptly lifting off
and soaring into a cloudless, late-winter sky
over Chesapeake Bay. A while later it zooms
back into view, slows to a hover over the runway
like a helicopter, then drops straight down to the
concrete, where it lands with a gentle bounce.
A U.S. Marine Corps test pilot is manning the
controls. If he were Air Force or Navy, his version
of the militarys highly anticipated new fighter jet
wouldnt have this capacity to take off and land on a dime
though it would come with other custom features. This is why
Air Force Lieutenant General Christopher Bogdan, whos in
charge of overseeing the acquisition of the F-35, brought three
plastic models of the fighter jet to a December 2016 meeting
with Donald Trump at his Florida residence.
Bogdan, a tall former test pilot who speaks in a raspy, author-
itative voice, has been working with Lockheed Martin Corp., the
planes manufacturer and the countrys largest defense con-
tractor, since 2012. Nine days before their meeting, Trump had
called Bogdans program out of control in a tweet, so the three-
star general knew that at Mar-a-Lago, the president-elect would
put him on the spot. But what he didnt anticipate was Trumps
eagerness to demonstrate his own knowledge of aviation. Trump
talked with pride about his personal Boeing 757, Bogdan says.
Anything about airplanes, hes excited about, and he told me
that the first time we met.
Amid the gold-inlaid, high-ceilinged splendor of the Jazz Age
52 chteau in Palm Beach, Bogdan explained the F-35s advanced
sensor system and stealth capability. Trump listened respect-
fully, but the next day he was back on Twitter, complaining about
the planes tremendous cost and cost overruns. To Bogdans off and land conventionally, and the Navy F-35C, designed for
continued surprise, in the days before the inauguration, Trump
twice telephoned the general at his office in an austere Pentagon
annex in Arlington, Va. He wanted to discuss the allegations
hed heard that the F-35s performance fell short of existing
fighters. Bogdan hastened to reassure Trump that those claims
were myths, misinformation, or old informationnone of Japan, and South Koreathat have lined up to buy it.
them worth believing.
On Jan. 30, his 10th day as president, Trump markedly
changed his tone. He took credit for knocking $600 million off
the price of the latest batch of 90 fighters and told reporters
the F-35 was a great plane. Since then, hes made the F-35 an
emblem of his dealmaking prowess. During his Feb. 28 address
to a joint session of Congress, the president boasted hed saved
taxpayers hundreds of millions of dollars by bringing down the
price of the fantastic new F-35 jet fighter.
In truth, thanks to Bogdans negotiations with Lockheed,
prices were going to fall with or without Trumps intervention.
And the plane, discounts notwithstanding, is still on its way
to becoming the priciest military procurement in U.S. history.
Trumps self- congratulation serves as a distraction from the
larger issue troubling the fighter jet: its performance. While
the Pentagons official line is that, after years of difficulties, the
F-35 is meeting high expectations, skeptics both outside and
within the military say its turning out to be a two-decades-in-
the-making, trillion-dollar mistake.
The ambition to create the version of the F-35 that I watched
on the tarmac at Patuxent Riverone that can make short
takeoffs and vertical landingswas what got the fighter jets
development under way
in the 1980s. The Defense
Ad v a n c e d Re s e a r c h
Projects Agency (Darpa),
the Pentagons tech arm,
began working at the
Marine Corps behest on
an improved version of
the Harrier, a crash-prone
vertical-landing jet of
British design. According Lockheed CEO Hewson
to a Pentagon history of
the F-35, Darpa quietly sought assistance from a research and
development arm of Lockheed Martin known as the Skunk
Works. By the early 1990s, the Darpa-Skunk Works collabora-
tion had produced preliminary concepts, and the Marine Corps
began pressing Congress for funding. The Air Force and Navy
PREVIOUS SPREAD: COURTESY U.S. AIR FORCE; THIS SPREAD: COURTESY LOCKHEED MARTIN; ILLUSTRATION BY 731
insisted that they, too, needed stealthy, supersonic fighters to
replace aging Cold War-era models. Out of this clamoring grew
a consensus that the only way to afford thousands of cutting-
edge fighters was to build a basic model that could be custom-
ized for each service. In terms of future tactical aircraft, this
was the program, says Frank Kendall, a senior Pentagon acqui-
sition official during the Clinton and Obama administrations.
There was no other program.
In 2001 the Pentagon declared Lockheed the winner of a
five-year competition against Boeing Co. for the opportunity
to build the F-35. At the time, the contract was estimated to
be worth $200 billion over three decades. Lockheed, which is
based in suburban Bethesda, Md., not far from the Capitol and
Pentagon, would assemble the plane in Fort Worth, in a mile-
long facility thats produced military aircraft since 1942. In addi-
tion to the Marine Corps F-35B vertical-landing jet, Lockheed
agreed to manufacture the Air Force F-35A, which would take
aircraft carriers, with larger, foldable wings, more durable
landing gear, and a tailhook.
Not only was the F-35 going to offer a 3-in-1 cost savings for
the U.S. military, the plane was supposed to help knit together
the air forces of 11 American alliesincluding Britain, Israel,
But this one-size-fits-all promise quickly led to problems.
For the F-35B, the Marine Corps variant, Lockheed incorpo-
rated a novel propulsion system with a 50-inch-diameter lift
fan positioned horizontally just behind the cockpit. When the
plane goes into vertical mode, doors on the fuselage open, allow-
ing the fan to draw in air from above and blow it toward the
ground. Simultaneously, the planes main
engine in the rear swivels 90 degrees
to expel its exhaust downward. The
combined force of fan and engine
allows the plane to hover.
The lift fan made the common fuselage bulkier
than it otherwise would have been. That, in turn,
increased drag and decreased fuel efficiency and
range. Lockheed engineers also discovered they had to slim
the F-35B by thousands of pounds to make it light enough to
hover. The degree of commonality among the three versions of
the F-35the shared featuresturned out to be not the antici-
pated 70 percent but a mere 25 percent, meaning that hoped-for
economies of scale never materialized. A pattern of continual
reengineering resulted in billions of dollars in cost overruns
and yearslong delays.
Beginning in 2007, the Pentagon accepted delivery of scores
of planes, even as Lockheed continued to make design changes
and address myriad deficiencies. The military didnt follow the
old rule of fly before you buy, says Michael Sullivan, director of
defense acquisition oversight for the Government Accountability
Office, the auditing arm of Congress. Once new weapons are
in the hands of the military services, says Kendall, the former
Pentagon acquisition official, theres a lot of inertia to continue,
no matter what. Michael Rein, a Lockheed spokesman, declines
to comment on what he calls the ancient history of this period.
The arrival of the Obama administration in 2009 brought
new scrutiny to the F-35 program. Ashton Carter, a physicist and
former Harvard professor of science and international affairs,
took over as the Pentagons chief weapons buyer, known for-
mally as undersecretary of defense for acquisition, technology,
and logistics. (He went on to serve as secretary of defense in
2015 and 2016.) The dysfunction startled Carter. What was sup-
posed to have been an economical plane at $50 million apiece
had doubled in price, he recalled in a talk at Harvard in 2014.
Part of the problem stemmed from a policy instituted in the
mid-1990s aimed at reducing red tape. This was a notion of
trying to skinny down the acquisition bureaucracy, says retired
General Norton Schwartz, who served as Air Force chief of staff
from 2008 to 2012. In doing so, we regrettably lost much of the
systems engineering ability that existed in-house.
The cost plus contracts the Pentagon signed with Lockheed
HOW THE F-35B
LANDS VERTICALLY
Doors open to draw
air into the lift fan
Relatively small wings
cut down on weight to
ease landing
The engine nozzle turns
down 90 degrees to
allow the plane to hover
and descend
only exacerbated the situation. The company received all its costs
and was eligible for a performance-based bonus on top of that.
Despite the programs disarray, the military consistently awarded
Lockheed 85 percent of its potential fee. In his Harvard talk,
Carter described confronting the Pentagon program manager,
a Marine Corps major general named David Heinz: He looked
me in the eyeIll never forget itand he said, I like the program
manager on the Lockheed Martin side that I work with, and he
tells me if he gets less than 85 percent, hes going to get fired.
Instead, it was Heinz who was fired, in 2010. Carter switched
the Lockheed contract to a fixed-price arrangement under
which the government and contractor split the cost of over-
runs. Carter declines to comment for this article, but con-
firms his earlier account. (Heinz, now chief executive officer
of IBC Advanced Alloys Corp., an Indiana-based company that
supplies Lockheed with the housing for one of the F-35s tar-
geting systems, also declines to comment, as does Rein, the
Lockheed spokesman.)
With the program about seven years behind schedule, the
Pentagon estimates it will spend $379 billion over 40 years
to develop and acquire more than 2,440 of the warplanes.
Adjusting for inflation, thats a 38 percent increase from the
initial 2001 estimate. Add more than $600 billion for upkeep,
and the total price tag approaches $1 trillion. But the aircraft
has already paid off for Lockheed. Having delivered 210 F-35s
so farmostly to the Pentagon, but also to Israel and other priv-
ileged U.S. friendsthe company is expected to derive more
than 20 percent of its revenue in 2017 from the jet.
For all its stumbles, the planes geographic and political heft
make it too big to fail. The three versions of the plane require a
total of some 300,000 parts, and Lockheed has parceled out the 53
subcontracting to all but five unlucky statesAlaska, Hawaii,
Louisiana, North Dakota, and Wyoming. Lockheed says the
F-35 directly or indirectly supports 146,000 jobs across the
U.S., ranging from minimum wage broom-pushers to engi-
neers paid well into six figures.
Consider Arizona. In December 2011, Republican John
McCain, the states senior U.S. senator and chairman of
the Armed Services Committee, went to the Senate
floor to declare that the F-35 program has been
both a scandal and a tragedy. But less than a
year later, the lawmaker, himself a former Navy
pilot shot down over Vietnam, sounded molli-
fied. The Marine Corps had decided to base a
squadron of 16 early-production
F-35Bs in Yuma, Ariz.
Joining Lockheed exec-
utives and Marine Corps
officers, McCain said at a ded-
ication ceremony: I amafter many
years of frustration and setbacksencouraged that
the overall program is moving in the right direction.
The F-35, he added, may be the greatest combat aircraft
in the history of the world. In addition to maintenance
jobs at the Yuma base, the plane provides work for 24 sub-
contractors in Arizona, supporting a total of 4,620 jobs,
according to Lockheed.
Across the country in Vermont, the independent Senator
Bernie Sanders has disparaged the F-35 in the Burlington
Free Press as an example of the Pentagons long record of
purchasing weapons systems from defense contractors with
massive cost overruns that have wasted hundreds of
billions of taxpayer dollars. Nevertheless, Sanders has
 endorsed the idea of bringing 18 of the fighters to Burlington
International Airport in 2019 to replace a squadron of aging F-16s
flown by the Vermont Air National Guard. In the face of local oppo-
sition to noise and other environmental objections, Sanders said
at a town hall meeting in 2014: My view is that given the reality
of the damn plane, Id rather it come to Vermont than to South
Carolina. And thats what the Vermont National Guard wants, and
that means hundreds of jobs in my city. Thats it.
Lockheed says the jobs total in Vermont will exceed 1,400.
South Carolina wont lose out: Theres a squadron of F-35s sta-
tioned at the Marine Corps air base in Beaufort. There are also
detachments in California, Florida, Maryland, Nevada, and Utah.
Since Lieutenant General Bogdan took over the F-35 acquisi-
tion program five years ago, by all accounts hes kept it from
going further off the rails. A blunt, informal officer who leads
a 2,000-person bureaucracy devoted exclusively to the F-35,
Bogdan wears an olive one-piece flight suit to his office in sub-
urban Virginia. He explains that the F-35s stealthy profile and
matte finish are designed to allow it to succeed against foes with
sophisticated radar and surface-to-air missilesthe Chinese or
Russians, for example. Youre the guy whos going to knock
down the door by going very deep into enemy territory, survive,
and go against the very toughest threats, Bogdan says. When
in stealth mode, the F-35 carries only two bombs and two air-
to-air missiles in an internal weapons bay. But once the oppo-
sitions defenses are eliminated, the plane can be outfitted
with six additional weapons, three beneath each wing. I can
go and wreak a lot of havoc, Bogdan says.
He points to a three-week aerial exercise in February called
Red Flag, which pitted dozens of U.S. warplanes against one
54 another in mock battle over the Nevada desert. The F-35s, the
stars of the show, recorded a 20-to-1 kill ratio, meaning they
took out 20 opposing planes for each one they lost. And they
dropped 51 practice bombs, with 49 direct hitsa level of accu-
racy Bogdan calls incredible. Other military leaders share
his enthusiasm. We cant get into those aircraft fast enough,
Lieutenant General Jon Davis, the Marine Corps aviation chief,
told a House Armed Services subcommittee in mid-February.
We have a game changer, a war winner, on our hands.
The F-35, in one of its most futuristic advancements, proj-
ects flight dataairspeed, altitude, heading, potential targets,
and warningsonto the curved visor of the pilots helmet. Its
almost a virtual-reality experience, pushing the skills of even
todays Xbox-weaned twentysomethings. Six infrared cameras
mounted on the exterior stream real-time imagery, allowing the
pilot to see through the skin of the plane, including straight
down. In a process called sensor fusion, the main onboard
computer can meld data from the exterior cameras, the planes
powerful radar, and an electro-optical targeting system. Its
always looking in every direction, says Major John Dirk, a Marine
Corps test pilot. The visors profusion of images and information
takes getting used to, he adds, but I can see threats I wouldnt
have been able to see before.
Some experts warn that test flights and mock battles are differ-
ent from the real thingand that the militarys enthusiasm should
be viewed skeptically. Its groupthink, says Pierre Sprey, who
worked at the Pentagon during the Vietnam War. He belonged
to a clique of aeronautical designers and engineers who called
themselves the fighter mafia and helped design two respected
aircraft: the F-16 Fighting Falcon, a maneuverable specialist at
air-to-air duels, and the heavily armored A-10 Thunderbolt II,
better known as the Warthog, which supports ground troops
by flying low and slow, strafing the enemy with a seven-barrel
Bogdan at Nellis AFB in Nevada in 2015
30-millimeter Gatling-type autocannon. The F-16 and A-10 each
do one thing well, Sprey says.
The Marine Corps obsession with short takeoff and verti-
cal landing, he says, led to F-35 attributes that limit the planes
maneuverabilitythe stout fuselage, which increases drag, and
small wings, which cut weight but reduce the amount of lift the
plane can generate. If F-35s face the best Chinese or Russian
fighters, they will be lucky if they can turn and run, he adds.
One could question Spreys objectivity, given that the F-35 is
intended to put his creations, the F-16 and A-10, into retirement.
Not so J. Michael Gilmore, who served from 2009 to January
2017 as the Pentagons director for operational test and evalu-
ationthe militarys chief weapons tester. Gilmore, who has a
Ph.D. in nuclear engineering, warned in a memorandum to the
Air Force last August that the F-35 will need support from other
planes to locate and avoid modern threats, acquire targets, and
engage formations of enemy fighter aircraft due to outstanding
performance deficiencies. According to Gilmore, the sensor-
fusion system fails to display some potential threats clearly, and
the planes electronic warfare capabilitya reference to classi-
fied radar-jamming weaponsis weak.
In a separate 2016 annual report released in January, Gilmore
addressed the F-35s protection of soldiers on the ground,
saying the plane does not yet demonstrate close air support
capabilities equivalent to those of the A-10 and other older air-
craft. He cited the F-35s limited weapons load while in stealth
mode. The F-35 burns fuel fast, making it difficult for the jet
to circle above a battlefield for long, Gilmore wrote. And he
pointed out that test pilots arent unanimously enthusiastic
about all aspects of the newfangled helmet. Symbol clutter,
he wrote, obscures the visor representation of air-to-ground
strafing, making that function unusable.
Perhaps most troubling are the complexities of the auto-
nomic logistics information system (ALIS), which hooks up to
the plane in the hangar and provides the information technol-
ogy backbone for maintenance of each aircraft. ALIS requires
16 million lines of code, compared with 8 million for the F-35
itself. When ALIS malfunctions, which it does somewhat regu-
larly, maintainers have to use time-consuming workarounds,
Gilmore said. Last April the GAO pointed out that all F-35 data
from across the U.S. fleet are routed to a central point of entry
and then to ALISs main operating unit with no backup system
or redundancy. If either of these fail, it could take the entire
F-35 fleet offline, threatening to ground the planes.
 Lockheeds Rein declines to comment on Spreys assessment.
As for Gilmores critique, the Lockheed spokesman refers to a
Jan. 17, 2017, written statement by Bogdan. The basic design of
the F-35 is sound, it said, but we recognize there are known
deficiencies that must be corrected.
This plane has a long way to go before its combat-ready,
says Dan Grazier, a defense analyst at the nonprofit Project on
Government Oversight in Washington. Given how long its been
in development, you have to wonder whether itll ever be ready.
In an interview, Bogdan responds to criticism of the F-35 with
equanimity. He stands by the overall reassurance he offered
President Trump but concedes the plane has kinks to be worked
out. ALIS, he says, is nowhere near as good as it should be,
and upgrades are under way, including building in the kind of
redundancy the GAO noted is absent. Meanwhile, he acknowl-
edges, F-35 maintenance personnel do have to do a lot of work-
arounds. Bogdan also worries that ALIS could be hacked. The
planes themselves have been well-secured against cyberattack,
he says, but ALIS connects to other government networks that
are potentially vulnerable. This isnt an abstract concern. A
Chinese businessman pleaded guilty last year in the U.S. to par-
ticipating in a conspiracy with hackers from the Chinese mil-
itary who prosecutors said stole plans for the F-35 and other
American warplanes. Beyond ALIS, Bogdan says the other sensor
and software glitches Gilmore and the GAO identified are being
addressed and will soon be fixed.
The knock on the F-35 that its not maneuverable obscures
a basic point about contemporary aerial warfare, Bogdan says:
Up-close dogfighting is a thing of the past. This airplane is
very maneuverable, he insists, but it doesnt have to be to
kill another airplane air-to-air. Its sensors can identify a foe
long before the two pilots can see each otherand fire a missile
with deadly accuracy at that distance,
Bogdan says.
By contrast, close air support of
ground troops presents a tricky
question, he says. The F-35 doesnt
have all the capabilities it needs yet.
One feature that will be added to new
planesand retrofitted on older onesis
the equivalent of a laser pointer for tracking g
moving targets. Currently the F-35 has a surprisiing
weakness in its inability to zero in on swift-movingi g
enemy vehicles, Bogdan says. Only F-35As hav ve inter--
nally mounted 25mm guns for ground strafing g; in the
future, similar weapons will be added in ext xternally y
mounted belly pods on Bs and Cs. When peop oplee are
complaining about close air capability of the F-35, he
says, theyre looking at what it can do today, and what it can
FROM LEFT: COURTESY U.S. AIR FORCE (2); COURTESY U.S. AIR NATIONAL GUARD
do today is limited. What it can do tomorrow is going to be very,
very good. But not as good, he admits, as what the venerable
A-10 already can do. We designed the F-35 to be a decathlete,
he explains: versatile and adaptable, if not necessarily a medal
winner in any one event.
Grazier frames this another way: You have a plane that at
best is a jack of all trades, master of none.
On Feb. 3 the White House announced an $8.2 billion contract
with Lockheed for 90 F-35s, the latest and largest batch yet. Based
on a per-plane cost for the F-35A of less than $100 million, the
deal trimmed $728 million from the last purchase. That savings
exceeded the $600 million Trump took credit for after interven-
ing with Lockheed CEO Marillyn Hewson.
Since late last year, Hewson has met with Trump at
Mar-a-Lago, Trump Tower in New York, and the White House.
But long before Trump began meeting, tweeting, or calling
Bogdan about the plane, negotiations between the Pentagon
and Lockheed were pointing to a significant volume discount.
Bogdan told reporters in December that the contract would be
valued at about $8 billion overall and that per-plane costs would
decreaseboth of which happened.
The president has balanced his praise for the plane with the
admonition that Lockheed shouldnt get too comfortable. Hes
warned that hed consider substituting some F-35 purchases with
Boeing F/A-18 Super Hornets. During a Feb. 17 tour of a Boeing
plant in South Carolina, he said, We are seriously looking at
a big order of F/A-18s. Lockheeds rival as the second-biggest
U.S. weapons contractor, Boeing has naturally tried to encour-
age Trumps interest in the Super Hornet. Were excited to
work with the new administration to bring the right capability
to the war fighter, says Dan Gillian, who heads the companys
fighter jet program. First flown in the 1990s, the twin-engine
F/A-18 has seen action over Iraq and Afghanistan. Its not really
comparable to the F-35. The Super Hornet, which is designed
to fly off aircraft carriers, lacks the F-35s stealth characteris-
tics and its array of advanced sensors.
Still, the president wants Lockheed and the Pentagon to know
hes in touch with Boeings CEO, Dennis Muilenburg. When
Trump telephoned Bogdan for the second time, on Jan. 17,
Muilenburg was in Trumps New York office listening in by
speakerphone. Bogdan says he didnt think Muilenburgs pres-
ence was inappropriate: The things I talked about in front of
Mr. Muilenburg were clearly publicly releasable information. I
understand the rules. (In mid-March, Trump selected a senior
Boeing executive, Patrick Shanahan, to serve as the Pentagons
second-ranking official. If confirmed by the Senate, Shanahan 55
would have to recuse himself from Boeing-related
matters for two years.)
m
Formalizing Trumps fighter jet commentary,
Secretary
y of Defense James Mattis has
o
ordered a Pentagon review of
th
the exten nt to which the F/A-18
c ld prrovide a competitive,
could
ffective fighter aircraft
cost-effe
l
alternaative. But the review
doesnt constitute an
existential threat
to the F-35. Mattis
limited the F/A-18
comparison to the
The F-16 (left) and the A-10 Navys F-35C carrier-based
model. The Navy is scheduled to
receive only 260 of its version of the fighter, with the majority
of planes1,763slated for the Air Force.
Lockheeds Hewson has become something of a Trump foil.
At a Feb. 23 White House meeting with manufacturing CEOs,
the president complimented herand himself. Shes tough,
but it worked out well, I think, for everybody, he said of the
recently agreed-upon Lockheed contract. She cut her price
over $700 million, right? By over $700 million. Do you think
Hillary would have asked for $700 million?
Bogdan, whos announced he will retire in the coming
months, is already negotiating the next order of 130 F-35s. He
expects the total price to exceed $10 billion. Looking further
into the future, beyond the F-35, Lockheeds Skunk Works is
again collaborating with Darpa on what the companys website
heralds as next-generation planes that will maintain U.S. air
dominance capabilities in the post-2035 world. 
56
57
 or two days, the crowd sits in darkness in
plush theater seats, watching the church
stage. There are smoke machines and LED
screens, harnessed climbers scaling a scaf-
fold mountain and raising their arms in sym-
bolic victory over the startup worlds arduous
climb. Theres talk of destiny-defining exits.
Of Jesus and his disciples: The most success-
ful startup in history! Of the parable of the talents, in which
two servants are lauded by their master for turning a profit
with money he staked them: The first recorded instance of
venture capital and investment banking in history! Of ancient
business elites: A church is the oldest marketplace in the
history of the world. Of the promised land of angel invest-
ing, where divinely inspired entrepreneurs dwell: Because
God creates things, too! Mark Burnett, the producer of The
Apprentice and Shark Tank, shows up to remind everyone
that the Bible is full of merchants and people doing work.
At last, near the end of Unpolished 2015, a faith and entre-
preneurship conference hosted by Crossroads, an evangelical
church in Cincinnati, the marquee event begins: the final round
of a pitch contest. Organizers have selected three prospective
company founders out of more than 100 entrants, each of
whom submitted a minute-long video pitch deck. One of the
finalists, Lyden Foust, a 25-year-old ethnographer, presents
his entry on the LED screens flanking the church stage. With
his chiseled jawline, tightly trimmed beard, and three-button
henley, he looks like an L.L. Bean model, save perhaps for his
rectangular glasses. In a voice-over, he describes his vision
to divide the worlds cities by vibe, calling his idea Google waist-high stage, people mingle, hugging and holding hands.
Maps wearing a mood ring. The cityscape of Nashville rolls
58 past, overlaid in swaths of color: blue for blue-collar neighbor-
hoods, brown for yuppie ones, green for hipster, purple for
commercial, teal for family, yellow for artsy.
Th accelerator
The l and,
d across the
h street, the
h church
h h
Every successful pitch deck, like every successful religion,
includes an origin story, and Fousts is no different. He recounts
booking a place in Nashville through Airbnb Inc., only to find
the house situated between a strip club and a manufacturing
plant. While retrieving something from his car, he turned to see
a man pointing a gun at his face. I just handed him my wallet,
Foust says. The robbery led to an epiphany: Why not mine
social data to tell people what a neighborhood is really like?
The idea isnt entirely new: An app that launched in 2014
with a similar aim (albeit a different crowd-sourcing method-
ology), SketchFactor, foundered after being widely criticized
for appearing to help white people avoid black neighborhoods.
But at this point, Fousts product is pure concept. He has no
employees to build it, only a name, Spatial. The other final-
ists pitch a family-run app-development company and a board-
game-rental app; then the judging is turned over to the audience
of 1,200 aspiring entrepreneurs. Fousts idea prevails, and Brian
Tome, Crossroads senior pastor, hands him an oversize check
for $3,000. Soon after, Foust will begin the next stage of the
churchs path to entrepreneurial success, applying for a spot
in a member-funded, Bible-based accelerator program, begin-
ning in a few months, thats designed to train startups in how
to raise money and grow.
Finally, the house lights come up. At the end of the aisles,
attendants await, holding pails overflowing with packets of
apple seeds. Gods placed a seed in you. And he wants to see
it come to fruitfulness, Tome says to the crowd, his spiked and
styled dirty-blond hair and untucked plaid shirt lending him
the air of an aging film star. Bowing his head, he prays, asking
God to lead everyone to the right seed that will bring forth
the right fruit at the right time in every business.
Its a remarkable altar call: Those who feel inspired are to
take these seeds from the attendants and go forth, claiming
their spiritual destiniesas entrepreneurs. At the edge of the
Others bow their head or kneel under the outstretched hands
of strangers to receive prayer. Foust joins them, walking down
the aisle and asking for blessings and prayers at the start of his
entrepreneurship journey.
amed the fastest-growing
church in America in
2015, Crossroads has
been described by the
Cincinnati Business
Courier as both an entre-
preneurial church and
a church for entrepre-
neurs. Indeed, it was originally a startupor more
accurately an unofficial spinoff from Procter &
Gamble Co., the $65 billion conglomerate based
downtown, a few freeway exits south of the main
church. In 1990, Brian Wells, a brand manager
for Clearasil, started a singles Bible study with a
P&G power couple, Vivienne Lee Bechtold, then a
brand manager in beauty care, and Jim Bechtold,
a marketing executive. The group, which met at
the Bechtolds home, quickly grew to more than
100 people. Eventually the singles started marry-
ing and having children, and Jim Bechtold asked
Wells one morning, while the two carpooled to
work, whether it made sense to start a church.
Over the next few months, a core of 11 people,
some of whom had helped build billion-dollar
consumer brands, reimagined church as one might expect P&G
executives to do. (The company more or less invented brand
management, and its been a prime breeding ground for business
talentMicrosoft ex-CEO Steve Ballmer, Intuits Scott Cook, HPs
Meg Whitman, and GEs Jeffrey Immelt, among many others, are
 all P&G alumni.) They
gathered demographic
data on Cincinnatians
churchgoing habits,
with a focus on the
citys affluent east side,
which includes the
P&G enclave suburbs
of Hyde Park and
Oakley. They scoured
secular popular music
and TV comedies for
tips on how to keep
churchgoers atten-
tion. They settled
on a target demo-
graphic, 25- to 35-year-
old males, figuring that
if they could get the
guy, they would get
his wife. They wrote
brand positioning
statementsa church
C ss
Crossroads
ds S
Senior Pastor
s Tome for friends who dont
like church; a church
for people whove given up on church. Finally they built a slide
deck featuring a mix of data and Scripture and began raising
money from friends, family, and business connections.
In the spring of 1996, Tome led Crossroads first official
service, speaking before more than 450 people at a rented audi-
torium in a local junior high school. Five years later, its rolls
swelling, the church purchased a vacant big-box store, using
the homes of some senior leaders as collateral. Crossroads spent
millions converting the space into a 3,500-seat auditorium with
two balcony tiers and enough stage lights to rival a Broadway
theater. Today, the church has nine locations in the greater
Cincinnati area (with another opening soon), some 30,000 con-
gregants, an annual operating budget of $33 million, and a staff
of 274 people, many with ties to P&G.
Among the employees is a 75-person experience team, the
equivalent of an in-house advertising agency, whose branding
efforts encompass direct-marketing campaigns, in-church clicker
surveys, and customized stage sets aligned with sermon themes.
The church also has a labs divisionessentially a two-person
market-research team led by a corporate brand ethnographer.
Its eight satellite churches operate almost as franchises, all of
them mirroring the main branchs tailored signage and other
brand imagery. Congregants all watch the same sermons, which
are telecast from the main church to the satellites with a brief
delay. Crossroads is even in the mergers-and-acquisitions game,
having lately acquired (its officials prefer the term adopted) a
church in Lexington, Ky., with 2,500 members and four locations.
In recent years, Crossroads version of the prosperity gospel
has begun to borrow from Silicon Valleys. The church included
the pitch contest at Unpolished 2015, its inaugural entrepreneur-
ship conference, and that same year some of its members created
a for-profit angel-investment wing, Ocean Capital, and the non-
profit Ocean Accelerator Inc., whose mandate is to increase
Gods presence in the marketplace. Ocean Capitals first fund,
of $230,000, was seeded entirely by six Crossroads members.
Ocean Accelerator got an early boost from Crossroads
annual Beans & Rice Week, when congregants forgo regular
meals in favor of beans and rice, then donate the savings to
the church. Traditionally, the money goes mainly to fighting
the citys homelessness and heroin epidemics, but in 2015 the
church put $120,000 toward the accelerator, a significant share
of the programs operating expenses. Selected entrepreneurs
would embark on five-month residencies, and each startup
would receive $25,000 from Ocean Capital. (The amount rose
to $35,000 in 2016 and $50,000 in 2017.) Also included were
free office space and access to dozens of spiritual and business
mentors from the churchs membership rolls, a whos who of
Cincinnatisand Americascorporate elite.
ne rainy morning in February 2016, Foust
and founders from eight other start-
ups, some of them fellow Crossroads
members, are gathered before a white-
board for a talk called Developing
Intellectual Capital. The speaker is Todd
Henry, a longtime Crossroads member
and motivational guru who promotes
himself as an arms dealer of the creative revolution.
Ocean Accelerator is across the street from the Crossroads
headquarters, in a converted car dealership owned by the
church. Among the participants in the accelerators second
cohort are an app offering restaurant discounts, a social network
for sports fans, a recruiting tool matching employees with com-
panies according to cultural fit, a site connecting college athletes
with high school students for personal training, and an online
auction site for churches to sell used goods. Only one of the nine
startups is solely headed by a woman, whos from London. For
a few weeks now, each team has been attending daily spiritual
seminars and weekly Bible studies, working from long tables in
an open-air room. Theyre all preparing for Demo Day, a couple
of months hence, when theyll stand on the Crossroads stage 59
and give five-minute pitches to an audience of venture capital-
ists and angel investors.
With Foust at Ocean is Will Kiessling, a 35-year-old developer
who left a job writing software for jet-engine tests at General
Electric Co. to become a partner at Spatial (since formally
renamed Spatial Labs). The two met years earlier at events in the
citys startup scene but only really got to talking after bumping
into each other at church one Sunday. Not only did we have this
commonality of startups, Foust says, but we both loved Jesus.
Henry, dressed in a crisp white oxford and bluejeans, begins
his talk by asking how entrepreneurs might turn thoughts into
value. He cites Warren Buffett, who reportedly spends four
to five hours a day reading, as someone who wrests profits
from the market by analyzing whats going on in the world.
We have this ability, Henry says, to co-create new things,
to partner with God in transforming creation. He points out
that pattern recognition is crucial for a successful startup,
as is understanding what he terms the law of the harvest:
Many of us, especially as entrepreneurs, we live in perpet-
ual harvest mode, constantly trying to reap gain, and some of
that is because our investors are telling us, We want to see a
return, he says. The problem is when you are living in per-
petual harvest mode, you arent taking the time to go back
and plant seeds and cultivate seeds. He calls on the entrepre-
neurs to see God as the source of wisdom and Jesus as a bril-
liant thinker with a deep systematic understanding of life,
skilled in the practice of pattern recognition.
This message resonates with Fousts original concept for
Spatial, which was, in essence, to identify social media and
crime-data patterns to help people navigate like a local in
unknown cities. But as the accelerator unfolds over the next
three months, he runs into technical and ethical problems with
 that goal. Early iterations of the service more than 1,000 people. Hes wearing
compile a heat map of different areas jeans and a tight-fitting gray T-shirt
in cities, using crime data on specific emblazoned with the Spatial logothe
neighborhoods in addition to social data. company name in a sans-serif typeface,
The approach has clear racial impli- with the letters midsection blanked out
cations; not only are the sweeps of by a horizontal barto pitch to 30 poten-
color reminiscent of decades of redlin- tial investors.
ing in black neighborhoods, the data The LED screen behind him displays
might have integrated biases prevalent ominous, looping swirls of dark blue
on social media into Spatials mapping ocean waves behind the Ocean logo.
platform. After a few months, Foust The origin story he tells is familiar, but
and Kiessling drop crime data com- he explains how Spatials model has
pletely. People were talking about not evolved, describing its patent-pending
going to a certain part of a city because algorithm, Luminate, which he says
it looked like there was a lot of crime will create a layer of social data around
there. It made me realize thats not what cities, or a third dimension of maps.
I wanted people to do, Foust says. Among its possible markets, he says, are
More than the Bible, he credits Jane travel booking companies, who might
Jacobss classic book The Death and Life pay for click-thrus to vacation rentals
of Great American Cities for the insight. and other services. He suggests that
Invoking Jacobs, he cites three ques- Refreshments
s s at the main church Spatial could increase booking rates on
tions that best indicate neighborhood sites such as Airbnb and FlipKey, which
safety: Are there lights on the streets? Are there eyes on the he claims fail to turn 95 percent of their visitors into customers.
streets? And does the community know each other? None of Think of the millions they are leaving on the table, he says.
those things are in crime data. It wasnt solving the problem. In recent weeks, as Spatial has begun promoting its solu-
Instead, Foust concludes that people want something much tion, Foust tells the audience, 10 companies have started using
simpler: quick and decisive answers about where to go. They its data. These clients are mostly early stage startups, includ-
couldnt care less about, Is this an artsy area? It was less ing PoshPacker in Washington, D.C., a hotel-booking site that
about experience and more about Can you just get me to the targets people who want a hip and high-end-like travel expe-
right place, right now? rience. Foust displays screen shots of maps from PoshPackers
As the product takes shape and Foust prepares to move site: Areas popular with the LGBT community are highlighted
60 from the concept phase to fundraising, a more explicitly spir- in puffs of purple. Orange puffs represent foodie zones. Foust
itual question begins to nag at him: How do you raise money says PoshPacker has doubled its conversion rate since deploy-
like Jesus? Foust has attended Crossroads for five years, but ing the Luminate algorithm (though the company will later go
his evangelical faith began when he was a child growing up in out of business). The day of static maps is over, he concludes.
a devout household on a tree farm in Paris, a town in north- The others go through their pitches, and afterward every-
east Ohio. Hes heard from other entrepreneurs how brutal one gathers in another cavernous auditorium to drink craft
fundraising can be. Youre going to have to sell your soul, beer with the investors. By design, no startup talks terms on
they warn. Youre going to have to lie. Demo Day, says Scott Weiss, a retired corporate chief execu-
To forestall this, he starts a reading group with five other tive officer who serves as Ocean Accelerators volunteer CEO
founders. The book they choose is secular: Venture Deals: Be and chairman. Our core approach is developing the capa-
Smarter Than Your Lawyer and Venture Capitalist, by Brad Feld bility and training them to raise money, he says. But, Weiss
and Jason Mendelson. For five weeks, every Friday afternoon, adds, If you are a Christian and you want to produce in your
the participants meet, discussing term sheets and the ins and faith, Ocean teaches you how to raise money in a Christian
outs of investor control over startups. The book demystifies way and that theres got to be an ethical standard to doing
the process for the group, but it doesnt help with the concern that. We teach them to pick your investors with care and
about integrity. After a few sessions, Foust decides that Jesus to be very careful, because you are going to be married a
first words in the New Testament, from Mark 1:15, best address very long time.
his fears: The time has come, Jesus says. The kingdom
of God has come near. Repent and believe the good news! or Crossroads, embracing the gospel of
In the verse, Jesus has just been baptized, and hes emerging Silicon Valley isnt solely about money; its
from the desert to begin his ministry. Describing the passage also about bringing the next generation into
later, Foust invokes the Greek translation, interpreting time the church. Ocean Accelerator offers a way to
not as chronos, chronological time, but as kairos, the right reckon with two converging trends: growing
or opportune moment. The word for repent, he continues, anxiety about jobs and a decline in church
means to turn away from or to change ones mind. The attendance among young people. Up until
etymology leads him to a decidedly contemporary exegesis of the millennial generation, there was inherent
the verse. The kingdom of God was Jesus startup, he says. faith in large corporations, social enterprises, and governments
A new future he was selling to people. And thats the same to drive employment, Weiss says. But this millennial group
thing Im saying as a startup foundera moment of time has has come along and said, No, no. Its actually my responsibil-
come, and theres a new future for us. ity to create jobs.
Buoyed by this insight, Foust arrives in April to present In his sermons, Tome, the senior pastor, frequently men-
at Demo Day. Following an early morning group prayer, he tions job growth and lionizes entrepreneurs. A business
strides onto the stage at Crossroads in front of an audience of endeavor is close to the heart of God and every bit as important
as anything else on Gods green earth, he recently preached.
Sitting in the church lobby a few weeks later, he describes
entrepreneurship as an ancient practice with Biblical roots.
Jesus constantly used business metaphors in his parables, he
says, and founded the first multinational corporate entity.
The emphasis appears to be working: According to a survey
Crossroads conducted in the fall, 43 percent of adults whod
joined the church in the previous two years were age 18 to 35.
And the accelerators startup classes are showing some early
financial promise. Fifteen of the 19 startups that have gone
through Ocean in its first two years have survived, raising a
combined $6 million and creating 66 jobs.
In keeping with their goals of appealing to younger gen-
erations and tapping into the widest possible market, Weiss
and the other officials are working to diversify their roster of
startup founders. At the close of 2016, Ocean announced its
next seven companies. Two of the startups are led by women,
and four are internationalone of these, Owl Labs, which is
building a prosthetic hand that incorporates machine learn-
ing, is headed by three entrepreneurs from Sudan.
These founders may soon have a larger investment pool
from which to draw. Ocean Capital is planning this summer to
raise $1.6 million for a new fund, its third. With the money, it
will seed three more accelerator classes, keeping the program
running until at least 2020. Crossroads is also increasing its
commitment; having donated nearly a quarter of a million
dollars to Ocean Accelerator for the programs first two years,
the church plans to give an additional $420,000 in 2017. (The
money will also help cover the next Unpolished conference,
which the accelerator is taking over.) Secular organizations are
getting in on the action, too: the foundation of PNC Financial
Services Groupis donating to the accelerator, and Fifth Third
Bancorp is the lead sponsor of Unpolished 2017.
n the months after participating in Ocean, Foust and
Kiessling gain admittance to another accelerator, a
highly competitive secular one, TechStars Mobility,
in Detroit. The experience is much different: for one,
they sleep on bunk beds in a house shared by found-
ers from 12 other startups. For another, Foust later
recalls, God never came up.
The pace is breakneck: The first month, called
Mentor Madness, requires the pair to talk with 150 different people
about Spatial. The second month consists of dozens of sales pre-
sentations. By the time Foust takes the stage for TechStars
Demo Day, following the third months arduous vetting
process, Spatials business model has shifted yet again,
to target the automobile navigation market.
The work he and Kiessling have put infueled by the
$120,000 stake they received for winning entry to the
acceleratorpays off in a more polished product and
presentation. The robbery anecdote remains, but the
colored swaths are gone; instead, hexagons appear in
response to a drivers commands. A request for family-
friendly educational events, for example, produces teal
hexagons and info on a museum show. A request for a bar
with sunset views prompts a digital assistant to suggest
a steakhouse on the 72nd floor of a skyscraper down-
town: Would you like me to route you there? she asks.
Then comes the big reveal: the Ford Motor Co. logo,
filling an entire slide. Foust announces a partnership
with the automotive giant, and the auditorium erupts
in cheers. The news comes as Spatial is preparing to
kick off its first fundraising round. Originally the plan is
to raise $500,000, but the deal with Fords Smart Mobility sub-
sidiary helps Fousts company meet that target almost imme-
diately, and more people want in.
A few weeks on, in late September, I meet with Kiessling
in a tiny conference room at Ocean, where Spatial is renting
space temporarily. As we talk, he points to a clear-glass dry-
erase board where financial scenarios have been hashed out.
We raised more money and got more people to agree to give
us money than we thought we could get, Kiessling says. Now
its kind of like, we have to go back. To let more people in,
Spatial will have to dilute the equity percentages Foust origi-
nally offered, without giving up too much of his own equity
and controlin the process. How do you negotiate that, and
do that in kind of a biblical way? Kiessling asks.
Foust is away in Detroit, renegotiating the terms. He
recounts later that things went smoothly: Everyone unani-
mously said yes, because from an investor standpoint it was
less risky. At other points in the process, he says, Investors
offered us a lot of money, and they were in it for the money and
not for our vision, and we had to turn down some money.
We retained our vision, and we didnt sell our soul and didnt
have to lie to raise money.
By the end of October, Spatial has attracted more
investment$1.8 million, including $190,000 from Ocean
Capitalthan any other Ocean Accelerator startup. Foust and
Kiessling reopen the round one more time for two investors
eager to get in on the ground floor, bringing the total raised
to $2.1 million. A few months later, Spatial opens an office in
Cincinnatis Over-the-Rhine neighborhood, where many of the
citys startups are located, and hires three more employees.
The company also has an office in Detroit; while there, Foust
and Kiessling sleep on the same bunk beds they did over the 61
summer. And Foust is flying regularly to Palo Alto, establishing
a footprint for the company and meeting potential clients there.
He wont say what deals might be in the works, but the
immediate goal isnt to build Spatial into the next unicorn
or make a lucrative exit. I feel like now, even more so than
before, Im having to submit to Gods will, because its getting
bigger and bigger. You think when you raise a bunch of money,
youd become more confident, but thats not the case. It gets
harder, he says. Now we have a bunch of people who believe
in us and work for us, and we have to make sure they are taken
care of as well. 
With reporting supported by the McGraw Center for Business
Journalism at the CUNY Graduate School of Journalism
Weiss, center, at an O
Ocean Accelerator meeting
 As the Trump adminis-
tration evaluates bids to
prototype a wall along the
U.S.-Mexico border, topog-
raphy will present as big a
challenge as political oppo-
sition. Corralling often wild
land beneath miles of con-
crete isnt easy, as can be seen
in these photos taken of a
55-mile stretch of fence in the
Rio Grande Valley of South
Texas between tiny Peitas
and Brownsville, the last
major town before land gives
way to the Gulf of Mexico.
The actual border is
formed by the Rio Grande.
No barrier can be built in
the middle of the muddy
green waters, and the banks
of the river are a flood plain
governed by international
treaty. The fence thats here,
a product of the U.S.s 2006
Secure Fence Act, is a porous
collection of concrete and
steel barriers set as far as
2 miles north of the actual
border and punctuated by
gaps to allow access for the
62 thousands of private land-
owners whose acreage runs
to the rivers edge.
Cordoned off from the
rest of the U.S., these patches
between the fence and the
river have sprouted their own
ecosystems. In border regions
such as this one, which facil-
itate more than half a trillion
dollars of trade every year,
life must go on. Workers still
harvest the crops, tourists
still enjoy butterfly sanctuar-
ies, and families still play with
their children. Lauren Etter

North of the Border,

By Kirsten Luce
 A U.S. Customs and Border
Protection agent stationed
outside a break in the fence on
private farmland in Peitas. Only
some of these gaps, which occur
about every quarter mile, are
regularly manned.

South of the Wall

 1

64

1 2 3
Each morning undocumented leave them alone to maintain good David Fox and his dog Jesse On a busy work morning, traffic
laborers form a caravan of vehi- relations with landowners. Until James hunt doves on private into the U.S. builds at a bridge
cles that travels to the south side the introduction of widespread land owned by Damian Mathers (foreground) connecting Reynosa,
of the wall, where they harvest irrigation in the late 1890s, this in Brownsville. When build- Mexico, to Hidalgo, Texas. Vehicles
cropshere spinach in Donna, area was covered with wild cattle ing the fence, the government heading south and pedestrians
Texasbefore returning north at ranges and mesquite trees. gave some landowners their own
the end of the day. Border guards gates (the Mathers gate is in the
background).

take the other bridge. Some
6.5 million cars, 470,000 trucks,
40,000 loaded rail containers, and
16,000 buses crossed the U.S.
southern border last year along
the dozens of official crossings like
this one.
4
Ariana Rios (center), 8, of Mission,
Texas, plays with cousins at
Anzalduas Park south of the border
wall. The public playground used
to be open from sunrise until
sundown but now closes at 5 p.m.
because of a growing inux of
migrants eeing drug violence in
Central America. Theyre often
ferried by the Zetas drug cartel,
which controls the Mexican side
of this border region, and usually
end up here at night. The asylum
seekers surrender themselves to
3
65
agents and hope for a lawyer and
protection. Border officials want
the park cleared of townspeople to
reduce confusion.
Abram-Perezville, Texas. The Rio
Grande oods seasonally. The wall
reinforced existing levees. This
extra ood protection, paid for by
the federal government, was the
reason some locals signed on.

67
 1

68

1 2 3
Border Patrol agents watch a car attempted a splashdown into Joel Contreras, a Hidalgo County Migrants line up alongside the
re in a eld south of the wall just the Rio Grande, but the vehicle deputy constable, closes a gate. Anzalduas International Bridge
next to the Anzalduas International crashed, then burst into ames. Locked gates stop cars but as they wait to be processed by
Bridge. The agents had pursued The driver ed and made it across arent much of a deterrent for agents from Customs and Border
the vehicle, which they believed the river to Mexico. people who simply walk up, over, Protection. Because there has
was loaded with drugs. The driver and through them in a matter of
seconds if no agents are around.

to be some U.S. soil between the
wall and the river, people from
south of the border will always
have a place to walk to for inten-
tional apprehension. Last year
137,000 family members and
unaccompanied children crossed
the southwest border, up from
about 80,000 the year before.
Of those, almost all came from
El Salvador, Guatemala, and
Honduras.
4
In a eld south of the border wall
in Hidalgo, a Customs and Border
Protection agent collects a ladder
that had been camouaged
with green paint and discarded
3
69
during a pursuit. Agents regu-
larly dispose of ladders to keep
them from being reused by other
border crossers.
TTEAM-BUILDINGGGGONE
W
WRONG O SOC S OK A STAND-UP
AS
SPORT
S O
SUMMER
U SU SHARKS
S S
OF THE LENDINGG VARIETY

P o i n t -
e
Th Shoot
d -
an born
Re o u ld d
th e L1 6 came
esigned e smartphone
ra

Fred B q uitous a
s th
ub i
to be a
s Walker
By Rob ss e s Ortega
yU ly
ho to g raphs b
P
 Etc. Design
A
fter more than a year of work, Rajiv Laroia was
on the verge of a breakthrough. By the summer
of 2014, with the help of five or so engineers,
hed developed a digital image-making system
that could achieve the resolution, depth of field,
and focus control of a clunky digital single-lens
reflex camera (commonly known as a DSLR) in a device just
a fraction of its size. At least that was the plan: Although they
had the technology locked down, Laroia and his team still
faced the daunting task of fashioning it into a product people
would actually want to buy.
Laroia, now 54, and his business partner, Dave Grannan,
53, envisioned a product that would look more akin to a
smartphone or tablet than a DSLR, or even a point-and-shoot,
Grannan says. The camera, which they dubbed the L16, was to
be the first product from Light, the company theyd founded.
Even more than the technology involved16 tiny lenses acting in
concert by means of a unique computational-imaging process
the real achievement would be to create a standalone camera
compact enough to carry around. The team asked themselves,
What are other things that have done what were trying to
do heretake something traditional that hasnt changed in a
long time and reboot it? recalls Lights senior vice president
for marketing and product design, Bradley Lautenbach. Thats
when they thought of Fred Bould.
Boulds biggest claim to fame is his work on the Nest thermo-
stat, the revolutionary energy-saving smart home device that
won raves from designers and users alike when it was released
72 in 2011. Nest won the top award given by the Industrial Designers
Society of America, and it was inducted into the permanent col-
lection of the Cooper Hewitt Smithsonian Design Museum not
long after Nest Labs, the company that made it, was acquired by
Google Inc. in 2014. The eponymous founder of Bould Design
BOULD DESIGNS
Some of his firms many hits
Logitech Squeezebox
streaming players
Nest Protect
smoke
detectors
Roku 2
streaming Hunter Douglas
player PowerView Pebble
remote controls
doesnt have the name recognition of a superstar such as Apple
Inc.s Jony Ive or Swiss designer Yves Bhar, but his 10-person
Silicon Valley company has become a go-to for entrepreneurs
who dream of reinventing entire product categories.
Bould, 53, is soft-spoken and bald, and his standard-issue
chunky glasses and black T-shirt make him instantly recognizable
as a designer with minimalist leanings. His father was a mechan-
ical and electrical engineer, and though Bould earned a masters
degree in product engineering from Stanford, his true interest
was in applying that knowledge to the design world. More spe-
cifically, he wanted to call the bluff of people who responded
to his design ideas by saying they couldnt be done. What you
mean to say, he recalls wanting to tell them, his tone more dry
than arrogant, is that you dont feel like doing the engineering.
Bould started his company in 1996, and in those days,
software-obsessed Silicon Valley was even more resistant to
manufacturing objects than it is now. For years he was essen-
tially a solo practitioner, working on a mix of tech products
and more traditional industrial design. In the early 2000s,
Bould designed the Squeezebox, a streaming audio player
created by the startup Slim Devices (later acquired by Logitech
International SA). A few years later, in 2010, Bould got an email
from Matt Rogers, a fellow graduate of his alma mater, Carnegie
Mellon University. Rogers wanted to meet with him to discuss
a project idea for his new company, Nest Labs, which hed co-
founded with Apple veteran Tony Fadell. They asked Bould
about his design process and knowledge of manufacturing,
and then the next day they called to say theyd like to work
with him. The whole process was surprisingly straightfor-
ward, Bould says. They worked together on various Nest prod-
ucts until the Google acquisitionFadell calls Bould a great
partnerat which point, Bould says, they parted amicably.
A lot of thermostat makers were kind of phoning it in, Bould
GoPro Hero
cameras
Light L16 camera
Nest thermostat

says, cheerfully deflecting credit for the products success onto
Fadell. It grew out of a need. Since then, hes added design-
ers and scaled up his companys capacity, working on various
versions of Roku Inc.s digital-media streaming player and con-
sulting on later models of GoPro Inc.s Hero camera.
When the Light team approached him in 2014, Bould
recalls, they more or less came to us with a box of parts.
The only mandate: The device had to be pocket-size. Today
there are 1.5 billion people who have smartphones, and
every one of them considers him- or herself a photogra-
pher, Grannan says. Its grown the pool. The ubiquity of
the mobile phone camera, along with the parallel rise of social
media, has made the device the dominant picture-making tool
of our time. About 1.3 trillion digital images will be produced
this year, estimates market-research company InfoTrends,
a fourfold increase since 2010. But a phone cameras tech-
nical limitations make it unsatisfying for a serious photog-
rapher. Most notably, its single tiny lens (or even the two
lenses in the iPhone 7) limits a smartphones
smartphone s ability to zoom
Today there are 1.5 billion people who
have smartphones, and every one of them
considers him- or herself a photographer
or capture decent images in low-light situations.
Thats where Light comes in. Laroia first got the idea for
the L16 after his previous startup, a wireless telecommunica-
tions company called Flarion Technologies, was acquired by
Qualcomm Inc. in 2006. He decided to take up photography
in the free time he suddenly had, and though on formal expe-
ditions hed bring his DSLR gearincluding a bag filled with
pounds of lenses, flashes, and, from time to time, a tripodhe
had to settle for his smartphone camera in more impromptu
situations. Frustrated, Laroia started speaking to fellow pho-
tographers, who felt the same way. He was a novice at optics,
but since the experts werent solving the problem, Laroia con-
cluded hed have to start looking into it himself.
So far, Laroia has attracted $35 million in funding from
backers including Google Ventures and Charles River Ventures,
which eventually introduced him to Grannan. As soon as the
L16 became available for presale in October 2015, it attracted
ecstatic camera-world buzz; the blog PetaPixel called it a rev-
olutionary new point-and-shoot camera that aims to transform
PHOTOGRAPHS BY ULYSSES ORTEGA FOR BLOOMBERG BUSINESSWEEK
the way we think about cameras. Although priced at $1,600
three times as expensive as most entry-level DSLRsthe L16
reached its investors 30-day sales target in about 30 hours.
The company has declined to specify what that figure is, but
Light representatives have indicated its in the neighborhood
of at least $10 million.
As with any boundary-breaking product, the L16 went
through a number of design iterations. The first thing casual
observers will notice about it is the curious collection of circles
on its outward facethe lens modules. Often with technology
products, designers spend a great deal of time trying to hide
that kind of thing, Bould says. Instead of disguising this weird
array with darkened glass or rearranging the components in
a more visually pleasing pattern, he left these technical guts
Etc.
unconcealed, treating them as a design feature rather than a
flaw. Bould displays an early foam model: a rectangular object
with a bunch of cones protruding from the front, each repre-
senting the scope of field the lenses capture. One of the biggest
challenges of designing the L16 was figuring out how to get
people to hold the thing without blocking this array, which
meant focusing not only on what the object looked like but
also on what it felt like.
As convenient as smartphones are, Bould points out, they
remain awkward for taking pictures. Probably there are
10 people dropping their phones as we speak, he says. Anson
Cheung, Boulds studio director, hauls out a big crate full of later
models of the L16 printed on the companys rapid-prototyping
machine. Earlier versions were more sharp-angled and boxy.
When the designersfive in all, fully half of Boulds design team
noticed users wrapping their fingers over the corner to reach
the shutter-release button, they smoothed the hard angles into
rounded contours to make the grip more natural. Later still, they
added a gentle depression along the bottom for the thumb. Most
of the cameras body is metal for durability, but the designers 73
covered the edges where the fingertips touch the device with a
thermoplastic rubber thats warmer. Taken together, these ele-
ments mimic the feel of holding a traditional camera, encour-
aging users to grip it with both hands.
Although the presale period vastly exceeded Laroia and
Grannans expectations, aspects of the production process for
the L16 have been less successful. The hardest thing about
being a Silicon Valley hardware startup is getting Tier 1 manu-
facturers to take your business, Grannan says. Many top fac-
tories only take orders in the millions of units from established
giants, not in the thousands from startups. Chinese mega-
factory Foxconn Technology Co. eventually agreed to handle
final assembly, part of an arrangement that included a small
investment in Light and an agreement to license a subset of the
L16s technology for use in smartphones. The resulting prod-
ucts wont match the L16 for quality, but they will noticeably
raise the baseline smartphone-photo image resolution.
The preordered L16s will finally start shipping this month,
and Grannan is planning an aggressive push after that: taking
new direct orders by May, then rolling out to specialty online
sellers, mass online sellers, and ultimately brick-and-mortar
retail by the end of 2017. But the cameras design is still a work
in progressBould will have to see what works and keep tin-
kering from there. How can we really connect the new tech-
nology with the old user? Because users are all old, he says
with a chuckle. We dont get a new population every time
we launch a new product. You have to work with preexisting
behaviors. Technology may be fast, but design is slow. A lot
of times what happens when new technology comes along,
youre tempted to say, Well, lets do everything new, Bould
says. Its important to step back and say, What do we want
the experience to be? 
 E tc . Fashio
on

Fa
Fal
Faalke Tia iago
ag
goo cottto
ton
on
o n cr
crew
ew ssoccks
ew k
$30
0; sock
ock
oc kh
khop
ho
h
hop y com
o ny. co
om
Z Zegng a trrou
egna ro
ou
ouse
ser
ers
$24
24
45;
5; ErmEr ene
en
n gi
ne illd
gil do Ze na b
o Zeg bou
outiq
quuees
ues
oh
Joh
Joh
Jo hnst
nston
on & Murp
Murprph
urp hy h es
y sho e
$$19
$1
119
98; joh
ohhnst
nstonm
onmurp
onmmurp phhyy.
hy.
y.com
om
m

S O O
74
W SOC S
I s
It s OK,
K, rea
ealllly,
y as long
loongg
as you
as u fol
olloow th
the
he ruulees
By S h
By hiib
boon Keennnned dy

OMBER
OMBE
BE RG B
OMBERG
ER US WE K
SSWEE
ESSWEE
SI ESSWE
BUSIN
BUS ESSW
Its the First Commandment off mens office
ffi attire: B OMB
KIM FOR BLO B
MB
Thou
h u shalt
h l wear dark-colored
d k l d socks.
k But as the
h
acceptable range off pants shades and ffabrics
KIM

h expanded, so have your options south off

has
ANGHEE
GHEE KI

t knee. Some things to keep in mind iff you

the
Y KAN GH

d d to wear white:
decide h :
OGRAPH
PHHS BY A

Dont wear gym socks. Dont wear white socks

OTOG P

k
Finer cotton knits l
only, f
with black loafers. k
Or black
PHOT

pl
please. h
pants. Theres l one
only
NE ; PH
ENNEDY

M h l Jackson.
Michael k
NE

Do consider your color

ON KE
BON
SHIBON

scheme. Spring and summer Do show them off. The

B

hues
h go best with white: light look is informal,
f so give your Th Mens
The Store
S o ata B
Barneys
ey New York k Uniqlol mens
OR: S
ED OR:

blues for
f pants, rich browns pants a ffew rolls and flaunt
fl Bloomingdales ribbed
B r
rib-knit midcalf socks ccolor
l socksk
SH N EDIT

dress socks
d k $31; b y
barneys.com $$2.90; uniqlo.com
l m
for
f shoes.. your ankles. $11;
$ bloomingdales.com
g m
FASHIO
FASHI
FASH
ASH
FAS
AS
FA
FA

BEWARE OF SHARKS
Charles Geisst is stronger on the history of predatory lending than on the economics. By Peter Coy
A
t what point does a
lender (good) become
a loan shark (bad)?
The question has exer-
cised philosophersand
unhappy borrow-
ersfrom antiquity to
the present. In Loan
Sharks: The Birth of Predatory
Lending, finance professor
Charles Geisst recounts the
debate in the U.S. from the late
19th century through the Great
Depression. The history illumi-
nates todays debates over, say,
what the Consumer Financial
Protection Bureau should do to
control payday lenders, though
Geisst is shy about drawing con-
clusions that might be useful
to policymakers.
Loan sharks thrive where tra-
ditional banking is absent. They
fill an unmet need, albeit often
in a heartless, exploitative way.
But one thing youll learn from
the book is that theres never
been consensus on whats a fair limit for
interest rates. In Rome it was 12 percent,
in Elizabethan England 6 percent, and
in the United States, it has ranged from
6 percent to 40 percent, Geisst writes.
That said, a few principles seem to have
been widely accepted over the decades.
One: Its fair to charge higher rates for
riskier loans. Two: Its less fair in cases
where the borrower is judgmentally
impaired or uninformedsay, a recent
immigrant who may not understand what
the words floating interest rate mean.
In the U.S., the largely rural popu-
list movement put up the first organized
opposition to predatory lending. The pop-
ILLUSTRATION BY BRANDON CELI
ulists favored high inflation, which would
make high-interest loans easier to pay
back over time. The members of the pro-
gressive movement, who succeeded the
populists in the early 20th century, tended
to be better educated, better organized,
The Critic
and more urban. They worried that high
inflation would raise their cost of living.
Recognizing that nature abhors a vacuum,
the progressives organized kinder, gentler
lending channels such as charities and
various mutual-aid organizations, includ-
ing credit unions, benevolent societies,
and Morris Plan Banks, named after the
lawyer Arthur Morris, who began making
small installment loans to upstanding cit-
izens of modest means.
About this time, in 1907, the Russell
Sage Foundation was formed for the
improvement of social and living condi-
tions in the United States. Recognizing
that state usury laws capping interest
rates at 6 percent or 7 percent were
too restrictive for legitimate lenders
to make a profit on small, risky loans,
and therefore left illegal loan sharks to
fill the gap, Russell Sages researchers
devised the Uniform Small Loan Law.
Etc.
The model legislation allowed
licensed lenders to charge as much
as 40 percent interest a year as
long as they provided ample dis-
closure of their terms to borrow-
ers. By the 1940s, 31 states and the
territory of Hawaii had enacted the
law, helping put loan sharks out
of business.
Geisst blames poor lending
practicesnot loan-sharking pre-
ciselyfor the stock market crash
of 1929. Investors borrowed
heavily from their brokers to buy
shares, which happened outside
the regulated banking system.
Broker loans had become a form 75
of shadow banking, a term that
became widely used eighty years
later during another financial
crisis, he writes. When lending
abruptly dried up, interest rates on
loans shot to as high as 20 percent
in a single trading day.
The conclusion of many of the
people Geisst features in his book
is that the best way to fight loan
sharks is not to outlaw them but rather
to give borrowers cheaper and safer
options. But Geisst himself, a former
investment banker who now teaches
at Manhattan College, never fully
embraces this prescription. He some-
times describes high-interest lending as
the disease itself, not just a symptom:
Loan sharking in its many forms has
caused stock market panics, struc-
tural banking problems, and often has
impeded economic recovery after severe
economic downturns.
Loan Sharks has its flaws, but its valu-
able for the history alone. Unfortunately,
Geisst ends his narrative at the Great
Depression, without explaining why,
and relegates the 80 years since to a
five-page postscript, leaving himself in
debt to readers with an interest in the
present. If only there were some way for
us to collect. 
S u r f s S U P !
oarding your ne w
Make stand-up paddleb
David Wolman
leisure-time activity. By

WHAT IS IT?
Exactly what it sounds like: You stand up on
a board and paddle around. Part of what makes
paddleboarding so fun is that its not that hard.
The boards are longer and wider than the ones
for surfing, so theyre more stable. Sure, you
may be a little wobbly at first, and beginners
should steer clear of big waves. But for most
people, a mellow float across a placid lake
should be more than doable on Day One.

WHAT
STUFF WILL I NEED?
For first-timers, all youll need is a bathing suit and
some sunscreenyou should be able to rent everything
else from your local sail/canoe/surf shop for $25 per hour, give
or take. If you want to make paddleboarding a habit, however,
consider buying your own gear.

THE BOARD
There are three main types:
Foam: Versatile and sturdy, and you wont have to dip into your kids
college fund to afford one. Try California Board Co.s 10'6" board ($550;
keepersportsstore.com).
,
A ll th at s it s
Inflatable: These are great if storage is an issue. Look for ones that pump
ff w a
up tight (15 to 25 pounds per square inch) for maximum stability. We like stay stu
th it
to ta ll y w o r
Watermans 10'9" BK Pro ($1,199; c4waterman.com).
Wood or fiberglass: The flashy stuff, best for tackling bigger waves or
longer excursions. Go for Three Brothers Boards 11'4" Irish Twin ($1,249;
threebrothersboards.com).
Make sure to note the weight capacity, typically specified by the manufacturer,
which will vary depending on the material, dimensions, and shape of your
board. If youre too big for your board, youll ride too low in the water, making
it tough to move around.

THE PADDLE
Some boards come with a paddleand sometimes with a leash, a fin, and a roof
rack as a package deal, so pay attention when youre buying. If youre
purchasing a paddle separately, aluminum or alloy is fine (Red Paddle Co.
alloy, $140; redpaddleco.com), carbon fiber is better (Aqua-Bound Malta,
$325; aquabound.com), and wood is way cool (Shaw and Tenney SUP, from
$429; shawandtenney.com).

THE OTHER STUFF

Personal flotation device: This doesnt have to be the bulky straitjacket
you recall from childhood trips to the lake. The Dakine Waistbelt PFD
($100; dakine.com) clips on like a fanny pack.
Leash: Ifor, lets face it, whenyou fall, this will keep your board from
shooting away and hitting an innocent bystander. Most board
manufacturers offer some variety of leash, starting around $20.
Roof rack: Have board, will travel with the Thule SUP Taxi
($270; thule.com).
Sunglasses: These are essentialglare can get intense out on the
water. Youll want a pair thats OK getting wet, such as the Oakley
Flak 2.0 XL ($150; oakley.com) or the more stylish Smith Drake
($219; smithoptics.com).
 Sport Etc.

HOW
CAN I MAKE
SURE I DONT
LOOK LIKE AN IDIOT?
Keeping stable on the board
is all about using your core
muscles, so think about doing
some Pilates before you get out
there, or at least banging out a few
WHERE crunches. Once youre on the water,
get yourself situated in the center of the
CAN board, sitting with one leg on either side
I DO IT? and your paddle laid perpendicularly in
front of you. Now get on your knees: If youre
feeling tentative, paddle around like that for
Bend, Ore.
a while just to get the hang of it. To stand,
Located on
push up slowly against the board while grip-
the southwest-
ping the paddle. Youll want your feet roughly
ern edge of this
shoulder-width apart, and your knees should
outdoor-sports-
remain slightly bent. Stay loose. Place your dom-
crazy town, the
inant hand on the top of the paddles shaft, with
elegant Tetherow
your other hand about halfway downyou want the
resort offers easy
curve of the paddle face bending toward the front
access to the moun-
of your board. Now stroke! And unless youre one of
tain lakes of Willamette
those people who likes to be rescued, pay attention
National Forest, the
to the wind and the current, and stick close to shore.
Deschutes River, and a
man-made whitewater park
if you want to try your luck
with some waves (from $179
77
per night; tetherow.com).

Sausalito, Calif.
The upscale-but-unpreten-
tious Cavallo Point hotel offers
easy access to Richardson Bay, off
San Francisco Bay. Paddle among the
houseboats, say hi to the sea lions, or
cruise across to Tiburon for lunch at one
of its bay-view restaurants (from $379 per
night; cavallopoint.com).

Chicago
The chic Hotel Lincoln is perched on the
western edge of Lincoln Park, just a short
stroll from the shores of Lake Michigan, where
the paddleboarding is plentiful (from $159 per
night; jdvhotels.com).

Kohala, Hawaii
The Fairmont Orchid is tucked into quiet Mauna
Lani Bay on the Big Islands northwestern coast. It has
sheltered waters for first-timers and access to the open
sea for those who feel more confident (from $299 per
night; fairmont.com).

EOPLE PADDLEBOAR
HOW M A N Y P
Austin
Lady Bird Lake, smack in the middle of the city, is a favorite
paddleboarding spot for Austinites. South Congress Hotel is in
D?

0.9 2.8
the heart of the nearby SoCo neighborhood, just south of the lake,
and is a perfect spot for post-float people-watching (from $249 per
night; southcongresshotel.com).

Burlington, Vt. million million

in 2009 in 2014
BLOOMBERG BUSINESSWEEK

The view from the Hotel Vermont, on the shore of Lake Champlain,
BOBBY SCHEIDEMANN FOR

cant be beat. Just a 15-minute drive south, Oakledge Park is an ideal

jumping-off point for an expedition (from $199 per night; hotelvt.com). he
:T
rce oor
PHOTOGRAPH BY

u
Naples, Fla. So utd tion
O da
Naples Beach Hotel & Golf Club should suffice. Weave in and around Inner un
Doctors Bay or out into the Gulf of Mexico. Paddling south to Naples Pier and Fo
back is a great four-mile round trip (from $319 per night; naplesbeachhotel.com).
 Etc. Survey
y

Whats Your Most Awkward Team-Building Experience?

Watch where you point that paintball gun. By Katie Morell

At a previous job, our boss would sometimes take us I was working for a health-care company
that had its team-building event at a Native
bowling. This time, though, he wanted to go paintballing. Im American casino in Southern California.
not a good shot, and I wasnt aiming for him, but my paint- The company hired an outside consultant
ball went awry. The next thing I knew, he was on the floor. to facilitate the event, and they were doing
The game was stopped, the ambulance came, and people a great job until one of the facilitators, a
white guy with blond hair and blue eyes,
started talking about potential liver rupture and damage to came onstage dressed like a Native
his kidneys. He was OKa preexisting condition had flared American. Many servers working the event
up. After the event, he told me it wasnt my fault, but I felt were Native American and were offended.
Casino management stopped the event
horrible and left the company six weeks later. and kicked us out.
Christina Comben
Pete Abilla
Content manager, Day Translations Inc.,
Founder and chief executive officer,
Valencia, Spain
Find a Tutor Near Me, Salt Lake City

We took a group of 120 people,

divided them into teams, and set them
loose on a scavenger hunt around a
theme park. Each team had a different-
colored bandanna, and they were
78
8 running around completing missions
when a security guard misinterpreted
one bandanna for a gang symbol.
He made that team follow him to a
side alley, where he could ask them
questions about what they were doing.
They were allowed to continue but had
to take off the bandannas.
Sharon Fisher
CEO, Play With a Purpose, Orlando

We like to
o combine
o service
elements intoo our
o team-
a
building activities. In June
ne 2015
my staff met at the Boston
Harbor dock to board a boat to
a nearby island to do some
cleanup. While talking with a
colleague, I stepped back and At a previous company, I was participating
fell into the water, scraping my
back on a post as I went down. in a manager-training meeting. We were
I cut myself pretty badly, the
water was freezing, and it was
divided into teams and tasked with hoisting
over my head. I was wearing each other through an imaginary window
jeans and a sweatshirt and felt
weighed down. The thought of basically, a rope stretched 3 feet off the
drowning came to mind, and
I panicked. Thankfully, my
groundin an allotted time. One team had to
team sprang into action and lift an obese woman. Everyone in the room
pulled me up.
saw the struggle, and she ended up crying.
Janet Kosloff
Some people were kind to her, but most
ILLUSTRATION BY PING ZHU

CEO and co-founder,

InCrowd Inc., Boston ignored the awkward situation and pretended
it didnt happen.
Seth Ollerton
Content marketing manager, DecisionWise, Provo, Utah
 What I Wear to Work Etc.
What do you do
Cool jacket.
for a living? I love that its dressy but not
Im the co-founder too dressy. Its got a silk lining,
of Aday, a clothing which I like because its a
line that makes luxury just for yourself.
high-performance
pieces that are
also the most LIZZIE FORTUNATO
comfortable clothes
in your wardrobe. What do you keep
in your backpack?
I always have my
ISABEL MARANT laptop and passport
and an overnight kit.
I pack for emergencies.
Who knows if Im going
Is that shirt from away for the weekend?
your brand?
Yes. Its a
reinvented And you can work
silk fabric out in that?
from Italy. I wear it to go rock
climbing a lot.
People stare at me,
of course. But its
machine washable
and dries quickly, so
it works perfectly. 79

ISHARYA

ADAY

ADAY
Tell me about
your leggings.
Theyre our best-
selling pair, made
in Portugal at the Tell me about your shoes.
same place Michael They have a cool textured surface
Phelpss swimsuits thats crocodile-y but not.
were made for Theyre the right combination of
the Olympics. statement-making and practical.
PHOTOGRAPH BY B. OBRIEN FOR BLOOMBERG BUSINESSWEEK

Whos the dog?

EVERLANE Thats Forrest. Hes a
rescue, a toy Australian

MEG HE
ADAY shepherd, we think.
Hes pretty much the
unofficial Aday mascot.
ALEXANDER WANG

29, co-founder, Aday, New York

Interview by Jason Chen

 Etc. How Did
id I G
Get
et H
Here?

Bloomberg Businessweek (USPS 080 900) April 10 April 23, 2017 (ISSN 0007-7135) E Issue no. 4518 Published weekly, except one week in January, February, April, June, and August, by

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
New York, NY 10022. POSTMASTER: Send address changes to Bloomberg Businessweek, P.O. Box 332, Haywards Heath, West Sussex, RH16 3FP UK. Businessweek.subs@quadrantsubs.com
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,

Sales: Call 800 298-9867 or e-mail: busweek@nrmsinc.com. Educational Permissions: Copyright Clearance Center at info@copyright.com. PRINTED IN BELGIUM CPPAP NUMBER 0414N68830
BILL COBB
President and chief executive officer, H&R Block Inc.

I suddenly started
to view a larger
world. It was
my nonbusiness
courses: sociology,
Russian history. I
realized that there is
more to life than the
New York area.
80
With his father, William,
on the Pizza Hut
corporate jet, 1996
I took a wrong turn. The Nasdaq was
going crazy, and I jumped for money,
which is the worst decision you can make.
The product didnt work, and it was one
of those cut-your-losses [situations].
Education
I was 27. It was a
St. Rose High School, $200 million company with
Belmar, N.J., class of 1974 national advertising, and I
The Wharton School got to lead a team. Then it got
of the University of
Pennsylvania, class sold to Pillsbury.
of 1978
Northwestern University
Kellogg School of
Management, Evanston,
Ill., class of 1979
The culture of Pepsi-Cola
Work was defined by We hate
At Wharton
graduation Experience Coke. I did a bunch of
Super Bowl advertising,
including the one about
197983 the kid who got sucked
Product manager, into a Pepsi bottle on
These were the Colgate-Palmolive
the beach. Pepsi had big
days of stuffed-
198386 budgets, and it was a lot
crust pizza, and
Marketing director, Jenos of fun.
we did a fun Pizza Frozen Food
ad with Deion
Sanders and Jerry 198795 That was my first international
Marketing director,
Jones about eating vice president for new assignment, and I just loved it. I
a slice backwards. business, VP for colas,
PepsiCo
had to have a broader business
perspective, and that has
199597
SVP and chief marketing helped me greatly.
officer for Pizza Hut,
PepsiCo In a
promotional
n from it and fix it. 3. Communicate early, often, and broadly.
19972000 shot for EBay,
SVP for international 2003
marketing, Tricon Global
Restaurants

2000
Head of sales and
marketing, Netpliance

200008 20082010:
SVP of global marketing, Semiretired, joined the
general manager for board of H&R Block
With his wife and
international, president
three sons in Bay
Harbor, Mich., 2015
for North America, EBay Were looking to reinvent virtually
everything we do. This tax season
2011
Present were introducing H&R Block With
I had no idea what anybody was talking President and CEO, Watson, an in-store experience that
about for the first two weeks. I said to H&R Block
ingests a clients first conversation with
myself, Look, youve had a successful a tax pro about recent happenings
career, you have confidence in yourself, home purchases, marriages, births
Courtesy subject (5)

Life Lessons
youre going to figure this out. and highlights the tax implications.
lear
g,

on
1. There are so many leadership books on hiring, but its all about the chemistry you build on the team. 2. Have a no-blame culture. When things go wr