September 12 — September 18, 2016 | bloomberg.

com

Vladimir Putin
just wants
to be friends
p42

Bringing It All Together
For results to meet expectations, belief in preparation and
teammates benefits world-class golfers and investors
O
One nickname for them was the Spanish
Armada, although they fared much better
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of 1588 did in war. Beginning in 1987,
and paired together over four consecutive
Ryder Cups for eight matches in foursomes
(alternate shot) and seven in four-ball
(best ball), Spaniards Seve Ballesteros
and José María Olazábal ran up a record
of 11-2-2—by far the most successful
partnership in the history of the event.
By way of comparison, the most effective
duo over the years on the U.S. side was
Arnold Palmer and Gardner Dickinson,
ZKRZRQÀYHPDWFKHV
More than any other player or captain,
Ballesteros imbued the European Team
with what has proved to be its secret
weapon over the past 25 years: an unwav-
ering belief in each other as teammates.
By 1987, Ballesteros was a Ryder Cup
veteran, but Olazábal was a 21-year-old
Ryder Cup rookie. So how did their magic
materialize in the blink of an eye?
In the days leading up to those ’87
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WORLD CLASS AS STANDARD
matches, European captain Tony Jacklin
sent his planned pairings out to play nine-
hole small-money matches. Ballesteros
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time ever as partners—squared off against
Bernhard Langer and Ken Brown for $10,
and were two down with two holes to play.
On the eighth hole, Ballesteros holed out
from a bunker to win. One down. On the
ninth, Olazábal rammed in a 20-foot birdie
putt to win. Match halved.
The next day, at the real thing, the
partners needed to two-putt from 15 feet
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(YHUDJJUHVVLYH%DOOHVWHURVUDQWKHÀUVW
putt six feet past the hole. His young
partner stepped up and drilled the come-
backer dead center. “From that point on,”
says Brown, now a commentator on BBC
golf telecasts, “neither one ever doubted
the other.”
A learned skill
“Being a team player is a learned skill,”
says noted sports psychologist Dr. Bob
Rotella. “For some players it’s a new expe-
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a lot for the good of the team. Other guys
ORYHEHLQJXQVHOÀVKWHDPSOD\HUV,Q7KH
Ryder Cup, knowing ahead of time who
you are going to be paired with, and to be
excited about that, is a big deal. When you
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you get down in a match. That’s when you
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can depend on each other.”
Rotella believes that under pressure,
“one of the biggest mistakes you can make
is to not trust your preparation. When you
believe in yourself and your teammate, you
trust that your normal routine will see you
through. When you don’t believe, you start
trying too hard and mess everything up.”
Standing on the 18th tee of a tied
Ryder Cup match and building an invest-
ment portfolio may seem like disparate
challenges, but both require a similar ap-
proach to maximize performance. Standard
Life Investments, Worldwide Partner of The
Ryder Cup, recognizes the importance of

“Being a team player is a learned skill. For some players it’s a new experience, and they’ve never had to
sacrifice a lot for the good of the team. Other guys love being unselfish team players.”
teamwork to help guide investors
WKURXJKYRODWLOHPDUNHWVDQGWKHÀUP
has made it the core of a distinctive
investment philosophy.
Just as pairings on the course must
maintain open lines of communication if
they are to outperform the competition,
a common investment language is key to
Standard Life Investments’ team-based
approach. Only by being on the same page
can teammates ensure the discipline, de-
liberation and debate necessary to identify
GETTY IMAGES
opportunity hidden within company fun-
damentals—such as internal restructuring,
changes to the regulatory environment or
technology improvements—that aren’t
ADVERTISEMENT
— DR. BOB ROTELLA
being priced in by the wider market, and
can add value to client portfolios.
“Everything as a reference”
On Sept. 30, Ryder Cup shots that count
ZLOOEHJLQÁ\LQJDW+D]HOWLQH1DWLRQDO*ROI
Club, in Chaska, Minnesota. At the helm
of the European Team, Darren Clarke will
have looked for indicators of performance
by using “everything the best players in
the world do as reference. I think what
\RXÀQGZLWKDORWRIWKHWRS\RXQJSOD\HUV
now is that they all have a team around
WKHP7KH\·YHJRWÀWQHVVJX\VWKH\·YH
got their psychologist, their nutritionist.
They’ve got a team of stats people who
analyze data as part of their progress, and
maybe they compare them to what the
other top players are doing.
“For example, for a period of time when
Jordan Spieth was playing exceptionally
well, you may want to use his performance
data as a benchmark. Or Rory McIlroy’s.
And you can use the desire to reach those
benchmarks to help you make better choic-
es, perhaps about you’re eating or what you
should be doing in the gym. In short, look at
everything the best players in the world are
doing, and set your goals accordingly.”
Find out more at
www.standardlifeinvestments.com/rydercup
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 “You know, I don’t want to
respond to your provocative
question, even though I
understand that it could
be interesting”
p42

3
PHOTOGRAPH BY JEREMY LIEBMAN FOR BLOOMBERG BUSINESSWEEK

“It’s smart to stay “I thought I’d be with “This is not just some
current and look as young Walmart no more than run-of-the-mill, usual corporate
as possible if you want to malfeasance. It’s hard to
keep working in an
three years or so. imagine a set of corporate
industry where so many Lo and behold, I sort of practices that could
people are in their 20s” fell in love” have done more damage”
p32 p76 p58
 Cover
Trail
September 12 — September 18, 2016
How the cover gets made

①
Opening Remarks Trump uses social media to be noticed. Justin Trudeau uses it to govern 10 “We got an interview with Putin.”

Bloomberg View Quantum computing’s security risks • How the EU can help Merkel 12 “Really? After all the stories we’ve
done about the Russian
government? Particularly the
Movers  A super move for Super Mario   Fox’s payoff to Gretchen Carlson 15
stories about hacking, corruption,
discrimination, war … ”
Global Economics
“To be fair, those are the kinds of
In Saudi Arabia, women’s lib begins with dropping the veil 16 stories we do about many places,
including the U.S.”
China talks supply-side, but means something else entirely 17
“Great point. I’m thinking we can
There’s plenty of land for sale—just not at prices builders want to pay 19 photoshop him riding a bear shirtless,
An Indonesian corruption cop comes back to finish the job she started 20 crashing through the interview studio,
since he won’t be photographed.”

Companies/Industries “He agreed to a shoot.”

With their market far from locked up, private prisons look for ways to diversify 23 “Whaaaa?”

Why London is Hollywood’s Visual Effects Central 24

Mitsui O.S.K.’s new LNG ship is longer than three football fields. It needs temp work 26 “
“Wow, that’s
g
great.”
With China ravenous for natural foods, New Zealand’s Comvita proffers manuka honey and more 27

Politics/Policy
As tattoos become a billion-dollar business, the FDA wonders if it should take a closer look 28
“Oh, wow.”
Cap and trade is a soft market in California—and faces a legal threat 29

4 The growing debate over whether Delaware’s business court isn’t pro-business enough 31

Technology “
“Wow,
Dress young, talk young, get a face-lift: How over-40s try to survive in Silicon Valley 32 w
wow,
w
wow.”
A hospital painkiller called virtual reality 34

A game of war over Game of War spotlights Cisco’s buggy software 35

“Can we run all three?”
Innovation: Sound that beams directly to the ears of the hard of hearing 36
“Let’s do two—though I love your
enthusiasm.”
Markets/Finance
This bank’s stadium-naming deal has a family connection 38

Moscow skyscrapers keep going up, but demand is going nowhere 40

Domestic Cover
COVERS AND COVER TRAIL: PHOTOGRAPH BY JEREMY LIEBMAN FOR BLOOMBERG BUSINESSWEEK

A cloud that contains the market’s whole history 41

Features
So, Mr. Putin … A Q&A with the Russian president. Plus: Who’s in line to succeed him 42

Strait to the Top The first luxury liner to cruise the Northwest Passage 50

Deep Pockets Is Exxon liable for climate damages? 58

Etc.
International Cover
Networks are prodding us to stream their back catalogs. A seven-night TV guide 65

Food: Kris Yenbamroong’s modern Thai mini-empire looks to expand 68

Fashion: Yes, you can wear white jeans after Labor Day. Here’s how 70

The Critic: The Chinese sci-fi epic that made it onto Obama’s and Zuckerberg’s reading lists 72

Design: Straighten up your office with clean-lined furniture 74

What I Wear to Work: MSNBC’s Jacob Soboroff likes desert boots because, he read, Anthony Bourdain does, too 75

How Did I Get Here? Sam’s Club’s Rosalind Brewer mastered competitiveness at her all-women’s Christian college 76

#Beyond100
54/100
How is BMW Group the world’s
most sustainable car company?
powerful water supply in a once
A
barren landscape is helping to drive
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Earth, and with it, BMW Group’s ambitious
sustainability goals.
Before the construction of the Grand
Coulee Dam in 1941, Moses Lake was a
sparsely populated, grassland stretch of the
Columbia Basin. Today, it is home to the
Moses Lake production plant, a pioneer in
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and nothing short of a game-changer for
the automotive industry.
The joint venture between BMW Group
and SGL Group harnesses clean hydroelec-
tric energy from the massive dam to create
ultra-lightweight vehicles. Of everything in
the process chain, it is the production of
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The plant is run entirely on renewable
energy generated by two neighboring
power plants, and includes highly automat-
ed production lines operating 24/7 for 360
SPONSOR CONTENT
every further downstream thing—whether
you accelerate it, brake it, crash it—you
have less energy to contend with. You
end up with weight saving throughout
the vehicle.”
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Lake is now used in the bodies of all
BMW i, BMW M models, and the new
BMW 7 Series vehicles.
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weight, and thus its fuel consumption
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Draeger, Board Member of BMW AG,
Coming soon: What does the future hold for
those who like to travel on two wheels?
BMW Motorrad believes inventive, intel-
ligent technologies will soon allow riders
unimagined freedom, and is set to unveil its
future-facing VISION VEHICLE in Los Angeles
Carbon fiber ribbons before sizing
at the Moses Lake production plant
Purchasing and Supplier Network.
Sustainability has been integral to
the group’s core strategic principles since
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throughout the value chain, from the
development of fuel-saving and alternative
vehicle concepts, through to production
processes and recycling practices.
BMW Group now holds leading
positions in many global sustainability
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Sustainability Index, Carbon Disclosure
Project and Corporate Knights Global 100.
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Motorrad’s bike of tomorrow at the Iconic
Impulses exhibition. The event is free and
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days a year, stopping only at Christmas for
maintenance.
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forward in making car production more
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a lecturer in composites engineering at the
on Oct. 13–16.
For more than 90 years, BMW Motorrad
has been an undisputed motorcycle pioneer,
and its VISION VEHICLE promises to raise the
bar yet again.
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/RV$QJHOHVZLOOEHWKHÀQDOVWRSIRUWKH
,FRQLF,PSXOVHVWRXUDQGIRUWKHÀUVWWLPH
all four BMW Group VISION VEHICLES will
EHVKRZFDVHGDVDTXDUWHW
8QLYHUVLW\RI6KHIÀHOG(QJODQG8. Find out more: www.bmwgroup.com/en/next100/iconicimpulses.html
“Fundamentally, it’s about weight,” he 10am–5pm Oct. 13–16, 10 Barker Hangar, 3021 Airport Ave., Suite 203, Santa Monica, CA 90405
says. “You save that mass, and then in

In co-operation with

Go to Bloom.bg/beyond100
for the whole series
 Index
People/Companies

Sony (SNE) 34
Southwest Airlines (LUV) 35
Spiegel, Brennan 34
Sprouts Farmers

50
Arctic
Market (SFM)
SugarCRM
15
32
Sugarman, Elizabeth 38
adventure
Sugarman, Jason 38

T
Tesla (TSLA) 15, 32
Thesys Technologies 41
Tillerson, Rex 60
Tiravanija, Rirkrit 68
Trace Research 27
Transneft 40
TransPerfect Global 31
Trudeau, Justin 10
Trump, Donald 10, 44
Turtle Beach (HEAR) 36
Tusk Strategies 31
Twitter (TWTR) 16, 60

UVW
Uber 15, 32
Under Armour (UA) 15
Vaino, Anton 46
Velodyne 32
Viacom (VIAB) 31
Villaraigosa, Antonio 38
VMware (VMW) 32
Volkswagen (VOW:GR) 15
VTB Group (VTBR:LI) 40
Walker, Claude 60
Walt Disney (DIS) 24
Warner Bros. (TWX) 24
Wass, Barnaby 31
6 Wells, Theodore 60
Whitehouse, Sheldon 60
Widodo, Joko 20

ABC Clinton, Hillary 10, 44, 60

Coakley Development Group 19
Google (GOOG)
Gore, Al
12, 32, 41
60 M Redshaw, Louis
Redstone, Sumner
29
31
Will, George
Wood Mackenzie
60
26
Abu Dhabi Commercial Bank 16 Coffey, Chris 31 Grande, Tony 23 Machine Zone 35 Renaissance Construction 40

MAIN: KATIE ORLINKSY FOR BLOOMBERG BUSINESSWEEK; BREWER: SARAH BENTHAM/BLOOMBERG; VILLARAIGOSA: DAVID PAUL MORRIS/BLOOMBERG
Abuljadayel, Kariman 16 Comvita 27 Guber, Peter 38 Management & Training 23 Rhythm & Hues Studios 24
Ackman, Bill 15 Corrections Corp. of McCarron, Suzanne 60 Ricker, Andy 68
Ailes, Roger
Al-Jouani, Souad
15
16
America (CXW)
Coulter, Scott
23
27 H McKibben, Bill
Mercedes-Benz (DAI:GR) 32
60 Rodriguez, Edie
Rosneft (ROSN:RM)
50
46
Al-Manea, Abdullah 16 Creative Artists Agency 68 Healey, Maura 60 Merkel, Angela 12 Rowling, J.K. 24
Alibaba (BABA) 27 Crystal Cruises 50 Hewlett Packard Miller, Alexei 44, 46 Royal Bank of
Amazon.com (AMZN) 41 CS Financial 38 Enterprise (HPE) 32 Mitsui O.S.K. Lines (9104:JP) 26 Scotland (RBS:LN) 40
Ancestry.com 31 CS LNG 26 Hininger, Damon 23 Modi, Narendra 17
Apache (APA) 15 Hope, Alex 24 Moving Picture 24
S 38
Apple (AAPL) 15, 32
Applied Materials (AMAT) 32 DEF Hospira
HP (HPQ)
32
32
Mozza Restaurant Group 68
MSNBC (CMCSA) 75 S&P Global Platts (SPGI) 17 Antonio
AppliedVR 34 Daewoo Shipbuilding & Marine HTC (2498:TT) 34 Murdock, David 31 Samsung (005930:KS) 34, 35 Villaraigosa
Aruba (HPE) 32 Engineering 26 Musk, Elon 15 Sam’s Club (WMT) 76
Assad, Bashar 44 Danaher (DHR) 15
IJ Sargent, William 24
Banc of California (BANC) 38
Barclays (BCS) 40
Danesh, Houman
Darnall, Beth
34
34 Indrawati, Sri Mulyani 20 N Sassoon, David
Schneiderman, Eric
60
60 XYZ
Bechdel, Alison 15 DeSaulnier, Mark 60 Industrial Light & Magic (DIS) 24 Nelson, Jonathan 32 Seabold, Jeffrey 38 Xi Jinping 17
Bin Salman, Mohammed 16, Deutsche Bank (DBK:GR) 40 Ivanov, Sergei 46 Netflix (NFLX) 66 SeaDragon 27 Yakunin, Vladimir 46
44 Dole Food 31 Ivanov, Viktor 46 Nielsen, Jim 29 Shawe, Philip 31 Yenbamroong, Kris 68
Bouchard, Andre 31 Double Negative (PRIF:IN) 24 John Burns Real Estate Night + Market 68 Smith, Lamar 60 Zhong, Walker 27
Bourdain, Anthony 68, 75 DuPont (DD) 31 Consulting 19 Nintendo (7974:JP) 15 Soboroff, Jacob 75 Zuckerberg, Mark 32, 72
Brewer, Rosalind 76 Durex 15 Johnson, Boris 10 Norris, Elwood 36
Brown, Jerry 29 Dyumin, Alexei 46
Elting, Elizabeth
Enbridge (ENB)
31
15
K O How to Contact
Kadyrov, Ramzan 10
Energy Maritime Associates 26
Erdogan, Recep Tayyip 44 Kaya, Irfan 40
Oaktree Capital Management 38
Obama, Barack 17, 60, 72
Bloomberg Businessweek
ExxonMobil (XOM) 60 Kazman, Sam 60 Oceania Natural 27
Editorial 212 617-8120 Ad Sales 212 617-2900
Facebook (FB) 32, 34, 72 Kickstarter 72
Subscriptions 800 635-1200
Fiat Chrysler (FCA:IM)
Fidelity National Information
15 KLA-Tencor (KLAC)
Kudrin, Alexei
35
46 P Address 731 Lexington Ave., New York, NY 10022
Services (FIS) 41 Palisades Group 38 E-mail bwreader@bloomberg.net
76
Rosalind
Formula One
Foster, Norman
15
40 L Paltrow, Gwyneth
PayScale
68
32
Fax 212 617-9065 Subscription Service
PO Box 37528, Boone, IA 50037-0528
Fox News (FOXA) 15 Lassman, Kent 60 Peabody Energy (PE51:GR) 60
Brewer
Framestore 24 Lego 15 Perry, Rick 10 E-mail bwkcustserv@cdsfulfillment.com
Frumhoff, Peter 60 Lieu, Ted 60 Pershing Square Holdings 15 Reprints/Permissions 800 290-5460 x100 or
Capital Economics 19 Furness, Tom 34 Liberty Media (LMCA) 15 Plank, Kevin 15 businessweekreprints@theygsgroup.com
Carlson, Gretchen 15 LinkedIn (LNKD) 32 Putin, Vladimir 10, 17, 40,
Letters to the Editor can be sent by e-mail, fax,
China Market Research
Group 27
G Liu, Cixin
Liu, Ken
72
72
44, 46
or regular mail. They should include address,
Chipotle Mexican
Grill (CMG) 15
Gas Sayago
Gavekal Dragonomics
26
17
Lucas, George
Luparello, Steve
24
41 R phone number(s), and e-mail address if available.
Choi, Roy 68 Gazprom (OGZPY) 46 Luzhkov, Yuri 40 Randich, Steve 41 Connections with the subject of the letter should
Cisco Systems (CSCO) 35 Geo Group (GEO) 23 Lynch, Loretta 60 Raymond, Lee 60 be disclosed, and we reserve the right to edit for
Clarke, Neil 72 Goldman, Duff 68 Lyster, Sue 24 Redshaw Advisors 29 sense, style, and space.
 V E YOUR W
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 It’s been a shirtless summer for Canadian
Opening Prime Minister Justin Trudeau. In late July,
in the Gatineau region of Quebec, he

Remarks emerged from a cave, bare-chested, to

surprise a vacationing family and posed
for a series of selfies. A few days later,
again shirtless, he photo-bombed a beach
wedding in Tofino on the West Coast. Both

Why Trudeau events made the international press and

were shared, at a conservative estimate,
several million times each. Since his elec-

Is Like Trump
By Stephen Marche
tion, barely a week has gone by without
the prime minister going viral. Canadian
government is becoming an experiment
in virocracy—rule through social media.
There is a U.S. parallel, though he’s
not in government yet: Donald Trump
also uses social media to garner vast
Both have exploited social media to win immense influence. influence. In the American presidential
Trudeau’s innovation is to use it to govern campaign, the Republican candidate
has relied on the mass exposure of his
various feeds and accounts instead of tra-
ditional advertising. But while his influ-
ence over social media is immense, its
actual effect on American politics has
yet to be proven. Still, the power of the
new media is unquestionable. Rick Perry
has joined the next season of Dancing
With the Stars because he’s realized that
dumb celebrity provides more political
clout than having run a state for 15 years.
10 Trudeau’s exploitation of social
media is different from his American
counterpart’s. Here’s a quick summary
of his biggest hits since he became prime
minister last October: He was photo-
graphed hugging panda cubs, he gave
a (possibly prepared) answer revealing
his knowledge of quantum computing,
he smiled while performing the peacock
yoga pose on a conference table, and
he went jogging with the president of
Mexico in suggestively short shorts.
There have been embarrassing viral
flubs as well: a cringeworthy push-up
video for the Invictus games, the time
he put his hand on his wife’s bum at the
Ottawa Press Gallery Dinner, and, infa-
mously, Elbowgate, in which Trudeau
“manhandled” a fellow MP (acciden-
tally brushed might be a more accurate
description) and apologized, in a dis-
tressingly Canadian way, four times for
it. These are hardly the long-running
garbage fires of Trump, but traditionally,
they would be gaffes. They don’t appear
to have affected Trudeau adversely. Being
PHOTO ILLUSTRATION BY JUSTIN METZ

a meme actually helps him.

In Canada, this is even more surpris-
ing than in the U.S., because a prime
minister doesn’t need to maintain con-
stant popularity. Trudeau’s parlia-
mentary majority gives him complete
control of the legislature and judicial
appointments, and everything else
important—unlike a U.S. president, who
has to help congressional allies win elec-
tions every two years.
So why does Trudeau do it if he
doesn’t need to? His opponents have
claimed it’s simple vanity, a mania for
attention, the Trudashian effect. But
already, less than a year into his gov-
ernment, it’s obvious that condescen-
sion is misplaced. In his short tenure,
Trudeau has demonstrated the political
effectiveness of virocracy as a governing
strategy—a way of overcoming criticism
and skirting controversy by the sheer
power of viral personality.
Trudeau’s dominance of social media
has made him wildly popular. A poll in
the middle of the summer claimed that
he would “win 80 percent of seats if
an election were held today.” And this
during a period when Canada shed
71,000 full-time jobs; the justice min-
ister informed the Assembly of First
Nations that Canada wouldn’t be adopt-
ing the United Nations Declaration on
the Rights of Indigenous Peoples as
it had repeatedly promised; and the
Atlantic provinces also lost their tradi-
tional guaranteed appointment to the
Supreme Court, a matter of importance
to a country with intense regional differ-
ences. Each of these issues, in any other
period of Canadian history, might have
led to serious political crises.
Here’s the foremost of Trudeau’s
lessons so far: If you can control the viral
space, traditional politics don’t matter.
Virality provides one of the greatest polit-
ical covers ever. While Trudeau was being
photographed with the pandas, Canada
quietly approved a sale of weapons to
Saudi Arabia that made it the second-
biggest arms dealer in the Middle East.
During Elbowgate, an assisted suicide law
was passed that should have been hugely
controversial. Instead of discussing the
medicalization of death, Canada’s public
media were obsessed with how forcefully
the prime minister had brushed aside one
of his colleagues and whether he apolo-
gized too much.
Trudeau’s virocracy is welded to
technocracy—this is his other impor-
tant innovation, and the key for anyone
who wants to follow his lead. Recently,
at a party in Ottawa to celebrate Barack
Obama’s speech to Parliament, I hap-
pened to be talking to an economist and
former adviser to conservative politicians,
a man who had twice voted for Stephen
Harper, Trudeau’s Conservative prede-
cessor. Trudeau had come to see him to
seek his advice about pension plans. The
economist had started sketching out pro-
posals, stopping himself at an option he
considered politically unviable. “No,”
Trudeau told him. “Don’t worry about
the politics. That’s my job. You just tell me
what you think the right thing to do is.”
His opponents, who’ve tried to paint
him as shallow and stupid, miss the
point. He understands the division of
labor: He’s the Face, so that the face-
less bureaucrats can do their jobs. His
task as prime minister is to create the
conditions under which what he consid-
ers the best policies, crafted by experts,
can be implemented. He possesses an
odd combination of total narcissism and
complete lack of ego. If I were his polit-
ical opponents, I’d fear him deeply. He
can get things done with the Canadian
people barely noticing, whether they
like it or not.
The shirtless episodes seem silly;
that’s just what Trudeau wants. His
achievements, which have received
nowhere near the attention of his con-
stant photo opportunities, are real,
and they’re substantial. In the first six
months, he enacted massive child-care
grants for the poor; reinstated the long-
form census, which the previous gov-
ernment had canceled; and brought in
25,000 Syrian refugees.
Trudeau’s viral politics is a tool
of global influence as well. Usually,
Canada’s foreign policy amounts to sup-
porting its allies in more or less irrele-
vant ways in various wars that aren’t of
its creation—an impotent and expensive
business. Trudeau’s viral politics is far
more effective in promoting Canada’s
vision for the world. His greeting of
Syrian refugees may well define the
image of Canada for decades. It showed
the world that there’s a way to respond
to Syrians that isn’t fearful. Trudeau’s
skill at media manipulation is a legit-
imately significant national asset. His
recent trip to China was a huge success:
Chinese social media implored its audi-
ence to “lick the screen.”
A traditional politician, in most of the
world, is a policymaker who tries to give
exciting speeches; a viral politician is a
celebrity who knows enough to listen
to policymakers. If recent history is any
guide, both sides of that equation are
essential. You need the celebrity. You also
need the experts. Social media success
without conscious policy ultimately fails.
The 2016 U.S. election is a confronta-
tion between viral celebrity and a policy
wonk. The two sides of the Trudeau
equation—virocracy and technocracy—
couldn’t be more separate in the
Virocracy—and its
dependence on
experts—is both utopian
and undemocratic
American scenario. Trump has almost
11 million Twitter followers to Hillary
Clinton’s 8 million, and 22.7 million
Facebook likes and followers to Clinton’s
15 million. Meanwhile, Clinton has
arguably the most comprehensive policy
platform in the history of American pres-
idential campaigns.
American progressives wish that
Clinton were more entertaining; she
herself acknowledges that weakness. For
Republicans, their crisis boils down to
one tantalizing question: What if Trump
had real policies instead of just making
America great again? No one truly knows
where he stands on Mexico, even though
he made a huge social media splash with
his unexpected visit on Aug. 31. Trump
may yet pick up on Trudeau’s techniques.
But for now, because he can’t provide a
broader platform or a consistent one, the
billionaire is devolving into a viral celeb-
rity who’s hijacked politics rather than
a viral leader.
Trudeau is beyond both Clinton and 11
Trump; he’s the next generation, using
virality to govern, not simply to win cam-
paigns. Politicians in other parts of the
world are experimenting with virality, too.
Ramzan Kadyrov of Chechnya uses social
media both to project a cuddly persona
and to issue stern warnings to toe the
official line. Vladimir Putin benefits from
state-sponsored “internet brigades” who
troll critics of his regime. Boris Johnson
could have been Britain’s first viral politi-
cian if he’d espoused a policy that experts
could actually implement.
Trudeau’s innovation hasn’t yet
reached the U.S., but it will. For people
who trust technocrats, who believe in
government, the new virocracy is some-
what utopian. But there’s something
intensely undemocratic about it as well.
Issues aren’t debated as they once were.
Instead, there’s a froth of social media
and beneath it, almost invisibly, the busi-
ness of government by experts.
The shirtless man emerging from
the Quebec cave is eager to smile for
the selfie. That way, you won’t look to
see what’s behind him. Everyone on
Facebook will love it. 
Stephen Marche is a columnist for Esquire
magazine and the author most recently of
The Hunger of the Wolf.
 Bloomberg
View
Is the World Ready for
Quantum Computers?
That technological advance may lead to
nightmarish breaches in data security
Quantum mechanics, Carl Sagan observed, is so strange that
12 “common sense is almost useless in approaching it.” Scientists
still don’t understand exactly why matter behaves as it does at
the quantum level. Yet they’re getting better at exploiting its
dynamics—in ways that may upend the technology business.
One of the most interesting applications is in computing. In
theory, quantum computers could take advantage of odd sub-
atomic interactions to solve problems far faster than a conven-
tional machine could. Although a full-scale quantum computer
is still years off, scientists have lately made a lot of progress
on the materials, designs, and methods needed to make one.
And that could have some striking benefits. Quantum com-
puters could simulate how atoms and molecules behave, to the
great advantage of chemists and drug designers. They could
solve optimization problems—say, how to efficiently route air-
plane traffic—far faster than current technology can. They could
speed advances in artificial intelligence, improve sensors, and
lead to the design of stronger and lighter industrial materials.
Unsurprisingly, then, investment in the field from big busi-
ness and the government, including intelligence agencies
focused on breaking codes, is surging. That suggests a looming
problem. To simplify a bit, the cryptographic tools commonly
used to protect information online rely on very hard math prob-
lems, such as factoring large integers, that normal computers
can’t solve in a reasonable time frame. Quantum computers,
though, could probably make quick work of such equations.
As a result, they could undermine the security of every-
thing from mobile phones to e-commerce to cloud computing.
Within two decades, by some estimates, quantum computers
may be able to break all public-key encryption now in use. “The
impact on the world economy could be devastating,” says the
nonprofit Cloud Security Alliance.
As dire as that sounds, panic isn’t in order just yet.
Researchers are already working on “quantum-resistant”
To read Matthew
Winkler on smart
infrastructure invest-
ment and Stephen
Mihm on the history of
index funds, go to
Bloombergview.com
encryption. Some companies claim to have made significant
progress in the field. Google, among others, is working on a new
form of security for its browser that might rebuff a quantum
algorithm. Although a lot more research is needed, standards
agencies around the world are well aware of the problem.
Yet some vigilance is still advisable. Businesses, in particular,
should pay attention. Many have files that must be stored for
years, for legal or commercial reasons. But woefully few have
a long-term strategy for protecting them. Governments could
also help. Public investment in basic quantum-science research
would help lay the groundwork for a promising new field. More
cooperation between Silicon Valley and the government, an
area that has shown room for improvement of late, could be
invaluable in this regard.
Angela Merkel Needs
Europe’s Help Now
The chancellor’s refugee policies led to a defeat
in her home state by a hard-right party
German Chancellor Angela Merkel suffered a humiliating
electoral defeat in her home state on Sept. 4. The result, driven
by a backlash against her policy on refugees, calls for hard
thinking not just on her part but also from Germany’s partners
in the European Union.
Voters in rural Mecklenburg-Western Pomerania, a tiny state
of 1.6 million, didn’t just defeat Merkel’s Christian Democratic
Union—they crushed it. With just 19 percent of the vote, the
CDU was pushed into third place behind the Social Democrats,
Merkel’s coalition partners, with 30 percent of the vote, and the
recently formed hard-right Alternative for Germany (AfD), with
about 22 percent. National elections are due next year. The AfD
may be about to establish itself as a powerful political force.
Merkel’s position on refugees was both brave and righteous:
She called for a strong humanitarian response to the flood of
migrants fleeing conflict in Syria, the Middle East, and North
Africa. Since early last year, Germany has taken in more than
a million. “Wir schaffen das,” Merkel said. “We can do this.”
She certainly wasn’t wrong to want to help, but she made too
little of the difficulties to be faced. Merkel has enabled the AfD
to argue that she’s deaf to her own people. She needs to make
clear now that resources adequate to the task will be made avail-
able and that there are indeed limits to what Germany can do.
In doing this, support from other EU countries will be
essential. The refugee crisis isn’t Germany’s problem alone.
ILLUSTRATION BY SIMON ABRANOWICZ
Managing it requires commitment from across the union, and
such support has been conspicuously absent. Merkel doubtless
hoped to lead by example—a noble sentiment, but it didn’t
work. Europe’s other governments ought to step forward
with moral and material support, with a new commitment to
effective joint control of the EU’s external borders, and above
all with offers to accept their fair share of genuine refugees. 
 You can’t
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without the
right tools.
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  Nintendo’s
stock rose almost

Movers
By Kyle Stock
 Fun Home, the Broadway musical
30 percent following an
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fl ored
co dom. It Enbridge buys Spectra
Broadway musical with a lesbian news at Apple’s iPhone 7 condo
Energy, creating an
protagonist and the first written was jusj st a joke:
unveiling on Sept. 7. Durex
D u
used the energy infrastructure
by women to win the Tony Award
resulting b
g buzz to giant
for Best Musical, it recouped its
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onths. A
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North American tour starts in Cleveland in October.
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to promot
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panda was racing league
 Lego a added 3,500 workers Formula One
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and still couldn’t produce from the
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demand, as is a
rise in four-person
households.
$256m
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 Chipotle Mexican Grill shares climbed almost 6 percent when Bill Ackmman’s uninsured Americans
Ups hit a record low
Pershing Square Holdings announced a 9.9 percent stake in the restaura ant
gy.
chain. The firm will push for changes in governance, spending, and strateg
8.6%
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agreed to pay former
TV host Gretchen 15
Downs Carlson to settle sexual
harassment charges

$20m
GEOGRAPHIC CREATIVE; CAR: COURTESY CHRYSLER; NORTH DAKOTA: TOM STROMME/THE BISMARCK TRIBUNE/AP PHOTO; MUSK: JUSTIN CHIN/BLOOMBERG
PHOTOS: PANDAS: WILDLIFE GMBH/ALAMY, CYRIL RUOSO/ JH EDITORIAL/MINDEN PICTURES/NATIONAL GEOGRAPHIC CREATIVE, JOEL SARTORE/NATIONAL

The median cash

holding at S&P 500
companies slipped to a
three-year low
 Under Armour
investors balked when
CEO Kevin Plank
$860m
announced plans to ITT Tech employees
 A federal court of sell 2.1 million shares, dismissed when the
appeals ruled that Uber a stake worth for-profit school shut
drivers must resolve down all its campuses
grievances individually
rather than as a $72m 8,000
class. Some 385,000
drivers are fighting in Shares of retailer
court to be treated as Sprouts Farmers
Uber employees, not Market went stale on
contractors. ast
a lowered forecast

 A federal judge temporarily halted construction of a $3.8

between American Indian protesters and private security
$ 8 billion pipeline in North Dakota af
y guards. The Standing
S Rock S
after violence broke
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Sioux tribe had filed a temporary
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“We will be in a far better po

osition  Long Island University
locked out 640 faculty
to convince potential invesstors members at its Brooklyn,
N.Y., campus on the first
to bet on us if the headline is not day of classes after failing
to agree on a new five-
‘Tesla Loses Money Again.’ ” year contract. It also froze
 Elon Musk in an internal memo urging cost cuts and more cars their e-mail accounts and
canceled health insurance
coverage.
 Global
Economics
September 12 — September 18, 2016
 They still can’t drive, but they’re chipping away at the dress code
 “I just decided that society is changing, and I’m going to just try”
For more than a decade, Bashayer
al-Shehri covered her face with a black
veil in public, automatically donning
16 the niqab like all her female relatives in
Saudi Arabia. Discarding it proved sur-
prisingly simple. “I just decided that
society is changing, and I’m going to
just try to see, and it was so easy,” says
al-Shehri, 28, a pharmacy student from
the capital, Riyadh, who’s been study-
ing in Chicago and was home for a
break. “I didn’t really notice any differ-
ence of treatment of people and how
they perceive me.”
A small but growing number of Saudi
women are pushing the boundaries of
a dress code that’s shrouded women
in this conservative Arab Gulf state in
black from head to toe. Travel and the
internet have opened them to other
customs and ideas, and young, edu-
cated urban women are setting trends.
The change is incremental. Al-Shehri
still wears a headscarf and drapes
herself in a floor-length robe, tradition-
ally black, called an abaya. The sight of
uncovered faces and colored abayas in
Riyadh are nevertheless gains for the
women of Saudi Arabia.
So are other developments. The gov-
ernment has imposed curbs this year
on the ability of religious police to make
arrests. Some analysts say the govern-
ment can’t carry out its reforms of the
oil-dependent economy without loos-
ening restrictions on half its population.
“Cultural and social change is an
integral part of Vision 2030, which will
be critical for increasing the role of
women in the economy,” says Monica
Malik, chief economist at Abu Dhabi
Commercial Bank. Saudi Vision 2030 is
the official blueprint for reform.
From 2010 to 2015, the number
of working women in Saudi Arabia
jumped 50 percent, to more than
830,000. As women head to jobs in
Riyadh and Jeddah, more are wearing
white, green, purple, and floral abayas
that would have been considered shock-
ing five years ago. The shift has created
a cottage industry of Saudi women who
sell unconventional robes, some in chic
boutiques and others on Instagram.
That women see colored robes as a
breakthrough reflects the guarded pace
at which social freedoms are develop-
ing in Saudi Arabia, where clerics influ-
ence politics and preach to millions
of followers on Twitter. The kingdom
remains the only country in the
world where women can’t drive, and
guardianship rules make them legal
dependents of male relatives for life,
meaning they can’t leave the country
without permission. Of 24 goals set in
Vision 2030, only one, to increase the
number of women in the workforce,
pertains to women’s advancement.
A fatwa, or edict, on the kingdom’s
official website of religious rulings says
abayas should not have “decoration
that draws attention” or “resemble the
clothing of infidels or men.” Yet com-
ments in July from an official cleric
suggest some measure of tolerance
on the issue of color. As long as it isn’t
tight or sheer, “I don’t see anything
wrong” with an abaya that’s brown or
any color that doesn’t draw attention,
Sheik Abdullah al-Manea, a member
of Saudi Arabia’s Council of Senior
Scholars, told the newspaper Okaz.
CLOCKWISE FROM TOP: FAYEZ NURELDINE/AFP/GETTY IMAGES; JEWEL SAMAD/AFP/GETTY IMAGES; ISABELLE ESHRAGHI/AGENCE VU
The appearance of a few beige or
pink abayas in a sea of black may
seem insignificant, but the changes in
women’s dress reflect a deeper shift
in Saudi society, says Hala Aldosari, a
visiting scholar at the Arab Gulf States
Institute in Washington. “Social net-
works carried debates in the last few
years that influenced better awareness,
particularly on women’s status and cul-
tural influences,” Aldosari wrote in
an e-mail. On a policy level, however,
“women’s issues are not a high priority
for the ruling family, as they still need
to appease religious groups” that are
more conservative, she says.
Although Deputy Crown Prince
Mohammed bin Salman plans unprec-
edented economic moves such as
selling shares in the state-owned oil
company, his goals for women are more
modest. Under Vision 2030, which he
leads, the government wants to increase
women’s participation in the workforce
to 30 percent, from 22 percent, over the

Morning prayer in Riyadh
Dr. Souad al-Jouani (left) with a student
next 14 years. That target is lower than
the current level of 31 percent in Sudan.
The kingdom’s official religious
authority says women are required
to cover their face and hands, but
many scholars say that injunction is
rooted in culture, not scripture. And
even though the stereotypical image
of a Saudi woman is a swirl of black,
in parts of the kingdom’s south the
traditional garb is floral dresses and
straw hats. The notion of religious
requirement has nonetheless pre-
vailed in the popular perception. “I
personally prefer to cover my face for
religious reasons,” says Heba Ahmed, a
MAC Cosmetics saleswoman in Riyadh.
“It is a traditional society, and I don’t
think that is a bad thing.”
After four Saudi women competed in
this year’s Summer Olympics with bare
faces, a hashtag popped up on Twitter
saying they “don’t represent” Saudi
Arabia. “We focused on women’s par-
ticipation, and we lost our respect for
our traditions,” one man posted.
Many of the changes embolden-
ing women in their fashion choices
were made possible by the late King
Abdullah, who appointed women to
the consultative Shoura Council and
lent his name to the kingdom’s first
co-educational university. He also
ordered lingerie and makeup shops to
employ only women, which increased
women’s employment and spared
women the embarrassment of buying
intimate apparel from men.
What began as a generational shift
accelerated after oil prices plunged, says
Paul Musgrave, an assistant professor
of political science at the University of
Massachusetts at Amherst. When King
Salman came to power in January 2015,
the oil price rout had already cut into
government revenue. Last year the
kingdom recorded a budget deficit of
almost $100 billion. The government
is phasing out energy subsidies and
introducing a value-added tax, driving
up the cost of living. The old policies
aren’t affordable now, Musgrave says,
and pressure for women to work will
increase. Yet unless they’re able to
“commute, travel, access, and stay in
jobs without a guardian’s permission,”
Aldosari says, “women will not join the
workforce in any significant numbers.”
Builders are hard-
pressed to find prime
land at good prices 19
Indonesia’s finance
minister goes after
tax evaders 20
Kariman Abuljadayel at the Olympics in Rio
At a news conference in April, Deputy 17
Crown Prince Mohammed said women
“must be effective and productive.”
Asked if Saudi Arabia would allow
women to drive—paying for drivers or
taxis can devour half of a salary—he said
the government can’t force something
society rejects. —Vivian Nereim, with
Deema Almashabi
The bottom line The oil crash may hasten Saudi
women’s liberation because they represent an
untapped pool of labor.
State Planning
What’s ‘Supply-Side
Reform’ in Chinese?
 This version favors hands-on
state control, not deregulation
 “It is about the government
micromanaging the economy”
To understand policymaking in China,
pay attention to the buzz phrases. The
country’s favorite economic slogan,
“supply-side structural reform,” just got
its most international exposure so far, at
the Group of 20 summit in Hangzhou.

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are published that count as two issues,
and when an additional special issue
may be published.
Global Economics
Faced with rising protectionism
and a sluggish global economy,
China’s reform “has entered the deep-
water zone where tough challenges
must be met,” Chinese President
Xi Jinping said in a Sept. 4 opening
address attended by President Obama,
Russian President Vladimir Putin,
and Indian Prime Minister Narendra
Modi. Calling for “real action” and “no
empty talk,” Xi said China would con-
tinue “vigorously advancing supply-
side structural reform.”
No one expects the macroeconomic
textbook defini-
China crude tion of supply side
steel production in Xi’s China—
900m the theory that
Metric inspired Ronald
tons
Reagan’s eco-
450m nomic policies
in the 1980s.
Reagan’s version
0 had as its goal
2000 2015 freeing up the
economy by
cutting taxes and regulations in the
hope that companies would invest
and produce more, driving growth.
Xi’s “supply-side structural reform”
is a grab bag of policies, focused on
cutting excess capacity, shuttering
a limited number of “zombie” com-
panies, and subsidizing favored and
often inefficient industries, says
Barry Naughton, an expert on the
Chinese economy at the University of
California at San Diego. The point isn’t
to encourage supply but, for the most
part, to curtail it.
First publicized nationally at an
annual economic planning meeting
at the end of last year, the slogan has
since been regularly heralded in the
state media as the newest guiding prin-
ciple for China’s economic future. (The
“New Normal” was an earlier slogan,
referring to China’s downshifting eco-
nomic growth, first propagated by Xi in
the fall of 2014.) “Supply-side structural
reform is an urgent task that cannot
afford any delay,” the People’s Daily
said in January in a front-page com-
mentary. A second-page commentary
warned in May of excessive debt and
called for more supply-side reform.
China must especially deal with
severe industrial overcapacity, an
issue of growing international concern
as the country’s steel exports have
surged, roiling markets in the U.S.
and Europe. “It is crucial that China”
sets up a way to monitor overcapacity
in the steel sector and its causes,
according to Jean-Claude Juncker, the
European Commission president, who
was in Hangzhou.
But controlling supply isn’t
easy. In the first seven months, the
government achieved 48 percent
of its planned cut of 45 million
tons of production. Yet over-
capacity remains huge, warned the
National Development and Reform
Commission (NDRC), China’s state
planner, in August.
Local cadres are loath to close fac-
tories that owe money to local banks,
pay taxes, and, above all, are big
employers. “For laid-off steelworkers,
what other jobs are there for them?”
says Sebastian Lewis of S&P Global
Platts in Shanghai. “And then there
are all the other businesses that are
affected—restaurants, taxi drivers—
which have a knock-on effect on the
rest of the economy. So that is the hin-
drance to capacity reductions.”
Provincial bosses, however, are
eager to appear enthusiastic about the
slogan. With a once-every-five-years
party congress coming in the fall of
2017, they’re vying to show they’re
on board with the policy; they hope
that will help them win a promotion
when China shuffles much of its senior
leadership. Hebei, home to about one-
quarter of China’s total steel produc-
tion; Heilongjiang, part of China’s
northeastern industrial rust belt; and
coastal Shandong have all recently
issued supply-side plans, including
capacity reduction targets and tax
breaks for new industries such as elec-
tric vehicles and eco-friendly agri-
culture. Guangdong, better known
for making toys than steel, outdid
others with a six-part, 42-page doc-
ument, complete with a vision state-
ment, Naughton says. “A lot of it is just
optics. You have got to look like you
are doing a good job implementing
Beijing’s policy.”
The policy shift reflects Xi’s desire
for stronger, top-down control by
the party over the entire economy,
ILLUSTRATION BY 731
says Andrew Batson, research direc-
tor in Beijing for China consultant
Gavekal Dragonomics. The NDRC is
setting production targets in steel,
coal, and other industries. The
State-Owned Assets Supervision

and Administration Commission,
which manages China’s largest state-
owned enterprises, announced a
200 billion-yuan ($30 billion) fund on
Aug. 18 to support company restruc-
turing and innovation. And the gov-
ernment is ordering big companies,
including steelmakers, to merge oper-
ations, in part to prepare for more
international competition.
“It is about the government micro-
managing the economy, saying this
industry will produce this much and
will lay off this many people; it is very
interventionist. It is not about the gov-
ernment laying out general principles
and letting the market sort it out,”
Batson says. “For economists who
are real liberals, they think it is terri-
ble. They think it is all about central
planning.” —Dexter Roberts
The bottom line President Xi is using the language
of supply-side economics to explain and justify
more central planning of the economy.
Shelter
U.S. Builders Want
More of the Best Land
 But property owners are holding
out for higher prices
 “There’s plenty of land … but it’s
all in outlying areas”
The pace of U.S. home construction
hasn’t picked up much from a
year ago. One reason, says Capital
Economics property economist
Matthew Pointon, is a shortage of
land—not that enough land isn’t avail-
able, but rather that builders are
having a tough time finding prime land
at prices they’re willing to pay.
Residential starts increased
2.1 percent in July, from the prior
month, for an annualized rate of
1.2 million. A year ago, starts were
at a 1.1 million annualized
rate. A survey by
the National
Association
of Home
Global Economics
Not a Lot to Build On
Annual U.S. housing starts
Share of builders rating the supply of local lots low or very low
64%
Onset of subprime
mortgage crisis 1.8m
Record high in
March 2016 1.2m
29% 0.6m
0
1997 2015
LOT SUPPLY SURVEY ISSUED AT IRREGULAR INTERVALS. DATA: NATIONAL ASSOCIATION OF
REALTORS, NATIONAL ASSOCIATION OF HOME BUILDERS
Builders (NAHB) in May found that June, Burns’s company found. A fin-
64 percent of homebuilders reported ished lot includes access to utilities,
the supply of lots in their markets was compliance with all laws, and all the
low or very low—the highest percent- necessary paperwork done. Values
age of reported lot shortages since the rose significantly more in markets
data were first collected in 1997. such as Seattle (11 percent), the
“The focus of homebuilders has San Francisco Bay Area (6 percent),
been on the multifamily sector and and Denver (7 percent). That matches
more expensive single-family “It’s the biggest the NAHB survey, which
homes,” Pointon says. “By headache you can found that 39 percent of
definition, more expensive imagine. It takes homebuilders in the West
a tremendous
single-family homes require more amount of time and characterized lot supply as
premium plots of land, which basically ingenuity “very low,” far more than 19
tend to be harder to come by.” to know how to those in other regions.
Low interest rates could also
weave your way
“There’s a guy right now.
through the offices
be affecting landowners’ will- and get a permit and I brought him an amazing
ingness to sell. Some may be get things done” offer on his property, and
holding on to their property he thinks it’s going to be
because they have to put their worth more next year,”
assets somewhere, and there’s says Joe Coakley, a manager at Coakley
not much else out there to make a Development Group in Kirkland,
return, Pointon says. Local develop- Wash. But when asked if he could put
ers in Austin and Seattle say they can’t a Bloomberg reporter in touch with
think of a better time to sell, because the landowner, he refuses: “I don’t
their real estate markets are overheat- want to publish his name out there for
ing. Yet some landowners there aren’t the world to see, because then I get
selling, because they expect even 15 brokers calling this guy and pushing
better prices down the road. me out of the way.”
“If you’re a land seller, you can This shortage doesn’t affect all the
probably get an all-time-high price marketable land. “There’s plenty of
for your land today,” says land in the country, but it’s all in out-
John Burns, chief execu- lying areas far from the job centers.
tive officer of John Burns So the demand to buy homes in those
Real Estate Consulting in outlying areas is lower than usual
Irvine, Calif. National fin- right now,” Burns says. “And the costs
ished lot values rose to build have risen.” Developers point
2 percent year- to new environmental regulations,
over- understaffed local government offices,
year and the painful process of obtaining
as of building permits for raw land.
“It’s the biggest headache you can
imagine,” Austin real estate investor
Jerred Morris says of the permit
process. “It takes a tremendous
amount of time and
 Global Economics

basically ingenuity to know how to domestic tax cheats and take up

weave your way through the offices
and get a permit and get things done.”
Pointon of Capital Economics says
that to boost housing starts, homebuild-
ers are going to need to increase the
price they are willing to offer for desir-
able land. “To do that, they’re going to
have to put up the price of the homes
they sell or take a hit to their profits,” he
says. “And to do that, you have to pull
through higher home prices onto con-
sumers, which they may be able to do
as earnings rise.” He expects to see the
pace of housing starts accelerate in
the next few months as that adjustment
starts to happen. —Alexandria Arnold
The bottom line In the West and on the West
Coast, builders are finding it more difficult to buy
land at a reasonable price.
Tax Dodgers
A Reformer Gets a
Second Chance
20
 Indrawati returns to Jakarta
to help collect unpaid taxes
 “I’m not coming back to Indonesia
to create fear”
Six years ago, Indonesia’s finance
minister, Sri Mulyani Indrawati, was
more or less driven into exile to the
World Bank in Washington after
embarking on an anticorruption cam-
paign and trying to get more tax
dodgers to pay up, including one
of the biggest corporations in the
country. Now she’s returned to resume
her former posi-
tion, this time in
an overhaul of the tax office. “I’m
not coming back to Indonesia
to create fear,” says Indrawati, a
54-year-old economist. “But def-
initely some action needs to be
done immediately because of our
budget plan.”
Widodo, also known as
Jokowi, has promised to provide
the political cover to make
reforms work this time. Widodo
wants to get back that
Indrawati
overseas money and
increase domestic tax revenue
by using an ambitious amnesty
plan aimed at raising 165 tril-
lion rupiah ($12.6 billion). The
grace period ends in March.
Spending that money and addi-
tional funds earmarked for rail-
ways, roads, and ports is crucial
to his plans to increase annual
economic growth to his target
of 7 percent by 2019, up from
less than 5 percent in each of the
past two years. “The savior for Jokowi has criticized the plan as being too
is Sri Mulyani, who has a great track generous in its effort to persuade the
record and respect from investors,” noncompliant to pay up.
says Achmad Sukarsono, Indonesia Upon her return in July, Indrawati
analyst at Eurasia Group in London. called the tax amnesty hotline 15 times
Indonesians are worried about and couldn’t get through, so she
Indrawati’s return, says James tripled the number of agents manning
Van Zorge, who runs Gordian Knot the lines and ordered the tax office to
Advisory, a business consultant in stay open on Saturdays and Sundays.
Jakarta. They know that in the past Her efforts have yet to show many
“the fat cats get off,” so officials might results: In the first eight weeks of
begin zeroing in on the middle class to the amnesty, Indonesia collected
reach their targets, he says. only 5.3 trillion rupiah in revenue,
After the amnesty expires, all bets about 3.2 percent of the target. Still,
are off. Of Indonesia’s 255 million stocks and the currency rallied after
people, only 30 million are regis- the amnesty law was approved in
tered taxpayers and only 10.9 million, June, with the benchmark Jakarta
including companies and individuals, Composite Index gaining almost
submitted returns last year, according 11 percent since then.
to the tax office. Indrawati, like Widodo, travels in

10.9 million
President Joko
Widodo’s cabinet.
She’s ready to
make another go at
curtailing graft.
The number of She will lead the
Indonesian companies
and individuals who
effort to bring back
Indrawati warns that “serious
action, domestically as well as inter-
nationally,” awaits tax evaders who
don’t join the amnesty program.
Those who own up immediately
pay as low as a 2 percent tax on
their assets, a far lower rate than
different circles from the families who
traditionally wield economic and polit-
ical clout in Indonesia. She grew up in
an academic household. “Economic
growth that benefits only a few is
like a poison. It is deadly but kills
slowly,” she wrote in a blog post last
BROOKS KRAFT/CORBIS/GETTY IMAGES

submitted tax returns what officials esti-
last year mate is the more
than $300 billion
that Indonesians stashed overseas
during their country’s periods of
political turmoil, beyond the reach
of the nation’s tax collectors. She
also wants to reduce the number of
for those Indonesians who’ve been
paying their fair share all along. The
amnesty rates will rise as the expira-
tion date gets closer. Those who don’t
declare will need to pay 200 percent
of the tax owed if they’re found
out. The Organisation for Economic
Co-operation and Development
year. —Karlis Salna, Yudith Ho, and
Andrew Mayeda
The bottom line Indonesian President Widodo
needs money to pay for infrastructure, and
Finance Minister Indrawati is essential to his plans.
Edited by Christopher Power
Bloomberg.com
 Companies/
Industries
September 12 — September 18, 2016
PHOTO ILLUSTRATION BY 731; SOURCE: GETTY IMAGES (2)
 Incarceration is falling, so private prisons try new businesses
 “We kind of read those tea leaves” and diversified
Why Stormtroopers, Mitsui O.S.K.’s wait for
Tarzan, and a wizard its ship to come in 26
call London home 24
A Kiwi honey company
tries to sweeten its
presence in China 27
With overall violent crime rates falling
nationally and fewer people getting sen-
tenced to long stretches behind bars,
private prison companies see a poten-
tially catastrophic decline in demand
for their services. Their response:
diversify into everything from halfway
houses to neighborhood check-in
centers for drug offenders.
Over the past three decades, entre-
preneurs and investors piled into the
private prison industry, convinced
that the thorny job of incarcerating
criminals could be a lucrative growth
business. No longer. Curtailment of
harsh mandatory-minimum sentences
and other changes in criminal justice
policies have combined to cut federal
and state inmate head counts to
1.5 million as of yearend 2015. That’s
down from 2.4 million in 2008, a
38 percent reduction.
In recent weeks, the two publicly
traded U.S. private prison opera-
tors, Corrections Corp. of America 23
(CCA) and Geo Group, have felt
the effects of a shrinking market.
On Aug. 29, the U.S. Department of
Homeland Security announced it
would review whether to end its use
of privately contracted facilities for
detaining criminal aliens and other
illegal immigrants. Just 11 days earlier,
the U.S. Department of Justice said
more definitively that it would begin
phasing out private prisons.
About half of the companies’ annual
revenue “may be at risk” after the
federal government announcements,
according to an analysis by Bloomberg
Intelligence. Both companies have
major immigration detention con-
tracts due to expire within the next
eight months. Those deals alone have
generated $520 million for Nashville-
based CCA and $228 million for the
smaller Geo, which is headquartered
in Boca Raton, Fla.
So far, state-issued private prison
contracts appear to be more secure
because state penal systems remain
more crowded than their federal
counterparts. Yet that hasn’t been
enough to reassure investors. Since
the Justice Department announce-
ment on Aug. 18, shares of CCA and
Geo have each sunk by more than
 Companies/Industries
30 percent. (Their largest rival, Aug. 18 Justice Department memo
Management & Training, based in instructing the Federal Bureau of
Centerville, Utah, is privately held.) Prisons to wind down its use of full-
Thus the drive for diversification. scale private prisons. The note
Most people enmeshed in the criminal emphasized that the department will
justice system aren’t held in prison or continue to pay private companies
jail, but instead are overseen by some to operate “hundreds of community-
form of “community corrections.” based residential reentry centers, or
That catchall term refers to several ‘halfway houses,’ across the country.”
kinds of institutions: halfway “The incentive for CCA has diversified into
houses, where some inmates private prison community corrections
go near the end of their companies is to through acquisitions, buying
‘widen the net’ of
sentences; “intermediate people under its first halfway house in
sanctions facilities,” which ever-increasing San Diego three years ago.
oversee released offend- levels of control.” Today it owns 25 such facili-
—American
ers who violate the terms of Friends Service ties with a total of 5,000 beds
their probation or parole; Committee report in six states. More deals are in
and day-reporting centers the pipeline, Grande says.
for people sentenced to “We have really ramped up
rehabilitative drug-treatment or and have had a lot of growth here in
employment-training programs, a short period of time,” CCA’s chief
rather than traditional imprisonment. executive, Damon Hininger, told
There were 4.7 million adult offend- industry analysts in an Aug. 19 tele-
ers on probation or parole as of the conference responding to the federal
end of 2014, the most recent figure cutbacks. Growth by acquisition
available. That number’s down will continue, CCA executives say.
7.8 percent from seven years earlier Historically, small local operators,
but still far larger than the prison pop- many of them family-run, have owned
24 ulation, and the decline has been most community corrections prop-
much slower. erties, so what’s going on now is the
“We kind of read those tea leaves” beginning of a consolidation of that
six years ago and began planning piece of the market.
the move toward community correc- Geo has been moving in the same
tions, says Tony Grande, CCA’s chief direction “for several years,” its vice
development officer. The strategy president for corporate relations,
shift has been justified, he adds, as Pablo Paez, said via e-mail. The
prison populations have shrunk company says it has more than
and government customers have indi- 20 residential reentry centers and
cated they want large private pro- about 60 day-reporting facilities,
viders to offer less The company tells
serving about 7,000 offenders a day.
punitive, shorter- analysts the loss of Skeptics of private prisons say they’re
term facilities contract revenue worried about the trend toward larger
won’t be severe
that are less like contractors buying up mom-and-pop
traditional prison and more like community corrections companies.
community-based operations that In a report published in August, the
include rehabilitation opportunities. American Friends Service Committee,
Grande points to a footnote to the a peace and social justice organiza-
tion, warned that the bottom-line focus
of publicly traded corporations will
Red Is the New Black undermine reformers’ goal of “shrink-
Corrections Corp. of America share price ing the size and scope” of the criminal
$36 punishment system.
“While the best practices in the area
of community corrections emphasize
Homeland Security tailoring interven-
The Justice $24 says it will review its tions to provide
Department says it
use of private prisons the lowest level
will phase out private
prisons of security or surveillance necessary
for the shortest amount of time,” the
$12 Friends committee added, “the incen-
6/1/2016 9/1/2016 tive for private prison companies is to
‘widen the net’ of people under ever-
increasing levels of control.”
Grande disagrees. “To reduce popula-
tions, we’ve got to find a way to reduce
recidivism in this country,” he says, and
CCA is already seeking to do that with
rehabilitative programs it runs in its
prisons. “If the needs change, we have
to change.” —Paul M. Barrett
The bottom line Federal and state inmate head
count has fallen 38 percent since 2008, pushing
private prison operators to diversify.
Entertainment
Why Hollywood Makes
Digital Magic in the U.K.
 London is tops for the visual-
effects industry—Brexit or not
 “Over eight years, the whole
industry shifted”
Inside an art deco building on the edge
of London’s Soho district are hundreds
of programmers and graphic designers
working on Rogue One, the Star Wars
spinoff film due out in December.
As you enter, a large photograph
of kids playing in Darth Vader and
Stormtrooper masks is the only obvious
hint that this is the London outpost of
Industrial Light & Magic, the visual-
effects company founded by George
Lucas and now owned by Walt Disney.
Based in San Francisco, ILM opened the
London office at the end of 2014, hoping
to tap into the city’s growing band of
digital artists as it prepared to tackle
effects for a new Star Wars trilogy.
The U.K. has produced three of the
world’s five biggest visual-effects com-
panies, turning London into a global
DATA COMPILED BY BLOOMBERG; THE MARTIAN: COURTESY FRAMESTORE
hub for film production. Its status
recently got an unexpected boost: The
10 percent drop in the pound after
the U.K. voted to leave the European
Union has made it even cheaper for
Hollywood studios to outsource film
production to London. “There’s a lot
more interest now in moving work to
the U.K.,” says Sue Lyster, the executive
in charge of production at ILM London,
which employs more than 300 people.
The British government first intro-
duced tax breaks for film production
in 1997. Two years ago, it made the

incentives more generous: Any film
with at least 10 percent of its produc-
tion in the U.K. gets a 25 percent cash
rebate on the amount it spends there,
capping out at 80 percent of a film’s
budget. Brexit could make that deal
even sweeter. EU rules against state
aid forced the government to cap tax
credits at 80 percent. If the U.K. leaves
the single market, the government
could extend the break to 100 percent
of film production costs if it wants.
Britain’s three leading visual-
effects houses—Double Negative,
Framestore, and Moving Picture—
are centered around Soho, London’s
cramped creative heartland. Together
they employ more than 5,000 people
globally and generate an estimated
£250 million ($332 million) of annual
revenue. U.K.-based production houses
have won the last three Oscars for best
visual effects—for 2013’s Gravity, 2014’s
Interstellar, and 2015’s Ex Machina.
Even before the pound’s recent
slide, London-based houses had
amped up this summer’s biggest block-
busters. Double Negative, which won
an Oscar in 2011 for Inception and in
2014 for Interstellar, labored over the
wild Las Vegas car chase scene in the
latest Jason Bourne installment while
also reimagining the Enterprise in Star
Trek Beyond. Framestore perfected
the jungle and gorillas in The Legend of
Tarzan. And Moving Picture is already
Before
generating Oscar nomination buzz
for its work on Disney’s update of The
Jungle Book, which filmed the Mowgli
tale entirely in a computer-generated
world without any outdoor locations.
Hollywood’s reliance on mega-
spectacles has made the green screen
central to today’s moviemaking. The
top-10 box-office list of 2016 is dom-
inated by films with heavy visual
effects. Digital artists can do every-
thing from removing a crane from
a sloppily filmed scene to designing
a 10-shot action sequence that can
cost upwards of $10 million for visual
effects alone.
Computer-generated imagery
accounts for about a third of the cost
of the average $100 million-plus block-
buster, double what it was a decade
ago, according to William Sargent,
co-founder of Framestore, London’s
oldest visual-effects house. “The nature
of filmmaking has changed over the
past 5 to 10 years, and it’s accelerating
as directors mix and match physical
and digital,” Sargent says. “Our market
is growing, because the computer-
generated component is going up.”
Tax breaks have enabled British
houses to undercut U.S. rivals on
price. As a result, many of the leading
Hollywood visual-effects companies
have struggled. In 2013, Rhythm &
Hues Studios, based in Los Angeles,
filed for bankruptcy after 25 years in
For The Martian, Framestore turned Matt Damon’s performance before a
studio green screen into a harrowing scene above the Red Planet
Companies/Industries
business. Eleven days later, it won an
Oscar for best visual effects for Life of Pi.
It was British author J.K. Rowling’s
works that ignited London’s visual-
effects industry. The eight Harry Potter
films generated a steady stream of
work for U.K. companies, allowing
them to expand. “Over eight years,
the whole industry shifted from the
West Coast of the U.S. to London,” says
Tim Burke, the visual-effects super-
visor on Fantastic Beasts and Where
to Find Them, a Potter spinoff that
will be released by Warner Bros. in
November. All three of the big London
effects houses are creating computer-
generated creatures for the film.
Before the Brexit-induced drop in
the pound, Canada had been stealing
work from the U.K. with even bigger
tax breaks. Vancouver reduced its tax
breaks in May, but studios can still get
a mix of provincial, federal, and visual-
effects credits covering 53 percent of
labor costs if they shift work to the
city. Montreal’s tax incentives are even
more generous.
Those benefits have led London’s
visual-effects companies to set 25
up Canadian offshoots. In 2013,
Framestore opened an office in
Montreal, where it now employs
350 people. The following year,
Double Negative sold itself to India’s
Prime Focus World to get the cash
to expand to Vancouver, where it
After
 Companies/Industries
has 450 staffers. “We were missing
out on work, because it was being
done in Vancouver,” says Alex Hope,
co-founder of Double Negative. “To
stay competitive, we wanted to expand
both in the U.K. and Canada.”
While the pound’s slump may put
a brake on work drifting to Canada,
ILM’s Lyster is worried about the
ability to hire junior talent to feed
the industry if the U.K. imposes visa
requirements on EU citizens. Senior
visual-effects artists would easily
pass a skills and income test for U.K.
work permits, while new gradu-
ates from Europe may not. Still, until
Brexit becomes a reality—which could
take years—Hollywood will likely
be looking at London as a bargain.
—Stephanie Baker
The bottom line The British pound’s post-Brexit
drop has made London-based visual-effects
houses even more attractive to Hollywood.
Shipping
26 When Bigger Isn’t
Necessarily Better
 A massive floating LNG complex
has open spots on its dance card
 “The bigger the vessel, the more
of an issue that becomes”
Nobody will ever accuse shipper Mitsui
O.S.K. Lines of not thinking big. Its
new 40 billion yen ($394 million) float-
ing liquid natural gas terminal, sched-
uled for delivery as early as the end of
this year, is longer than three football
fields and capable of storing enough
LNG to power all of Sweden for a day.
That heft was supposed to be one of
its biggest selling points, allowing cus-
tomers to quickly sail in a complete
complex to store and transform LNG
back into gaseous fuel at a fraction of
the cost of building a billion-dollar gas
terminal on land.
But since the vessel was ordered
three years ago from Daewoo
Shipbuilding & Marine Engineering,
supplies of onshore gas have risen, and
the number of smaller competing ships
has grown—lowering ship-leasing rates
and dimming the appeal of the float-
ing megafactory. That means the gas
complex may sit idle after delivery.
It will be more than a year before the
vessel’s first confirmed job, a 20-year
charter for Uruguay’s Gas Sayago, a
joint venture of state-owned energy
companies. Construction delays, cost
overruns on the energy project, and
a change in the project’s developers
have postponed the country’s need for
the vessel. And now to free up cash,
Mitsui O.S.K. is looking for a partner in
Uruguay to share the cost of develop-
ing the ship, says Takeshi Hashimoto,
the company’s senior managing exec-
utive who’s overseen the project since
its start. Explains Hashimoto: “We
need to think about our balance sheet.”
For now, Mitsui O.S.K. is scouting for
short-term business to get some cash
in the door. Although the vessel could
also function as a regular LNG carrier,
there’s little demand for one-off deliv-
ery jobs for units of its size, says David
Boggs, managing director of Singapore-
based consulting firm Energy Maritime
Associates. “They could lay it up and
leave it in the shipyard, or tell the ship-
yard to take their time” finishing con-
struction, Boggs says. “That’s still
cheaper than taking delivery and just
having it sit with no business.”
Mitsui O.S.K. won’t disclose the cost
of idling the vessel, says Yuki Fujiwara,
a spokesman for the Tokyo-based ship-
ping line. “We can still make a profit
with the ship over its 20-year con-
tract even if we can’t find a home for
it for the first year and a half,” he says.
Still, Hashimoto is confident growing
demand for LNG will increase the
chances of finding work. “We’re looking
for a temporary job where we can
deploy the ship,”
Asian liquefied he says. “There
natural gas are places in Asia
$15 and South America
Spot price
with such a need.”
index* Even if the big
$9 boat finds a tem-
porary job, it may
struggle to work
$3 to its full capac-
9/29/14 9/5/16 ity. Today, some
smaller LNG
vessels in Asia aren’t fully deployed.
And with the capacity to store
263,000 cubic meters (862,861 cubic
feet) of LNG, Mitsui O.S.K.’s 345-meter
vessel will be bigger than any other
so-called floating storage regasifica-
tion unit, or FSRU, on the water.
The ship’s size will make it harder
to efficiently deploy, says Richard
Nelson, a Singapore-based partner
specializing in energy at law firm
King & Spalding, who estimates
that smaller FSRUs in Southeast
Asia are already using no more than
30 percent of their capacity. “There’s
a question generally about how to
deploy FSRUs at anywhere near
100 percent capacity,” he says, “and
the bigger the vessel, the more of an
issue that becomes.”
These FSRUs have limited potential
to simultaneously share their capacity
across multiple customers and users,
he says. Each one is basically a single
complex with one storage tank. The
market for the vessels is small, with
fewer than two dozen in operation
globally, but it’s recently been growing
because countries have been taking
advantage of a 60 percent plunge in
LNG prices over the past two years to
increase their consumption.
Egypt and Pakistan started import-
ing LNG for the first time last year using
the units, despite predictions that Egypt
wouldn’t have the infrastructure in
place to get the fuel this decade, says
Andrew Buckland, principal analyst
for LNG shipping and trade at Wood
Mackenzie, an energy research and con-
sulting firm. He expects there will be at
least 30 FSRUs globally by 2018, up from
23 at the start of 2016.
LNG imports from FSRUs could
rise 26 percent this year, to 29 million
metric tons, after jumping 44 percent
in 2015, according to Wood Mackenzie.
“It’s definitely the brightest spot of the
*INDEX EXPRESSED IN U.S. DOLLARS PER MILLION BRITISH THERMAL UNITS; DATA: ENERGY MARKET CO.
LNG industry,” Buckland says. “FSRUs
allow you to access gas far more quickly
than building a land-based facility.”
But it’s still an expensive outlay.
A new FSRU with a 170,000 cubic-
meter capacity would cost more
than $250 million, about a quarter of
the cost of developing a similar-size
onshore facility, King & Spalding said
in a December report. Lately demand
for some FSRUs has been hit by weaker
economic growth, says John Mathai,
an analyst at Bloomberg Intelligence.
“Utilization levels have been weak,
despite low LNG prices,” he says. “In
the largest market for FSRUs by capac-
ity, Brazil, gas demand has been hit by
an economic slowdown.”
Also clouding the outlook: Leasing
fees for FSRUs have fallen because of
 competition, down 20 percent from
five years ago, to about $120,000 a day,
according to consultant CS LNG. And if
smaller ships are idle, there’s unlikely to
be a rush to give work to Mitsui O.S.K.’s
immense vessel. —Chris Cooper,
Kiyotaka Matsuda, and Angus Whitley,
with Kyunghee Park
The bottom line Mitsui O.S.K. has a $394 million
floating LNG vessel set for delivery by yearend. The
terminal doesn’t have any work before 2018.
Health Foods
Catching Sales With
More Than Honey
 New Zealand’s Comvita looks to
new products to foster growth
 “Anything that’s sort of natural is
doing really well”
Consumers in mainland China are
demanding foreign brands that
promise something many local prod-
ucts can’t: peace of mind. Worsening
pollution and several product-safety
scares have led to increased sales for
imports that are considered safer, from
baby formula and facial creams to fresh
fruit and live seafood. “The fear of pol-
lution is changing consumer spending,”
PHOTOGRAPH BY ANDREW MUSSON FOR BLOOMBERG BUSINESSWEEK; BEES: ANDREW’S HONEY; PROP STYLING: HEAVY SETTING
says Shaun Rein, managing director of
Shanghai-based China Market Research
Group. “Anything that’s sort of natural
is doing really well.”
Comvita is one beneficiary of the
growing appetite for all-natural foods.
The company, the biggest honey brand
in New Zealand, relies on Chinese con-
sumers clamoring for manuka honey
for about 60 percent of its sales. People
in China have long eaten honey to
improve digestion and bolster their
immune systems. Touted as a superfood
for its antibacterial qualities, manuka
honey is made by bees that pollinate the
Leptospermum scoparium, a plant native
to New Zealand and Australia.
On Tmall, the online market-
place owned by Chinese e-commerce
company Alibaba, two 250-gram jars
of Comvita’s manuka honey sell for
849 yuan ($127), more than nine times
the price of a similar amount of the
company’s clover honey. The brand
is popular in cities such as Beijing and
Shanghai but hasn’t yet caught on in
less affluent cities, says Andrew Zhu,
director of Auckland-based Trace
Research, so there’s a lot of room for
growth. On Sept. 5, Comvita announced
a joint venture with a Chinese partner
to distribute its honey on the mainland.
The company reported earnings of
NZ$18.5 million ($13.7 million) on sales
of NZ$231 million for the 15 months
ended in June. That compares with
profit of NZ$10.2 million and sales of
NZ$153 million in the 12 months ended
in March 2015. Still, Comvita says sales
have suffered because of a slowdown in
the Chinese economy, which is on track
to grow about 6.7 percent this year, its
weakest performance since 1990. The
slowdown is putting pressure on the
company to find new products.
Comvita is looking to take advan-
tage of New Zealand’s reputation as
an environmentally friendly country.
Last September, it bought a 13 percent
stake in SeaDragon, a New Zealand
producer of fish oils. A plan to diver-
sify into oils, berry products, and
olive-leaf extracts for the supplements
market will help Comvita double
annual revenue, to NZ$400 million,
by 2020, says Chief Executive Officer
Scott Coulter. Sales of honey and
other bee-related products will gen-
erate NZ$280 million; the other
$127
What two jars of manuka honey
fetch on Alibaba’s Tmall
NZ$120 million will come from items
like bilberry supplements (NZ$74.26 27
for 180 capsules) and olive-leaf extract
oral spray (NZ$22.20 for 20 milliliters).
Comvita says such products can help
maintain healthy eyesight and cho-
lesterol levels. “Our goal is to try to
produce at the high-quality end of the
market,” Coulter says. The strategy is
“about connecting our customers to
the source of their food.”
Meanwhile, demand for manuka
honey has created an opening for
counterfeiters, says Walker Zhong, CEO
of Oceania Natural, a small Auckland-
based Comvita rival. “There’s a lot of
fake manuka honey because it’s so
expensive,” he says. New Zealand’s
Unique Manuka Factor Honey
Association, which represents the coun-
try’s beekeepers and honey producers,
is trying to trademark the name and
preserve it for use by Kiwis only. Says
association spokesman John Rawcliffe,
“The consumer expects that if it’s
manuka honey, then it comes from New
Zealand.” —Bruce Einhorn
The bottom line Comvita says honey products
and new oils and extracts will help it double its
revenue, to $290 million, by 2020.
Edited by James E. Ellis and
Dimitra Kessenides
Bloomberg.com
28

 The FDA looks at the risks of body inks as reports of adverse reactions climb
 “Even the most reputable places can’t guarantee the safety of ink”

Emily Pratt wasn’t impressed when
she heard about the U.S. Food and
Drug Administration probe into the
potentially harmful effects of tattoo
ink. She would have shrugged to show
how little she cared, but she was a
bit sore from the tattoo machine that
had been smacking away at her left
forearm. This was her seventh inking:
a wraparound bouquet of six roses in
shades of yellow and red rendered at
Embassy Tattoo in Washington, D.C.
Sitting in the tattoo parlor’s waiting
room, which doubles as the recovery
area, the 22-year-old Pratt says, “The
fact that I’m here says I’m not worried
about the side effects.”
The FDA and other health experts
are. “Even the most reputable places
can’t guarantee the safety of ink,”
says Arisa Ortiz, a dermatologist and
assistant professor at the University
of California at San Diego. She’s co-
author of a 2011 article that cited
researchers in Germany, Spain, and
the U.S. who discovered potentially
hazardous substances like mercury
and charcoal in some tattoo dyes.
Concerns have grown with the
explosion in body art’s popularity
and the availability of tools and inks
online. In the U.S., the industry is
growing about 9 percent a year, which
researcher IBISWorld forecasts will
make it a $1.1 billion business by 2020.
In the U.S., the inks are regulated
as cosmetic products. The FDA
can screen them before they hit
the market, but it’s rarely done so,
according to its website, because of
“competing public-health priorities
and a previous lack of evidence of
safety problems specifically associ-
ated with these pigments.”
The agency does investigate when
PHOTO ILLUSTRATION BY JUSTIN METZ; PHOTO: GETTY IMAGES
it receives complaints, and hundreds
have been filed since 2004, compared
with only five from 1988 to 2003, with
people reporting reactions includ-
ing itching, scarring, or inflamed skin
even years after getting inked. One
reason could be the proliferation of
do-it-yourself equipment and inexpen-
sive dyes, says “Sailor” Bill Johnson,
vice president for the National Tattoo
Association. “I’ve been using the same
product for nearly 40 years and have
never had a problem with it,” he says.
Scientists at the FDA’s National
Center for Toxicological Research in
Jefferson, Ark., are exploring several
aspects of inks’ long-term effects,
including how the chemicals metab-
olize in the body. “Many pigments
used in tattoo inks are industrial-
grade colors suitable for printers’ ink
or automobile paint,” the agency says
on its website. Chemists have discov-
ered that some yellows break down
when exposed to sunlight or certain
enzymes, though it hasn’t been
determined whether this is harmful.
The FDA hasn’t said when its ink
study will be done.
Three in 10 Americans have at least
one tattoo, according to a Harris Poll
released in February, up from 2 in 10
four years ago. The prevalence is
highest among millennials (47 percent)
and Gen Xers (36 percent). “Tattooing
has become mainstream,” says Diane
Pacom, a University of Ottawa sociolo-
gist. “The millennials, they’re doing it as
a statement of belonging to the system—
because everybody has tattoos now.”
Would negative findings by the FDA
greatly dim tattooing’s allure? Lars
Krutak, a tattoo history expert at
the Smithsonian
Institution’s
$1.1 billion
National Museum
of Natural History,
doesn’t believe
so. After all, mil-
lions of Americans
still smoke despite
2020 revenue
forecast for the
the risks. But
U.S. tattoo industry what the FDA
discovers, he
says, may lead to
“better regulation, quality standards,
labeling, and even the reclassification
of tattooing ink itself.”
Anna Felicity Friedman, a tattoo
historian who estimates 50 percent
of her body is covered in ink, says
no matter what the FDA concludes,
the U.S. “may be at a tipping point in
tattoo popularity.” Young people she
knows “are consciously deciding to
remain untattooed, either to be rebel-
lious, since tattoos are no longer a
mark of rebellion, or to avoid being
deemed a fashion victim.”
Attacking Delaware’s
mighty business court
as antibusiness 31
Jason Recker, a 15-year-old from
Peoria, has already done some
research. “You don’t see a lot of
tattoos on lawyers and engineers and
teachers,” he says, as he considers
future careers. “I don’t think I’ll want
to get a tattoo when I’m old enough.”
—Bradley Joseph Saacks
The bottom line While the FDA has so far refrained
from regulating tattoo inks, some of its scientists
are looking into pigments’ long-term effects.
Climate
Can California Save Its
Cap-and-Trade Plan?
 Most carbon credits go unsold at
auction, keeping CO2 prices low
 “The program is about reducing
emissions, not raising revenue” 29
In 2012, when California began its cap-
and-trade program, it was hailed as a
model for the rest of the world. While
Congress had failed to pass a similar
system two years earlier, California
was going to demonstrate how a large,
industrialized economy could cut
greenhouse gases while also raising
billions of dollars for clean energy
projects. The idea was fairly straight-
forward: By forcing oil refiners, power
plants, and factories to buy permits
to emit greenhouse gases and then
gradually shrinking the supply of
those permits, the state could steadily
raise the cost of carbon dioxide pollu-
tion and compel businesses to lower
their carbon footprint.
State officials initially set a minimum
price of $10 per metric ton of CO2.
The California Air Resources Board,
which runs the auctions where compa-
nies bid on carbon permits, projected
that prices could eventually reach
$50 a ton. Instead, prices have traded
closer to $12 per ton, leading to far less
revenue than anticipated and raising
questions about what, if any, effect the
program has had in lowering the state’s
carbon emissions.
In the last fiscal year, ended on
 Politics/Policy
June 30, California’s cap-and-trade
revenue fell about $600 million short
of the $2.4 billion that Democratic
Governor Jerry Brown had forecast.
This year the shortfall looks to be
much larger. The latest cap-and-trade
auction, held on Aug. 16, fetched just
$8 million for the state, with about
two-thirds of the emission permits
going unsold. That follows a May
auction where only 10 percent of the
permits were sold and only $10 million
raised. Brown had hoped cap-and-
trade revenue would hit $2 billion
this fiscal year, money he was count-
ing on to help fund his pet green
projects, specifically a $64 billion
high-speed rail system.
One reason companies have stopped
buying carbon permits is that they may
soon become worthless. The California
Chamber of Commerce has challenged
the constitutionality of the auctions,
arguing in a lawsuit that cap and trade
amounts to an illegal tax. An appeals
court is expected to rule sometime in
2017. In the meantime companies are
hedging their bets and buying futures
30 contracts, which allow them to lock in
a price to purchase carbon permits at
a later date, while only paying about
10 percent of the cost upfront. “Why
would anybody bid into the auction
right now and pay hard cash?” asks Alex
Rau, a principal at the carbon-trading
advisory group Climate Wedge.
Even if cap and trade in California
survives the legal challenge, its future is
unclear. There’s a debate over whether
the state has the authority to operate
the program beyond 2020. Despite his
best efforts, Brown hasn’t persuaded
the legislature to renew
it. “The cap-and-trade
Digits program has been a
$85b
Projected cost of the U.S. Air Force program to develop and procure an inter-
continental ballistic missile to replace the silo-based Minuteman III, in use since
the 1970s. That’s up from a previous estimate of $62 billion. —Tony Capaccio
California’s Cooling Carbon Market
Emissions allowances offered and sold
Emissions allowances offered but not sold
Demand for CO2
permits has crashed as
California’s cap-and-
trade auctions face
legal challenges
Nov.
2014
AUCTIONS HELD EVERY THREE MONTHS;
DATA: CALIFORNIA AIR RESOURCES BOARD
failure,” says California State Senator
Jim Nielsen, a Republican. “It really is
a poor way to fund programs. It’s just a
big way to get money for government.”
Brown is considering whether to put a
cap-and-trade measure on the ballot in
2018 and let voters decide its fate.
Lawmakers have tightened
California’s carbon emissions stan-
dards, passing a bill on Aug. 24 that
requires a cut to 40 percent below 1990
levels by 2030. The previous target was
to reach 1990 levels by 2020. Those
stiffer emissions rules could breathe
new life into cap and trade if it survives
past 2020, says Bloomberg Intelligence
analyst Rob Barnett. “I think it
probably could increase demand
for those permits, but that’s over
the long term,” he says.
California’s program is one of a
host of climate initiatives the state
put in place over the past decade,
including mandates that require
refiners to cut the carbon inten-
sity of their fuel and utilities to
buy more solar and wind power. Those
other initiatives may also have undercut
the effectiveness of cap and trade.
Instead of spending money on carbon
permits, some of the state’s biggest
emitters are focusing on complying
100m with other mandates. Sacramento’s
municipal utility, for example, is buying
75m more renewable energy and investing
in energy conservation so it can comply
50m with the Renewable Portfolio Standard
that Brown signed into law last year
25m requiring utilities to get half their elec-
tricity from renewables by 2030. One
0 of the state’s largest utilities, Southern
Aug. California Edison, is doing the same
2016
thing and says the RPS will drive future
emissions cuts and ultimately reduce its
need to buy carbon permits at auction.
Alex Jackson, legal director of the
Natural Resources Defense Council’s
California Climate Project, concedes
that cap-and-trade revenue is lower
than expected. “But let’s not lose
sight of the fact that the program is
about reducing emissions, not raising
revenue,” he says. “If emissions
are staying below the cap, then it is
working as designed.” Greenhouse
gas emissions from California’s
power sector are already 20 percent
below their 1990 levels, but the
state’s overall emissions fell by just
1.5 percent from 2012 to 2014.
California’s cap-and-trade program
is hardly the only one struggling with
FROM LEFT: LEE CORKRAN/GETTY IMAGES; JEFFERSON SIEGEL/GETTY IMAGES
The Pentagon
wants to buy
642 new
missiles

low prices and weak demand. The
price of permits in the world’s largest
carbon market, covering the European
Union, is down 51 percent this year.
It’s not that carbon markets are inher-
ently flawed. It’s that they’re not getting
a fair chance, says Louis Redshaw, who
runs an emissions-trading company,
Redshaw Advisors in London. Instead of
establishing strict emission ceilings and
allowing carbon markets to work, politi-
cians set lax limits and buttress cap and
trade with renewable energy subsidies
and other environmental measures. “In
theory, carbon markets are the perfect
answer,” says Redshaw. “The problem is
the implementation by the politicians.”
—Mark Chediak and Joe Ryan
The bottom line California’s cap-and-trade
program is being challenged in court, leading to a
lack of demand for the carbon permits it auctions.
Litigation
Is Delaware’s Business
Court Antibusiness?
 Critics say the judiciary has grown
too powerful
 “It’s like scheduling major surgery
to cure a common cold”
It was a classic love story turned soap
opera. Two decades ago, Elizabeth
Elting and Philip Shawe founded a
translation-services company in their
New York University dorm. They
owned it 50-50 and eventually became
engaged but never married. By 2011 the
couple were fighting over who should
run the Manhattan-based company,
TransPerfect Global, and bickering
about everything from taxes to payroll.
Today, this story of love and business
gone bad is at the center of a debate
about whether Delaware’s mighty busi-
ness court—which has legal authority
over half of all U.S. public companies—
has grown too powerful. With the ex-
lovers unable to agree on buying each
other out, in May a Delaware chancery
judge, Andre Bouchard, ended their
two-year legal battle and ordered the
software company to be sold at auction.
Within months, some TransPerfect
executives created a political action
committee called Citizens for a
Pro-Business
Delaware. The
group is blanket-
ing the state with
radio ads and lob-
bying lawmakers
to curtail the court’s
power. The judge’s
decision was “the most
drastic option available”
for a profitable company,
says Chris Coffey, a man-
aging director at New York’s
Tusk Strategies, which was
hired to orchestrate the cam-
paign. “It’s like scheduling major
surgery to cure a common cold.”
(Coffey is a former aide to Michael
Bloomberg, founder and majority
owner of Bloomberg LP, which owns
Bloomberg Businessweek.)
Coffey says about a dozen well-paid
TransPerfect executives have been
paying his fees and that “several
hundreds of thousands of dollars”
have been spent on the campaign.
The executives are fighting the sale
order because they’re worried about
private equity ownership taking over
the company and demanding deep
staff cuts, Coffey says. That would be
“destroying the meritocracy,” says
Barnaby Wass, a vice president at
TransPerfect and member of the PAC.
The campaign is unprecedented in a
state long seen as friendly to business
interests. Yet the reaction marks the
latest attempt by corporations to push
back against a court they’ve described
as overreaching and less sympathetic
to business than it once was. In recent
years companies including Dole Food,
DuPont, and Ancestry.com have crit-
icized the court and the state for not
adopting pro-business measures, such
as shifting legal fees to losing parties
and discouraging shareholder suits.
Last year, Dole’s chief executive
officer, David Murdock, threatened to
cancel an agreement with Delaware to
ship bananas and pineapples through
the Port of Wilmington if the state didn’t
crack down on shareholder suits similar
to one that Dole was facing, disput-
ing a company’s valuation of its shares.
Ancestry.com and DuPont joined in
Murdock’s call for changes. Delaware
lawmakers fended off Murdock’s
demands, and the CEO agreed to pay
about $170 million to settle claims he
shortchanged investors. In July, the
Politics/Policy
chancery’s
Judge
Bouchard
said he
was open
to allow-
ing dissi-
dent Viacom
board members
to force the com-
pany’s controlling
shareholder, 93-year-
old Sumner Redstone, to take
a mental exam.
The court’s defenders dismiss
critics as self-interested companies
wrapping themselves in an anticourt
mantle. The detractors are “all flying
the flag that Delaware isn’t as business-
friendly as it used to be,” says Lawrence
Hamermesh, a Widener University pro-
fessor who teaches Delaware corpo-
rate law. “The reality is that they’re
all unhappy litigants who don’t have a
good basis for their argument.”
The controversy poses a challenge
to Delaware officials, who have long
guarded their court’s business-friendly
reputation, for good reason. More than 31
1 million legal entities are incorporated
in Delaware, paying annual fees total-
ing more than $1 billion, which account
for a fourth of the state’s budget.
Bouchard’s order isn’t the first time a
U.S. judge has ordered a profitable busi-
ness to be sold, says Robert Thompson,
a Georgetown University law profes-
sor. “The usual response to one of these
orders would be to appeal the decision,
not to set up a lobbying campaign.”
Changing corporate law in Delaware
isn’t easy. The legislature typically
alters these statutes only on the rec-
ommendation of the Delaware State
Bar Association. That’s why William
Chandler III, Bouchard’s predeces-
sor as the chancery court’s chief
judge, thinks the TransPerfect cam-
paign is a waste of time. “They’d have
been better off flushing that money
down the toilet,” says Chandler, who
retired in 2011 and is now a partner
at Wilson Sonsini Goodrich & Rosati.
—Jef Feeley and Katherine Greifeld
The bottom line Delaware’s business court, with
legal authority over half of U.S. public companies,
is facing challenges from a grass-roots PAC.
Edited by Matthew Philips
and Cristina Lindblad
Bloomberg.com
 “Inside, I feel like I’m
25 and don’t want
September 12 — September 18, 2016
to slow down yet.”

Peredo spent Houston, jumping

18 months looking between contract
for work before he gigs, has run out
took off his bow tie of friends in her
and landed a job network

32

We’re Not Too

 Silicon Valley’s over-40s try lawsuits, classes, makeovers—even surgery—to keep working
 “If you’ve worked at a large company for 10 years … your skills are six generations behind”
After Andrea Rodriguez lost her the Golden State Warriors, and the companies, the median employee
job last fall, she put away her suits. Kardashians. She collected 500 con- is more likely to be 31 (Apple),
Not because she didn’t plan to keep nections on LinkedIn, got herself on 30 (Google, Tesla), 29 (Facebook,
working—she just had to seem younger. Twitter, Pinterest, and Snapchat, and LinkedIn), or younger, according to
She’d been a successful sales trainer started a blog. A hiring manager at researcher PayScale. Plenty of other
at SugarCRM, a Cupertino, Calif., Aruba, a wireless equipment maker industries try to phase out older
company that pitches marketing and owned by Hewlett Packard Enterprise, workers for younger, cheaper ones, but
customer service software to busi- read the blog, and after five months the Bay Area’s tech companies are sin-
nesses. Suddenly she was looking for a without a paycheck, Rodriguez got gularly uninterested in and even dis-
PHOTOGRAPHS BY DAMIEN MALONEY FOR BLOOMBERG BUSINESSWEEK

job in Silicon Valley, and she was over
50. Early in her search, she recalls, one
hiring manager told her, “We have a
very diverse age group—some people
are right out of college, and one older
group is as old as 48.” Gulp.
So as Rodriguez chased more inter-
views, dresses with brightly colored
sweaters or jackets over skirts replaced
her five suits. She started regularly
scanning Reddit, Yelp, IMDb, and
MSNBC, checking words she didn’t
know on Urban Dictionary, so she
could talk about superhero movies,
another sales training job.
In an effort to keep her twenty- and
thirtysomething colleagues think-
ing of her as an older sister rather
than a mom, she goes out of her way
to socialize in the break room or at
company events. That’s where Reddit
and IMDb come in handy. “If you
bring up Julie Andrews in The Sound of
Music, all conversation will stop,” she
says. “You’ll be viewed as an outsider.”
The median U.S. worker is 42, which
makes sense given the boundaries of
typical working age. At Silicon Valley
trustful of long résumés, says Michael
Welch, a San Francisco employment
lawyer. Mark Zuckerberg famously
summed up the Valley ethos at age
22, when he told a Stanford audience,
“Younger people are just smarter.”
Not all the older workers are going
quietly. From 2008 through last year,
the Valley’s 150 biggest tech compa-
nies faced 226 complaints of age dis-
crimination filed with the California
Department of Fair Employment and
Housing, 28 percent more than com-
plaints of racial bias and 9 percent

o Old for This
more than those of gender bias. Last
month, former employees of the
old, combined Hewlett-Packard sued
spinoffs HP Enterprise and HP, alleg-
ing they were targeted in a large wave
of layoffs because of their age. (One of
the plaintiffs, an efficiency expert, had
just earned HP’s highest performance
rating; only 250 of its 50,000 employ-
ees get that.) The plaintiffs are seeking
class-action status on behalf of workers
40 and older who were laid off and
replaced by younger employees. Next
year, Google is scheduled to face a trial
in a suit alleging age bias in hiring. The
plaintiffs declined to comment. HP and
Google deny the plaintiffs’ claims and
say they’ll defend against them.
Rodriguez went
all in on social
media and was
hired by someone
who’d read
her blog
“If you bring up
Julie Andrews in
The Sound of Music,
all conversation
will stop. You’ll be
viewed as an
outsider.”
Lawsuits tend to be expensive and
turn off prospective employers. Many
older tech workers are just going to
greater lengths to seem younger as
they try to win over potential bosses
younger than their kids. Besides the
standard preinterview tricks—listing
only recent jobs on résumés, freshen-
ing online profile photos—job seekers
are investing in retraining, creeping
on potential employers, and changing
their appearances in all kinds of ways,
including plastic surgery.
At ProMatch, a state-funded job
counseling and networking program
in Sunnyvale, Calif., Robert Withers
advises his mostly middle-aged or
older clients to cut anything on their
Hospitals test virtual A bug in Cisco gear
reality as a painkiller proves fatal for a
34 hosting company 35
Innovation: Speakers
that beam clearer
sound 36
Career counselor
Withers advises
clients to hang
around office
parking lots to get
a feel for the style
33
résumés that’s more than 10 years
old, to use a professional photogra-
pher for their LinkedIn headshots,
and to hang out in the parking lots
of places where they’ll be interview-
ing to see what the people there wear.
Michael Peredo, a 55-year-old auto
engineer dismissed from Mercedes-
Benz in February 2015, says he had
trouble giving up his bow ties for
T-shirts, as some he met at ProMatch
suggested. “I feel like myself wearing
them,” he says. He spent 18 months
out of work before landing a contract
gig at Velodyne, writing software for
self-driving cars. Just before that inter-
view, he took off his bow tie.
“If you’ve worked at a large company
for 10 years and get laid off, chances are
your skills are six generations behind,”
says Jonathan Nelson, chief execu-
tive officer of the Valley social network
Hackers/Founders, which organizes
meetups for startup developers. “I
know downsized engineers in their 40s
and 50s who’ve retrained themselves to
build mobile apps or do big data—and
 Technology
others who are Uber drivers.”
Bob Schoenberger, 61, is among the
unlucky ones. He’s taken classes to
learn new coding languages since his
job at chipmaking supplier Applied
Materials was outsourced to Asia in
2010, but except for some contract
work at medical device maker Hospira,
he and his wife have had to subsist on
now-exhausted unemployment ben-
efits, savings, and cash from the sale of
the land where they’d hoped to retire.
Schoenberger plans to start a training
program to become a pharmaceutical
technician. “I’ve pretty much recon-
ciled to leaving this area for someplace
cheaper,” he says. “Cashing out the
house and fleeing.”
One 60-year-old software engineer,
fired in January after seven years at
a chipmaker in San Jose, now wears
casual button-downs, khakis, and
sneakers to interviews, studies embed-
ded systems (cell phones, video game
consoles) at a local extension school,
and has started working out and dyeing
his gray hair a dark auburn. He also
had blepharoplasty, plastic surgery to
34 remove bags and dark circles under
his eyes. “It’s smart to stay current and
look as young as possible if you want to
keep working in an industry where so
many people are in their 20s,” he says.
“I still want to work in tech, because I
love solving problems. And I don’t yet
have enough saved for retirement.”
Even the most aggressive attempts to
pass for younger may not be enough.
In the Valley, like most places, landing
a job often comes down to networking.
Cynthia Houston, 54, has a youth-
ful, asymmetrical haircut and wears
ProMatch’s office
clothing recommended by her niece,
but she’s been unemployed or working
on contract for two years since she lost
her job as a project manager at cloud
services company VMware. Her most
recent contract gig was at HP, a refer-
ral from a former colleague. “Every
job I’ve gotten until now was through
someone I knew,” she says. “But they
aren’t around now.” —Carol Hymowitz
and Robert Burnson
The bottom line Older workers booted from
Silicon Valley jobs are seeking restitution or, more
often, going to great lengths to seem younger.
Virtual Reality
Hospitals Try Giving
Patients a Dose of VR
 With the price of hardware falling,
headsets are getting a fresh look
 “Virtual reality undoubtedly has
an effect on the human mind”
Deona Duke hadn’t yet turned 14 in
June when the bonfire exploded. She
was watching it with a friend, and the
explosion coated her in flames that
burned a third of her body. When she
awoke four days later from a medically
induced coma, she had to watch while
physicians changed her bandages and
scraped away dead skin. That’s about
as fun as it sounds, she says. “The
recovery was actually more painful
than the accident itself.”
At the Shriners Hospital for Children
in Galveston, Texas, doctors started the
girl on an unusual treatment to go with
the painkillers: a virtual-reality headset.
Slipping it on, she was immersed in
SnowWorld, a game depicting an icy
landscape, where she lobbed snowballs
at igloos and penguins. “It distracted
me from what they were doing,” Duke
says, “so it helped with the pain.”
Shriners is one of a few U.S. hos-
pitals testing VR as a pain reliever.
The idea is that the distraction of the
virtual worlds will be engaging enough
to quiet the “harm alarm” of pain,
says Beth Darnall, a clinical associ-
ate professor at Stanford Health Care’s
division of pain medicine, which
has studied VR. In research done at
Shriners and at Harborview Burn
Center in Seattle, patients reported
less discomfort. In some of the
research, MRI scans of patients’ brains
showed fewer pain receptors firing
during VR use.
“I was amazed,” says Ronald
Yarbrough, who’s been using a
Samsung Gear VR headset at Cedars-
Sinai in Los Angeles. Yarbrough, a
54-year-old former truck driver, has
spent the past month in a room over-
looking Cedars-Sinai’s landing pad,
waiting for a helicopter to bring him a
heart. He’s kept alive by machines, and
his room quickly came to feel like a cell.
Yarbrough says a couple days spent
using the Gear, with software made by
startup AppliedVR, has helped take
his mind off his predicament. “I was on
a lot of pain medication, and I’ve been
able to whittle that down, because I’m
not sitting around thinking about it,” he
says. Once discharged, he plans to buy a
VR headset of his own.
Cedars-Sinai’s director of health-
services research, Brennan Spiegel,
says he’s seen how VR headsets can
help alleviate other types of pain,
including abdominal and back pain.
“Virtual reality undoubtedly has an
effect on the human mind,” he says.
FROM LEFT: PHOTOGRAPH BY DAMIEN MALONEY FOR BLOOMBERG BUSINESSWEEK; ILLUSTRATION BY SIMON ABRANOWICZ; COURTESY SAMSUNG; YOUTUBE
It worked for about 80 percent of
the 150-odd patients he’s tried it on,
Spiegel adds, but the reasons it works
have yet to be adequately studied. He’s
about to begin a new, more stringent
clinical trial. “As a scientist, I want to
understand rigorously how something
like virtual reality can truly improve
health outcomes, compared to a
control population,” Spiegel says.
The virtual world’s use in pain man-
agement dates to 1993, when Tom
Furness, an industrial engineering pro-
fessor known as the godfather of VR,
unveiled an $800 headset for consum-
ers that relied on a TV tuner and a
small supply of videotapes. The device
was a commercial flop but got rave
reviews from den-
tists who found it
$35 thousand
mollified young
patients. Early VR
equipment tailored
for medical use
cost as much as
$35,000 and found
The cost of some
early, 1990s-era
few takers, except
medical VR equipment for a handful
of academic
research labs.

As Samsung, Facebook, Sony,
HTC, and others race to build a dom-
inant VR system, the equipment is
finally getting both good and afford-
able enough for more hospitals to test.
Software makers like AppliedVR are
supplying several hospitals with head-
sets that play their games. Houman
Danesh, director for integrative pain
management at Mount Sinai Hospital
in New York, says VR use has the
potential to become a relaxation tech-
nique akin to yoga and hypnosis. Like
Spiegel, though, he cautions that its
effectiveness in treating chronic pain
has yet to be proven or fully under-
stood. And if its effects can be veri-
fied, how long do they last?
At Shriners in Galveston, Duke says
the painkilling effects of SnowWorld,
made by researchers at the University
of Washington, diminished over time
as she got bored. “For teenagers they
should find, like, different games,” she
says. “That game they were showing
me seemed like it was for little kids.”
—Ian King and Caroline Chen
The bottom line VR, used as a distraction tool for
severely injured patients, seems to help relieve
pain but needs more thorough testing.
Software
Don’t Blame Me—
It Wasn’t My Code
 A bankruptcy fight over a mobile
game draws eyes to Cisco’s bugs
 “The entire network often has to
go down in order to patch”
Game of War: Fire Age, your typical
melange of swords and sorcery, has
been one of the top- grossing mobile
apps for three years, accounting for
hundreds of millions of dollars in
revenue. So publisher Machine Zone
was furious when the game’s servers,
Digits
$1b
The potential cost of Samsung’s recall of all 2.5 million Note 7s shipped in the
phone’s first two weeks on sale, according to estimates compiled by Bloomberg
run by hosting company Peak Web,
went dark for 10 hours last October.
Two days later, Machine Zone fired
Peak Web, citing multiple outages,
and later sued.
Then came the countersuit. Peak Web
argued in court filings that Machine
Zone was voiding its contract illegally,
because the software bug that caused
the game outages resided in faulty
network switches made by Cisco
Systems, and according to Peak Web’s
contract with Machine Zone, it wasn’t
liable. In December, Cisco publicly
acknowledged the bug’s existence—too
late to help Peak Web, which filed for
bankruptcy protection in June, citing
the loss of Machine Zone’s business as
the reason. The Machine Zone-Peak
Web trial is slated for March 2017.
“Machine Zone wasn’t acting in
good faith,” says Steve Morrissey, a
partner at law firm Susman Godfrey,
which is representing Peak Web. “They
were trying to get out of the contract.”
Machine Zone has disputed that asser-
tion in court documents, but it declined
to comment for this story. Cisco also
declined to comment on the case,
saying only that it tries to publish con-
firmed problems quickly.
There’s buggy code in virtually
every electronic system. But few com-
panies ever talk about the cost of
dealing with bugs, for fear of being
associated with error-prone products.
The trial, along with Peak Web’s bank-
ruptcy filings, promises a rare look at
just how much or how little control a
company may have over its own oper-
ations, depending on the software
that undergirds it. Think of the cor-
porate computers around the world
rendered useless by a faulty update
Technology
About three dozen
of the devices
were found to have
batteries that caught
fire and exploded
from McAfee in 2010, or of investment
company Knight Capital, which lost
$458 million in 30 minutes in 2012—
and had to be sold months later—after
new software made erratic, auto-
mated stock market trades.
Peak Web, founded in 2001, had
worked with companies including
MySpace, JDate, EHarmony, and Uber.
Under its $4 million-a-month contract
with Machine Zone, which began on
April 1, 2015, it had to keep Game of War 35
running with fewer than 27 minutes of
outages a year, court filings show.
According to Machine Zone, the
hosting service couldn’t make it a
month without an outage lasting almost
an hour. Another in August of that year
was traced to faulty cables and cooling
fans, according to the publisher.
Cisco’s networking equipment
became a problem in September, says
a person familiar with Peak Web’s
operations, who requested anonym-
ity to discuss the litigation. The com-
pany’s Nexus 3000 switches began to
fail after trying to improperly process
a routine computer-to-computer
command, and because Cisco keeps its
code private, Peak Web couldn’t figure
out why. The person familiar with the
situation says Cisco denied Peak Web’s
requests for an emergency software
fix, and as more switches failed over
the next month, the hosting service’s
staffers couldn’t move quickly enough
to keep critical systems online.
Finally, late in October, came the
10 hours of darkness. Three people
familiar with Peak Web’s opera-
tions say the lengthy outage gave the
company time to deduce that the
troublesome command was reducing
the switches’ available memory and
 Technology
“It’s very intimate,
like someone
whispering in
causing them to crash. The company

Innovation your ear.” alerted Cisco. Machine Zone’s attor-

neys wrote that Peak Web has “aggres-
sively sought to place the blame
elsewhere for its failures” and that it

Sound Beams could have prevented the downtime.

In December, Cisco confirmed to Peak
Web that it had replicated the bug and
Form and function Innovator Woody Norris
issued a fix, according to e-mails filed
HyperSound Clear speakers emit sound in a Age 77
as evidence in the lawsuit.
controlled, narrow beam. Attached to TVs and Chief scientist at Turtle
Networking equipment such as
other electronics, the speakers are designed Beach, a 200-employee switches and routers, which carry the
to improve clarity and speech intelligibility for audio equipment company
those with hearing loss.
world’s internet and corporate data
in San Diego
traffic, tend to be especially difficult
to fix with a software patch, says John
Origin Turtle Pescatore, director for emerging secu-
1.
Beach came from a
merger of Voyetra
rity trends at the SANS Institute, an IT
Focus While typical speakers Turtle Beach with training and research company. “The
create audio waves that Norris’s company, entire network often has to go down
Background Norris
can be several feet long, Parametric Sound, previously founded in order to patch—very disruptive in
HyperSounds emit ultrasonic which developed the Long Range Acoustic
waves with lengths of about speaker technology. Device, which makes
the best of times,” he says. In July,
2/15 of an inch. Southwest Airlines blamed a failed,
a sonic weapon used
by ship captains to aging router for an outage that can-
ward off pirates.
celed hundreds of flights.
Cisco, the leader in the $42 billion
business for corporate networking
equipment, has had similar problems
before. In one previously unreported
36 incident, in 2014, a glitch in a Cisco
Typical speaker HyperSound Audible sound Invicta flash storage system corrupted
audible sound ultrasound beam data and disabled the emergency-
room computer systems at Chicago’s
Mount Sinai Hospital for more than
2. 3. eight hours, says a person familiar with
the incident. Cisco later froze ship-
Beam The waves’ small size Conversion The ultrasonic
means the speakers can waves carry an audio signal ments of Invicta equipment and dis-
focus them in a particular that’s converted back into continued the product line. In another
direction. “It’s like a flashlight sound, maintaining its unreported case, a Cisco server in
beam, compared with light focused direction, when the
from a bare bulb,” Norris says. wave hits air molecules. 2012 overheated inside a data center
at chipmaking equipment manufac-
turer KLA-Tencor, forcing the facility
to close and costing the company more
than $50 million, according to a person
Other uses Turtle HyperSounds’ audio
Beach also sells can be heard best familiar with the matter.
sound-beaming by listeners Spokespeople for Mount Sinai and
speakers to stores positioned in the KLA-Tencor didn’t respond to requests
and museums that beam’s path
could use displays
for comment. While declining to speak
that focus audio about specific incidents, Cisco spokes-
directly in front man Nigel Glennie says that after the
FROM LEFT: ILLUSTRATIONS BY 731; COURTESY TURTLE BEACH

of them.
company was notified of server failures
at two customer sites in 2012, it posted
Next Steps public notices about the “thermal
Tests reviewed by the U.S. Food and Drug Administration, which has cleared event” and replaced the faulty devices.
the $1,675 speakers for use as a hearing aid, showed the speakers improved Peak Web had its own thermal event:
speech cognition among 10 adults with mild to severe hearing loss. Turtle Chapter 11. —Jordan Robertson
Beach is mostly selling HyperSounds through health-care providers but has
The bottom line Buggy software, particularly in
begun putting them on retail shelves. In August, the FDA cleared an add- networking equipment, can leave companies with
on feature designed to relieve symptoms of tinnitus. Norris’s next project few ways to fix underlying problems.
is a speaker that can be integrated into a TV or computer screen, or a car
dashboard, to focus sound on people in front of it. —Caroline Winter Edited by Jeff Muskus
Bloomberg.com
 October 24-25, 2016
Park Hyatt New York

Today’s leaders are facing unique challenges,

from Brexit to the U.S. presidential election to
global economic instability to technological
change.

This October, Bloomberg’s The Year Ahead

summit will convene global leaders to
discuss the most important trends, risks, and
opportunities that every executive will face in
2017—and how they can steer their companies
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Proudly sponsored by:

Speakers include:
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Chairman and CEO
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Paul Tudor Jones

Co-Chairman and Chief Investment Officer
Tudor Investment Corporation

Andrew Liveris
Co-Chairman and CEO
Official hotel partner: The Dow Chemical Company

Anne-Marie Slaughter
President and CEO
New America
 Markets/
Finance
September 12 — September 18, 2016

Ten years ago, Steven Sugarman, a

38
  Banc of California has a history of related-party deals
 “It’s our backyard, it’s our hometown”
former Lehman Brothers investment
adviser, co-wrote a book on how to
avoid stock losses. One of its top tips:
“Beware of companies run by family
and friends.”
Now, Sugarman is chief executive
officer of the fastest-growing publicly
traded U.S. bank—a lender raising some
of the red flags from his book. Banc
of California is paying $100 million
for the naming rights on Los Angeles’s
new soccer stadium, one of the
richest prices in Major League Soccer.
Sugarman’s brother is a minority inves-
tor in the team, the new Los Angeles
Football Club, marking the latest in a
series of Banc of California deals involv-
ing the CEO’s family and associates.
Irvine-based Banc of California is
a success story among small banks,
many of which have struggled to regain
their footing after the global financial
crisis. Since 2010 its assets have soared
more than tenfold, to $10.2 billion as
of midyear, fueled by acquisitions.
Tip No. 4 in Sugarman’s book, The
Forewarned Investor: “Beware of com-
panies that go on buying binges.”
At 41, Sugarman is the youngest
CEO among the more than 100 U.S.
banks with a market value exceeding
$1 billion. The bank’s stock has deliv-
ered the highest return to shareholders
in that group—about 56 percent this
year, on top of 32 percent in 2015.
The bank has drawn big inves-
tors, including Oaktree Capital
Management, and counts former Los
Angeles Mayor Antonio Villaraigosa
as an adviser. And its market-beating
returns have come despite misgiv-
ings expressed over the years by one
of the bank’s biggest shareholders,
as well as community activists, over
deals benefiting Sugarman’s family
and board members. Institutional
Shareholder Services, an adviser to
investors, praises its auditing but gives
the bank’s governance risk the worst
grade on its scale. (Tip No. 7: “Listen
to the skeptics.”)
The bank details related-party trans-
actions in regulatory filings, and they
are vetted by its board. Sugarman says
such deals are inevitable, because
the board and executive team are

almost never more than “one to two
degrees of separation” from leaders
in Southern California’s business com-
munity. “It’s our backyard, it’s our
hometown, and the return on this
investment is something we’re pretty
excited about,” he says of the stadium
deal. Any time potential conflicts arise, PacWest Bancorp
the bank will “manage them, we’ll
make sure they’re done right, and we’ll Signature Bank
make sure there’s full disclosure.”
Sugarman had this to say in his book:
“Disclosure does not cleanse the prob-
lems associated with conflicts of inter-
est. It simply alerts investors that there
may be trouble down the road.”
A company spokesman says
Sugarman’s brother Jason—one
of more than two dozen inves- subsidiary that Reinvestment Coalition, which
tors in the Los Angeles Football
Club—had no involvement in
the stadium deal. Jason Sugarman
didn’t respond to messages seeking
comment. Nor did Jason’s father-in-
law, Hollywood executive Peter Guber,
a fellow owner who serves as LAFC’s
executive chairman.
The soccer club and its partners aim
to privately finance the $350 million
stadium. Banc of California’s
$100 million contribution, described
by people with knowledge of the deal,
exceeds the lender’s combined profits
for 2014 and 2015. The company has
promised to pay it over 15 years.
Such transactions, even when dis-
closed, should serve as warning signs
for investors when deciding whether
to buy the stock, says William Black,
a former regulator who’s now an eco-
nomics and law professor at the
University of Missouri at Kansas City.
Sugarman, a former McKinsey con-
sultant with a degree from Yale Law
School, left Lehman Brothers in
2005, helped start a hedge fund, and
wrote his book with a colleague. In
2010 he was part of an investor group
that injected $60 million into First
PacTrust Bancorp, helping it repay
a government bailout. Two years
PATRICK T. FALLON/BLOOMBERG
later, Sugarman became CEO, and
the company was renamed Banc of
California soon after.
The bank’s balance sheet grew as
it completed acquisitions, expanded
its securities investments, added
Built a presence
in the Southeast
and in New York
construction
lending
Expanded with
the help of
acquisitions
Fastest-Growing U.S. Banks
Asset growth in the last five years
Banc of California
BofI Holding
Sterling Bancorp
341%
Bank of the Ozarks
327%
310%
Texas Capital
254%
252%
DATA COMPILED BY BLOOMBERG
branches, and increased lending.
Along the way, it drew accolades for
expanding in communities neglected
Grew in part
by other banks.
through a But even the California
finances taxi
medallions
has praised such work, expressed
concerns in 2014 about the bank’s
related-party deals. It cited Banc of
California buying a business belong-
ing to a onetime board member,
which helped him repay a debt to
Sugarman’s family, and its purchase
of another business that had recently
hired Sugarman’s brother. These con-
nections are spelled out in the bank’s
periodic reports.
The first deal began in December
2012, when the company hired a mort-
gage business run by one of its board
members, Jeffrey Seabold, to provide
consulting and training for $100,000
a month. The following May, Seabold
stepped down from the board and
joined the bank as a senior executive
under a contract that gave it an option
to buy his company, CS Financial.
Banc of California exercised th he
option several months later fo or
$10 million.
At the time, Banc of
California said Seabold was
the majority owner and that
Sugarman’s relatives held
a minority stake. The bank
later disclosed that Seabold
transferred all of the stock
he received in the sale to
Sugarman’s sister-in-law for “repay- repay
ment of a certain debt” owed by CS
Financial to an entity she controlled.
The sister-in-law, Elizabeth Sugarman,
is Jason’s wife. She didn’t respond to
an e-mail seeking comment.
Why Moscow keeps
adding skyscrapers 40
Can markets in the
cloud prevent the next
flash crash? 41
In 2013, Banc of California bought
the Palisades Group, a money
manager. Jason Sugarman had started
1,052%
435%
working for Palisades as a consultant
a few months before the sale, even-
tually earning more than $1.3 million
from the bank through 2015. The bank
sold Palisades to its management team
earlier this year.
By mid-2014, some investors were
expressing concern about Banc of
California’s related-party deals with
CS Financial and Palisades. Richard
Lashley, a principal at activist investor
PL Capital, one of the bank’s largest
shareholders, sent Sugarman a letter
that June. “I understand that indepen-
dent members of the board reviewed
and approved them but the issue is not
mooted by that form because the sub-
stance, and taint, remains,” Lashley
wrote. “Related-party transactions
should be avoided going forward.” 39
Lashley didn’t respond to messages
seeking comment.
The relationship with Oaktree, the
private equity firm run by Howard
Marks, required Banc of California to
make additional disclosures to share-
holders. After the investment firm
took a stake in November 2014, the
bank extended more than $50 million
in credit facilities to companies
owned by Oaktree. In 2014 and 2015,
Oaktree also paid Palisades almost
$10.5 million in management fees.
The firm exited its stake in the bank
during this year’s second quarter,
accorrding to a regulatory filing.
Ann Oaktree spokeswoman
d
declined to comment.
Used copies of The
F
Forewarned Investor now
ssell for a penny on Amazon.
Itss warning about compa-
niees run by families covered
instaances when CEOs place their
kin in senior posts
S
Steven Sug
S garman
but also included
related par transactions. The red
related-party
flags described in the book don’t nec-
essarily mean something is amiss, it
said. “A company could be perfectly
sound and exhibit one or more of
the traits listed,” Sugarman and his
 Markets/Finance
co-author wrote. However, “the
accumulation of danger signs should
be taken by investors as an indica-
tion of a heightened level of risk.”
—Jennifer Surane, Zeke Faux, and
Dakin Campbell
The bottom line Banc of California has grown
quickly while making transactions some think hit
too close to home.
Real Estate
Going Vertical
At the Kremlin
 Despite soaring vacancies,
Moscow pushes new towers
 “The government hates that
construction has dragged on”
The three tallest skyscrapers in
Europe have all opened since 2013 on
a riverfront site 2.5 miles west of the
Kremlin. All that new glass-sheathed
40 space hit the market just as the
Russian economy tanked and vacan-
cies for premium offices in the dis-
trict soared to more than 40 percent.
Today, with a recession stretching into
its sixth quarter and office vacancies
across the city stuck at 20 percent,
the local government has a simple
message for the builders still working
at the site: Keep going.
The mayor’s office is pushing devel-
opers to complete the skyline of
Moscow City—a district similar to
Paris’s La Défense or London’s Canary
Wharf—in time for the
2018 FIFA World Cup,
Digits
1,000
One insurer’s annual price to cover 1 million francs ($1.03 million) in physical cash against
theft or damage. Demand for such insurance has gone up since the Swiss central bank began
imposing negative interest rates on some of lenders’ deposits, spurring them to pass charges
on to cash-rich corporate and institutional clients.
when foreign tourists are expected to
pour in for the world’s most-watched
sporting event. The 374-meter (1,227-
foot) Federation Tower, Europe’s tallest
building, will open by yearend. And two
more skyscrapers in Europe’s top 10 are
expected to go up by the first kickoff.
“The government hates that construc-
tion has dragged on for so long,” says
Yulia Nikulicheva, head of strategic
consulting at real estate brokerage JLL
in Moscow. “Moscow City was always
about prestige.”
Like his communist-era predecessors,
Russian President Vladimir Putin has
a penchant for the grandiose, backing
initiatives such as the $50 billion
Sochi Olympics and a 12-mile bridge
dubbed “the project of the century”
to link Russia with the Crimean penin-
sula annexed from Ukraine. Moscow
City, conceived by former Mayor Yuri
Luzhkov as a global financial center,
will eventually have office space for
150,000 workers and about 300,000
square meters (3.2 million square
feet) of apartments. The final price
could reach $13 billion, according to
brokerage CBRE.
Moscow authorities say they haven’t
pressured builders and that deci-
sions regarding construction are being
made by developers. “The city has
only created the foundations for inves-
tors to finish their work,” says Sergei
Kuznetsov, the capital’s chief archi-
tect. “It’s an iconic site, and we need to
finish it, so that it contributes to the city
rather than continues as a problem.”
Imagined as a glittering business
district that would rival the City in
London, Moscow City faced setbacks
from the start. Construction delays
shot holes in the original timetable
Swiss francs
for a 2007 completion before the 2008
financial crisis made matters worse.
The idea appeared buried for good
in 2014, when Russia was slapped
with sanctions for annexing Crimea
and oil prices collapsed, undermin-
ing the backbone of the Kremlin’s
resource-based economy. It was hoped
that foreign banks would want to
anchor Moscow City. But Deutsche
Bank, Royal Bank of Scotland, and
Barclays are all making cuts in Russia.
“Wherever possible, developers
switched to apartments or downsized
the projects,” says Konstantin Losiukov,
a director at brokerage Knight Frank
in Moscow. “But anyone who started
building before the recession was
already committed.”
Now state-owned companies and
government agencies occupy almost
half the available office space in
Moscow City. Oil pipeline monop-
oly Transneft last year purchased
the 55-story Evolution Tower. And the
mayor’s office and Russia’s second-
biggest bank, VTB Group, bought
buildings that account for a quarter
of Moscow City’s floor space, accord-
ing to Knight Frank. Those deals
helped bring down the vacancy spike
of two years ago, when tenants were
so scarce that a youth hostel took
the 43rd floor of the Imperia Tower.
Annual rents have plunged to $520
per sq m this year, from $830 in 2014,
according to Knight Frank. Still, vacan-
cies in Moscow City won’t fall below
10 percent before the end of the
decade, JLL estimates. Eight percent is
considered a healthy balance between
ANDREY RUDAKOV/BLOOMBERG
supply and demand.
Renaissance Development, whose
Neva Towers will be the final pieces
of Moscow City when completed in
2019, has scaled back its vision. The site
was originally planned for a Norman

Moscow City
Foster building taller than New York’s
One World Trade Center. But after
the company acquired the land in
2013, it drew up a more modest pair of
towers. Foster is no longer involved.
The $1.2 billion project will include
60,000 sq m of office space, about a
third of the amount in the original
plan, with a greater focus on residen-
tial use, according to Chief Executive
Officer Irfan Kaya. “We took a six-month “If big tech firms can win more trust in
breather at the end of 2014 to reassess,”
he says. “But we never considered
pulling the plug. In development, it’s
use it or lose it.” —Jake Rudnitsky
The bottom line Even though 20 percent of
Moscow office space is vacant, the government is
pushing developers to top off new skyscrapers.
Fintech
Putting the Market’s
History in the Cloud
 Amazon and Google vie to help
build a huge archive for the SEC
 It’s a “treasure trove of order and
execution information”
Trying to understand what causes flash
crashes is no longer a challenge only
for financial regulators and Wall Street.
It’s a big deal in Silicon Valley, too.
On the afternoon of May 6, 2010,
U.S. stocks lost almost $1 trillion in
value within minutes, and then within
minutes made up much of the loss.
Years later the debate over how to
avoid a repeat of the so-called Crash
of 2:45 rages on. To make it easier to
go back and find clues about poten-
tial future short circuits in the market, Financial Markets Association, which
the U.S. Securities and Exchange
Commission has asked exchanges to
help create a massive repository of
stock and options trading data.
Tech giants Amazon.com and
Google are bidding to help provide
storage for the database through their
cloud-computing services. Some Wall
Street companies have been skepti-
cal of the system, known as the con-
solidated audit trail, or CAT. They’ve
cited concerns about cost as well
as the security of the data, which
could include names and addresses for
100 million customer accounts as well
as trading records.
For tech companies, CAT could
also be one of the biggest inroads yet
into the financial industry. “Their
involvement in this project I do think
is a threat to the incumbents,” says
Jo Ann Barefoot, a former official at
the Office of the Comptroller of the
Currency who studies financial tech-
nology as a senior fellow at Harvard.
Washington, that’s one of the biggest
challenges facing banks.”
Right now the SEC has access to
trading data, “but it’s labor-intensive
and time-consuming to aggregate,”
says Steve Luparello, director of the
SEC’s division of trading and markets.
It often has to be cobbled together
from different systems run by the
exchanges and a Wall Street-funded
watchdog, the Financial Industry
Regulatory Authority (Finra). With
CAT, regulators could see data from
a day’s orders by noon the follow-
ing day. Luparello says the SEC
expects the initial phase to be oper-
ational by the end of 2017.
Trading records could be stored
in a cloud—that is, offsite—where
they would be encrypted and could
be accessed remotely by the SEC.
Financial technology company
Fidelity National Information
Services has joined with Google to
vie for the CAT contract. Amazon
is working on a bid in conjunc-
tion with Finra. The regulator has
already used Amazon to migrate
90 percent of its data, such as bro-
kerage transaction records, to the
cloud. A third contender is led by
Thesys Technologies.
Lobbying over CAT has mounted,
with the Securities Industry and
represents the biggest broker-dealers,
Markets/Finance
complaining about potential costs in a
July letter to the SEC. The SEC has esti-
mated CAT implementation costs for
exchanges and broker-dealers could be
about $2.4 billion.
The Investment Company Institute,
a trade group for fund managers, sent
a letter last month
outlining its secu-
90 percent
rity concerns.
“This treasure
trove of order and
execution informa-
tion has tremen-
Portion of Finra’s data dous commercial
that’s been moved to value, and we are
the cloud via gravely concerned
Amazon’s service
that cyber crimi-
nals and others will
seek to access and use it for their per-
sonal gain to the detriment of funds and
their shareholders,” wrote David Blass,
general counsel for ICI. Bloomberg LP,
which owns Bloomberg Businessweek,
has also written to the SEC criticizing
aspects of the plan.
The CAT proposal specifies that
whoever wins the bid must ensure the
security and confidentiality of the data 41
and agree to use it only for appropriate
surveillance and regulatory activities.
Spokesmen for the tech companies
declined to comment.
Amazon and Google already hold
cloud data for other companies,
including their own rivals, without
having access to it. Peeking at such
data would risk alienating clients in a
fast-growing and crucial business line—
Amazon’s cloud-computing division
delivered 56 percent of the company’s
operating income in the second
quarter of 2016.
The SEC is expected to weigh in on
the CAT plan in November, and the
exchanges will choose the winner by
January. Steve Randich, Finra’s chief
information officer, says Wall Street
companies have been asking for infor-
mation on how Finra outsourced
its data. He says the move cut costs
while bolstering security. “There
is resistance,” Randich says, “but
it is fading.” —Benjamin Bain and
Elizabeth Dexheimer
The bottom line The SEC is creating a database
to help it look back at unusual market events. Two
tech giants want a piece of that business.
Edited by Pat Regnier and David Rocks
Bloomberg.com
 DEBRIEF

‘We are ready to work with any

If someone says
that they want
to work
42

Photographs by Jeremy Liebman

president. 

Russian President
Vladimir Putin
on the future of Europe,
why he’s bullish on Gazprom,
and the coming
U.S. election

with
Russia,
we’ll welcome it’
 DEBRIEF
On Sept. 1, in the Siberian port city of Vladivostok, Russian You know, I don’t want to respond to your provocative ques-
President Vladimir Putin discussed a wide array of issues tion, even though I understand that it could be interesting.
with Bloomberg Editor-in-Chief John Micklethwait. The two- Come on—many, many times you’ve criticized Europe.
hour interview ranged from islands disputed with Japan to I’ve been critical, but I’ll repeat: We hold 40 percent of
the price of petroleum and the vicissitudes of Gazprom, our reserves in euros, and it’s not in our interest for the euro
the immense state-owned enterprise that supplies natural zone to collapse. Although I don’t rule out that there could
gas not only to his country but to much of Europe. Putin, be some decisions made that would consolidate a group
the longest-ruling Russian leader since Leonid Brezhnev, of countries with equal levels of development and thereby,
weighed in on the U.S. election, as well as his relationship with in my opinion, strengthening the euro. But there might be
Turkey’s Recep Tayyip Erdogan and Syria’s Bashar al-Assad. some other interim decisions in order to preserve the current
Here are excerpts from their conversation. number of euro zone members.
We have criticized many things and believe that our part-
John Micklethwait: There seems to be the beginnings of a ners have made more than a few mistakes, as probably we
political deal with Japan where you might give up one of the have, too. Nobody is safe from these mistakes, but in regards
Kuril Islands in exchange for greater economic cooperation. to the economy, I’ll say it again: In my opinion, the European
Are you open to a deal of that sort? Commission and the leading economies of Europe are acting
Vladimir Putin: We don’t trade in territories, although the pragmatically and are on the right track.
problem of a peace treaty with Japan is, of course, a key one. Russia used to have $500 billion in reserves. It is now
And we would very much like to find a solution to this problem down to $400 billion. You have this target to go back up to
with our Japanese friends. We had a treaty signed in 1956, and, $500 billion. Should the central bank be buying more dollars
surprisingly, it was ratified both by the Supreme Soviet of the to push the reserves back up?
USSR and by the Japanese Parliament, but then the Japanese You and I know about the necessary amount of central bank
side refused to adhere to it, and then the Soviet Union basically reserves, and the target is well-known. But for the general public,
nullified all the agreements within this treaty. we can say that the point of the central bank’s gold and foreign-
Several years ago, our Japanese colleagues asked us to currency reserves isn’t to finance the economy but to ensure
return to a discussion of this topic. And we did, we met them foreign trade. And for that we need a level that’s sufficient to
partway. … We’re not talking about some swap or sale, support foreign trade of a country the size of Russia for at least
we’re talking three months. But we have such a level that we’re not only able
to safeguard our foreign trade, but also stop working and live off
the reserves for, at minimum, half a year, if not more. So that’s
about finding a more than enough. From the viewpoint of safeguarding sta-
bility of the economy and foreign trade, we absolutely have
44
solution where neither party would feel enough gold and foreign-currency reserves. And every-
thing else—the buying and selling of currency—is related to the
regulation of the domestic-currency market. How the central
defeated or a loser. bank reacts to this, and whether it will lead to an increase in
Do you expect the euro to survive? the reserves, is so far difficult to say.
I hope so. I hope so because, first of all, we believe in the Almost two years ago you said that if crude oil fell below
foundations of the European economy. We see that west $80 a barrel, there would be a collapse in oil production. Well,
European leaders in general—there are disagreements, of the price is still below $50, and production hasn’t stopped.
course, which is understandable, that we see, observe, analyze— Has your thinking changed on that at all?
but they stick to very pragmatic approaches to resolving eco- Well, if I said that oil output would cease, then I was mis-
nomic issues. We can’t say whether they’re right or wrong. It taken. … I said that new deposits probably wouldn’t be com-
depends on your perspective. They don’t missioned at a certain oil price. Strictly
misuse financial instruments or liquid- Less Bang speaking, that is what happened.
ity. They primarily strive for structural Oil and gas rents* as a percentage of GDP 50% But perhaps even surprisingly, our
changes. In fact, the same problems are oil and gas companies, mainly the oil
no less acute in our economy, perhaps Russia companies, are continuing to invest. In
even more so. I’m referring to a problem 40% the past year, the oil companies have
that we can’t overcome, specifically the invested 1.5 trillion rubles [$23.3 billion],
dominant role of the oil and gas sector in and if you take the state’s investment
30%
Russia and, as a result, our dependence in the pipeline network and electricity
on oil and gas revenue. But in Europe, sector, then the overall investment in
without dependence on oil and gas, energy is 3.5 trillion rubles in the past
20%
they’ve also needed structural reforms year. That’s quite significant.
for a long time. I think that the leading  By the way, we are the world’s leader
economies have taken a very pragmatic Middle East and North Africa 10% in terms of natural gas exports, with a
and intelligent approach to resolving global share of about 20 percent. In the
the economic problems facing Europe. World export of liquid hydrocarbons, we’re also
That’s why we hold about 40 percent of 0 among the leaders. We’ve been first in
our reserves in euros. 1999 OECD member states 2014 liquid hydrocarbon exports. … On the
You expect Europe to keep the existing whole, Gazprom is in great shape and
membership? They’re not going to lose *RENTS ARE THE DIFFERENCE BETWEEN THE VALUE OF OIL AND GAS AT WORLD is increasing exports to its traditional
PRICES AND TOTAL COSTS OF PRODUCTION; DATA: WORLD BANK
another country like they lost Britain? partner countries.
Would you still be in favor of a production freeze if the Saudis
and Deputy Crown Prince Mohammed bin Salman want that?
He is a very energetic statesman, and we really have struck
up a friendly relationship. This is a man who knows what he
wants and knows how to achieve his goals. But at the same
time, I consider him a very reliable partner with whom you can
reach agreements and can be certain that those agreements
will be honored.
But still, we weren’t the ones who rejected the idea of freez-
ing output levels. It was our Saudi partners who, at the last
moment, changed their view and decided to take a pause in
taking this decision. But I want to repeat: Our position hasn’t
changed, and if Prince Salman and I speak about this, then I
shall, of course, put forward our position again. We believe that
this is the right decision for world energy. That’s the first thing.
The second thing is that everyone knows what the dispute was
about. The dispute was that if production were to be frozen,
then everyone should do it, including Iran. But we understand
that Iran is starting from a very low level, related to the well-
known sanctions against this country. It would be unfair to leave
it at this sanctioned level. I think that from the viewpoint of eco-
nomic sense and logic, then it would be correct to find some
sort of compromise. I am confident that everyone understands
that. The issue isn’t economic, it’s political.
Gazprom is worth less than a fifth of what it was 10 years
ago, and it’s fallen from being among the top 10 companies
in the world to 198th. And you’ve had the same manager
running it for 15 years, Alexei Miller. You’ve now given him
another five-year contract. What I’m saying is, you’re not as
tough on businesspeople who are running the oil side as you
might be on other people.
Listen, Gazprom is clearly undervalued. This is an absolutely
obvious fact. We have no plan to sell it yet. And this is because of
the peculiarities of the Russian economy, the social sphere, and
Russian energy. Gazprom is part of Russia’s power system. One
of Gazprom’s functions is to ensure the country gets through
the peak periods of autumn and winter, to supply Russia’s big
power companies. And it fulfills this function.
Of course, there are issues and there are problems. We see
them. I know that Gazprom’s management is taking the nec-
essary steps in order to resolve these issues and that it fights
for its interests on world markets. Does it do it well? Poorly?
That’s another question.
Many criticize it, they say that it needed to be more flexi-
ble, that it should have switched to a floating price depending
on the current state of the economy, but the gas business is
very specific. It’s not even like trading oil. It’s a separate busi-
ness that’s linked to big investments in output and transpor-
tation, and this means that producing structures must be sure
that they can sell at a certain price.
I know you’re a generous man, but if you had a general who
had lost 80 percent of his army, you might not keep him as a
general. Gazprom still has the export monopoly. You wouldn’t
think of taking it away from them, given that performance,
because it’s worse than other gas companies?
Listen, that’s a different story. If we were talking about a
general, then the general in this case has lost nothing, he’s sent
troops into reserves, which can be called back at any moment
and put to use.
There is an American election on the way, and as you well
know there’s a choice between Hillary Clinton and Donald
Trump. Who would you rather have at the other end of the
telephone if there is a geopolitical situation—Donald Trump
or Hillary Clinton?
I would like to work with a person who can be accountable for
decisions made and implement any agreements that we reach.
Surnames don’t matter at all. Of course, that person must enjoy
the trust of the American people, so that they won’t just have
the desire but also the reinforced political will to fulfill all those
agreements. That’s why we never interfered, aren’t interfer-
ing, and don’t plan to interfere in domestic political processes.
Can I just push you on that? You’re really telling me that if
you have a choice between a woman, whom you think may
have been trying to get rid of you, and a man, who seems
to have this great sort of affection for you, almost border-
ing on the homoerotic, you’re not going to make a decision
between those two?
You know, I essentially already answered your question. I’ll
reformulate it again, say it in different words. We are ready to
work with any president, but, of course—I also said this—to
the extent that the future administration is ready. If someone
says that they want to work with Russia, we’ll welcome it. And if
someone, as you said—although it may be an inaccurate trans-
lation—wants to get rid of us, that will be a completely differ-
ent approach. But we will survive it, and it’s not clear who has
more to lose with that approach.
But the thing is, I’ve repeatedly seen the anti-Russian card
played during domestic political campaigns in the States. I think
that it’s a very shortsighted approach. At the same time, they
send us all sorts of signals from all sides that actually things
are just fine. … It seems to me that it doesn’t fully meet the level
of responsibility that lies on the shoulders of the U.S. I think
that all this should be more dignified, calm, and more balanced.
As for the fact that someone is criticizing us, you know, crit-
icism is leveled at us by Mr. Trump’s team as well. For example,
one of the members of his team said that we paid, that Russia 45
allegedly paid money to the Clinton family via some foundations.
What’s that? Does that mean that we control the Clinton family?
It’s complete nonsense. I don’t even know where Bill spoke and
through which funds. So both one side and the other are using
it as a tool, using it as a tool in a domestic political struggle, and
that’s bad, in my opinion.
The other accusation you’ve faced, or heard a lot, is people
connected with Russia or backed by Russia were the people
who hacked into the Democratic Party database.
No, I don’t know anything about that. You know how many
hackers there are today, and they act so delicately and pre-
cisely that they can leave their mark at the necessary time and
place or even not their own mark, camouflaging their activity as
that of some other hackers from other territories or countries?
It’s an extremely difficult thing to check, if it’s even possible to
check. At any rate, we definitely don’t do this at the state level.
And then, listen,
does it even matter
who hacked
this data from the campaign headquarters of
Mrs. Clinton?
Is that really important? The important thing is the content
that was given to the public. There should be a discus-
sion about this, and there’s no need to distract the public’s
 DEBRIEF
Putin Grooms a New
Generation of Leaders
The Russian president is removing old allies
and replacing them with young loyalists, likely
ensuring his leadership will continue until 2024
After 16 years in charge, Vladimir Putin
is shaking up his team to cement his
control into the next decade. The
63-year-old leader is pushing aside some
longtime allies and grooming young lieu-
tenants—many of whom share his back-
ground in the security services and aren’t
old enough to have worked under any
other leader—to form a new generation
of Kremlin leadership. One of them could
even become his successor one day.
In his interview with Bloomberg, Putin
wouldn’t admit he’s planning to run for
another six-year term in 2018 (almost
everyone in Moscow’s political estab-
lishment believes he will), but he made
clear he’s settling in for the long haul.
He’s already ordered top advisers to
come up with a program for his next
46 term. Key attributes for a potential suc-
cessor when the time comes? “A young
person” but a “mature person,” was as
far as he would go.
After two years of plunging oil prices
and economic pain that have barely
dented his popularity rating of more than
80 percent, Putin sees stability, not stag-
nation. He sharply rejects the idea that
his bold moves outside Russia—like the
military foray in Syria and the annexation
of Crimea—are at odds with his reluc-
tance to make the changes at home
that even his advisers say are needed
to get the economy back on track. “On
the whole, we’re moving in the right direc-
tion,” he says.
The next decade will be harder in
many ways than Putin’s first, when
surging oil prices helped him almost
double the size of the economy, drive up
living standards, and centralize Kremlin
control. Even before Western sanc-
tions and falling crude prices knocked
Russia into recession last year, growth
had begun to stall.
Now the pressure to stretch every
kopeck has become intense. Putin, long
known for standing by his closest allies,
has begun pushing some old-timers out.
First to go was Vladimir Yakunin, 68, in
August 2015. As head of the national rail-
ways, the country’s largest employer, he’d
become known for his repeated appeals
for more government aid. The remov-
als picked up this year, with longtime
aide Viktor Ivanov, 66, removed in the
spring as head of the antidrug police.
Sergei Ivanov (no relation), a 63-year-old
whose ties to Putin go back decades to
the Soviet KGB, was dropped as Kremlin
chief of staff in August.
“There’s almost no one left from
the original politburo,” says Olga
Kryshtanovskaya, a specialist on the
Kremlin elite at the Russian Academy
of Sciences. “The demands for effi-
ciency are now higher. The survival of the
system is at stake,” says Alexei Makarkin,
deputy head of the Center for Political
Technologies, a Moscow political consul-
tancy. Putin’s “goal is to preserve his rule
for the long term, relying on new people
and new blood,” he says.
He’s been elevating younger officials,
many who began their careers when he
was already president. The new Kremlin
chief of staff, Anton Vaino, 44, started out
as a low-level protocol official in 2002.
Some ex-bodyguards have been installed
as regional governors to give them a
chance to build political experience.
One, Alexei Dyumin, 44, spent years
at the president’s side ready to take a
bullet to save him. Now, some aides say
Putin and Dyumin have a special bond,
that the president sees him as among
the most trusted and loyal, putting him
on the political fast track soon after he
served a few months as deputy defense
minister. Asked about the promotions of
Dyumin and other security service vet-
erans, Putin says, “The most important
thing is that the right person wants to
grow, is capable of growing, and wants
to serve the country. If he wants it, and
I can see that the person has potential,
then why not let him work?”
Putin isn’t purging his entire inner
circle just yet, of course. Several long-
time allies remain in top jobs, and at least
one was recently promoted. Putin has
nothing but praise for Alexei Miller, 54,
who as head of state gas giant Gazprom
has presided over an 80 percent drop
in its market value. “This absolutely
doesn’t worry or bother us,” Putin says
of the market plunge. “We know what
Gazprom is, what it’s worth, and what it
will be worth in the coming years.” Putin
put Miller, an associate from the 1990s
in St. Petersburg, in as chief executive
officer in 2001.
The new generation is steeped in
the state-controlled system that Putin
has built. While some of his contem-
poraries might have had the stature to
challenge the president in private, the
younger officials owe their entire careers
to him. That bodes ill for the overhauls
that could jump-start the economy—
loosening state control, stimulating
private business, and cutting wasteful
government spending. Putin has long
resisted such steps in practice, despite
embracing them in public statements.
Putin points to signs the worst of the
recession is over. He also hints that state
oil major Rosneft might be allowed to bid
for a smaller rival in a planned privati-
zation auction, something pro-market
officials argue would only reinforce
government control.
That’s the kind of decision that
explains why many forecasters say the
best Russia can hope for in the next
few years is annual growth of about
1.5 percent, not enough to keep it in
the top ranks of world powers. Former
Finance Minister Alexei Kudrin, still a
Putin adviser, warned last year that con-
tinued stagnation would shrink Russia’s
share of world output to the lowest in
more than two decades, erasing the
gains made under Putin.
For the moment, that doesn’t seem to
be a threat to his continued rule. While
poll ratings for his government and
the ruling party have dropped despite
the Kremlin’s tight control over critical
media coverage and political debate,
Putin’s dominance remains unchallenged.
“Putin’s leadership is undisputed,” says
Evgeny Minchenko, a Moscow political
consultant. With no signs of major health
problems or serious political threats,
Putin will be able “to stay in charge of
the country for a long time,” he says.
Reelection in 2018 would mean
Putin breaks the postwar record for
years in power set by Soviet leader
Leonid Brezhnev—whose rule epito-
mized stagnation for many Russians—
and puts the issue of succession off until
the end of the next presidential term, in
2024. —Ilya Arkhipov, Henry Meyer, and
Gregory L. White, with Torrey Clark and
Stepan Kravchenko
attention from the essence of the problem by raising some in NATO? About 600 million, correct? There are 146 million
side issues connected with the search for who did it. in Russia. Yes, we’re the biggest nuclear power. But
And to be honest, I couldn’t even imagine that this sort of
information is interesting to American society—specifically
that the campaign headquarters worked in the interests of
one of the candidates, in this case Mrs. Clinton, rather than
do you
equally for all of the Democratic Party candidates. It would
simply not even occur to me that this could be interesting
to anyone.
really think that we’re about to

Turkey recently sent troops into Syria, and you did not
protest too loudly. Do you think Turkey has now moved
closer to your idea that the future of Syria has to involve
conquer
President Assad staying in some way, or have you changed
your mind about President Erdogan? A little bit ago, you
were complaining that you were stabbed in the back and
the Baltics
using
about the problems to do with the jet being shot down.
First off, we’re operating on the basis that Turkey apol-
ogized for the incident that took place and for the death of
our people. It did it directly, without any reservations, and
we value that. President Erdogan took this step. We see a
clear interest on the part of Turkey’s president in restoring
full-scale relations with Russia.
nuclear weapons?
What is this madness? That’s the first point, but by no means
We have many common interests in the Black Sea region, the main point.
and more globally and in the Middle East. We very much The main point is something completely different. We have
expect that we’ll be able to establish a constructive dialogue. a very rich political experience, which consists of our being
We have many big projects, including Turkish Stream [a pro- deeply convinced that you cannot do anything against the will
posed gas pipeline from southern Russia across the Black of the people. Nothing against the will of the people can be
Sea to Turkey] in the energy sector. done. And some of our partners don’t appear to understand this.
We have a large project to build a nuclear power station When they remember Crimea, they try not to notice that the will
on unique terms. They consist of several elements: We will of the people living in Crimea—where 70 percent of them are
finance, own, and operate it. … This will be an economically ethnic Russians and the rest speak Russian as if it’s their native
beneficial project for both sides. language—was to join Russia. They simply try not to see this. 47
In addition to everything else, as I already said, we have In one place, Kosovo, you can use the will of the people, but
a mutual desire to come to an agreement about the region’s not here. This is all a political game. So, to give reassurances, I
problems, including the Syrian one. I continue to believe that can say that Russia has pursued and plans to pursue an abso-
nothing can be decided externally about the political regime lutely peaceful foreign policy directed toward cooperation.
or a change of power. When I hear someone saying that As far as expanding our zone of influence is concerned, it
some president must go, not domestically but externally, it took me nine hours to fly to Vladivostok from Moscow. This
raises major questions for me. … I get this confidence from is a little less than from Moscow to New York, through all of
the events of the last decade, specifically the attempts at Western Europe and the Atlantic Ocean. Do you think we need
democratizing Iraq and attempts at democratizing Libya. to expand something?
We see that in fact led to the collapse of the state and the Do you think Russia is getting easier to run or harder?
growth of terrorism. Simpler than when? Compared to Ivan the Terrible’s time,
It’s the same with Syria. When we hear Nicholas II’s, Brezhnev’s, Khrushchev’s?
that Assad should go for some reason Energy-Dependent In your time.
someone peripheral thinks so, I have a big Share of Russian federal revenue from oil and gas I think it’s more complicated because,
question: What will it lead to? Will it be in 50% despite all the criticism of our Western
line with international legal standards, and partners, our domestic democratic
what will it lead to? Wouldn’t it be better process is developing. Significantly
to be patient and facilitate changes to the 40% more parties are going to take part in
structure of the society itself, to muster these elections than in previous years,
this patience, allowing changes to the and this will obviously leave its mark on
30%
structure of the society, waiting for when the course and result of the campaign.
these changes happen naturally within There is a practical dimension. We now
the country? see that the polling of our leading polit-
20%
I think the root of Western distrust is the ical force—the United Russia party—slid
idea that you want to expand Russian a little. … Clearly, it’s the start of a pro-
influence, in some cases geographically. 10% active election campaign. And the large
I think all sober-minded people who number of parties that are now taking
really are involved in politics under- part in the election process, they are all
stand that the idea of a Russian threat 0 on the television screens, in the media
to, for example, the Baltics is com- ’06 ’15 and the papers. … They look great on the
plete madness. Are we really about television, they criticize and pour
DATA: RUSSIAN FINANCE MINISTRY
to fight NATO? How many people live scorn on the representatives of
 DEBRIEF

Changing of the Guard

OUT IN

Vladimir Sergei Viktor Anton Vaino, 44 Alexei Dmitry

Yakunin, 68 Ivanov, 63 Ivanov, 66 Started work Dyumin, 44 Mironov, 47
Former intelli- Former Soviet- Former Soviet-era in Kremlin in Putin bodyguard Former Soviet-
gence officer and era KGB col- KGB colleague of Putin’s first term. promoted last era KGB officer
close Putin friend league of Putin’s Putin’s was a top Replaced Sergei year to deputy served in intelli-
since the 1990s. once seen as a Kremlin official Ivanov as head defense minister. gence until 2013.
Removed in 2015 potential succes- from 2000-08. of presidential Made acting gov- Named acting
as head of the sor. Ousted as Removed as administration. ernor of central governor of
national railways. Kremlin chief of antidrug chief Tula region in central Yaroslavl
staff in August. in April. February. region in July.

the ruling party. But they don’t say if they are ready to take whether the country is large or small. It’s a question of how you
responsibility for taking some not very popular, but ultimately relate to the work, to what extent you feel responsible for it.
necessary, decisions. Russia is also hard to govern. Russia is at the development
Are you envious of the Chinese, who don’t have to go through stage of both its political system and the creation of
these elections? a market-based economy. It’s a complicated process,
There is a different political system in China, and it’s a dif- but very interesting. Russia, actually, is not just a large
ferent country. I don’t think you’d like to see 1.5 billion people country, it’s a great country. I mean its traditions and its
sense some sort of a disorder in their society and in their gov- cultural particularities.
48 ernment. So let’s give the Chinese the right and the possibil- Yes, there are particularities and traditions in the political
ity to decide how to organize their country and their society. sphere. Why hide it? We all well know that we had an absolute
Russia is a different country. We have different processes, a monarchy, and then almost immediately the communist period
political system that’s at a different level of development. … It’s began. The base broadened a bit, but to a certain degree
becoming more complex. In fact, that only makes me happy, the country’s leadership became even harsher. It was only in
and I’d like for the system to become stronger so that we have the 1990s that we moved toward building a completely dif-
a balance in our political system that would allow it to be always ferent system of domestic politics, a multiparty system, and
in an effective state and aimed at development. that’s also a difficult, ambiguous process. You can’t skip over
People might say there are two ways in which Russia is very steps of it. You need the public to get used to it so that they
difficult to rule. One is it’s a very personal system, where felt their own responsibility when going to vote. So that they
many people vote for you rather than for your party. And the don’t put their faith in populist decisions or reasoning, or one
other reason is that Russia is still a fairly lawless place. You group of candidates that’s just bashing another group. The
have things like the murder of politician public needs to carefully analyze what’s
Boris Nemtsov, which I know you con- Ruble Down, But Not Out being proposed by the candidates. That
demned and you have brought people Russian foreign reserves goes for elections to Parliament, and it
in, but the mastermind is still being $600b goes for presidential elections.
sought. Is Russia a very, very hard place You look around the world at the
to govern at the moment? moment. There are so many countries
$500b
Any country is hard to govern, believe that become dynasties—the Clintons,
me. Do you think the U.S. is easy to the Bushes in America. You have chil-
govern? Is it easy to solve what would $400b dren you’ve successfully kept out of
seem to be simple tasks, such as, say, 0.03295 the public eye. Would you ever want
Guantánamo? President Obama said $300b your daughters to go into politics?
in his first term that he would close U.S. dollars I don’t think I have the right to wish
per ruble
Guantánamo, but it’s still open. Doesn’t something for them. They’re young but
$200b
he want to close it? Of course he does. already adults. They should determine
I’m certain that he wants to. But a thou- their futures themselves. On the whole,
sand things come up that don’t let him $100b to the extent I see it, they’ve already
completely settle the matter. Speaking 0.01524 made those choices. They’re doing
of which, that’s actually bad, but that’s science and some other things that are
GETTY IMAGES (6)

0
another topic. 1/4/2013 8/5/2016 absolutely noble and needed by people.
Any country is hard to govern, even a They feel needed, they get joy from their
very small country. It’s not a question of DATA: BLOOMBERG
work, and that makes me very happy.
 Cruising Through the Apocalypse
Come aboard. Now that the Arctic ice is vanishing, let’s sail the once-impen

On Aug. 16, the Crystal Serenity set out

from Seward, Alaska, carrying 1,700
passengers and crew, and escorted
by a comparatively minuscule, 1,800-
ton icebreaker. She circled west and
north around the Alaska Peninsula and
through the Bering Strait before heading
east into the maze of straits and sounds
that constitute the Northwest Passage.
For centuries, explorers tried to estab-
lish a sea route here between Europe
and Asia. Many met with ruin. A few
stranded sailors famously ate their
boots—and each other. When the Crystal
Serenity emerged free and clear of the
maze on Sept. 5, there were no accounts
of scurvy or cannibalism, only tales of
bingeing on themed buffets and grum-
bles from shutterbugs about the Arctic’s
monotonous landscape.
Operated by Crystal Cruises, the
Serenity became on that day the first
passenger liner to successfully ply the
50 Northwest Passage. As climate change
melts Arctic sea ice twice as fast as
models predicted, more and larger ships
have made their way along these fatal
shores. In 2013, the Nordic Orion was
the first bulk cargo carrier to transit the
Passage, hauling a load of coal.
Rates on the Serenity started at around
$22,000 per person. For that, passengers
were anointed, by Slate, “the world’s
worst people”—for venturing into a vul-
nerable ecosystem in a diesel-burning,
69,000-ton behemoth. Canada’s National
Post described the cruise as an “invasion”
of indigenous communities. Britain’s
Telegraph hinted at Titanic hubris,
asking, Is this “the world’s most danger-
ous cruise”?
As for the Arctic villages the Serenity
visited, they were, depending on whom
you ask, either overwhelmed or over-
joyed by the ship’s hordes of curious,
wealthy strangers. The communities
staged dances, hawked arts and crafts,
and expressed hope that the Crystal
Serenity reaches New York safely on
Sept. 16. Assuming it does, Crystal
Cruises plans to offer the route again
next year, departing Anchorage on
Aug. 15. Edie Rodriguez, the compa-
ny’s chief executive officer, said that a
few passengers have already rebooked.
—Eva Holland 
 Photographs by Katie Orlinsky
etrable Northwest Passage

51

After five days at sea, the ship docked in Ulukhaktok in Northwest Territories, Canada.
 Crystal Cruises passengers on the shuttle to Nome, Alaska, for a visit.
52

Ventriloquist Mark Merchant and Jose Diego, the bald eagle, chat with cruisers outside one of the ship’s auditoriums.
With no venue in Ulukhaktok large enough for 1,000 tourists, community members went aboard the Serenity to perform
traditional dances in the main theater. They met with their fans afterward. 53

Poolside as the ship passes Canada’s Smoking Hills, where oil shale cliffs auto-ignite and have burned for centuries.
54
 55

For Crystal Cruises’ Northwest Passage historic first, penthouse berths went for $44,000 and up. “It was quite a home run all around,” CEO Rodriguez said.
 Calculating prices in the Hubert jewelry shop, one of the stores on board.
56

An Ulukhaktok elder welcoming committee.

Because the Bering, Beaufort, and Chukchi seas freeze, there are few docks or wharves even where there are
settlements. Visitors must be prepared for “wet landings” by Zodiac. 57

Sitting roughly 120 miles from the top of the world.

Scientists at the biggest U.S. oil company
understood as early as anyone that fossil
fuel emissions were heating up the earth’s
atmosphere. Can it be found liable for
misleading the public since?

By Paul M. Barrett and Matthew Philips


Last fall, ExxonMobil executives hurried along the
hushed, art-filled halls of the company’s Irving,
Texas, headquarters, a 178-acre suburban complex
some employees facetiously call “the Death Star,” to
a series of emergency strategy meetings. The world’s
largest oil explorer by market value had been hit by
a pair of multipart investigations by InsideClimate
News and the Los Angeles Times. Both reported that as early as
the 1970s, the company understood more about climate change
than it had let on and had deliberately misled the public about it.
One of Exxon’s senior scientists noted in 1977—11 years before a
NASA scientist sounded the alarm about global warming during
congressional testimony—that “the most likely manner in which
mankind is influencing the global climate is through carbon
dioxide release from the burning of fossil fuels.”
The two exposés predictably sparked waves of inter-
net outrage, some mainstream media moralizing, and the
Twitter hashtag #ExxonKnew. The Washington Post editorial
page, for one, chided Exxon for “a discouraging example of
corporate irresponsibility.” Bill McKibben, the founder of the
“The most likely
Exxon scientist James Black (in 1977):
manner in which mankind is
influencing the global climate is
through carbon dioxide release
60
from the burning of fossil fuels”
environmental group 350.org, which spearheaded protests
against the Keystone XL pipeline, wrote an impassioned article
in the Guardian accusing Exxon of having “helped organize
the most consequential lie in human history.”
Kenneth Cohen, then the company’s vice president for
public and government affairs, convened near-daily meetings
to form a response. “We all sat around the table and said, ‘This
feels very orchestrated,’ ” says Suzanne McCarron, who suc-
ceeded Cohen when he retired at the end of last year. McCarron
still seems shocked that her company could come under sus-
tained attack. “We wanted to know who’s behind this thing,”
she says. While Exxon tried to identify its new nemesis—made
difficult, perhaps, by the release of the two reports being coin-
cidental—the executives also decided to nitpick the journal-
ism and sent lobbyists to Capitol Hill to argue their side. That
didn’t go so well. “I couldn’t get any journalist to actually eval-
uate the coverage,” Exxon spokesman Alan Jeffers says, with
evident frustration.
The crisis might have died down, a week or two of bad PR
and nothing more, but several politicians saw an opening.
On Oct. 14, four weeks after the first InsideClimate report,
Democratic Representatives Ted Lieu and Mark DeSaulnier,
both from California, asked U.S. Attorney General Loretta Lynch
to launch a federal racketeering investigation of Exxon. “It
occurred to me that this looks like what hap-
pened with the tobacco companies a decade
ago,” Lieu says. Democratic presidential can-
didate Hillary Clinton added her support for a
Department of Justice inquiry. “There’s a lot of
evidence that they [Exxon] misled people,” she
said two weeks later.
Exxon “helped
Environmentalist Bill McKibben:
organize the most consequential
lie in human history”
Stoked by 40 of the nation’s best-known environ-
mental and liberal social-justice groups—including the
Environmental Defense Fund, Sierra Club, and Natural
Resources Defense Council—the anti-Exxon animus only
intensified. And if there wasn’t a coordinated campaign before,
now there was: The groups all signed an Oct. 30 letter to Lynch
also demanding a racketeering probe. (Lynch has since asked the
FBI to examine whether the federal government should under-
take such an investigation.) The same day, Lieu and DeSaulnier
tried to interest the Securities and Exchange Commission in a
fraud probe against Exxon, a request that’s pending. Five days
later, on Nov. 4, New York Attorney General Eric Schneiderman
opened a formal investigation into whether Exxon had misled
investors and regulators about climate change.
“We cannot continue to allow the fossil fuel industry to
treat our atmosphere like an open sewer or mislead the public
about the impact they have on the health of our people and
the health of our planet,” former
Vice President Al Gore said at a
subsequent news conference
organized by Schneiderman.
Compelled by the New York
AG’s subpoena, Exxon has so far
CLOCKWISE FROM TOP LEFT: (MCKIBBEN) DAVID WOLFF-PATRICK/GETTY IMAGES; (TILLERSON) CHRIS RATCLIFFE/BLOOMBERG; (RAYMOND) MIKE SEGAR/REUTERS; (CLINTON) MELINA MARA/GETTY IMAGES
turned over some 1 million pages
of internal documents.
Hours after Schneiderman
issued his subpoena, Exxon Chief
Executive Officer Rex Tillerson
went on Fox Business Network.
“The charges are pretty unfounded, without any substance at
all,” he said. “And they’re dealing with a period of time that
happened decades ago, so there’s a lot I could say about it. I’m
not sure how helpful it would be for me to talk about it.” These
remarks themselves weren’t terribly helpful—certainly not to
Tillerson’s company.
McCarron and her colleagues can sound a tad overwrought
when discussing all this. “The goal of the coordinated campaign
is to delegitimize the company by misrepresenting our history of
climate research,” she says. “Tackling the risk of climate change
is going to take a lot of smart people, and we’ve got some of the
best minds in the business working on this challenge.”
A company that has 73,500 employees and reported
$269 billion in 2015 revenue would seem not to have much to
fear from a bunch of tree-huggers and a grandstanding state
AG. And yet the #ExxonKnew backlash comes at a financially
perilous time for Big Oil. A glut-driven collapse in crude prices
has rocked the entire industry. On July 29, Exxon announced
second-quarter profit of $1.7 billion, its worst result in 17 years.
That followed a rocky spring when ferocious wildfires reduced
production in the oil-sands region of western Canada. (The
frequency and intensity of such fires may be related to climate
change, Exxon’s Jeffers acknowledges, adding, “But we just
don’t know.”)
Democratic presidential candidate Hillary Clinton:
“There’s a lot of
evidence that they
[Exxon] misled people”

Most important, though, #ExxonKnew comes
as climate change, after being on a legislative back
burner, has gotten hot again. Signs of this include
President Obama’s rejection last November of the
Keystone pipeline from western Canada, the Paris
summit in December that produced an interna-
tional agreement to lower greenhouse gas emis-
sions, and the U.S.-China plan, finalized on Sept. 3,
committing the world’s two largest economies to implement
the Paris accords. It’s too soon to say how much of a danger
Schneiderman’s investigation poses to Exxon or if the corpo-
ration will ever be charged billions of dollars for carbon pollu-
tion. But it can’t ignore the risk of the sort of litigation storm that
engulfed Big Tobacco in the 1990s. ExxonMobil doesn’t want to
become the Philip Morris of climate liability.
#ExxonKnew has taken shape over the past year, but Peter
Frumhoff traces its roots to January 2007. That’s when the Union
of Concerned Scientists, a Cambridge, Mass.-based nonprofit,
published a 64-page report alleging that Exxon used the cigarette
industry’s tactics to “manufacture uncertainty on climate
change.” Founded in 1969 by physicists worried about nuclear
issues, the UCS has branched out over the years. Frumhoff, a
59-year-old Ph.D. ecologist, serves as its director for science
and policy. He dresses in grad-school casual and seems highly
amused by Exxon’s notion that he’s a central player in a con-
spiracy against the company. For starters, Frumhoff is a snap
to track down and operates quite openly—violations of the con-
spirator’s imperative to plot in secret.
The 2007 report, which Frumhoff oversaw, compared Exxon
to cigarette manufacturers that only five months earlier had
been found liable by a U.S. district judge for violating the federal
Racketeer Influenced and Corrupt Organizations Act (RICO).
“ExxonMobil has underwritten the most sophisticated and suc-
cessful disinformation campaign since Big Tobacco misled the
public about the incontrovertible scientific evidence linking
smoking to lung cancer and heart disease,” the report asserted.
With a relatively modest expenditure of $16 million from 1998
to 2005, Exxon helped fund a network of some 40 advocacy
organizations that raised doubts about the growing scientific
consensus that global warming is caused by carbon dioxide and
other heat-trapping emissions, the UCS found. Exxon, Frumhoff
says, is “sort of the poster child for combining a very large con-
tribution to the [climate] problem with an arrogant organiza-
tional culture and a significant investment in disinformation to
avoid regulation.”
The idea of “making oil the next tobacco” percolated quietly
for several years and reemerged in June 2012 in sunny La Jolla,
Calif., Frumhoff says. It was there that he co-convened a meeting
of scientists and lawyers who discussed not only the parallels
between fossil fuels and cigarettes, but also the method used
to wound tobacco: the amassing via litigation
of internal corporate documents showing that
cigarette companies concealed the hazards of
smoking. “Similar documents may well exist in
the vaults of the fossil fuel industry and their
trade associations and front groups,” an online
report summarizing the La Jolla meeting stated.
Even “a single sympathetic state attorney
“Let’s agree
Former Exxon CEO Lee Raymond (in 1997):
there’s a lot we really don’t know
about how climate will change in the
21st century and beyond”
“The charges are pretty
Exxon CEO Rex Tillerson:
unfounded, without any substance at all.
And they’re dealing with a period of time
that happened decades ago. …
I’m not sure how helpful it would be for
me to talk about it”
general might have substantial success in bringing key internal
documents to light.”
Several more years passed before a passel of climate docu-
ments surfaced, not courtesy of a prosecutor’s subpoena, but
as a result of journalistic digging: those reports in InsideClimate
(21,000 words in length) and the Los Angeles Times. The two
organizations reported that after accumulating climate knowl-
edge for a decade or so, Exxon changed course beginning in
the late 1980s, just as public debate over greenhouse gas emis-
sions heated up.
By the 1990s, top Exxon executives were publicly raising
doubts about the sorts of findings the company’s own scientists
had made. In October 1997, Lee Raymond, then Exxon’s CEO,
said in a speech in Beijing, “Let’s agree there’s a lot we really
don’t know about how climate will change in the 21st century
and beyond.” Arguing against the 1997 Kyoto Protocol, an early
attempt to forge an international agreement on emission reduc-
tions, he added, “It is highly unlikely that the temperature in the
middle of the next century will be significantly affected whether
policies are enacted now or 20 years from now.”
Working separately from InsideClimate, the Los Angeles Times
showed how Exxon incorporated climate change projections into
its Arctic exploration plans in the 1990s while publicly under-
mining such projections.
The overlapping investigative journalism efforts appeared 61
as delegations from countries around the world were getting
ready for the December climate talks in Paris. On the sidelines
of the Paris summit, McKibben, the author-activist, co-hosted
a mock trial of Exxon in which he served as a prosecutor. “This
is not just some run-of-the-mill, usual corporate malfeasance,”
McKibben said at the trial. “It’s hard to imagine a set of corpo-
rate practices that could have done more damage.” Exxon, need-
less to say, was found guilty.
By its public-relations staff’s own admission, Exxon spent last
fall and winter in a largely reactive mode, scrambling to respond
to each new revelation or congressional request for an investi-
gation—and never succeeding in offering an alternative narra-
tive. “It was like playing whack-a-mole,” spokesman Jeffers says.
Seeking to illustrate how InsideClimate “cherry-picked” evi-
dence, the company’s communications team pointed Bloomberg
Businessweek to a half-dozen alleged examples. One focused on
the site’s account of the late James Black, the Exxon scientist
who told management in 1977 of the “general scientific agree-
ment” about man-made global warming. Exxon accused the
publication of failing to include qualifications feathered into
Black’s work, such as his noting that “a number of assump-
tions and uncertainties are involved in the predictions of the
greenhouse effect.” But InsideClimate did prominently note that
Black’s “presentations reflected uncertainty running through
scientific circles about the details of climate change.” Exxon
also accused the organization of erroneously asserting that
the company had “stopped” doing carbon research in the
late 1980s. But InsideClimate had written, correctly, that the
company “curtailed” its in-house research program during
that period. (“Curtail” doesn’t mean “stop.”)
Exxon has also accused InsideClimate and the Los Angeles
 “It occurred to me that this
Times of having financial conflicts of inter- Representative Ted Lieu (D-Calif.):
est. The Times articles were researched
and written in collaboration with an looks like what happened with the tobacco
environmental- reporting project at
Columbia University’s Graduate School companies a decade ago”
of Journalism, and that program has
taken substantial grants from environmentally oriented foun- about his Exxon investigation. At the news con-
dations, such as those funded by the Rockefeller family. Despite ference, he sounded like he’d already decided to
the source of their original wealth—in 1870, John D. Rockefeller take the company to court: With “morally vacant
created Standard Oil, the corporate forerunner of Exxon—the forces” blocking climate action in Washington,
Rockefeller charities in recent years have taken strong stands he said, states were obliged to devise “creative
against the fossil fuel industry. The Rockefeller Family Fund gave ways to enforce laws being flouted by the fossil
Columbia Journalism School $550,000 to help pay for its fossil fuel industry.”
fuel reporting project but exercised no editorial control, says Lee Schneiderman also arranged for private brief-
Wasserman, director of the fund. The Los Angeles Times initially ings for the visiting AGs. These closed-door sessions featured a
failed to disclose the funding of the Columbia reporting project, talk on climate science by Frumhoff and a legal backgrounder
though the newspaper eventually linked to the financial details by Matt Pawa, a private plaintiffs’ attorney who in 2013 won a
online. Since 2013, the separate Rockefeller Brothers Fund has $236 million groundwater-pollution verdict against Exxon. The
provided InsideClimate with $200,000 a year; that fund had no company’s public-affairs representatives see great significance
say over what the website published, according to David Sassoon, in Pawa’s also having attended Frumhoff ’s 2012 gathering in La
InsideClimate’s founder and publisher. Jolla. “You see the same people showing up at planning meet-
As its attacks on journalists fizzled, Exxon tried sending lob- ings over the years,” Jeffers says. Schneiderman says he doesn’t
byists to dozens of congressional offices to counter #ExxonKnew know anything about the La Jolla session and that his office rou-
on Capitol Hill. Lieu, the California Democrat seeking federal tinely consults with outside experts.
investigations, is still shaking his head over a November visit from A more consequential aspect of the prosecutors’ conclave
four Exxon emissaries. The lobbyists handed out a 10-page pre- was the announcement by the attorney general of the U.S. Virgin
sentation titled Managing Climate Change Risks, which sought to Islands, Claude Walker, that his tiny Caribbean territory had
underscore the company’s carbon-reduction bona fides. “It was launched a parallel investigation of Exxon. In theory, the Virgin
a really surreal meeting,” Lieu says. The lobbyists “came in and Islands has ample reason to be anxious about climate change:
said, ‘We believe in climate change and that it’s being caused Warming, rising ocean waters could swamp its homes and resorts
by humans, and we support a carbon tax.’ I thought to myself, in coming decades. But in practice, the territory proved itself
62 Where is this coming from? Is this like some white-hat depart- inadequate to the task of confronting Exxon.
ment that no one else at Exxon knows about?” In March the Virgin Islands issued a sprawling, loosely worded
Lieu hadn’t been keeping up with the evolution of Exxon’s subpoena that demanded the company’s correspondence with

CLOCKWISE FROM TOP LEFT: (LIEU) ANDREW HARRER/BLOOMBERG; (SMITH) BILL CLARK/GETTY IMAGES; (SCHNEIDERMAN) SPENCER PLATT/GETTY IMAGES
climate-related positions since Tillerson replaced the hard- scores of conservative and free-market organizations, includ-
nosed Raymond as CEO in 2006. In 2007, Exxon began cutting ing FreedomWorks, the Heartland Institute, and the Heritage
off funding for some nonprofits that deny widely accepted Foundation. In a separate subpoena, it sought documents directly
science on global warming. The company in 2009 for the first from the Competitive Enterprise Institute, a right-leaning group
time endorsed a tax on carbon emissions, a stance vehemently that’s cast doubt on mainstream climate science and formerly
opposed by Republicans in Congress and therefore dead on received financial support from Exxon. This focus on commu-
arrival on Capitol Hill. At the Exxon annual meeting in Dallas in nication opened the door for Exxon’s New York law firm, Paul,
May, the silver-haired Tillerson went out of his way to tell share- Weiss, Rifkind, Wharton & Garrison, to seek to kill the islands’
holders that “the risks of climate change are serious and they subpoenas on First Amendment grounds. Paul Weiss filed court
do warrant thoughtful action.” papers in Texas on April 13 condemning the Virgin Islands’
Strictly speaking, though, #ExxonKnew isn’t a campaign attempt “to deter ExxonMobil from participating in ongoing
aimed at what the company is saying or doing today. #ExxonKnew public deliberations about climate change.” (The more precisely
focuses on discrepancies between past actions and past state- tailored New York subpoena didn’t explicitly name nonprofits
ments. That historical inquiry, Lieu says, deserves the author- with which Exxon may have communicated.)
ity and force of a government investigation. Exxon’s lobbyists Finally, Exxon had its counterpunch: that hostile outsid-
didn’t change his mind. ers had attacked the company’s free-speech rights. There’s
a reason Theodore Wells, the Paul Weiss partner who’s led
Exxon executives say their view of #ExxonKnew as a conspiracy Exxon’s legal defense (and has represented such clients as Philip
was confirmed by the gathering of 15 state attorneys general and Morris), is known as one of the craftiest people in his profes-
Gore in New York on March 29. Schneiderman, the host, says sion. However unlikely the image of Exxon as victim, that’s
he organized the event simply to educate fellow state officials how Wells decided to characterize his client—and it worked. On
April 22, the Washington Post carried two opinion
“The goal of
Exxon executive Suzanne McCarron: pieces on the topic: a column by George Will head-
lined “Scientific Silencers on the Left Are Trying
the coordinated campaign is to Shut Down Climate Skepticism” and one by
Sam Kazman and Kent Lassman, respectively
to delegitimize the company general counsel and president of the Competitive
Enterprise Institute, condemning “the environ-
by misrepresenting our mental campaign that punishes free speech.” In
the following days, dozens of similar broadsides
history of climate research”
 “Unfortunately,
Representative Lamar Smith (R-Texas):
were issued from the Wall Street Journal edito-
rial page, Fox News, the Heritage Foundation, the attorneys general have refused
and many others.
Once again, politicians followed. In mid-
to give the committee the information
May, the House Committee on Science, to which it is entitled. What are they
Space, & Technology began investigating
what it called “a coordinated attempt to hiding and why?”
deprive companies, nonprofit organizations, and scientists of with the situation. Schneiderman is investigating under the broad
their First Amendment rights.” The only company the panel provisions of a 1921 state law called the Martin Act, arguably the
mentioned by name was Exxon. Committee staff members and most potent securities-fraud statute in the country. Named for
Exxon’s McCarron say that despite the company’s widespread sponsor Louis Martin, an otherwise-forgotten state assemblyman,
lobbying of Congress, it didn’t ask the panel or its chairman, the law forbids “any fraud, deception, concealment, suppres-
Lamar Smith (R-Texas), to begin the probe. First elected in sion, [or] false pretense.” Crucially, it doesn’t require a prose-
1986, Smith has received almost $685,000 in career campaign cutor to demonstrate that a defendant consciously intended to
contributions from the oil and gas industry, according to the defraud investors or regulators. New York’s top court has inter-
Center for Responsive Politics. By early July, the Virgin Islands preted it to cover “all deceitful practices contrary to the plain
had turned tail and withdrawn its subpoenas of Exxon and the rules of common honesty.”
Competitive Enterprise Institute. Trying to put the best spin Schneiderman doesn’t have a slam-dunk case. “The New York
on his humiliating retreat, Virgin Islands AG Walker said via attorney general has a plausible theory, but he’ll need more
e-mail that extricating itself from the sub- than the results of the journalistic investigations,” says Michael
poena imbroglio will allow his office to “use Gerrard, a law professor at Columbia who directs the Sabin
our limited resources to address the many Center for Climate Change Law. “It’s not enough to show that
other issues that face the Virgin Islands Exxon had internal knowledge of climate change when exter-
and its residents.” Wells didn’t respond to nal knowledge was widespread. The government would have to
requests for comment. show that there were things that only Exxon knew and that were
Schneiderman now finds himself under material to investors and that Exxon kept from investors. Such
investigation, too. When the New York evidence might be there, but we don’t know yet.”
AG’s office refused to cooperate with the One potential defense that Exxon is floating: Since the 1970s
science committee, its scientists have published

nas to Schneiderman;
“The First
Smith issued subpoe- New York Attorney General Eric Schneiderman: climate findings in more than
50 peer-reviewed articles.
Massachusetts Attorney
General Maura Healey,
Amendment doesn’t give you What Exxon knew, the argu-
ment would go, the wider sci-
63

who’d launched her

own investigation of the right to commit fraud” entific world also knew. The
company didn’t keep secrets
Exxon; and eight nongovernmental organizations, including the the way the tobacco industry did.
Rockefeller funds, the Union of Concerned Scientists, and 350. org. Few complicated securities-fraud cases go to trial; the risk of
“Unfortunately, the attorneys general have refused to give the com- losing and the costs of extended litigation impel settlement.
mittee the information to which it is entitled,” Smith told report- With those risks in mind, Exxon and New York may eventually
ers on July 13. “What are they hiding and why?” look to a separate case resolved by Schneiderman’s office in
November. The attorney general found after a two-year investi-
Not a thing, according to Schneiderman, who says Smith’s gation that coal producer Peabody Energy provided incomplete
inquiries evoke 1950s-era communist hunting by the House information to investors by saying in public reports that it
Un-American Activities Committee: “They have no evidence of couldn’t “reasonably predict” the risks it faced from climate-
any cabal, no evidence of any misconduct.” As for the science related regulations. St. Louis-based Peabody, which in April
panel’s concern about Exxon’s First Amendment rights, declared bankruptcy amid a collapsing coal market, neither
Schneiderman says the federal government’s successful RICO admitted nor denied wrongdoing and didn’t face pecuniary pun-
case against the tobacco companies made “very clear that the ishment. The company did agree to provide more forthcoming
First Amendment doesn’t give you the right to commit fraud.” disclosures to investors.
If Schneiderman continues to resist the House commit- “It’s really too soon to tell” whether the Peabody settle-
tee’s document demands, the confrontation could end up in ment provides a model for the Exxon case, Schneiderman
court—a fight the New York official sounds eager to have. He’d says. He expects to amass evidence in the Exxon investigation
have an excellent chance of winning, too. It’s unusual for a of “a much more sophisticated ongoing policy of deception”
congressional panel to interfere with a pending state investiga- than what his office found inside Peabody—wrongdoing that
tion, says Senator Sheldon Whitehouse (D-R.I.), a former federal could warrant seeking substantial money damages. Exxon has
prosecutor who advocates putting Exxon under a microscope. kept that alleged policy in place through recent years,
Smith “is trying to subvert the power of state government [and] Schneiderman says, pointing to a 2014 company report claim-
do something he is not entitled to do under any kind of discov- ing that international efforts to reduce climate change wouldn’t
ery rules,” Whitehouse says. More succinctly, Peter Shane, a oblige fossil fuel producers to leave enormous amounts of oil
law professor at Ohio State University, says, “Congress has no in the ground untouched.
authority over the conduct of state law enforcement.” Exxon denies any deception took place and isn’t ready to talk
Exxon, for its part, has been cooperating with Schneiderman’s settlement, McCarron says. She calls Schneiderman’s comments
subpoena because the company’s lawyers at Paul Weiss advised “an attack on the integrity of the company” and says Exxon
their client that it had no choice, according to a person familiar “will pursue all available legal options to defend ourselves.” 
Tran-
scripts.
The politics
of democracy.
Untangled.
Exclusive coverage at BloombergPolitics.com
And on “With All Due Respect” weekdays at 5pm/et.

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CHEF YOUR JOB IS ON THE LINE CHINA’S
SCI-FI INVASION
KEEP WEARING WHITE
JEANS

The Primest
Prime Time
Ever
Watch the best old shows to
get ready for the new ones
By Sam Grobart
 Etc. Television

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PREVIOUS PAGE: ILLUSTRATIONS BY JACI KESSLER LUBLINER

8:00 GILMORE GIRLS—“Pilot,” MZf[hklehp&k^gmla^gZgb`Zgl' `Zm^ma^fnk]^kh__hkmng^m^ee^kl4

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 Etc.
HOLD THE SPRING ROLLS
Is Kris Yenbamroong’s modern Thai ready for mass consumption? By Sheila Marikar
O
n a recent Saturday night,
dozens of young people packed
Night + Market, a Thai res-
taurant on West Hollywood’s
Sunset Strip. Beer towers topped
sticky laminate-wood tables. A
server with a man bun and a
bubblegum-pink apron rushed
around with plastic plates. There may
have been music; it was hard to tell over
all the shouted conversations. The cumu-
lative effect was more TGI Fridays than
fine dining—a comparison Night + Market
chef Kris Yenbamroong embraces. “We’re
definitely a party place, and I’ve always
wanted to be that,” he says. “We get a
crazy, fun, derelict kind of crowd.”
With another Night + Market in Los
Angeles’s trendy Silver Lake neighborhood
68 and a third slated to open in Venice this
fall, Yenbamroong, 34, is presiding over
a mini-empire. Now he’s going for chef
stardom, something few people hawking
“ethnic” cuisine have attained. In July he
signed with Lisa Shotland at Creative
Artists Agency, whose clients include Roy
Choi, L.A.’s Korean taco impresario, and
Duff Goldman, the star of Food Network’s
Ace of Cakes. Yenbamroong’s first cook-
book is due out in a year. After that, who
knows? “Most people think, I want to go
Food
into my community and do this,” Shotland
says, explaining that young chefs don’t
always share Yenbamroong’s aspira-
tions. “I look at some contemporaries,
like Andy Ricker”—the chef of Pok Pok,
a Thai standard-bearer
in Portland, Ore., which
has outposts in New
York and L.A.—“and I
feel like that’s something
Kris will do. The ques-
tion is, how quickly?”
Yenbamroong grew
u p a t Ta l é s a i , t h e
Americ anized Thai
restaurant his parents
o p e n e d o n Su n s e t
Boulevard in 1982,
the year he was born.
(Wolfgang Puck was a
regular.) From 13 to 17,
he lived in Bangkok and
Chiang Rai, Thailand,
then returned to the U.S. to study film at
New York University. In 2008 his parents
called him back to California to help run
the family business. He failed at first.
“I had no idea where the money came
from,” he says. He discontinued lunch
service and takeout—major sources of
revenue—and blew cash on a renovation.
Yenbamroong;
the Night + Market
in Silver Lake
“The only good part was some dishes that
I added to the menu tasted good, but no
one wanted them,” he says. “They wanted
the same thing they had been eating every
Sunday night for 20 years”: spring rolls
and red curry, not Thai-
style beef jerky with
spicy chili dip.
The space next to
Talésai opened up in
2010, and his family
leased it, intending
to use it for private
events. Yenbamroong
began throwing boozy
dinners there with
pals such as Thai artist
Rirkrit Tiravanija. He
made the jerky for them,
and something clicked.
“I realized, it seems like
my friends are having a
lot of fun, I should do it
for the public,” he says. He dubbed the
space Night + Market and began serving
dinner in November 2010—though “only
four nights a week,” he says. “Another one
of my stupid ideas.”
Yenbamroong’s menus shun fine-
dining trends in favor of the kind of street
food he loved in Thailand. He credits his
dad with schooling him in business, but
he’s had other mentors, including David
Rosoff, the former general manager of
Mozza, an Italian restaurant group in
L.A. His fans run the foodie gamut, from
Gwyneth Paltrow to Anthony Bourdain. “I
didn’t make the rounds in all these famous
kitchens,” he says. “I’m with all these full-
PHOTOGRAPHS BY ROB KULISEK FOR BLOOMBERG BUSINESSWEEK
blown chef dudes, which I’m not.”
In 2015, Night + Market took over the
portion of the building originally used
by Talésai. Yenbamroong used to pride
himself on being small and subversive,
but now going big is its own form of rebel-
lion. “If I were to do a supper club and
invite 10 people a night, that would be
expected,” he says. “For me to come out
of this totally different world and say, ‘I
want to do a fast-casual restaurant’—that’s
super transgressive. I’m not supposed to
be part of that club.” 
 Christy Gardner

“My victory is having my new battle buddy.” Christy was badly

injured while serving overseas. With the right support, she has
triumphed over limitations. Every year, DAV helps more than
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 Etc. Fashion
Layer With
a Blazer Throw On
a Sweater
On her A long, ribbed sweater is On him
great for playing with texture Subdued, autumnal
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skinny on a cool day. Guys: Stick at frame-store.com rogue denim look, I know
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Saturdays NYC shirt,
Victoria Beckham $120; saturdaysnyc
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70

On him

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Perry Ellis
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 Etc.
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Footwear will pop if you keep
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simple yet polished. A jean jacket
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Keep Your
finishes an ensemble without
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Pants On
Three ways to transition
On her

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71

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 Etc.
IT CAME FROM
72
CHINA!
Why you ought to make time for a 1,500-page
sci-fi trilogy. By Aaron Rutkoff
T
here was a moment recently
when the internet, parsing a
report from scientists at the
Search for Extraterrestrial
Intelligence Institute, thought
we might have received our first
interstellar transmission. The
hyperventilating headlines gave
way a few hours later to cold-water
explainers about why it probably wasn’t
the work of aliens—or a wrong number.
But let’s say it was a real message from
94 light-years away: Should we call
back? Anyone who’s read China’s most
popular science fiction series, The
Three-Body Trilogy, in which author
Cixin Liu follows into the far future
the consequences of a Chinese scien-
tist who replied to such a signal, would
keep silent forever.
The first translated volume, The
Three-Body Problem, reached the U.S.
in 2014 and wound up on the reading
lists of President Obama and Facebook
founder Mark Zuckerberg—two people
The Critic
who’ve spent a bit of time contemplating
what’s to come. The final volume,
Death’s End, arrives in the U.S. on
Sept. 20 ($26.99; Tor Books), but you
should read the roughly 900 pages of
the first two books first so it makes
sense. Why, you might ask, should you
bother to read that many
pages of Chinese sci-fi?
E s p e c i a l ly wh e n you
probably haven’t perused
AN ALIEN
much of the Western INVASION,
variety lately? Given how
many times we’ve seen
400 YEARS IN
the American imagina- THE MAKING
tion destroy humanity—
Independence Day, War of
the Worlds—isn’t it time we let somebody
else take a crack? The payoff is a grand—
and grim—speculation about the limits
of scientific progress.
The trilogy’s plot defies easy sum-
marization: In 1971 a disaffected sci-
entist makes contact with an alien
civilization, which leads to the prospect
of a full-scale invasion 400 years in the
future. (Interstellar travel takes a while.)
Scientists and statesmen undertake
generation- spanning policy initiatives
to prepare, leading to clever plot twists
that unfold throughout the course of
decades. By the time the reader gets to
Death’s End, the love story between a
brain in a jar and the beautiful astro-
physicist the brain went to college with
but never had the nerve to ask out will
make total sense and be genuinely
moving. Again, it’s complicated.
Chinese fiction hasn’t made signifi-
cant inroads with U.S. audiences, but
that should change. Turkish writer
and Nobel laureate Orhan Pamuk once
said of China’s rising middle class, “I
do not think we shall truly understand
the people who have been part of this
transformation until we have seen their
private lives reflected in novels.” He
was talking about Chinese versions of
Jonathan Franzen, not Isaac Asimov, but
we can ease into that. Don’t think that
this trilogy doesn’t tackle serious stuff—
topics it’s hard to believe the censors
let Liu publish, such as brutal infighting
during the Cultural Revolution, followed
by a Maoist purge in which a physicist
is murdered.
Translators are working to bring
American readers up to speed. Chinese
American novelist Ken Liu (no relation),
a popular and award-winning sci-fi
author, translated the first and third
books in the series, creating engross-
ing, nuanced prose. Around the time
The Three-Body Problem reached the
U.S., Neil Clarke, editor of Clarkesworld,
an online sci-fi enthusiast magazine in
Stirling, N.J., began a Kickstarter cam-
paign that’s raised about $13,000 to pay
for the translation of nine
other stories by Chinese
sci-fi authors, includ-
ing Han Song, whose
acclaim almost matches
Cixin Liu’s.
Ken Liu has warned
English readers against
putting a neat definition
on what makes Chinese
science fiction different from its U.S.
counterpart. There’s a lot of sci-fi in
ILLUSTRATION BY SAM ISLAND
China, he says; asking what defines an
American sci-fi story would produce
an equally unsatisfying answer. Still,
reading someone else’s dark dreams of
the future has got to be good for us. For
once, we get to be the aliens. 
haveKINDLE willTRAVEL
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 What I Wear to Work Etc.
What do you do?
I’ve been on the campaign
trail chasing down real
people rather than
candidates. I’ve been to
GARRETT LEIGHT X What’s that on
MARK MCNAIRY
Iowa, New Hampshire, your tie?
Nevada, Texas, Ohio,
Florida, Wisconsin, North
It’s a mallard.
Dakota. …  What’s funny is that
How do you dress
for such different
right next to it is the
climates? number 1974, and
I’ll look at the weather
in advance—and people are always
usually pack the wrong
thing because it’s BAND OF OUTSIDERS asking what the year
constantly changing. means, but it has
no significance.
I asked my wife.

JACOB
SOBOROFF
BAND OF OUTSIDERS

How did you get into

desert boots?
33, political correspondent, I read an interview with
MSNBC, Los Angeles Anthony Bourdain talking
about his travel regimen,
and he apparently always
wears Clarks and brings a
puffy down jacket. These
shoes work with anything:
Describe your style. a suit, jeans, whatever.
I like uniform dressing.
Remember that cartoon,
Doug? How he had
a closet of the same
sweater-vest-and-shorts
outfit? That’s like me—I
have a closet full of the
same things.

You’re probably never far

from your phone.
PHOTOGRAPH BY CHRISTOPHER LEAMAN FOR BLOOMBERG BUSINESSWEEK

I constantly hold it because

I’m always on social media,
even between takes when
CLARKS I’m on-air. I use a Mophie
backup battery case. We’re
out here all day long, and
ABC is the motto.
Tell me about your suit.
My wife used to work
ABC?
for Band of Outsiders, Always be
which explains why I charging!
have so much of it. I love
slim-fitting suits, and
this one was handmade
by [former Band of
Outsiders tailor] Martin
Greenfield in Brooklyn.
Interview by Jason Chen
 Etc. How Did
dIG
Get
et Here?

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ROSALIND BREWER President and chief executive officer, Sam’s Club
At Spelman,
early ’80s
Education
“I got a lab coat! But
there was no one to
Cass Technical
High School, Detroit,
talk to in the lab.
class of 1980 I’d bring my radio.”
Spelman College,
Atlanta, class of 1984

Work
With her
“It’s a private, all-women’s Experience husband, John,
college based in Christianity, at the Blue
Scholarship
and you had to get to know 1984–88
Gala to benefit
Spelman, 2010
yourself to survive in that Research technician,
Kimberly-Clark
competitive environment.”
76 1988–98
Market manager, director
“Nonwovens are polymers for skin care, vice
president for nonwovens,
heated and pressurized
Kimberly-Clark
to make fabric. The
technology is similar for 1998–2006
“Retail only has one cycle: Go.
President for
diapers, feminine care, I was out of breath the first six to
manufacturing and
adult incontinence, and operations, global nine months.”
the sterilized clothes president, Kimberly-Clark
surgeons wear.”
2006–12
VP, senior VP, executive
VP for Southeast
operations, EVP for
“I thought I’d be with Walmart
East business unit,
no more than three years or so. Lo and Walmart Stores
behold, I sort of fell in love.”
2012–
Present
President and CEO,
Sam’s Club
. “Be agile and ready to change every day.”

Speaking at the U.S. Chamber of Commerce, 2012

“Our e-commerce is growing,

At a
but a combination of being able
Walmart to order online and pick up
shareholders
in-club is doing even better.
Courtesy subject (4). Getty Images (4)

meeting,
2012 In total, we’re at $58 billion in
Life Lessons revenue, with 655 clubs
and over 100,000 associates.”
3
.”

e
m
1. “Listen at all levels. Some of the best ideas come from those on the front lines.” 2. “Seek people who are willing to act and inspire others to do the sa
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