July 14 — July 20, 2014 | businessweek.

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ULY S S E - NAR DI N. COM
F o r a c a t a l o g c a l l : 5 6 1 9 8 8 8 6 0 0 o r
u s a 7 6 @u l y s s e - n a r d i n . c o m
Sonata Streamline
Self-winding. Patented manufacture movement with
Silicium technology and 24 hour alarm and countdown.
Titanium case with ceramic bezel.
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“With all this
plastic, I could lay
the whole road
to the airport”
p54
“If my father in heaven
wants me to be the
test case for something,
I’ll be the test
case for something”
p48
“It’s kind of insane that
as a 19- or 20-year-old,
you can make more
than the U.S. average
income in a summer”
p31
“If you took out the sex, it would be
boring. And if you took out the idealistic
component … it would just be sleazy”
p42
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Opening Remarks The Tinder scandal is more than a return of the Boom-Boom Room era 8
Bloomberg View House Republicans flunk college math • Presenting the GMO chestnut tree 10
Global Economics
The debate over exporting U.S. oil 12
China nurtures red tourism to boost patriotism and make the Party look good 14
Brazil loses the World Cup, and the economy is sinking, but Dilma Roussef may still win 15
Indian Prime Minister Modi’s hard choices 16
Ukraine’s richest man changes sides at the best possible moment 17
Companies/Industries
Japan’s pachinko industry considers an alliance with big casinos 19
World Cup ratings broke all records, but what about ad revenue? 20
Why Brazil sees Mexico in its rearview mirror 21
British pubs try to reverse a decades-old hangover 22
Briefs: América Móvil gets Slimmed down; the latest Transformers is bofo at the Chinese box ofce 23
Politics/Policy
Companies that go ofshore to avoid U.S. taxes are still winning billions in federal contracts 25
Obama can reform immigration without Congress—up to a point 26
Insurers and drug companies bicker over who will pay for pricey new drugs 27
Republicans attack the CFPB’s ofce face-lift with creative math 28
Technology
Are you a teen, love money, and need a summer internship? Head for Silicon Valley 31
GE and Pratt square of in the skies over more efcient jet engines 32
A smarter way to keep the lights burning, one utility at a time 33
Amazon is making inroads in India, but local company Flipkart isn’t conceding defeat 34
Innovation: Cue can detect everything from fertility to flu with a swab of bodily fluids 35
Markets/Finance
An ex-banker wants to be Mr. Nice Guy making high-rate loans to small businesses 36
Puerto Rico may not be able to borrow in the bond market 37
Billionaire Guo Guangchang aims to be the Warren Bufett of China 39
A company that finances lawsuits bounces back from a bad bet 40
Bid/Ask: Archer Daniels Midland’s $3 billion acquisition of Wild Flavors is a natural; Expedia goes Down Under 41
Features
“Chaos Has a Cost” The fall of Dov Charney and the future of American Apparel 42
Of the Grid in Suburbia Robin Speronis jerry-rigged her own utilities. Then she took on the law 48
India’s Garbage Solution A chemist known as Plastic Man turns litter into pavement 54
Etc.
Ofces for introverts: Steelcase’s new Quiet Spaces are an antidote to the open plan 59
Fashion: Sandals that aren’t too casual for the workplace 62
Survey: Icebreakers to put your elevator companions at ease 64
The Critic: A very blatant race to create the hit song of summer 65
Advertising: Drugstore brands are empowering women and hoping for viral-video success 66
What I Wear to Work: Gilt executive Jyothi Rao gilds her polished look with edgy accents 67
How Did I Get Here? There’s no playbook for being White House counsel, says Kathryn Ruemmler 68
July 14 — July 20, 2014

“Cover is Dov Charney.”
“Oh boy.”

“No black
and white.”

“Better, but
can we try
something more
recognizably him?”
“Ask and ye shall
receive, kind sir.”

“You and your quirky editor rules.
How about we just rip of the
Andy Warhol Esquire cover, except
instead of falling into a soup can,
Dov is falling into something else.”

“No, I believe the quote was,
‘Designers are best seen, not heard.’ ”
How the cover gets made
Cover
Trail

“This
lacks—how
should I put
this?—an idea.”

“Great, an idea!
It also makes
absolutely
no sense.”

“I had no idea
designers ripped
each other of!”
“Speaking of
Warhol, didn’t he
say, and I quote,
‘It’s totally cool
to copy stuf’?”
2
Innovative thinkers everywhere use
INDUSTRY SOLUTION EXPERIENCES
from Dassault Systèmes to explore
the true impact of their ideas. Insights
from the 3D virtual world are unlocking
new and innovative ways to create and
manufacture automotive parts from
unconventional and biodegradable raw
materials. How many more secrets does
the sea still hold?
want sustainable
transportation, could
we look to the sea?
Algae-based bioplastic materials –
a dream our software could bring to life.
It takes a special kind of compass to understand
the present and navigate the future.
3DS.COM/TRANSPORTATION
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E
EBay (EBAY) 34
Emson, Colin 40
Enterprise Inns (ETI:LN) 22
Enterprise Products
Partners (EPD) 12
Essentia Equity 44
Expedia (EXPE) 41
F
Facebook (FB) 8, 15, 23, 31
Flipkart.com 34
Folli Follie (FFGRP:GA) 39
Forever Yogurt 36
Fosun Group 39
Fox (FOX) 20, 49
Franklin Templeton
Investments 37
Frost & Sullivan 32
Fruit of the Loom (BRK/B) 44
FTI Consulting (FCN) 44
Fundera 36
G
Gap (GPS) 44
García Padilla, Alejandro 37
General Electric (GE) 32
Gilt 67
Gladwell, Malcolm 44
Glass, Noah 8
Glassdoor 31
Goins Waste Oil 36
Goldman Sachs (GS) 12, 15, 36
Google (GOOG) 31
Gotham City Research 23
Goulding, Ellie 65
Greenfield, Lauren 66
Gulczynski, Christopher 8
Guo Guangchang 39
H
Hackett, James 60
Hadapt 31
Harbour Litigation Funding 40
Harris, Calvin 65
Hawthorn Leisure 22
Hecht, Jared 36
Helvetia Holding (HELN:SW) 41
Hensarling, Jeb 28
Honda Motor (7267:JP) 21
I
IAC/InterActiveCorp (IACI) 8
IHS (IHS) 12
Ingersoll-Rand (IR) 25
International-Matex Tank
Terminals 41
ITV Studios America (ITV:LN) 64
J
Jepsen, Carly Rae 65
JPMorgan Chase (JPM) 39
Juridica Investments 40
K
Kahala Franchising 64
Kalamata Capital 36
Keane, James 60
Khattack, Ayub 35
KKR (KKR) 41
Konami (9766:JP) 19
L
Laine Pub 22
Lamach, Michael 25
Landrieu, Mary 12
Las Vegas Sands (LVS) 19
Let’s Gowex (GOW:SM) 23
Li Ka-shing 39
LinkedIn (LNKD) 31
Loews Hotels & Resorts 64
Longford Capital 40
Lookout 31
Loveman, Gary 19
Luttrell, John 44
Lyft 23
Bloomgarden, Kathy 64
BMW (BMW:GR) 21
Boeing (BA) 32
Bogart, Christopher 40
Borg-Neal, Peter 22
Boulud, Daniel 64
Brean Capital 44
Brown, Reggie 8
Bufett, Warren 39
Bulkin, Noah 22
Bulltick Securities 15
Burford Capital (BUR:LN) 40
C
CAC Consultoria Politica 15
Caesars Entertainment (CZR)
19
Cain, Susan 60
Calara, Mandy 36
Carlyle Group (CG) 39
CBRE (CBG) 28
CenterPoint Energy (CNP) 33
Cerberus Capital Management
22
CFM International 32
Charlie Bravo Aviation 64
Chery Automobile 21
Chevron (CVX) 40
Chicago Bridge & Iron (CBI) 25
Cisco Systems (CSCO) 14
Citigroup (C) 39
Clinton, Bill 68
CLSA Asia-Pacific Markets 16
Club Méditerranée (CU:FP) 39
Cole, Tom 26
Comcast (CMCSA) 20
Cook, Tim 31
Cordray, Richard 28
Cosmo
Pharmaceuticals (COPN:SW)
41
Crumbs Bake Shop 23
Cue 35
D
Daimler (DAI:GR) 21
DeVos, Rich 64
Dish México 23
Donziger, Steven 40
Dropbox 31
DTE Energy (DTE) 33
Dynam Japan
Holdings (6889:HK) 19
D’Aloisio, Nick 31
Index
People/Companies
A
AbbVie (ABBV) 41
Abe, Shinzo 19
Accenture (ACN) 25
Adelson, Orly 64
Admiral Taverns 22
Airbnb 31
Airbus (AIR:FP) 32
Akhmetov, Rinat 17
Alibaba Group 39
Allen, Todd 49
Amazon.com (AMZN) 34
American Apparel (APP) 44
American Electric
Power (AEP) 33
América Móvil (AMX) 23
Apple (AAPL) 31
Archer Daniels Midland (ADM)
41
Aristocrat Leisure (ALL:AU) 41
Arora, Rohit 36
Ascend 32
Avalere Health 27
Avenue Capital Group 22
Azalea, Iggy 65
B
Badeen, Jonathan 8
Bain Capital Partners 39
Banglesdorf, Rene 64
Bank of America (BAC) 49
Bank of Baroda (BOB:IN) 16
Bansal, Binny 34
Bansal, Sachin 34
Beck, Glenn 49
Belle Haven Investments 37
Bentham IMF 40
Berkshire Hathaway (BRK/A) 39
Bezos, Jef 34
BHF-Bank 39
Biz2Credit 36
M
Ma, Jack 39
Macquarie Group (MQG:AU) 41
Mandis, Steven 36
Markey, Edward 12
Maruhan 19
Mateen, Justin 8
Mazda Motor (7261:JP) 21
McCaul, Michael 12
McHenry, Patrick 28
Medtronic (MDT) 25
Menendez, Robert 12
Metinvest 17
MGM Resorts
International (MGM) 19
Modi, Narendra 16
Moody’s (MCO) 16, 37
Munoz, Joe 8
Myerson, Jef 33
N
Nasdaq (NDAQ) 23
Nationale Suisse 41
New York Independent System
Operator 33
Nielsen (NLSN) 20
Nikon (7731:JP) 19
Nissan Motor (7201:JP) 21
Nooyi, Indra 23
Novartis (NVS) 27
O
Oakman Inns & Restaurants 22
Obama, Barack 25, 26, 68
Oppenheimer Funds 37
P
P Ark Holdings 19
Peak Reinsurance 39
PepsiCo (PEP) 23
Perry, Katy 65
Pfizer (PFE) 27
PG&E (PCG) 33
Pierluisi, Pedro 37
Pioneer Natural
Resources (PXD) 12
PKVerleger 12
Planet Argon 31
Podesta, John 12
Poroshenko, Petro 17
Pratt & Whitney (UTX) 32
PricewaterhouseCoopers
Health Research Institute 27
Procter & Gamble (PG) 66
Punch Taverns (PUB:LN) 22
Q
Quiet Revolution 60
R
Rad, Sean 8
Rafaele Caruso 39
Rajan, Raghuram 16
Rao, Jyothi 67
Reid, Harry 25
Reis (REIS) 60
Reserve Bank of India 16
Rihanna 65
Risk Capital Partners 22
Rodriguez, Juan Carlos 20
Rolls-Royce (RR/:LN) 23
Rubio, Marco 10
Ruder Finn 64
Ruemmler, Kathryn 68
Rurelec 40
Ryzhenkov, Yuriy 17
S
Safran (SAF:FP) 32
Sakamoto, Satoshi 19
Salix Pharmaceuticals (SLXP)
41
San Diego Gas &
Electric (SRE) 33
Sandberg, Sheryl 66
Sato, Yoji 19
Saverin, Eduardo 8
Sayman, Michael 31
SCM Holdings 17
Seedfund 34
Sega Sammy
Holdings (6460:JP) 19
Serruya, Michael 64
Sever, Clint 35
Shanghai Yuyuan Tourist
Mart (600655:CH) 39
Shire (SHP:LN) 41
Skymet Weather Services 16
Slim, Carlos 23
Snapchat 8
Snapdeal.com 34
Speronis, Robin 49
Spiegel, Evan 8
Spiro Sovereign Strategy 15
Spotify 65
Standard General 44
Steelcase (SCS) 60
Stiles, Sheila 36
Symantec (SYMC) 34
T
Teal Group 32
Technopak Advisors 34
Tele2 41
TeliaSonera (TLSN:SS) 41
Thiel, Peter 31
Tiger Global Management 34
Timberlake, Justin 65
Time Warner (TWX) 40
Tinder (IACI) 8
Tisch, Jonathan 64
Tollgrade Communications 33
Towa Sangyo 19
Trane (IR) 25
Twitter (TWTR) 8
Tyco International (TYC) 25
U
Uber 23
Uhlman, Bonnie 66
Unilever (UL) 66
United Parcel Service (UPS) 34
Universal Studios (CMCSA) 44
Univision 20
V
Valero Energy (VLO) 12
Vasudevan, Rajagopalan 56
Verizon (VZ) 66
Viacom (VIA) 23
Video Gaming Technologies 41
Volkswagen (VOW:GR) 21
W
Walt Disney (DIS) 20
Warren, Elizabeth 28
Weiner, Jef 31
Whitehead, John 49
Wild, Hans-Peter 41
Wolfe, Whitney 8
Woodsford Litigation Funding
40
Wotif.com Holdings (WTF:AU)
41
Wyden, Ron 10
Wynn Resorts (WYNN) 19
X
Xi Jinping 14
Y
Yahoo! (YHOO) 31
Yong An Insurance 39
Z
Zonal Retail Data Systems 22
Zuckerberg, Mark 31
Zuckerberg, Randi 64
How to Contact
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Corrections & Clarifications
In “Vietnam’s War Over Catfish” (Global Economics,
July 7-July 13, 2014), we incorrectly identified James
Bacchus as a lobbyist for the Vietnam Association of
Seafood Exporters & Producers. Bacchus was hired
as an attorney for the association. “Boeing Has a
Belly Full of Trouble” (Companies/Industries,
July 7-July 13) misstated the amount of cargo
volume for 2014; it is 57.3 million tons. In
“Worst-Case Scenario” (Markets/Finance,
July 7-July 13), Scout Unconstrained Bond Fund was
incorrectly described as an exchange-traded fund. It
is an open end mutual fund.
54
India’s
roads
17
Rinat
Akhmetov
31
Mark
Zuckerberg
4
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The 3DEXPERIENCE Platform
Explained
The 3DEXPERIENCE platform
is a business experience platform.
It provides software solutions
for every organization in your
company – from engineering
to marketing to sales – that
help you, in your value creation
process, to create differentiating
consumer experiences.
With a single, easy-to-use interface,
it powers INDUSTRY SOLUTION
EXPERIENCES, based on 3D design,
analysis, simulation and intelligence
software in a collaborative interactive
environment. It is available on premise
and in public or private cloud.
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That phrase has become a punch line in the $76.9 billion incen-
tives and rewards industry, which is seeing robust growth in the
wake of the recent recession. An improved economy, a more com-
petitive job market and a generational sea change in the workforce
have major corporations turning to incentive programs in order to
engage and motivate employees.
In the process, the rewards themselves have also changed.
Gone are the knockoffs and discounted items that once made the
idea of “reward” and “recognition” seem like a bad gag. In their
place are luxury-brand, “trophy-value” items—designer clothing,
jewelry, electronics, home accessories—that signal to employees
that they are valued.
“For mainstream business leaders, incentives are no longer a
joke,” says Louise Anderson, President of the Incentive Marketing
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[those that supply both consulting and analytics] can show com-
panies that when employees are engaged and recognized, there’s a
lift in performance.”
But something more is at stake today: the engagement and
retention of millennials, who currently compose an estimated 53
percent of the workforce. With baby boomers now in the minority
and workers changing jobs more frequently, “the balance of power
has changed and with it the dynamics of incentive programs,” says
Paul Gordon, Vice President of Sales at Rymax Marketing Services
Inc., a full-service loyalty marketing provider that creates and man-
ages rewards and incentives programs.
In place of recognizing years of service at annual events, new
incentive programs, according to Gordon, are moving toward peer-
to-peer recognition, and at closer intervals. “It’s become important
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rather to have programs that recognize people on a regular basis
and drive the business.”
Millennials’ importance to companies is not to be underesti-
mated, argues the IMA’s Anderson. “Granted, they got a trophy for
everything [when they were kids], but today, more than recogni-
tion, they want feedback. Even when they’ve gotten corrections or
suggestions on improvement, that says to them that someone has
noticed them and wants them to be successful. So that phrase,
‘They want a lot of recognition’? Dig into it and you’ll see the source
of productivity in a big, big way.”
Companies are also paying more attention to exit surveys,
Anderson believes, because they want to retain younger workers
as older ones are retiring. “They’re concerned,” she says. “The
number-one reason for younger employees leaving a job isn’t com-
pensation, it’s a lack of recognition or appreciation—they didn’t feel
their work was valued.”
To engage the new workforce, as well as play to the post-recession
job market, Rymax went after products that hadn’t occupied the
motivational space in the past—high-brand equity items such as
Michael Kors handbags, Kate Spade accessories and Beats by Dr. Dre
headphones. The company, which has exclusive partnerships with a
number of brands, matches products to an organization’s culture, the
demographics and characteristics of its workforce and its budget for
meetings and events, with an eye on return on investment.
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possible because Rymax is manufacturer-direct for most brands,
a differentiation that provides it considerable buying power. “It’s
an extremely cost-effective way to communicate,” says Gordon.
Something else Rymax has done is to take the player-loyalty
program model successfully created for the casino industry and
move it to the corporate world. That has meant offering a choice
of products, in a variety of ways.
As the face of the modern workforce changes,
so too does its motivation. Millennials don’t
just want “a job”—and high-value incentives
let them know they matter
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another in what Gordon terms “a feeding frenzy.” At other events,
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information about initiatives, objectives and long-term goals.
“The trip to the meeting isn’t enough anymore,” Gordon
stresses, nor are the token thank-you gifts of the past, which were
often re-gifted. “Employees feel special when they’re engaged in
interactive, themed events and have the opportunity to get things
they didn’t think they could—something with trophy value like
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Return of
The Boom-
Boom
Room
By Nick Summers
A culture of rampant
sexism plagued Wall
Street for years. Is the
tech industry next?
The parallels between Silicon Valley
in the 21st century and the Wall Street
of the 1980s and ’90s are by now well
established—the exponential growth, the
billions in revenue, the ability to lure the
brightest young minds with outsize pay.
But there’s a darker side of the analogy
that deserves more scrutiny. Thirty years
ago, the financial industry’s rise was
marked by a culture of rampant sexism
as banks and brokerage frms were unable
or unwilling to rein in a male-dominated,
star-driven system —epitomized by the
infamous “Boom-Boom Room” of a Smith
Barney brokerage in Garden City, N.Y.,
where female employees were habitually
stalked. Now it appears that the frat-boy
ethos of Wall Street persists at some of the
decade’s most successful tech startups.
On July 1, Whitney Wolfe fled a sexual
harassment suit against Tinder, the
popular hookup app, and its corporate
parent, IAC/InterActiveCorp. Wolfe, a
former vice president for marketing, says
she was subjected to a constant stream
of sexually charged abuse and that both
Tinder’s chief executive ofcer and his
supervisor at IAC looked the other way.
The behavior Wolfe alleges in her com-
plaint is awful: She says that Tinder Chief
Marketing Ofcer Justin Mateen, whom
she had dated, called her a “desperate
loser” who “jumps from relationship to
relationship,” a “joke,” a “gold digger,” a
“disease,” and a “slut” who needed to be
“watched” if she were to keep her job.
Tinder CEO Sean Rad, Wolfe says, dis-
missed her pleas for help as “dramatic”
and told her that if she and his pal Mateen
couldn’t get along, she’d be fred. Wolfe
left the company after a Tinder party
in April 2014, at which she says Mateen
called her a “whore” in front of Rad.
That would all be abhorrent enough.
What is more troubling is that Wolfe says
she was also stripped of her title as co-
founder and that her role in launching the
venture was written out of its history. If
so, this isn’t just adding insult to injury;
it’s adding injury to injury, since a co-
founder of a hot startup can expect to
attract better career opportunities than
someone who was an ordinary employee.
Monkeying with the truth about who
did what and airbrushing people out
of origin stories is common to popular
startups—think Facebook and Eduardo
Saverin, Twitter and Noah Glass,
Snapchat and Reggie Brown. If what
Wolfe alleges is true, it would establish
that the widespread chauvinism in the
industry isn’t limited just to low-level
“brogrammers” but infects the “founder
class,” too. It’s a diferent, quieter, but no
less punishing form of sexism than the
kind practiced in the Boom-Boom Room,
and it may be more prevalent in the tech
industry than its blithely positive entre-
preneurs want to acknowledge.
What makes someone a “co-founder”
vs. a mere early employee? I have some
perspective on Tinder, after spending two
weeks last summer reporting a feature for
Bloomberg Businessweek. What I found
was a meteoric startup that wasn’t really
a startup, owing to IAC’s majority stake,
one of many facets of the company that
Rad and Mateen seemed eager to spin.
To hear them tell it, they had thought
up Tinder before either entered IAC’s
orbit and were responsible for the app’s
success. Having spoken to nearly every-
body who was involved, here is what I
believe made Tinder work. It was a team:
Joe Munoz, who built the technical back
end; Jonathan Badeen, who wrote the
iOS code; Christopher Gulczynski, who
created the design; Rad, who played
point. And Wolfe, who ran marketing.
In the summer of 2013, with Rad and
Mateen loath to credit others, I opted
not to referee the pettiness in the maga-
zine, referring obliquely to the work of
88
because of her age or gender, and her
complaint paints an inaccurate picture
of my actions and what went on here. We
take gender equality very seriously.” Rad
didn’t mention the co-founder angle.
There’s little to be said about Rad and
Mateen’s good judgment. Last summer,
I noticed that both had posted a screen-
shot of a new Urban Dictionary term,
“Tinderslut,” to their Instagram feeds.
When I mentioned this to them, Rad was
embarrassed and said he was scrubbing
the post from his account, while Mateen
said, “I don’t think you should delete it.
It was an exciting day for us.” It was no
aberration—Mateen’s private Instagram
feed was flled with photos of nearly
naked women and sneering captions
about “bimbos” and anatomy.
“Although it is tempting to describe
the conduct of Tinder’s senior executives
as ‘frat-like,’ ” Wolfe says in her suit, “it
was in fact much worse—representing
the worst of the misogynist, alpha-male
stereotype too often associated with tech-
nology startups.”
These unzipped attitudes are preva-
lent in the tech scene. In recently pub-
lished e-mails from his college days,
Snapchat founder Evan Spiegel rages
about “sororisluts.” The 2012 TechCrunch
programming conference included the
presentation of an app called “Titstare,”
which drew gales of laughter from the
overwhelmingly male audience.
Can this culture be changed? Another
Wall Street parallel is edifying: It was
money, of course, that fnally compelled
fnancial frms to combat sexual bias and
abuse. They spent millions to settle most
of the lawsuits fled against them, installed
chief diversity ofcers, and promised to
professionalize their cultures. Silicon
Valley may be on the cusp of a similar
and expensive run of litigation.
Founded in many cases by people
who were not even alive when the
Boom-Boom Room thrived, tech startups
were supposed to be better than this—
meritocracies where the best could
advance regardless of pedigree, race, or
gender. That’s why the Tinder lawsuit
matters. It’s not just about compensation,
which Wolfe is suing to recover; it’s also
about a woman’s right to be recognized for
her work. Whitney Wolfe was part of the
creation of Tinder, and that deserves to
be known.
—With Sheelah Kolhatkar
others without giving their names. And I
didn’t cite Wolfe, for an entirely diferent
reason. After a single, passing reference
from Tinder’s (female) PR rep, none of
the many men I spoke to had mentioned
her, and it simply didn’t occur to me to
include her.
After more conversations with Tinder
people post lawsuit, I’m convinced that
Wolfe has as much right to be called a
co-founder as the others. Getting an
app to critical mass isn’t easy. In 2012,
when Tinder was still unknown, Wolfe
devised a plan to promote the service at
college sororities. “We sent her all over
the country,” Munoz says. “Her pitch was
pretty genius. She would go to chapters
of her sorority, do her presentation, and
have all the girls at the meetings install
the app. Then she’d go to the correspond-
ing brother fraternity—they’d open the
app and see all these cute girls they
knew.” Tinder’s user base tripled, Munoz
says. “At that point, I thought the ava-
lanche had started.” Only then was
Mateen hired by his longtime friend Rad,
as Wolfe’s superior.
In her lawsuit, Wolfe says she was the
one who suggested the name “Tinder” to
Rad. “She never got credit for [her con-
tributions],” Munoz says. “She never got
credit for it. It got taken away and mar-
ginalized in favor of the friend.” Munoz
started to say that Rad hadn’t done this
solely because Wolfe was a woman. But
I asked him if it wasn’t the case that
Rad had shunted aside a good, if not
excellent, female employee in favor of
someone whose main qualifcation was
being his “bro pal.” Munoz laughed.
“I think that’s a fair interpretation of
events,” he said.
Mateen and Rad did not respond to
requests for comment for this story. Their
supervisor at IAC, Sam Yagan, who is CEO
of the conglomerate’s Match dating divi-
sion, declined to comment, as did Wolfe
via her attorney. IAC has suspended
Mateen indefnitely. In a memo to Tinder
employees, Rad called Mateen’s com-
munications “unacceptable,” while also
calling Wolfe’s complaint “full of factual
inaccuracies and omissions.” He added:
“We did not discriminate against Whitney
Wolfe alleges that she was
not only harassed but also
erased from history as a
co-founder of Tinder
99
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If the greatest living American were a tree, it would probably
be the chestnut. Nat King Cole sang about it. Abraham Lincoln
probably built his log cabin from it. The telegraph era, which
required tall poles of strong wood, was enabled by it. In the frst
half of the 20th century, however, the American chestnut fell
victim to a fungus unintentionally imported from China, and
the tree that once dominated the forest canopy of the eastern
U.S. all but disappeared.
For years, scientists have been trying to develop a strain of
chestnut tree that is immune, using traditional hybridization
methods to instill resistance from Chinese chestnut trees into
the American variety. Now plant scientists have found another
way to develop a chestnut tree that fghts of the fungus. Bor-
rowing a gene from wheat, they created a strain that produces a
substance that neutralizes the fungus’s lethal acid. What’s more,
this trait is passed along to seedlings. Versions with even greater
resistance are in development.
In the last few years, researchers have planted several exper-
imental stands of the trees. If they get approval from the U.S.
Environmental Protection Agency and Department of Agricul-
ture, these genetically modifed chestnut trees will be planted
in the wild.
Will this plan cause an outcry among the foes of genetic mod-
ifcation, the ones trying to keep GM foods of grocery store
shelves? Probably not—though the Food and Drug Administra-
tion may have to give its OK before anyone roasts a GM chestnut
on an open fre. And opponents of GM food will undoubtedly
continue to try to scare consumers away from any food made
from genetically modifed plants.
But that controversy is years away. Until then, the only proper
response to the incipient return of this American icon, which
once numbered 4 billion in the eastern woodlands of the conti-
nent, is celebration. Straight and durable, the American chest-
nut tree stands—or will soon again—as evidence of the benefts
of genetic engineering.
How to Keep Colleges
Honest About Costs
The Return of
An Old Chestnut
House Republicans shouldn’t block
the list of most expensive schools
Should genetic engineering be
allowed to restore a fallen tree?
Shame. That’s the reason Congress, when it passed the Higher
Education Opportunity Act of 2008, required the Department
of Education to publish a list of the most expensive colleges and
universities, which it did once again on June 30. The hope was
that this simple act of public exposure would put pressure on
colleges to hold down costs and ofer more aid.
Congress had good reason to take that step: The increase in
the price of a college education has far outpaced the infation
rate over the past two decades. There is a healthy debate over
what to do about this trend, and the simple release of data alone
won’t reverse it. But a little public information doesn’t hurt.
However, several House Republicans have now introduced a
bill repealing the requirement that the list be published. True,
the list isn’t perfect—its defnition of net price, for example, could
lead colleges to game the distribution of fnancial aid—but all
college rankings come with caveats. Even if the bill passes and
the list is no longer a congressional mandate, the Department
of Education should continue publishing it. It doesn’t need Con-
gress to tell it how to present data.
Republicans say their bill, which replaces the list with detailed
reporting rules, will give people more useful information. Even
if some provisions of the House bill have merit, such as order-
ing the Department of Education to disclose the percentage of
Pell Grant students who graduate, colleges are already required
in many cases to report such information to the federal govern-
ment and are failing to do so. Better enforcement, not new leg-
islation, should be the No. 1 priority.
Providing consumers with more useful information requires
less law, not more. In 2008, Congress prohibited the Department
of Education from collecting and publishing the most basic data
about college graduates. Consider this: If you are a high school
senior looking at engineering programs, wouldn’t you like to
know what percentage of each college’s engineering majors fnd
jobs and what their average salaries are?
In the Senate, a bipartisan bill sponsored by Republican
Marco Rubio and Democrat Ron Wyden is aimed at providing
answers to those kinds of questions. But House Republicans,
not to mention college presidents, don’t want students to have
that information in a standardized format for easier compari-
son. Restrictions can be placed on the data to protect privacy—
and even limit the use of it. But a blanket prohibition protects
colleges’ reputations at great cost to students.
Before adding new reporting requirements, Congress should
reduce the prohibitions on information it has already imposed.
Legislators in both parties are constantly trying to run the
executive branch, eliminating agencies’ discretion wherever
possible and creating more regulatory headaches. If House
Republicans are serious about improving transparency, they
should stop blocking the government from providing it.
To read Mohamed A. El-
Erian on Brazil’s World
Cup loss and Leonid
Bershidsky on hackers
and credit cards, go to

Bloombergview.com
10
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happen. You have a passion for your business. Liberty Mutual Insurance has
a passion for protecting it. For more than 100 years, we’ve helped all types of
businesses thrive. With coverages like commercial auto, workers compensation,
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July 14 — July 20, 2014
  Debate heats up over the wisdom of banning sales abroad
  “A “slugfest between industrial consumers and producers”
To sell abroad or stay at home: Those
are the terms of a debate roiling the U.S.
oil industry. At the heart of the disagree-
ment is a 1975 ban on U.S. oil exports
imposed by Congress when domes-
tic reserves were dwindling and the
country was still spooked by the 1973
Arab embargo. Thanks to new technol-
ogy, oil production in the U.S. now tops
8 million barrels a day, the highest since
1988. That’s prompted U.S. producers
to call for an end to the ban so they can
serve new markets. Refners and other
companies want the ban maintained to
beneft from the cheap prices of the local
oil they use to make gasoline, chemicals,
and plastics. “This debate is a major slug-
fest between industrial consumers and
producers of oil,” says Michael Webber,
deputy director of the Energy Institute at
the University of Texas.
A recent development has put a spot-
light on the dispute. In late June, the
Commerce Department determined
that two Texas companies, Pioneer
Natural Resources and Enterprise
Products Partners, could start export-
ing an ultralight type of crude called
condensate, which occurs naturally as
a gas and condenses into a liquid once
drilled out of the ground. Condensate is
added to heavier crudes to make them
easier to refne, and is a basic ingredient
for chemicals. Horizontal drilling has
unlocked far more condensate than the
U.S. can use. Exporting it should relieve
the surplus building up. The two com-
panies had asked Commerce if mini-
mally processed condensate could be
classifed as a refned product, which
can be exported. Commerce said it
could but insisted the ruling doesn’t
open the door to abolishing the ban.
The ruling could be a precursor to
rolling it back. In April, Texas Republican
congressman Michael McCaul intro-
duced a bill to end the ban, but the like-
lihood of Congress passing it seems slim,
with both houses in near-gridlock and
powerful industries lined up on either
side of the issue. Democratic Senator
Mary Landrieu of Louisiana, chair of the
Senate Energy and Natural Resources
Committee, is perhaps the person in
Congress best placed to lead the efort
to kill the ban. But she’s facing a tough
reelection this year and has both refn-
ers and oil producers in her state. Two
senators, Robert Menendez (D-N.J.) and
Edward Markey (D-Mass.), are asking
Commerce why its ruling doesn’t violate
the ban. And there’s some movement
from the executive branch. In May, pres-
idential adviser John Podesta said
the possibility of allowing crude DATA: GOLDMAN SACHS
Fueling the Economy
Keeping the ban
would help U.S.
refiners, as domestic
crude would need to
be refined at home
Contribution to GDP in 2020
Ban on oil exports stays Ban goes
Oil refiners
Oil extractors
Crude’s total
contribution to
U.S. GDP
$800b
$400b
$0b
13
Ukraine’s richest man
displays a great sense
of timing 17
Bringing the
revolutionary past
alive in China 14
Brazil’s economy, not
soccer, is Roussef’s
big problem 15
Will Modi take
unpopular steps to
boost Indian growth? 16
exports is “a topic that’s under consider-
ation” at the White House.
The American Petroleum Institute
says lifting the export ban would create
300,000 jobs across the economy and
cut the trade defcit by $22 billion by
2020. Energy research frm IHS is even
more bullish: Ending the ban by 2016
would help create about 1 million jobs
and boost investment in the oil indus-
try by almost $750 billion. Both say
lifting the ban will increase U.S. oil pro-
duction. Selling U.S. crude abroad, they
argue, will lower international prices
and make gasoline cheaper in the U.S.
“It’s time to unlock the benefts of free
trade for U.S. consumers and further
strengthen our position as an energy
superpower,” says Kyle Isakower, the
Petroleum Institute’s vice president for
regulatory and economic policy.
Those against ending the ban point
to its economic benefts. Having all that
crude trapped in the U.S. has lowered
the price of domestic oil compared with
crude from overseas. Over the past three
years, the average price of West Texas
Intermediate oil has been $13 per barrel
cheaper than the international bench-
mark, Brent crude. That gives large
consumers of oil such as refners and
chemical companies a big cost advan-
tage over foreign rivals and has helped
the U.S. become the world’s top exporter
of refned oil products. Net income at
Valero Energy, the biggest refner in
the U.S., has more than doubled since
2010. Lifting the ban could erode that
edge by raising the price of U.S. oil,
which in turn could push gasoline prices
upward. Taking that step is also hard to
justify with the U.S. importing more than
7 million barrels a day.
A June 10 Goldman Sachs report
suggests keeping the ban in place
for a few more years until the U.S. is so
saturated in domestic crude that refn-
ers can’t absorb it all. With refners
using about 91 percent of their capac-
ity, there’s room to run. “You will know
when the U.S. is saturated when domes-
tic crude trades at a much larger dis-
count to international prices,” says
Damien Courvalin, a Goldman oil
analyst who co-authored the report. He
disputes producers’ concern that the
export ban will crash U.S. oil prices and
make drilling unproftable. According
to Courvalin, the break-even price to
produce oil in the U.S. is $85. With U.S.
oil at around $100, producers can make
money even if the price slips.
The real threat to the U.S. oil boom
isn’t a lack of exports, it’s the lack of
efcient ways to move crude around the
country, says Philip Verleger, a former
director of the ofce of energy policy
at the Department of the Treasury
and founder of PKVerleger, a consult-
ing frm in Colorado. Five years into
the oil boom, the country is still build-
ing pipelines to the new areas of pro-
duction. The industry has had to rely
DATA: U.S. ENERGY INFORMATION ADMINISTRATION
A Gusher
Barrels of crude per day
Imports
Domestic
production
10m
7m
4m
Q1 1990 Q1 2014
14
Global Economics
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Ideology
Red Tourism Stages a
Comeback in China
Historical sites of the revolution
are flooded by Chinese tourists
“Coming here helps one
understand China’s red spirit”
Ear-splitting explosions go of and
plumes of gray smoke drift over the
arid Shaanxi countryside of north-
western China. Ragtag Communist sol-
diers in blue uniforms fre their rifes
at an advancing Nationalist tank while
villagers run for cover. Finally, justice
prevails; the red fag of the Chinese
Communist Party is held proudly aloft
while peasants dance in celebration.
It’s a scene repeated every day at
11 a.m. as 350 actors reenact the
“Defense of Yan’an,” a famous battle
against the Nationalist forces of
Generalissimo Chiang Kai-shek that was
crucial to the founding of the People’s
Republic in 1949. “By coming here we
can understand how the party sac-
rifced, created the new China, and
built such a beautiful country for us,”
says 13-year-old Deng Yi, visiting from
Wenzhou, who along with his mother
and father, each shelled out 150 yuan
($24) to watch the show.
That’s what China’s leaders want to
hear as they expand “red tourism” in
more than 100 sites across China. Their
goal: to boost patriotism and support
for the Chinese Communist Party. “We
need to seize these two concepts—red
bases and patriotic education on the
one hand and developing red tourism
on the other,” said President Xi Jinping
in March.
Red tourism is not new to China.
Millions focked to red sites including
Mao Zedong’s birthplace in Shaoshan,
Hunan province, during the
Cultural Revolution from 1966
to 1976. Visits to revolution-
ary locales spiked in 2011, as
China prepared to celebrate the party’s
90th anniversary. If China’s leaders
have their way, red tourism will have a
massive renaissance. Already last year,
786 million tourists visited revolution-
ary sites, up 17.3 percent from the pre-
vious year, generating 198.6 billion
yuan ($32 billion) in revenue, up 19.1
percent, according to the National
Tourism Administration.
One of the most popular is Yan’an,
the “cradle of the revolution” where
Mao, General Zhu De, and other revo-
lutionaries spent more than a decade
living in caves starting in 1936. It’s also
where President Xi, while a teenager,
spent seven years among the peas-
ants during the Cultural Revolution.
Jinggangshan, in Jiangxi province, where
the rebels hid out in the late 1920s and
early 1930s, and Zunyi, in Guizhou prov-
ince, a key stop on the Long March, are
also top destinations.
To prepare for the onslaught
of photo-snapping fellow
travelers, China’s Ministry
of Civil Afairs last year
spent 2.8 billion yuan on construct-
ing memorials, while the state bureau
in charge of cultural relics earmarked
487 million yuan for renovating red
sites. Another 1.5 billion yuan was spent
on 66 “red tourism highways” across
the country.
“We hope to teach the next gener-
ation about what happened before,”
says Hong Jiasheng, chairman of Yan’an
Shengdian Red Tourism Development,
which is run jointly with the local gov-
ernment and draws 500,000 tour-
ists annually. An entrepreneur from
Zhejiang province, Hong launched
on July 6 a similar show in Fushun,
Liaoning province, reenacting an
important 1948 battle.
The push to develop red tourism is
part of a larger campaign launched in
December to instill citizens with what
Xi calls core socialist values aimed
at realizing the “Chinese Dream.”
on oil trains that are proving dan-
gerous and face possible restrictions.
“The issue of exports is entirely moot
until we fx the transportation infra-
structure,” says Verleger. “Even if we
do lift the ban and produce an extra
million barrels a day, how are we going
to move it?” —Matthew Philips
The bottom line According to one estimate,
lifting the export ban on U.S. oil would create
almost 1 million jobs.
“We need to seize
these two
concepts—red
bases and
patriotic education
on the one hand
and developing red
tourism on the
other.”
—President Xi
15
Global Economics
Elections
Will Voters Shrug Of
Brazil’s World Cup Loss?
Roussef may win a second term
despite inflation and weak growth
“The government ... intervenes
heavily in the economy”
Brazil’s battered psyche was evident in
scenes of crying fans and players after
the country’s worst World Cup defeat.
Some in the stands vented their frus-
tration by cursing President Dilma
Roussef, whose government doled out
a record $11 billion to fund the tourna-
ment. Roussef, who’s seeking a second
term in October, can at least boast that
the event came of without a hitch, con-
trary to what many expected. “People
will be in a bad mood for a few days,
but the Cup won’t decide the elections,”
says João Augusto de Castro Neves, an
analyst with Eurasia Group, a politi-
cal consulting frm that gives Roussef a
70 percent chance of winning.
The big challenge for Roussef will
be mending the world’s seventh-largest
economy, which is growing at the
slowest rate under any president in more
than two decades. That’s in part a result
of investors’ distaste for her adminis-
tration’s policies. Business confdence
has fallen to the lowest level in more
than a decade. And among the seven
largest Latin American economies, Brazil
ranks last in fxed investment, at about
18 percent of gross domestic product.
Growth forecasts for 2014 have been cut
in half from the start of the year, to just
over 1 percent. “Brazil is firting with
recession,” says Nicholas Spiro, manag-
ing director at Spiro Sovereign Strategy,
a London-based investment consult-
ing frm, and without political consen-
sus about policy it “will bump along the
bottom for a long time.”
University of Hong Kong. Xi “is a
natural believer in many of the values
of Mao Zedong, but it is also political
expediency,” says Lam. “Associating
himself with Mao and his values is
a way to strengthen his authority.”
—Dexter Roberts and Jasmine Zhao
The bottom line Last year, China spent
2.8 billion yuan on building revolutionary
memorials to rekindle patriotic tourism.
Those include patriotism, dedica-
tion, civility, and harmony. The values
campaign will expand patriotic edu-
cation in primary and middle schools,
with university students encouraged
to go on organized weeklong summer
visits to red sites. Since China’s
opening to the world, “Chinese have
embraced diversifed thoughts, includ-
ing the decayed, outdated ideals of
mammonism and extreme individ-
ualism,” the People’s Daily said in a
February editorial.
“We all have read about this in our
textbooks but you need to see it for
yourself,” says 43-year-old Wu Kunliang,
an engineer for Cisco Systems in
Beijing, while on a visit with his family
to Yan’an. “Mao said the people must
have spirit. Coming here helps one
understand China’s red spirit.”
Xi hopes red tourism can also help
bolster the party’s legitimacy as his
anti-graft campaign uncovers cor-
ruption among senior party ofcials,
according to Willy Lam, an expert
on Chinese politics at the Chinese
In most countries, the one beneft
of a slack economy is that it helps keep
a lid on prices. Not in Brazil, where
annual infation in June broke through
the 6.5 percent upper ceiling of the
central bank’s target. It would be almost
8 percent if it weren’t for government
policies restraining prices for gasoline,
electricity, and public transportation,
says Alberto Ramos, Goldman Sachs
Group’s chief Latin America economist.
At the same time, high interest rates are
doing a better job of stifing consumer
demand than damping infation.
Despite all this, Roussef commands
a sizable lead over rivals. Her elec-
toral support jumped four percentage
points, to 38 percent, following three
straight drops this year, according to
a Datafolha poll in July, indicating that
even Brazilians who had questioned
the costs of staging the Cup gave her
credit for it. The poll showed support
for her main challenger, Aécio Neves,
at 20 percent, up one point from June.
“The biggest legacy of this Cup is renew-
ing the confdence of the Brazilian
people in the country and its capacity,”
wrote Roussef in a July 7 question-and-
answer Facebook session.
Brazil’s president can still count
on the backing of low-income voters,
surveys show. Roughly 50 million
Brazilians, or a quarter of the pop-
ulation, receive benefts through
Bolsa Família, the federal antipoverty
program. What’s more, unemployment
remains at near-record lows, in part
because more youth are opting for post-
secondary training than in the past.
If reelected, Roussef has pledged to
double the number of low-cost homes
built each year to more than 5 million.
“I still believe in this government’s pol-
icies,” says José Vicente da Silva, a
53-year-old doorman. “They’re directed
at the country’s most needy. That’s why
I’m going to vote for her.”
Roussef has tried to rev up growth
with payroll and sales tax cuts and by
DATA: CENTRAL BANK OF BRAZIL
Anemic Outlook
1/2014 7/2014
Disappointment with Roussef’s policies has led
economists to cut GDP growth estimates
2%
1%
0%
16
Global Economics
14.2%
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boosting lending by state banks. The
loose fscal policy helped trigger a sover-
eign debt downgrade in March, the frst
in more than a decade. Her administra-
tion also has pressured utilities to accept
lower electricity rates and capped fuel
prices, causing revenue shortfalls at the
state-run oil company, Petrobras. Many
investors say these policies have fueled
mistrust. “The government doesn’t
comply with any of its guidance, inter-
venes heavily in the economy, and often
doesn’t abide by the rules of the game,”
says Klaus Spielkamp, the head of fxed
income at Bulltick Securities in Miami.
The same discontent over public
services, infation, and graft that trig-
gered protests last year hasn’t gone
away and may douse any positive efect
from the World Cup, according to José
Luciano Dias, directing partner of CAC
Consultoria Politica, a consulting frm in
Brasilia. “The day-to-day concerns about
education, health, everything involved
in social well-being are much more
important than the games,” says Adenir
Freixo, a resident of Rio de Janeiro. “We
can’t forget the problems we have.”
— Raymond Colitt and David Biller
The bottom line Brazil’s low-income voters are
likely to buoy President Roussef’s reelection
chances in October.
Subsidies
Great Expectations for
Modi’s First Budget
Investors hope the government will
deliver on its pro-growth promises
“He has about two to three years to
show that his model works”
Investors have been euphoric in the
two months since India Prime Minister
Narendra Modi swept into ofce.
Campaigning on promises to kick-start
the economy, Modi’s strong mandate
has boosted confdence that he will
carry through on his pro-business
reforms—increasing spending on
infrastructure and opening India to
more foreign investment.
Modi’s budget, expected to be
released on July 10, will be the frst step
of a plan to revive the country’s weak
economy. It will also be a gauge of how
willing he is to make unpopular choices.
Cutting government subsidies is one
of Modi’s biggest challenges. In
each of the past two fscal years,
food, fertilizer, and oil subsidies
cost the government about 2.5 tril-
lion rupees ($42 billion), equal
to about half of the defcit each
year. The subsidies “detract from
spending on other things like ports
and rail,” says Glenn Levine, senior
economist in Sydney with Moody’s
Analytics. “If ever there was a time to
push through a tough budget in India,
this is it,” Levine says. “He has the
political capital.”
Modi has some room to maneuver,
thanks in part to optimism about the
economy’s growth so far this year.
Gross domestic product, which grew
4.9 percent in 2012 and 4.7 percent
last year, will improve slightly in 2014,
rising 5 percent, projects Moody’s
Analytics. It may reach as high as
6 percent next year.
Modi has been treading cautiously.
A plan to raise passenger train fares,
announced soon after he assumed
ofce, has been modifed in response
to mounting pressure from citizens
who took to the streets in Mumbai
and New Delhi to protest the hikes.
An increase in government-con-
trolled natural gas prices has also been
delayed. Although an advocate of free
trade, he has imposed a higher tax
on sugar imports, which should make
local sugar growers more competitive
and help reduce their debts. Modi has
also extended costly tax cuts on cars,
capital goods, and some consumer
products to promote growth.
“India can’t revive its economy
by giving fscal goodies to individu-
als,” says Rajeev Malik, a senior econ-
omist at CLSA Asia-Pacifc Markets
in Singapore. “Difcult decisions are
needed to engineer good days.”
Still, given that Modi’s Bharatiya
Janata Party has a majority in the
lower house of Parliament but doesn’t
control the upper house
or most state govern-
ments, the prime minis-
ter will need time to make
his mark. Modi’s focus on
“more governance and less
government” is a break
from Indian leaders since the coun-
try’s frst prime minister, Jawaharlal
Nehru, says Madhav Nalapat, a political
commentator and professor at Manipal
University. Forcing cuts to popular
subsidies too soon in his term could
backfre. “He has about two to three
years to show that his model works,”
says Nalapat. “If that happens, people
will be willing to accept a certain
amount of pain.”
As Modi tries to keep Indian voters
on his side, he’ll need help from the
heavens. In a country with limited irri-
gation networks, farmers rely on the
annual monsoon to deliver 70 percent
of the rainfall. This year’s seasonal
rains have been 42 percent lower than
average since June 1. Jatin Singh, the
chief executive ofcer of private fore-
caster Skymet Weather Services, puts
the chance of drought at 60 percent.
That could put pressure on food prices
and lead to a spike in infation.
Retail prices went up 8.3 percent in
May. If infation remains stubbornly
high, central bank Governor Raghuram
Rajan may be forced to intervene again.
Since taking over at the Reserve Bank of
India in September, he’s raised interest
rates three times and has said further
tightening won’t be warranted if con-
sumer price infation doesn’t exceed
8 percent by the beginning of 2015.
India remains heavily depen-
dent on oil imports, with its refners
getting 85 percent of their crude oil
from overseas. Turmoil in Iraq could
push energy prices higher. That, com-
bined with a weak monsoon, could
quickly cut short Modi’s honey-
moon with Indian voters and foreign
“India can’t revive
its economy by
giving fiscal
goodies to
individuals.
Difcult decisions
are needed to
engineer good
days.”
—Rajeev Malik
Passenger fare hike
announced by Modi
in June
17
Global Economics
Ukrainian Army has ousted the
militias from their stronghold in
Slovyansk and has advanced on
Donetsk. In a televised interview,
Akhmetov urged the government not
to bomb the city. Ukrainian President
Petro Poroshenko’s spokesman,
Svyatoslav Tsegolko, declined
to comment on Akhmetov’s role in
the confict.
Akhmetov’s 100-plus companies
include steel mills, coal mines, chemi-
cal plants, and power stations as well as
a soccer club , banks, insurance com-
panies, and media outlets. Together
they generated $23.5 billion in revenue
in 2012, according to the website of
his holding company SCM Holdings.
Results for 2013 have not been reported.
Both the pro-Kiev and pro-Russia
camps have heaped criticism on
Akhmetov. “His TV stations and news-
papers are working against us,” says
Andrei Purgin, deputy premier of the
self-declared Donetsk People’s Republic.
Akhmetov waited too long to declare his
loyalty to the new government in Kiev,
says Yuriy Yakymenko, head of polit-
ical studies at the Razumkov Center
research group in Kiev. If this resistance
against the rebels “in the Donbas had
started sooner, we could have avoided
huge human losses,” he says. “For that
we would have needed those who have
infuence in the Donbas to use it.” The
billionaire didn’t respond to questions
e-mailed to SCM.
Akhmetov got his start buying coal
from Ukraine’s many mines and selling
it to factories, power plants, and steel
mills. His partner was local businessman
Akhat Bragin, who in the early 1990s was
accused by police in Donetsk of being a
crime boss. Bragin denied the allegation
and in 1995 was killed in an explosion
at his soccer club’s stadium. Akhmetov
took charge and now owns the team.
After Yanukovych became presi-
dent in 2010, in a campaign Akhmetov
helped fund, the billionaire’s power
business won fve government auctions
for some of Ukraine’s biggest power
generators and distributors, two as the
sole bidder, all for about $600 million.
To gain the confdence of his
workers—and keep them from joining
the separatists—Akhmetov has raised
pay by about 20 percent. He also ofered
bonuses of $25 a day to employees in
confict zones who patrol the streets
with local police loyal to Kiev. Those
incentives have paid of in Mariupol,
a city of 500,000 on the Sea of Azov
Edited by Christopher Power
Businessweek.com/global-economics
Civil Unrest
Ukraine’s Top Oligarch
Walks a Fine Line
Rinat Akhmetov defies the rebels,
but Kiev questions his loyalty
“Don’t pay much attention to what
people say on the bus”
Each day at noon, hundreds of thou-
sands of factory workers in Ukraine’s
east pause as sirens blare for three
minutes, an act meant to signal def-
ance against pro-Russian militias.
The workers’ boss, Rinat Akhmetov,
wants to restore unity to Ukraine and
preserve the fortune that makes him
Ukraine’s richest man.
The daily siren and the hefty raises
at his metal and power plants and coal
mines are just two of the ways the bil-
lionaire is rallying support in the Donbas
region for the national government. The
Donbas, Ukraine’s industrial and coal
mining region in the east, is where most
of Akhmetov’s workers live. Many of his
300,000 employees backed the revolt
when the fghting started. Not anymore,
say company ofcials. “Now 99 percent
of the workforce understands the events
that are happening and supports the
principle that Donbas is part of Ukraine,”
says Enver Tskitishvili, who runs a steel
mill for Metinvest, the steelmaker at the
core of Akhmetov’s empire.
Akhmetov, worth $13.2 billion
according to the Bloomberg
Billionaires Index, supported Kremlin-
backed President Viktor Yanukovych
until the politician fed in February and
protesters in Kiev toppled his govern-
ment. When separatists in the Donbas
frst clashed with the Ukrainian Army,
Akhmetov, 47, sat on the sidelines as
they seized buildings and claimed
autonomy. Then in May he came out
against the uprising and vowed to help
end it. It’s been a good call so far. The
investors. “The major risks for him are
oil and water,” says Rupa Rege Nitsure,
Mumbai-based chief economist at Bank
of Baroda. “His hands will be very, very
tied.” —Bruce Einhorn, Unni Krishnan,
and Kartikay Mehrotra
The bottom line Modi’s first budget will be
judged in part by how much it curbs enormous
but popular government subsidies.
that was recaptured by government
forces on June 13. Lawlessness spread
after an earlier government ofensive
failed on May 9, prompting Metinvest,
Mariupol’s largest employer, to call on
its steelworkers and the people of the
city to help secure the streets. More
than 33,000 people signed up to join
unarmed patrols alongside police of-
cers in one week alone, according to
company ofcials.
Now through factory foor meetings,
e-mails, and in-house publications,
managers make sure every employee is
educated on the dangers of separatism,
says Dmitry Cherkez, a deputy depart-
ment head at Ilyich, one of Metinvest’s
two steel mills in Mariupol. “We say
to people: ‘Don’t read the Internet
too often, don’t pay much attention to
what people say on the bus,’ ” he says.
Some workers say they’re unimpressed.
Yevgeny Nikolaenko, an engineer at
Akhmetov’s Azovstal, a Metinvest steel
mill, says while the patrols helped
restore order in Mariupol, he’s neutral.
“I don’t support one side or the other,”
he says. “This is all about geopolitics.”
Some of the steelmaker’s manag-
ers have had to fend of militias to
prevent them from forcibly enlisting
factory workers, says Yuriy Ryzhenkov,
Metinvest’s chief executive ofcer. “They
come and say, ‘Give us your people to
fght,’ ” he says. “We explain that if that
happens, production will stop, some-
thing that didn’t even happen during the
Great Patriotic War,” referring to World
War II. He adds, “We hope this will come
to an end tomorrow, but we are trying
to make sure that even if it continues
for several years, we can keep the com-
pany’s operations together.” —Stepan
Kravchenko and Henry Meyer
The bottom line Akhmetov’s factory workers
have been given 20 percent pay raises to boost
their morale and secure their loyalty.
Innovators like Interface® are using the
LEED® green building program to meet
their business goals. Better buildings,
better business.
George Bandy Jr.
Vice President of
Sustainability
Interface
Pictured: LEED Platinum Interface showroom, Chicago, Ill.
usgbc.org/LEEDON
July 14 — July 20, 2014
Briefs: A crash diet for
Carlos Slim 23
World Cup TV ratings
soar; U.S. ad revenue,
maybe not 20
In an upset, Mexico’s
cars score a goal
against Brazil 21
British pubs hope to
win crowds back with
food 22
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“Welcome!” two young women in
shorts and Hawaiian shirts chime over
the clatter of pinballs and J-pop at the
entrance to Million pachinko parlor
in Tokyo’s Suginami district. Nearby,
garish orange, green, and yellow signs
woo visitors with promises of fun
within: “All your favorite machines are
waiting for you, nice and clean. We lead
you to the next level of amusement.”
For nearly a century, this is how mil-
lions of Japanese
ofce workers,
housewives, and
retirees have
kicked of long,
smoky nights out.
And their fading-but-still-fervent
appetite for the pastime has helped
turn pachinko, a pinball-slot machine
hybrid that’s managed to skirt
Japan’s gambling ban for decades,
into an industry with 19 trillion yen
($187 billion) in annual bets—bigger
than the economy of New Zealand.
But limits on big pachinko payouts,
an aging player base, and time have
taken a toll on Japan’s indigenous form
of wagering. Attendance at parlors has
sunk more than 60 percent since the
mid-1990s, and pachinko operators have
been unable to raise capital
through public stock oferings
on Japanese securities markets because
of the game’s murky legal status. So the
industry is looking to an unlikely savior
to stem the slide: casinos.
With the 2020 Tokyo Olympics prom-
ising to attract millions of cash- toting
foreign tourists and governments
hungry for the greater tax revenue that
legal gaming could bring, Japanese law-
makers in December took up a bill
to legalize casinos in the world’s third-
largest economy. Prime Minister Shinzo
Abe said in June that his
ruling party would seek to
pass the bill in the fall. If approved,
Japanese casinos could log an esti-
mated $40 billion in revenue annually
as early as 2025, forecasts brokerage
CLSA, making it Asia’s second-biggest
gaming market after Macau.
The chance to grab a piece of that
growing market is tempting big parlor
operators and pachinko machine makers
such as Dynam Japan Holdings and
Sega Sammy Holdings to embrace
a change that threatens their long
To play, drop
money in here
Winning balls come
out here
As balls cascade
through a sea of pegs,
some get stuck; others
trigger additional
prize balls to drop
Use the crank to
shoot the ball
  Japan’s homegrown pastime considers casinos for growth
  “We will have to find a way to survive in this war”
19
dominance of Japan’s tradi-
tional gaming market. Some
smaller pachinko operators seek
the social legitimacy that’s likely
to come with any gambling legis-
lation, making it easier to recruit
employees. “Pachinko compa-
nies are feeling a
sense of crisis that
they will go into
decline unless they
do something,” says
Daigo Fukunaga, a senior analyst
at Advanced Research Japan.
Pachinko companies argue that
their deep roots in the Japanese
gaming industry make them ideal
collaborators for global casino com-
panies, such as MGM Resorts
International and
Wynn Resorts, that
may need local part-
ners to help them
break into the market.
The potential ben-
efts are most obvious
for pachinko machine makers such as
Sega Sammy. Best known outside Japan
for its discontinued video game con-
soles, the company gets almost half its
$3.7 billion annual sales from pachinko
machines. In May it said it would begin
making electronic table games for Macau
and Singapore casinos.
Konami, whose products include
pachinko machines and video games,
already makes slot machines and
other gaming equipment for Las Vegas
Sands and MGM Resorts in other
countries. The company says it may
strike equipment deals with clients
including both casino giants, as well
as Caesars Entertainment. Satoshi
Sakamoto, chief executive ofcer of
Konami’s gaming unit, said in May that
Japanese casinos “could be a turning
point” for the company.
Dynam, Japan’s second-largest
pachinko operator, may sell additional
shares to fund its entry into the casino
market, Chairman Yoji Sato said in
March. And Maruhan, Japan’s biggest
pachinko operator, is also interested in
running casinos, according to people
familiar with the company’s plans who
were not authorized to disclose them
and declined to be named.
There are 11,000 pachinko parlors
across Japan. Players often sit for hours,
plunking down up to 4 yen (4¢) for each
metal ball. Although there is some skill
involved in determining the amount
of force to use when shooting the balls,
pachinko is mostly a game of
chance. The balls beget more
balls, which beget prizes such
as a Hello Kitty bread maker
or a Nikon Coolpix digital
camera. Instead of the phys-
ical prize, winners can get
tokens that can be redeemed at a shop
next door for money, avoiding laws that
bar cash payments. That Coolpix camera
would fetch about $100 at the exchange.
Japan prohibits gam-
bling except for state-
run options such as horse
and boat racing. Pachinko
has been allowed to
operate in a legal gray
area because operators
rely on these third-party
shops to exchange prizes for cash.
The National Police Agency, which
oversees the pachinko industry, has
described the system as “not imme-
diately illegal” without endorsing it.
The legal ambiguity is why
Tokyo-based parlor owner P Ark
Holdings’ 2005 application to list on
the Jasdaq Securities Exchange was
rejected and why Dynam went to Hong
Kong in 2012 for the frst public ofer-
ing by a pachinko operator. A national
gaming law could change all that. “If
casinos are legal, saying no to pachinko
doesn’t make sense,” Advanced
Research’s Fukunaga says.
The game’s reputation had long
been sullied by concerns that pachinko
feeds gambling addictions that were
exacerbated by machines ofering high
payouts. Under public pressure, the
industry in 1996 voluntarily removed
machines that paid out lavish amounts.
Regulators further crimped jackpots
in 2004, when winnings could reach
$10,000 per day. Without big payouts,
today pachinko ofers few thrills a
smartphone can’t match.
The change signaled an end of the
seven decades of growth for pachinko,
which saw bets peak at 31 trillion
yen in 1995, according to the Japan
Productivity Center, a think tank. At
that time 29 million people played the
game, about a quarter of all Japanese.
Motoyuki Nakajima, executive manag-
ing director at the Pachinko Chain Store
Association, says he welcomes an end to
the gambling ban. “We have to change
our environment, which people think is
dirty, smoky, and noisy,” he says. “With
casinos, we will be able to change.”
In February a group of law makers
proposed legislation to supplement a
scheduled corporate tax cut by impos-
ing a 1 percent tax on pachinko win-
nings. This would generate 200 billion
yen of tax revenue, but parlor opera-
tors want legitimacy in return. Two of
the fve major industry groups so far
support the move, Nakajima says. “If
the cashing issue is cleared, it makes
it possible for pachinko parlors to get
listed,” he says. “There are 10 to 20 com-
panies wanting to do [an] IPO, and they
are all preparing.”
Some pachinko operators are hes-
itant to embrace casinos. Masato
Kishino, president of Towa Sangyo,
which operates 26 pachinko parlors
around Tokyo, says casinos could speed
pachinko’s decline. “I can’t think of
any positive factor” for the industry if
casinos are legalized, he says. “We don’t
have stores nationwide like Dynam or
Maruhan. We will have to fnd a way to
survive in this war.”
Even big pachinko players may not
fare well. Dynam spokesman Kazuyuki
Sugiyama says the company’s typical
parlor requires about $4.4 million for
the initial investment, without the
pachinko machines. But casino compa-
nies such as Sands and MGM say they’re
ready to spend as much as $10 billion
to build a single casino resort in Japan.
That’s one reason Caesars Chairman
Gary Loveman isn’t keen on forming a
partnership with pachinko parlors. “I
think it’s a less likely ft for us, because
it’s not clear what the complementary
set of skills would be in their case,” he
says. —Yuki Yamaguchi
The bottom line Japan’s pachinko parlor
operators take in $187 billion in bets annually.
A decline has them eyeing casinos.
Head to the
pachinko parlor
Sports
Another World Cup
Surprise: TV Ratings
Soccer’s highest-ever viewership in
the U.S. came at a bargain price
“The bulk of the advertising … was
not presold on these numbers”
Whatever the ratings for the fnal match
in Rio de Janeiro on July 13, the 2014
FIFA World Cup in Brazil has been a
record-setting success on television
in the U.S. The match between the
U.S. and Portugal on ESPN on June 22
Wow! You won
2,590 balls
That’s enough
to trade in for …
… a Nikon Coolpix
digital camera!
Or receive a token that
can be exchanged at the
shop next door for cash.
Now you have about
$100!
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drew a record audience for soccer,
with an average of 18.2 million viewers,
according to Nielsen. On Univision,
Mexico’s match with the Netherlands
on June 29 set the viewership record for
any U.S. Spanish-language telecast at
10.4 million viewers. Almost 25 million
people watched the U.S. play Portugal
on the two networks, about 10 million
more than the average for the National
Basketball Association fnals and Major
League Baseball’s World Series.
For Walt Disney’s ABC and ESPN,
which hold rights to English-language
telecasts in the U.S., total viewership
through the frst 60 matches is up
42 percent over the 2010 World Cup. For
Univision, the Spanish-language rights
holder, viewership is up 38 percent over
2010. These fgures don’t include record
trafc on the two networks’ streaming
services or the crowds watching at bars.
Celebrations at ESPN and Univision,
however, will be muted and short-lived.
The immediate fnancial beneft to the
networks is minimal, since most of the
advertising inventory for the tourna-
ment was sold well ahead of time—and
likely at rates pegged to lower viewer-
ship. “The bulk of the advertising, the
70 or 80 percent that was presold, that
was not presold on these numbers,”
says Marc Ganis, president of the
Chicago consulting frm SportsCorp.
Moreover, both networks were outbid
for the next two World Cups, in Russia
in 2018 and Qatar in 2022. Fox owns the
English-language rights to the pair, and
Telemundo, a property of Comcast/
NBCUniversal, has the Spanish-
language rights for the U.S. “It’s bitter-
sweet,” Scott Guglielmino, ESPN’s head
of soccer programming, says of the net-
work’s lame-duck status. “We are cer-
tainly living in the moment.” Both
Guglielmino and Juan Carlos Rodriguez,
president of Univision Deportes, say
the success of this year’s World Cup
is partly a testament to their cover-
age. “Univision Deportes continues
to be the No. 1 destination for soccer
fans 12 months out of the year,” writes
Rodriguez in an e-mail. Still, accord-
ing to Brad Adgate, director of research
at Horizon Media, “there has got to
be some second-guessing” at the two
networks over the failure to bid high
enough for the next two World Cups.
Although FIFA doesn’t disclose fnan-
cial details of its agreements, multi-
ple news outlets reported that ESPN
paid $100 million
for the rights to the
2010 and 2014 World
Cups, while Univision
paid $325 million for
the same pair. For
2018 and 2022, fees
more than doubled,
with Fox paying
roughly $450 million
and Telemundo
$600 million. The steep
price increases are in keeping with a
boom in the cost of sports program-
ming, which has maintained its live
audience better than most television
against digital recorders.
For ESPN and Univision, this year’s
ratings will still pay of in goodwill with
advertisers and potential leverage in
negotiations with carriers over the per-
subscriber fees they pay for the chan-
nels. For Fox and Telemundo, both of
which declined comment, this year’s
numbers raise the foor, but not nec-
essarily the ceiling, for 2018 and 2022.
Brazil’s peak audiences are probably
not sustainable. The record-setting U.S.
match with Portugal aired at 6 p.m. on a
Sunday on the East Coast. The team’s
elimination match with Belgium at 4 p.m.
the following Tuesday attracted a slightly
smaller audience of 16.5 million. Both
matches fell within an ideal window for
many, toward the end of the workday
but before competition from prime-time
programming. “The time zone this year
was perfect,” says SportsCorp’s Ganis.
And the two main attractions for the U.S.
audience—the U.S. and Mexican teams—
made it to the round of 16.
Time zones in Russia and Qatar are
far less favorable. Russia ranges from
7 to 16 hours ahead of New York. And
Qatar, during the summer, is 7 hours
ahead. A 6 p.m. match in Moscow
would be on at 10 a.m. in New York.
During the 2006 and 2010 World Cups,
matches starting between 9 a.m. and
11 a.m. on ABC and ESPN averaged
2.1 million viewers. And there’s no guar-
antee that the U.S.
and Mexican teams
will qualify for future
World Cups. “The
TV ratings, I think,
will be going down,”
says Ganis. “But the
alternative means of
viewing—if not the
whole games, at least
snippets of them,
and if not live, on a
form of a delay—will go up.” Fox can use
that marquee programming to try to
boost the fees it charges carriers for the
two 24-hour sports channels it launched
in 2013. —Ira Boudway
The bottom line The World Cup match
between the U.S. and Portugal on ESPN drew
18.2 million viewers, a record for soccer.
More U.S. Viewers Watch the Other Football
Final
Semi
Group
Quarter
Sixteen
Autos
Why Mexico Is Speeding
Past Brazil in Cars
It benefits from low labor costs and
a rich neighbor
“The auto industry is going to
continue as the icon of this country”
Remember in the 1990s when some
Cassandras feared the North American
Free Trade Agreement would someday
help Mexico eclipse car production
of its higher-cost rivals north of the
border? Two decades later, Mexico is
The Spain vs.
Netherlands final
becomes the most
watched soccer
match in the U.S.
Growth of ABC/
ESPN’s audience
through the first 60
matches over 2010
Data not yet available
Average TV audience share for match telecasts by World Cup round
2006 Germany 2010 South Africa 2014 Brazil
0% 10% 0% 10% 0% 10%
37%
21
Companies/Industries
making its move, but against another
competitor: Brazil.
The country is poised to overtake
South America’s largest nation as the
top Latin American automobile pro-
ducer for the frst time in more than
a decade. Mexico’s ascent is fueled in
part by auto sales running at the fastest
pace in almost eight years in the U.S.,
its largest market. The boom coin-
cides with a slump
in Brazilian pro-
duction through
June as its domestic
demand cools.
“People talk
about the energy
and telecom indus-
tries in Mexico,
but the auto indus-
try is going to con-
tinue as the icon of
this country,” says
Luis Lozano, lead automotive partner at
PricewaterhouseCoopers in Mexico City.
Passing Brazil, where output has fallen
17 percent this year, would vault Mexico
to No. 7 among the world’s auto produc-
ers. China is No. 1, followed by the U.S.
The diverging fortunes of Mexican
and Brazilian auto production refect the
state of their biggest markets. Because of
high labor costs and taxes, Brazil-made
cars and trucks are too expensive to send
abroad and go mostly to local buyers.
Mexican factories export 8 out of every
10 cars they produce—with more than
half bound for the U.S.
Auto output in Mexico rose 7.4 percent
during the frst six months of 2014,
to 1.6 million vehicles, bolstered by
new plants owned by Nissan Motor,
Honda Motor, and Mazda Motor,
according to the Mexican Automobile
Industry Association, known as AMIA.
Brazil’s production through June was
1.47 million, reports Anfavea, Brazil’s
automaker association.
Mexico’s proximity to the U.S. also
gives it an advantage, as do labor
costs for carmakers that are about
20 percent of U.S. levels, according
to PricewaterhouseCoopers. So the
broader reason for the big surge “is
the appeal of Mexico as the produc-
tion source for North America,” says
Bill Rinna, senior manager of North
American forecasts at LMC Automotive.
LMC forecasts Mexico will pass Brazil
in 2016; other researchers put it sooner.
The recent plant openings in Mexico
by Honda, Mazda, and Nissan represent
a combined investment of $4 billion.
Drinks
To Keep the Ale Flowing,
U.K. Pubs Look to Data
Numbers-savvy owners find a new
way to boost sales
Analysis of what a person drinks “is
an incredibly important element”
Noah Bulkin is not the man you’d
expect to be pouring your next pint of
ale. Oxford-educated, Bulkin, 37, spent
15 years as a mergers-and-acquisitions
specialist at Merrill Lynch and Lazard
before leaving last year to start his own
pub company, Hawthorn Leisure.
He’s acquired hundreds of struggling
pubs and plans to turn them around
And Volkswagen’s Audi unit is build-
ing a $1.3 billion plant to assemble the
luxury Q5 sport utility vehicle.
In June, Daimler and Nissan
said they would produce luxury
vehicles, including Infniti compact
cars, at a new $1.4 billion factory in
Mexico, the biggest project to date
in their four-year-old partnership.
Earlier this month, BMW said it
will invest $1 billion in a new factory
in central Mexico that will make about
150,000 cars annually. “Whatever is
made there can be exported” to any of
the more than 40 countries that have
free-trade agreements with Mexico,
including the U.S., says Augusto Amorim,
analyst for South America at IHS.
Brazil has logged some new plants
of its own. In April, Nissan opened a
$1.5 billion complex in Resende, and
Chery Automobile has a $530 million
factory in São Paulo state that will
start production this year, marking the
Chinese automaker’s frst major invest-
ment outside its home country.
Yet as Mexico’s auto exports have
advanced 9.7 percent this year, Brazil’s
shipments have fallen 37 percent. And
Brazilian consumers have slowed pur-
chases because of tighter credit and a
weakening economy. That’s one reason
IHS is forecasting Mexican auto output
this year of almost 3.2 million, ahead
of Brazil’s 3.17 million. —Brendan Case
and Christiana Sciaudone
The bottom line With labor costs just
20 percent of those in the U.S., Mexico could
pass Brazil to become the No. 7 auto producer.
1.6m
Mexico
1.47m
Brazil
Share of sales from food at pub chain Oakman Inns
& Restaurants
by tracking everything from the price
charged for beer to daily sales fuctua-
tions to customers’ drink preferences.
Understanding pricing and the mix
of drinks is key, Bulkin says: “A lot of
pubs don’t have that data.” As he sees
it, British pubs have long suffered from
a lack of attention. “If you can make
them the core of your business,” he says,
“there’s a fantastic opportunity.”
Over the past decade, Britain’s
£70 billion ($120 billion) pub indus-
try has fallen on very hard times.
About 20,000 outlets have closed since
2004, according to the British Beer
& Pub Association, hit by the reces-
sion, a smoking ban that took effect in
2007, and the availability of cheaper
booze in supermarkets. The volume of
beer imbibed in U.K. bars has declined
45 percent since 2000, leaving large pub
companies such as Punch Taverns and
Enterprise Inns weighed down by debt
after years of rapid expansion.
The industry is fighting back, thanks
in part to investors like Bulkin. After six
years of declines, sales at pubs open at
least a year have grown for 14 consecu-
tive months, according to pub industry
data provider CGA Strategy. Several pub
deals, valued at a total of $730 million,
have been announced in the past year,
more than in the prior two combined.
Britain’s 50,000 pubs fall into three
categories: those owned and managed
by companies; so-called tied or tenanted
pubs leased by individuals who pay rent
to the pub’s corporate owners; and inde-
pendently owned establishments. The
tied pubs have suffered the most, due
to what a Parliamentary business com-
mittee in a 2009 report called “down-
right bullying” of tenants by owners.
The committee has conducted several
investigations over the past decade into
claims that owners are taking advan-
tage of tenants, withholding information
about how rents are set and forcing them
to buy beer from just one supplier.
Bulkin is buying up mostly tenanted
pubs—he’s acquired 363 since early
May. He is spending anywhere from
roughly £10,000 to £100,000 per bar on
Vehicle
production
January-June 2014
22
Companies/Industries
Briefs
América Móvil Slims Down
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By Kyle Stock
Edited by James E. Ellis and Dimitra Kessenides
Businessweek.com/companies-and-industries
○u○ Bending to Mexico’s new antitrust rules,
Carlos Slim’s América Móvil agreed to dial back
its Mexican telecom empire. The government
had proposed profit-crushing restrictions on the
main business unit controlled by Slim, the world’s
second-richest man. América Móvil’s board agreed
to divest some assets, reducing its share of Mexi-
co’s land lines and mobile phones to below 50 per-
cent. It also won’t acquire pay-TV provider Dish
México. ○○ Viacom’s Paramount Pictures set a box-office
record in China with Transformers: Age of Extinction. In just 10
days in theaters there, it garnered $223 million, besting Avatar.
The special- effects spectacle was savaged by critics, but its
producers carefully courted mainland consumers by setting
part of the movie in China and casting it via a popular Chinese
reality show. ○k○ Let’s Gowex, a
Spanish builder of Wi-Fi hotspots,
which had been considered a rare
success story in the recession-
ravaged nation, went out of business
after its founder and CEO admitted
to falsifying financial records for
more than four years. The mea culpa followed an eight-month
investigation by Gotham City Research, a short-selling firm that
accused Let’s Gowex of misleading investors. ○q○ Lyft,
a car service, said it will expand to New York
City, upping its rivalry with Uber. The startup,
known for the pink mustaches it puts on its
vehicles’ grilles, will initially target those parts
of the city where traditional taxis can be hard
to find. ○ ○ Crumbs Bake Shop, which built
a semisweet business on gourmet baked
goods, said it will close all its stores, days
after Nasdaq delisted its stock. Last year,
Crumbs posted an $18.2 million loss.
CEO
Wisdom
Global advertisers spent
57 percent more per
Facebook ad impression
in 2014’s second quarter
vs. the first three months,
says media buyer
Nanigans. That’s $1.95
per thousand
impressions.
renovations, including new touchscreen
cash registers that are linked to a cen-
tralized database and allow Bulkin to see
what’s selling and what’s not. With the
help of a former banking colleague, he’s
projecting potential sales and earnings
at the pubs. “Applying some granular
analysis of what a person might drink
and what they will pay is an incred-
ibly important element,” he says.
“This hasn’t been done in the bottom
end of the sector.” Two beers that are
identical in price and taste similar could
deliver as much as an 80 percent differ-
ence in profit per keg to the pub, he says.
Bulkin also hopes to improve rela-
tionships with tenants. He requires his
managers to meet with tenants weekly—
previous owners, he says, checked in
only once every few weeks—to discuss
which beers to offer, pricing, and how to
differentiate the pub from competitors.
“We can be very flexible and creative
to come up with the right structure for
each pub,” he says.
Another investor in Hawthorn Leisure
is New York-based Avenue Capital
Group. Cerberus Capital Management
bought pub company Admiral Taverns
last year, and Risk Capital Partners
of London recently invested in Laine
Pub, a 45-unit chain based in Brighton.
The fresh money is inspir-
ing new ideas and business
models. Oakman Inns
& Restaurants, a chain
of nine high-end pubs,
has expanded its dining
menu and now gener-
ates 60 percent of its sales
from food. Founder Peter
Borg-Neal uses the same meat supplier
as Windsor Castle and has spent about
£1 million per pub on upgrades, adding
dining rooms and outdoor seating.
Zonal Retail Data Systems, which sup-
plies registers and databases to U.K.
pubs, says it will increase sales to about
£50 million this year, more than double
what it sold in 2010.
Still, technology can do only so much
to improve the camaraderie that attracts
Britons to pubs. “I feel special here,”
says Bruce Brunson at the White Horse
in Welwyn, Hertfordshire. “When I
walk in, it’s like I’m Norm from Cheers.”
—Matthew Boyle
The bottom line New investors are pouring
fresh money and ideas into Britain’s
$120 billion pub industry.
Increase in Rolls-Royce
sales in the first six
months of 2014.
Ultraluxury vehicles are
now the hottest
segment of the car
industry.
33%
“I don’t think
women can have it
all. … Every day you
have to make a
decision about
whether you are
going to be a wife
or a mother, in
fact many times
during the day you
have to make those
decisions. And you
have to co-opt a lot of
people to help you.”
Indra Nooyi, CEO,
PepsiCo
23
Companies/Industries
23
July 14 — July 20, 2014
GOP attacks on the
CFPB’s ofce redo
don’t add up 28
How Obama can
reform immigration
without Congress 26
The fight over who
should pay for pricey
new drugs 27
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Ingersoll-Rand is a great American
success story. Founded 143 years ago by
a Connecticut farmer who invented a
steam-powered rock drill, the company
made tools that carved out the Panama
Canal and shaped Mt. Rushmore. More
recently it’s become a leader in energy-
efcient air conditioners: Ingersoll-
Rand’s Trane unit has won more than
$350 million worth of federal con-
tracts to retroft government build-
ings and military facilities as part of a
U.S. Department of Energy conserva-
tion program. When President Obama
announced an expansion of the initiative
in May, Chief Executive Ofcer Michael
Lamach was a guest. Obama ofered
“thanks to all the companies who are
doing the great work.”
What Obama didn’t mention is
that Ingersoll-Rand is no longer a U.S.
company, at least not on paper. In
2001, amid a wave of corporate expa-
triations, it shifted its legal address to
Bermuda, cutting its tax bill in half.
Other companies that did business
with the U.S. government, including
Tyco International and Accenture,
had also adopted Bermuda addresses,
prompting members of Congress to say
they’d punish corporations that pull up
stakes. “There is no reason the U.S. gov-
ernment should reward tax runaways
with lucrative government contracts,”
fumed Democratic Senator Harry Reid
of Nevada, whose father wielded an
Ingersoll-Rand jackhammer as a hard-
rock miner. Republican Charles Grassley
of Iowa called for an end to “fat govern-
ment contracts” for such companies.
In the years since, Congress has
passed several pieces of legislation to
limit or ban these contracts. Yet the law
is riddled with exemptions that allow the
ofshore companies to legally bid for gov-
ernment work. A company that avoids
domestic taxes by shifting its address
abroad can still be eligible for federal
contracts if it has “substantial busi-
ness” in its new home—thus nominally
demonstrating its move wasn’t solely for
tax reasons. The rules also don’t cover
U.S. companies that acquire foreign
addresses, and tax benefts, through
takeovers of overseas competitors.
More than 40 U.S. companies have
reincorporated in tax havens, a strat-
egy known as inversion, 11 of them since
2012. Seven more are in the process
  Companies that register abroad to avoid taxes get federal dollars
  “There is no reason the U.S. ... should reward tax runaways”
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of doing so. Last month, Medtronic,
a Minnesota medical device maker
whose customers include the Veterans
Afairs Department, announced plans to
become Irish. The government awards
more than a dozen companies that have
left the U.S. contracts worth more than
$1 billion a year.
The law defning inverted com-
panies doesn’t cover Accenture, a
company with Chicago roots that incor-
porated in Bermuda in 2001. The same
is true for Chicago Bridge & Iron, a
Texas-run corporation with a Dutch
address. According to public records,
Accenture earned $960 million from
federal contracts in 2013, and CB&I
made $734 million. A spokesman for
CB&I says the company complies with
the law. Accenture spokesman James
McAvoy says the company is eligible for
government contracts because it was
never incorporated in the U.S. When
it frst separated from Chicago-based
Arthur Andersen in 1989, it was set up
as a network of separate partnerships
around the world overseen by a Swiss
entity. For that reason the U.S. General
Accounting Ofce concluded in 2002 that
Accenture wasn’t an inverted company.
McAvoy says a 2012 review by the U.S.
Department of Homeland Security con-
frmed that Accenture, now based in
Ireland, isn’t subject to the ban.
In its brochures, Ingersoll-Rand touts
its projects for the Army and Navy. Yet
for years it told shareholders and cus-
tomers in public
flings that it might
be subject to the
law. Recently the
company con-
ducted an “exhaus-
tive legal analysis”
and decided it’s
not covered, says
spokeswoman
Misty Zelent. The
government relies
on contractors to police themselves.
Zelent says the company works closely
with government contracting ofcials to
ensure compliance with a “complex area
of the law.” Its contracts show just how
complex it is and how many legal ways
there are around the rules.
For the most part, Ingersoll-Rand has
been able to sidestep the question of
whether it’s inverted. Three separate
gaps have allowed the company to con-
tinue doing business with the U.S. gov-
ernment. First, the ban applies only to
contracts funded by annual congres-
sional appropriations. Ingersoll-Rand
sought contracts paid for with other
money, including a contract to main-
tain equipment at military-base super-
markets. Signed in March 2010, it’s
funded with a 5 percent surcharge on
purchases at the stores.
Second, Ingersoll-Rand was awarded
contracts during periods when the rules
had lapsed. Congress’s frst government-
wide contracting ban expired in
September 2008 and didn’t go back into
efect until the following March, when
Congress passed a funding bill for the
2009 fscal year. In the interim, Energy
Department ofcials added the company
to a list of contractors authorized to
pursue up to $5 billion in government
work over as many as 10 years. Ingersoll-
Rand has been awarded two projects
under authority of the DOE deal.
Third, some contracts allow Ingersoll-
Rand to bid on new projects under what
spokeswoman Zelent calls a “grand-
father clause,” without running afoul of
the law. Thus Ingersoll-Rand has bid for
and won energy-saving projects under
the authority of Energy Department
contracts signed years earlier.
The biggest was a $124 million project
at Naval Air Station Oceana in Virginia
Beach, Va., the East Coast home of
the Navy’s fghter jets. In August 2009,
Ingersoll-Rand’s Trane unit was hired to
replace an old steam plant with a more
Executive Power
Obama Goes It Alone
On Immigration
He can fix the problem without
Congress—up to a point
“The president cannot give people
green cards”
With immigration reform dead on
Capitol Hill, President Obama says he
will use his executive authority to make
changes to the law himself. “I’m begin-
ning a new efort to fx as much of our
immigration system as I can on my own,”
Obama said in June. “If Congress will not
do their job, at least we can do ours.”
How much can he do without congres-
sional approval? Actually, quite a bit.
The president has the power to grant
many of the estimated 11 million undoc-
umented immigrants already in the
U.S. relief from deportation simply by
instructing the Department of Homeland
Security not to pursue their cases. In
2012, after Congress repeatedly declined
to pass the Dream Act, which would
have ofered citizenship to immigrants
whose parents brought them to the
U.S. illegally as children, Obama said he
would ofer the immigrants “deferred
action”—essentially a two-year stay on
deportation proceedings. More than
550,000 people have qualifed.
Since 1982 more than 40 companies have moved abroad
Seeking Greener Pastures
1982 2014 2010 2005 2000 1995 1990 1985
Chicago
Bridge & Iron
reincorporates
in The Hague
Ingersoll-Rand joins
a wave of corporate
inversions
Medtronic
announces plans
to become Irish = one company
McDermott Intl.
adopts the address
of a Panamanian
subsidiary as its legal
headquarters
Amount U.S.
companies with
overseas addresses
earn from federal
contracts annually
$1b
efcient heating system, with the cost
covered by the Navy’s energy savings. It
was Trane’s third such job at the base.
The project came under the authority of
a Trane contract from 1999. “The Navy
had no legal basis for not considering
Trane’s proposal, which the Navy found
to be the best value to the government,”
a Navy spokesman said in an e-mail.
Democratic Representative Rosa
DeLauro of Connecticut, who was instru-
mental in passing the frst federal con-
tracting ban in 2002, says she’s working
on a bill to expand the prohibition to
cover more corporate runaways, includ-
ing most of the current crop. “We should
not be rewarding them,” DeLauro says.
“Let’s give it to the companies that stay
here, employ people here, and pay their
taxes here.” —Zachary R. Mider
The bottom line U.S. companies that head
overseas to avoid taxes are still able to win
lucrative government contracts.
26
Politics/Policy
Health Care
Who Should Pay the Bill
For Wonder Drugs?
Patients are caught in a fight
between insurers and Big Pharma
“You can’t keep increasing prices
at this level”
In 2010 the frst oral medication for
multiple sclerosis became available, a
pill from Novartis called Gilenya. At
about $4,000 a month, it was the most
expensive treatment for MS. Now it’s
the cheapest. “When it came on the
The National Council of La Raza, a
Hispanic civil rights group, the AFL-
CIO, and other immigrant advocates
have urged the White House to extend
deferred action—which can include
authorization to work in the U.S.—to
anyone who would have qualifed for
the “pathway to citizenship” under the
terms of the immigration reform bill
passed by the Senate last year. That
program would have covered people
who’ve been in the U.S. since 2011 and
don’t have serious criminal records,
which accounts for about two-thirds of
all undocumented immigrants. “These
are people that we know are going to
eventually be legalized by Congress,”
says Marshall Fitz, director of immi-
gration policy for the liberal Center for
American Progress, who adds that polls
show a majority of Americans support
the Senate bill.
What Obama can’t do is declare an
amnesty. “The president cannot give
people green cards—you know, lawful
permanent resident status,” says
Hiroshi Motomura, a UCLA law profes-
sor. “This is all temporary reprieve.”
The president can make changes to the
way immigration laws are enforced.
Liberal groups are pressing for an end
to federal immigration enforcement
programs like Secure Communities,
under which local police share the
fnger prints of people
they arrest with federal immigration
authorities. Civil liberties advocates
say such initiatives violate privacy laws
and that some U.S. citizens have been
mistakenly held as undocumented
immigrants. Because the rules were
created by Homeland Security and not
Congress, “there would be no question
that the president could suspend or
terminate that program,” says Yale Law
School professor Michael Wishnie.
Beyond these steps, the president
begins to bump up against the limits
of his power. Obama says he wants to
redeploy federal immigration enforce-
ment agents to the Mexican border.
That’s something he can do within the
confnes of existing law, but he needs
Congress to agree to pay for it. On July 8
the White House requested $3.7 billion
in emergency appropriations for addi-
tional surveillance, detention, and ser-
vices for migrants, and to hire more
immigration court judges to expedite
deportations, particularly of unaccom-
panied children arriving from Central
America. House Republicans were
quick to counter with threats to reject
the special requests—and withhold
money for federal agencies next year
if the president moves ahead without
their approval. “There’s always appro-
priations tools where you can direct
and deny funding,” says Republican
Representative Tom Cole of Oklahoma,
a deputy majority whip. “There’s abun-
dant weapons there.”
Obama has said he’ll announce his
next steps by the end of the summer.
With the midterm elections approach-
ing and the Democrats’ Senate majority
at risk, the question is how far he’s pre-
pared to go. “As a legal matter, his discre-
tion is really broad,” says Motomura. “As
a political matter, I think it’s much more
constrained.” —Josh Eidelson
The bottom line With Congress deadlocked,
the White House may exercise its executive
authority to achieve immigration reform.
Dr. Katherine Mitchell, testifying before the House Veterans’ Afairs Committee on June 8. Mitchell, a physician, said Veterans Administration
ofcials ignored her repeated warnings about poor care at the VA hospital in Phoenix. When she persisted, she said she was reprimanded,
suspended, and transferred from the hospital.
Quoted
“The VA, in my
opinion, has routinely
intimidated any
employee who brings
forth information
that is contrary to the
public image that the
VA wishes to project.”
Politics/Policy
27
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market all the older drugs raised their
prices,” says Ted Thompson, vice presi-
dent of federal government relations at
the National Multiple Sclerosis Society.
Breakthrough medications that cost
tens of thousands of dollars or more a
year are becoming common for treating
chronic conditions such as MS, cancer,
HIV, and hepatitis C. In coming years
dozens of new specialized medicines
are expected to arrive with similar price
tags. The U.S. health-care system has
yet to sort out who will pay for them,
and how much. It’s a question that’s
pitting drug companies that develop
medicines against the insurance com-
panies and government programs that
buy them—and leaving patients caught
in the middle.
The blockbuster drugs of previous
decades were aimed at dis-
eases afecting tens of mil-
lions of people. One in 10 U.S.
adults under 65 takes cho-
lesterol medication such as
Pfzer’s Lipitor, introduced
in 1996. Today, “biopharma
companies are targeting more
complex diseases afecting very
small populations,” says Robert
Zirkelbach, spokesman for the
trade group Pharmaceutical
Research & Manufacturers of America.
Of the 27 drugs approved by the U.S.
Food & Drug Administration last year,
19 were specialty medications, includ-
ing nine cancer treatments, accord-
ing to PricewaterhouseCoopers Health
Research Institute. Selling expensive-
to-develop pills to fewer people means
each dose will cost more. The institute
projects that by 2016 spending on such
Ofce Space
OK, Maybe the Granite
Fountain Is a Bit Much
Republicans use ify math to attack
the CFPB’s ofce renovation
Updating the aging building is a
“blatant waste” of public money
When the U.S. Consumer Financial
Protection Bureau opened in 2011,
the best available government ofce
space large enough to accommodate
its thousand-plus employees was a run-
down concrete building on G Street near
treatments will more than double from
2012, to $192 billion.
U.S. taxpayers have a lot at stake.
Although the government pays
37 percent of America’s $263 billion pre-
scription drug bill through programs
such as Medicaid, Medicare, and military
and veterans’ health care, Washington’s
buying power doesn’t always translate
into the lowest prices. By law, drugmak-
ers must sell prescription medications to
the military and to Medicaid, the state-
federal health program for the poor, at
prices below the retail average. The per-
centage discount, based on a drug’s
average sale price, is set by a complex
formula. But when Medicare’s prescrip-
tion beneft for the elderly was created
in 2003, the pharma industry success-
fully lobbied to prevent the program
from negotiating similar dis-
counts, arguing that competi-
tion among the private insurers
that administer Medicare’s drug
plan would hold down prices.
That didn’t work: Medicare
pays on average 69 percent
more than Medicaid for
brand-name drugs, accord-
ing to a June U.S. Government
Accountability Ofce report.
Even if Medicare could bargain
with drug companies, it might not make
much diference. Earlier GAO research
found that when Medicaid’s pharmaceu-
tical discounts were created in the 1990s,
drugmakers responded by raising retail
prices—diminishing the efect of the dis-
count and raising costs for other buyers.
Since the late 1990s prescription
drugs have consistently made up about
10 percent of America’s total medical
bill. The amount individuals pay has
changed, though. Half a century ago
patients covered more than 90 percent
of medication costs. As recently as 1991,
Americans still bore more than half of
drug costs directly. By 2012, they paid
just 18 percent. Private insurers and
Medicare picked up a greater share as
treatments became more sophisticated
and expensive.
Insurers have been trying to shift more
of those costs back onto patients, saying
people who have to pay part of their
way will use services more prudently. A
recent analysis of 123 Obamacare drug
plans found more than half had at least
one class of medicines that required
patients to pay 30 percent of the cost,
including for generics. The report,
by consultant Avalere Health, was
funded by the pharmaceutical industry.
Charging a percentage of drug costs,
rather than a fat co-pay, means patients
with chronic conditions can pay thou-
sands of dollars more than healthy
people on the same insurance plan.
“The specialty drugs are typically on the
highest tier with the highest cost-shar-
ing,” says Thompson of the MS Society.
The Afordable Care Act limits the total
amount people have to pay out of pocket
each year to $6,350 for individuals or
$12,700 for families. Most people never
have to shell out that much. But a patient
with MS—or HIV, or cancer—might hit
that ceiling in the frst few months of the
year paying 30 percent or 40 percent of
drug costs, as some plans require.
Advocates for patients argue that
insurers design health plans with
high fees on specialty drugs to steer
sick people away, an end run around
Obamacare’s ban on discriminating
against those with preexisting con-
ditions. The nonproft AIDS Institute
fled a complaint with the government
on May 29, arguing that four insurers
in Florida were discriminating against
patients by putting all HIV drugs into the
highest cost tier. The bigger problem,
insurers say, is the high cost of medi-
cines: “You can’t keep increasing prices
at this level and have a system that’s sus-
tainable,” says Brendan Buck, spokes-
man for America’s Health Insurance
Plans, the industry lobby. As advances
in medical science make their way from
lab benches to pharmacy counters,
paying for cures may become as vexing a
problem as fnding them. —John Tozzi
The bottom line Some insurers require
sick patients to pay extra for expensive
breakthrough drugs to treat chronic diseases.
$150b
$250b
$200b
$50b
$100b
1980 2012
Gilenya went from
being the most
expensive
treatment for MS
to being the
cheapest
Drug costs have
risen twice as fast
as health spending
since 1980
Private insurance
Patient out-of-pocket
Medicare
Medicaid
Other
Prescription Drug Spending
DATA: NATIONAL HEALTH EXPENDITURES
28
Politics/Policy
Edited by Weston Kosova and Allison Hofman
Businessweek.com/politics-and-policy
the White House that once housed the
now-defunct Ofce of Thrift Supervision.
The bureau’s director, Richard Cordray,
has called the dark, musty structure a
“dump.” The U.S. Department of the
Treasury said the building, erected in
1976, was in need of “major renova-
tions,” which the low rent refected.
Three years later, the CFPB’s plans
to fx up the place are under attack by
Republicans who fought to block the
agency’s creation and have tried since
to weaken or kill it. Representative Jeb
Hensarling of Texas, chairman of the
House Financial Services Committee,
decries the renovation as a “blatant
waste” of public money. The CFPB says it
will cost about $140 million; Republicans
predict it will come to much more.
The U.S. General Services
Administration is managing the project
and intends to update the interior, fx
the leaky roof, and upgrade the build-
ing to LEED Gold environmental stan-
dards. Hensarling and other opponents
have latched onto a planned glass stair-
case, and a granite fountain, benches,
and trees in the building’s public
outdoor plaza as evidence of opulent
excess. “It has become abundantly
clear that it’s not 1700 G Street that
needs an overhaul, but rather the entire
structure of the CFPB,” Representative
Patrick McHenry of North Carolina,
chairman of the committee’s Oversight
and Investigations Subcommittee, said
in a July 2 press release.
Services Committee spokesman says
their calculations use a smaller foot-
print for the renovation than the GSA,
but that explanation doesn’t account for
all of the extra $169 per square foot. At
the overstated $421, the project actually
would cost less per square foot than the
Bellagio ($482) and Trump Tower ($448)
if adjusted for infation to make the
numbers comparable—something the
GOP estimate doesn’t do.
The GSA has said the costs are in
line with other government renova-
tion projects, and the inspector general
concluded the CFPB followed proper
contracting procedures. The report did
take the agency to task for not initially
making a required “business case” to
justify the renovation.
Republicans have cast the project as
a misuse of public dollars in a time of
tight budgets. “The CFPB is funded by
the Federal Reserve, which happens to
be taxpayer money,” Hensarling said in
a February speech that denounced the
renovation. But the Federal Reserve is
self-fnanced, largely with income on
securities such as government bonds,
so the amount Congress needs to set
aside for the ofce redo is precisely zero.
—Karen Weise
The bottom line Republicans say the CFPB’s
new ofce will cost more per square foot than
the Bellagio. They need to check their figures.
“...  It also equals more than $590 per square foot

being renovated at
the CFPB’s rented headquarters. That means the CFPB is spending much
more per square foot than it cost to build the Trump World Tower ($334/
square foot),

the Bellagio Hotel and Casino ($330/square foot)

and the
Burj Khalifa in Dubai ($450/square foot).”

From the GOP-led House Committee on Financial Services’ July 2 press release: “Inspector General Reports
CFPB Renovation Costs Now Exceed $215 Million—$120 Million More Than Previous Estimate”
② ③ ④

$590 per square foot?
Really?
The inspector general actually
estimated construction costs
for the 512,000 sq. ft. project
will total $145.1 million.
That comes to
$283.40
per square foot.
To reach their higher number,
GOP critics added tens
of millions in extra costs
not usually included in
construction estimates.
Pricier than the
Bellagio? Really?
The square-foot costs that
critics use aren’t adjusted for
inflation, so it’s not a head-to-
head comparison. In today’s
dollars, Trump Tower cost
$448
per square foot,
the Bellagio
$482,
and the Burj
$500,
all way more expensive
than the CFPB’s makeover.
The GOP members say their calcu-
lations show the renovation will cost
$215.8 million, or $590 per square foot—
more than double the CFPB estimate,
and more than it cost per square foot to
construct the lavish Bellagio Hotel and
Casino in Las Vegas. These fgures were
picked up by newspapers and conser-
vative websites, which ran them under
headlines like “Elizabeth Warren’s
Brainchild Builds HQ Costlier Than
Trump Tower.” There’s just one hitch:
Their numbers don’t add up.
At McHenry’s request, the inspec-
tor general of the Federal Reserve, the
CFPB’s parent agency, prepared a report
in June examining the project’s price tag.
It said the job would cost an estimated
$145.1 million for construction, con-
struction management, and GSA fees.
The report said the renovation covers
512,000 sq. ft., bringing the estimate to
$283 per square foot. The renovation has
since been scaled back to 503,000 sq. ft.
The Republican fgures infate the
total price by tacking on $70.7 million
for costs such as hiring movers and
renting temporary ofces to use during
the construction. Those expenses aren’t
typically included in calculating con-
struction costs, says Randolph Harrell,
executive vice president at the brokerage
CBRE. “But it is a real cost,” he says.
Even with all of that packed onto the
price, though, the grand total would still
only reach about $421 per square foot,
well short of the GOP’s $590. A Financial
Math
Check
29
Politics/Policy
© 2014 Samsung Telecommunications America, LLC. Samsung, Galaxy Tab and The Next Big Thing Is Here are all trademarks of Samsung Electronics Co., Ltd. Appearance of devices may vary.
Device screen images simulated.
T H E N E X T B I G T H I N G
I S H E R E

  Silicon Valley recruits interns out of high school
  “The point is we’re always on the lookout for really top talent”
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Innovation: A kit that
tracks fertility and
flu 35
Can Amazon trounce
India’s homegrown
e-commerce stars? 34
Bringing power to the
people with a little help
from data 33
In the jet engine wars,
it’s Pratt vs. GE 32
mobile news-summarizing app. Early
Facebook investor Peter Thiel pays teen-
agers $100,000 to quit school and work
on their own projects.
Online coding tutorials and collab-
orative Web communities are helping
high schoolers produce successful apps
before they earn computer science
degrees. Hackathons and bug-hunting
contests can connect skilled kids with
companies, says James Anderson, 15,
who met the founders of Portland (Ore.)-
based Web startup Planet Argon at a
conference on the Ruby on Rails pro-
gramming language. Then 13, the self-
taught app maker impressed the Argon
engineers and persuaded them to let
him intern for them last summer after he
graduated from middle school. “I felt like
age shouldn’t hold me back, as long as I
can code,” says Anderson, who just fn-
ished ninth grade.
On Facebook’s campus, Sayman
can get a meal or a haircut or have his
laundry done for free whenever he
wants. “My life here is basically the
mom was like, ‘No, you have to learn to
live on your own,’ ” he says.
While teens aren’t overrunning Silicon
Valley yet, talent-starved tech compa-
nies are reaching out to kids to fll spots
in their internship programs. Facebook
says it has just begun to recruit teens
before their freshman year of college.
LinkedIn opened its summer program
to high schoolers two years ago; Airbnb
has had interns as young as 16. “Talent
is our No. 1 operating priority and our
most important asset,” LinkedIn CEO
Jef Weiner said on his company’s most
recent earnings call, welcoming this
summer’s crop of interns.
For established companies, it’s all
about playing defense against Silicon
Valley’s newer-is-better culture, espe-
cially as the young and technically
inclined see that the biggest jackpots
can come from creating their own start-
ups. College dropout Zuckerberg is an
obvious example; Summly founder
Nick D’Aloisio became a millionaire at
17 last year when Yahoo! acquired his
After Facebook recruited Michael
Sayman last November, it didn’t mess
around—it few him out from Miami to
meet Mark Zuckerberg. The chief execu-
tive talked to Sayman about 4 Snaps, the
mobile game he built using Facebook’s
development tools that has attracted
more than 500,000 players. Sayman’s
mom, Cristina, came with him, because
he was still in high school. “When I got
the e-mail saying—oh my God—Mark
Zuckerberg wants to meet you, I had to
make sure nobody was playing a prank
on me,” the young coder says.
Sayman, now 17, started in June as a
summer intern at Facebook’s Menlo Park
(Calif.) headquarters just after gradu-
ating from high school and six months
before he’s due to get his braces of.
“I try to keep my mouth closed during
meetings because I don’t want people to
see them and not take me seriously,” he
says. He’s staying in a suite in Facebook’s
Mountain View intern housing with
an older colleague. “They gave me the
option of living with my mom, but my
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opposite of my life back home,” he
says. Perhaps more dazzling for high
school-age kids, it’s become standard for
engineering interns to make more than
$6,000 a month on top of free housing
and transport, according to job search
site Glassdoor, which relies on employee
reports. “It’s kind of insane that as a 19-
or 20-year-old, you can make more than
the U.S. average income in a summer,”
says Daniel Tahara, 21. (America’s
average monthly household income
is $4,280.) Tahara interned at big-data
startup Hadapt last summer and mobile
security startup Lookout the year
before. Tahara, who wouldn’t say how
much he was paid, started full-time at
Dropbox this month.
Hiring minors means dealing with
concerned parents, says Doris Tong,
who manages recruiting at LinkedIn and
once had to get a parental release for a
young participant at a company hack-
athon. Under-18 hires can also mean
extra paperwork. Bern Coh, in charge of
recruiting interns at Airbnb, says to hire
a 16-year-old last year, “we actually had
to get a work permit for him.”
Kyle Ewing, Google’s head of global
stafng, says her company isn’t inter-
ested in hiring high schoolers. They may
be able to build apps, Ewing says, but
she’s recruiting for projects that require
a higher degree of academic rigor. She
says Google won’t
take on an intern
who isn’t at least
working toward a
college degree and
prefers that they
complete their
course of study.
Facebook’s head
of global recruit-
ing, Miranda
Kalinowski, says
the company has
“no hard and fast rule” on intern ages,
though it typically recruits from univer-
sities. “The point is we’re always on the
lookout for really top talent,” she says.
Sayman has heard there are other high
school-age interns at Facebook, but he
hasn’t seen them.
Sayman taught himself to build
apps when he was 13, partly to help
his mother, now a driver for Lyft, and
father, an audio engineer, pay the bills
after a home foreclosure four years
ago. Almost immediately, he became
the family’s main breadwinner, his
mom says. Sayman says he isn’t sure
whether he’ll go to college. For now,
he’s busy touring the Valley and snap-
ping selfes with the likes of Apple soft-
ware chief Craig Federighi and CEO
Tim Cook. If Facebook makes him a
full-time ofer, he says, he’ll take it.
“I’m 17, and these guys are the best of
the best,” he says. “I don’t know the
things that they talk about that are old,
like cassette tapes, but we get along.”
—Sarah Frier
The bottom line Tech companies aren’t shy
about hiring teenage makers of hit apps,
so long as their parents are OK with it.
Hardware
The Great Jet
Engine Race
The quest for fuel efciency leads
to unconventional designs
Rising oil costs mean “you simply
can’t drag around the old engines”
As airliners replace their feets with
more efcient models, jet engine makers
are reimagining how planes are powered
in a bid to score deals with Boeing and
Airbus. The narrowbodied Boeing
737 Max and Airbus A320neo, slated to
hit the skies over the next two years, are
designed to take advantage of improved
aerodynamics. CFM International and
Pratt & Whitney are building engines
meant to cut fuel use by 15 percent,
though they’re taking diferent paths
to get there. Jet engine sales in the next
decade will total $500 billion, according
to industry analyst Teal Group.
CFM, a joint partnership of General
Electric and French aerospace company
Safran, says it plans to close more than
$8 billion in deals with airplane manu-
facturers for its new engine, the Leap, at
the biannual Farnborough International
Airshow that begins in England on
July 14. First announced at the air show
six years ago, Leap’s technology was
developed mostly at GE’s global research
center in upstate New York. GE has spent
20 years tinkering with a carbon com-
posite used in the engine’s fan blades,
which can weigh one-third less than con-
ventional aluminum ones. It’s making
carbon composite engines by molding a
woven, fexible carbon fber and cooking
it with epoxy resin to yield a material
as durable as metal. Other parts of the
engine use materials with the low weight
and heat resistance of ceramics. Three-
dimensional printing has enabled GE’s
team to create one-piece parts that used
to come in 20 heavier pieces. “They’ve
really taken it beyond in terms of com-
posites,” says Wayne Plucker, an analyst
at researcher Frost & Sullivan.
GE’s R&D operations last year cost
$5.5 billion—twice what it spent a
decade ago and more than 487 compa-
nies in the Standard & Poor’s 500-stock
index. The funds cover everything from
undersea oil facilities to bioengineering,
but aviation is a top priority for GE, says
Mark Little, who runs its global research
center. “People around the world are
fying a lot more, so the number of air-
planes is going up by a factor of two
over a decade,” he says. “Airliners are
refreshing their entire feets, because
with that high-priced fuel, you simply
can’t drag around the old engines.”
GE’s revenue from aviation businesses
is now 14.8 percent of its total, up from
10 percent three years ago.
Richard Aboulafa, vice president of
analysis for Teal Group, says competi-
tion helped push the long-gestating GE
engine to market. “They needed to rein-
vent their product ofering to fght of
a challenge from Pratt,” he says. Pratt’s
new engine, the PW1000G, is based on
a counterintuitive idea: increasing ef-
ciency by spinning fan blades more
slowly. The two main parts of any jet
engine are the fan, which moves air
through the engine, and the turbine,
which burns fuel to spin the fan. The
1. Palantir $7,012
2. VMware $6,966
3. Twitter $6,791
4. LinkedIn $6,230
5. Facebook $6,213
6. Microsoft $6,138
7. EBay $6,126
8. ExxonMobil $5,972
9. Google $5,969
10. Apple $5,723
Average monthly
pay for interns
Data from Glassdoor
Leap engine
32
Technology
Energy
Updating an $876 Billion
Museum Piece
U.S. utilities are starting to invest
in a smarter grid
“Many utilities are blind beyond
the substation”
On a recent muggy morning, Jef
Myerson, director of business trans-
formation for Houston-based utility
CenterPoint Energy, is pointing to
mundane-looking gray metal boxes high
on a wooden utility pole. They mask
state-of-the-art wireless relays that
collect data on customers’ power use
every 15 minutes. Myerson is showing a
visitor around Braeswood, a tree-lined
neighborhood of several hundred 1950s-
era ranch homes about 7 miles south-
west of downtown. It’s being reftted
for CenterPoint’s “intelligent grid.” This
frst phase is scheduled to be completed
by yearend at a cost of $138 million,
with the help of $50 million from the
federal government.
When fully deployed, the grid will
encompass a network of sensors,
switches, smart meters, and data anal-
ysis software that will give CenterPoint
more control over and insight into its
almost 50,000 miles of power lines.
Breaks in the lines typically take
hours, even days, to fnd, particularly
in the wake of bad storms. Starting
in Braeswood, CenterPoint, which
powers more than 2 million homes
and businesses, is gaining the ability
to almost instantly pinpoint a problem
to a single block. It plans to use algo-
rithms that can analyze weather pat-
terns and spot weaknesses in the lines
to predict failures. The smarter equip-
ment can also reduce the risk of over-
load by telling customers when energy
costs them the least. “We’re bringing
a mechanical system into the digital
age,” says Myerson.
The U.S. electrical grid, once one
of the world’s great marvels, is crum-
bling after decades of underinvest-
ment. Valued at $876 billion by the
Edison Electric Institute, an indus-
try group, the grid is an amalgam of
almost 7,000 power plants that send
electricity over 450,000 miles of
high-voltage transmission lines and
2.5 million miles of feeder lines. All this
is managed by 3,300 utilities serving
150 million customers. The grid is argu-
ably the biggest machine on earth. It’s
also something of a relic, largely built
after World War II from designs that
date to Thomas Edison. Half of U.S.
homes still have mechanical meters
that require workers to show up and
read them. Most utilities can’t analyze
their customers’ energy use beyond
the monthly bill.
CenterPoint is among a growing
number of utilities remodeling their
pieces of the grid with the kinds of
GE R&D
expenses
FY2003 FY2013
$6b
$3b
$0
GE aviation
revenue
FY2005 FY2013
$22b
$11b
$0
The CFM Leap
engine undergoes
icing tests in
Winnipeg, Man.
Site 3B, 1 of 10 test
sites at the GE Aviation
Peebles Test Operation
in Ohio
relationship between the parts, tradi-
tionally connected to the same shaft,
is push-pull: Turbines produce more
thrust when moving at top speed, but
fans create more drag as they spin faster.
Pratt’s new engines have geared turbo-
fans, which allow the two components to
move independently. The fan blades can
slow down while the turbine spins furi-
ously. Pratt declined to comment on its
engine or competition with CFM.
Planemakers are split on which
approach is best. Boeing, a longtime
CFM customer, decided to design the
737 Max around the Leap engine. “We
saw their technology road map and how
they were bringing that to the Leap,
and it made a lot of sense for us,” says
Keith Leverkuhn, general manager for
the Max line. Boeing already has more
than 2,000 orders for the plane, bring-
ing CFM’s total engines ordered to 6,770
as of June 30, an edge over Pratt’s 5,500,
according to the companies.
CFM and Pratt are battling for
Airbus’s business and have split its
orders for A320neo engines, says aero-
space consultancy Ascend. Airbus
lets airlines choose their engines, and
36 percent of its A320neo inventory will
carry the Leap, while 35 percent will use
the PW1000G; the other 29 percent are
unannounced. Aboulafa says CFM will
eventually have to make a geared tur-
bofan engine to keep pace with the ef-
ciency Pratt’s design could achieve. For
now, however, anyone in the market for
a jet engine has a difcult decision to
make, he says: “It’s rather remarkable
that they are able to take such difer-
ent paths and have such similar results.”
—Joshua Brustein
The bottom line CFM and Pratt & Whitney are
fighting for slots on new Boeing and Airbus
planes with their redesigned engines.
7,000
power plants
Valued at
$876 billion
The U.S.
grid
2,950,000
miles of lines
3,300
managing utilities
150,000,000
customers
The Leap is 15 percent
more fuel-efcient
than the previous
CFM engine
This tower houses fuel
and other service lines
required to operate
an engine
DATA: BLOOMBERG
33
Technology
Technology
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3
1
E-Commerce
Flipkart’s Fight to
Maintain Its Lead in India
The company found a way to do
online business in cash
Now Amazon “has come to within
striking distance”
In 2007, when Indian software engineers
Sachin Bansal and Binny Bansal were
starting their online bookstore Flipkart.
com out of a two-bedroom apartment,
they faced a challenge Amazon.com
founder Jef Bezos never had: how to
collect payment. At frst the two, who
aren’t related, accepted credit cards,
but because few Indians use them, they
needed a way to conduct e-commerce
in cash. Payment-on-delivery was the
obvious solution, but Flipkart didn’t
want third-party couriers to carry large
quantities of its money. So in 2010 the
company decided to remake itself as
a version of both Amazon and United
Parcel Service.
Becoming a delivery service brought
a slew of infrastructure problems. India
has no standardized street address
system, and road conditions are rough.
Often a building name, street, and
series of landmarks are needed to
locate a house. And customers have
to be home to receive a package. “You
cannot leave anything outside the
door, because it will just disappear,”
says Ashok Banerjee, Flipkart’s former
vice president for logistics, now chief
technology ofcer for e-business at
Symantec in California.
The entrepreneurs looked at dis-
tribution as a technology problem.
“The advantage we had was we were
not a logistics company trying to do
e-commerce,” says Mekin Maheshwari,
head of human resources. “Because we
were creating the systems completely
in-house, we could actually solve it.”
With venture funding from Tiger Global
Management, Flipkart’s engineers
developed systems to determine the best
warehouse locations; it has six across
the country. It alerts customers by text
several hours before a scheduled deliv-
ery and has a lab dedicated to improving
the fnal stage of deliveries, from local
warehouses to buyers.
The market leader, Flipkart delivers
5 million shipments monthly—books,
data analysis tools that hardware
makers have been hawking to consum-
ers. While talk of a smart grid has been
around for years, the utilities’ eforts
mark the start of a huge, albeit decen-
tralized, infrastructure makeover that
could total almost half a trillion dollars
in retroftting costs before it’s com-
pleted, according to the Electric Power
Research Institute, a research arm of
the utility industry.
The deteriorating grid is forcing
some utilities to act quickly. Power
outages are up 285 percent since 1984,
and the U.S. ranks last among the top
nine Western industrialized nations in
the average length of outages, which
the federal U.S. Energy Information
Administration says cost businesses as
much as $150 billion a year. Hundreds of
thousands of miles of power lines can’t
be monitored from a central location,
so repairers spend 60 percent of their
time searching for breaks. “Many util-
ities are blind beyond the substation,”
says Edward Kennedy, chief executive
ofcer of Tollgrade Communications,
which makes grid sensors and consults
with utilities on smart-grid projects.
Besides CenterPoint, Columbus
(Ohio)-based American Electric
Power, Sempra Energy’s San Diego
Gas & Electric, and New York
Independent System Operator,
which runs New York State’s grid, are
smartening their systems. Giant PG&E
has established an R&D facility with
more than 120 engineers and techni-
cians testing ways to speed smart-grid
adoption. In Detroit, DTE Energy has
begun a fve-year, $250 million grid
upgrade. Working with Cranberry
Township (Pa.)-based Tollgrade, the
utility is installing outage-predicting
sensors and software that it estimates
will eliminate about 500,000 outage
minutes for its 2.1 million customers
over the next three years. In Austin,
Texas, smart-grid researcher Pecan
Street is using 300 test homes to show
how a utility that tracks power fow
can change how and when to gener-
ate electricity as well as how and when
consumers use it. Ultimately, the goal
of these projects is to digitize energy-
use data so that power generators and
customers can exchange information
about demand to eliminate overbuild-
ing and waste.
The smart grid may be a necessity
if the utility system is to absorb and
manage changes in U.S. power genera-
tion. A surge in rooftop solar has turned
tens of thousands of consumers into
generators, and regulators and green
groups are pushing utilities to incor-
porate more of that power. “There is
a lot of technology coming, and if you
don’t integrate it successfully, you’re
going to have one hell of a mess on your
hands,” says Roger Duncan, chairman
and one of the founders of the Pecan
Street project. “The current grid is just
not designed to handle this.”—Mark
Chediak, Jim Polson, and Ken Wells
The bottom line Local utilities are remaking
the grid with smart meters, wireless relays,
and data analysis software.
GRAPHIC BY BLOOMBERG BUSINESSWEEK. DATA: EATON
Spread across vast
distances, rural
power grids are more
vulnerable to disruption
Black Holes
N/A
Some Twin Cities
households were in
the dark for six days
in June 2013 after
powerful storms
In September, 6,000
people lost power after
a raccoon invaded a
utility substation in
Cookeville, Tenn., and
caused a “huge ball
of fire”
Hours of power
outage per
100,000
people, 2013
0 to 0.5
0.5 to 1
1 to 1.5
1.5 to 2
2+
34
Edited by Jef Muskus
Businessweek.com/technology


Next Steps
Cue, which began taking preorders in May, expects U.S. Food and Drug
Administration clearance in 2015. Khattak says he hopes that beyond flu
diagnoses and fertility testing, people will eventually use the kit to keep closer
track of the benefits of exercise, sleep, and healthier eating. “It makes a really
big diference if you can see the actual results for yourself on a daily basis,”
he says. —Caroline Winter
Innovators Ayub Khattak and Clint Sever
Age Both 29
Title Co-founders of Cue, a four-year-old
startup in San Diego
Form and function
A home test kit that uses a drop of bodily
fluid to, in minutes, diagnose the flu or analyze
levels of inflammation and certain vitamins and
hormones, including luteinizing hormone, which
triggers ovulation.
Innovation
Cue
electronics, makeup, and clothing—to
18 million registered users in 150 cities,
and its cash-on-delivery model made
e-commerce more viable in India.
“Flipkart really changed the rules of
the game,” says Pragya Singh, associ-
ate vice president at consulting frm
Technopak Advisors, who estimates
that India’s $3 billion e-commerce
market will reach more than $19 billion
in fve years. India has one of the
youngest online populations, and its
smartphone adoption is growing faster
than China’s. And because e- commerce
totals less than 1 percent of retail
spending, “There’s room for a lot of us
to grow,” says Sandeep Komaravelly,
senior vice president for marketing at
Snapdeal.com, a Flipkart competitor
backed by EBay.
The market has proven irresistible
to Amazon, which a year ago launched
its own Indian site. Although laws
prevent foreign retailers from selling
products in India, Amazon can serve
as a marketplace for local merchants
and deliver their goods. Amazon India
adopted cash-on-delivery from the
get-go and introduced one-day delivery
in December. Flipkart has countered
with its own one-day delivery and a
loyalty program similar to Amazon
Prime and says it’s also shifted away
from selling its own inventory in favor
of acting as a marketplace for others.
Flipkart says it sold more than
$83 million in merchandise in March,
putting it at an annualized $1 billion sales
rate. Snapdeal says it’s close to those
numbers; Amazon wouldn’t comment
for this story, but Technopak’s chair-
man, Arvind Singhal, says Amazon India
will reach that level by the end of next
year, if it hasn’t already.
Despite the market’s growth poten-
tial, Amazon has a good chance to over-
take Flipkart on its home turf, says
Mahesh Murthy, a managing partner
at Seedfund, a venture capital frm in
Mumbai. “I believe that one viable busi-
ness will dominate the niche. However,
it increasingly appears that Flipkart may
not be that company,” he says. Amazon,
he notes, “has come to within striking
distance of Flipkart … and it continues
to have deep pockets, and it’s a patient
player.” —Bianca Vázquez Toness
The bottom line Flipkart has been an early
leader in online shopping in India, but it may
be overtaken by Amazon.
Funding Cue, which
has 12 employees,
raised $1.5 million
from angel investors.
Customers Many
early adopters are
in Silicon Valley.
The founders say
most are interested
in testosterone
monitoring.
Analysis Sensors convert
the biological sample into
digital results and transmit
them to an app on the user’s
smartphone via Bluetooth.
The app stores results to
build a patient profile.
2.
Design The device
sits on a wireless
charger, measures
3 cubic inches, and
weighs roughly
6 ounces.
Origin Khattak says
the 2009 swine flu
outbreak convinced
him that people
needed a way to test
themselves quickly.
Sampling A Cue wand is
used to collect nasal fluid
to diagnose flu; saliva to
measure testosterone;
or blood to test levels of
inflammation, vitamin D, or
fertility. The wand is placed
in a cartridge.
1.
Technology
35
July 14 — July 20, 2014
  Mandis wants to be a nice guy in high-rate small-business lending
  “Providing capital to people … is, I think, a good thing”
A Nasty
Neighborhood’s
Mr. Rogers
Steven Mandis was working on a book
two years ago about whether Goldman
Sachs put proft above principles when
he decided to get into small-business
lending’s version of subprime: a corner
of Wall Street where brokers push loans
with interest rates that can climb higher
than 100 percent to dentists with bad
credit and pizzeria owners behind on
their bills.
As Mandis, a former Goldman Sachs
banker, scouted for lenders to invest
in, he saw ofces that looked like boiler
rooms, with salespeople furiously
working the phones. The co-founder of
one frm he visited had been sentenced
to probation for insider trading.
Mandis was not deterred. Although
some competitors may take advan-
tage of borrowers in distress, he says,
he’s driven by something loftier than
proft. “There’s this obligation to try
to do something to solve a problem in
America,” he says. “Providing capital
to people to grow their businesses and
to give jobs to people is, I think, a good
thing.” Mandis began by investing in
two lenders, then started his own frm,
Kalamata Capital, late last year.
Borrowers who turn to the costly
loans often have bad credit, little collat-
eral, or maxed-out credit cards. Taking
out high-rate loans they may not be able
to repay can lead them to bankruptcy
instead of growth. “This is like a payday
loan for a business,” says Pat Fossett, a
lawyer in Corpus Christi, Texas, making
a comparison to costly cash advances
for workers. “Unless they’re making
a large proft to pay that high interest,
they’re shooting themselves in the foot.”
Small-business lending has yet
to recover from the fnancial crisis.
Loans of less than $1 million are down
22 percent from 2007 because of tighter
lending standards, Federal Reserve
research shows. Even as banks have
pulled back from funding businesses
directly, Wall Street investors have fun-
neled at least $1.7 billion in fnancing
over the past two years to the high-rate
lenders rushing in to fll the gap, accord-
ing to data compiled by Bloomberg.
Mandis says he’s funding Kalamata
with his own money and chose the
name because of his family’s Greek
heritage to evoke an olive branch
extended to customers. He wants to
make his company the frst choice for P
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Bid/Ask: ADM walks
on the Wild side; tax-
driven drug deals 41
Warren Bufett is a
role model for a
Chinese billionaire 39
A litigation
finance firm learns
from a mistake 40
Muni Bonds
Can Puerto Rico
Keep the Lights On?
A credit rating downgrade may
keep the island from borrowing
“They’re done. They’re not going to
be issuing any more debt”
After Moody’s Investors Service cut
Puerto Rico’s rating to B2, fve steps
below investment grade, on July 1, the
price of the island’s general obligation
bonds plummeted to record lows. The
downgrade puts Puerto Rico in a tough
spot: No U.S. state or city with a credit
rating that low has ever borrowed
money in the public markets, accord-
ing to data compiled by Bloomberg.
“They’re done,” says Matt Dalton,
chief executive ofcer of Belle Haven
Investments, which manages $2.1 billion
in munis. “They’re not going to be
issuing any more debt on the island. I
don’t see how they can bring people
back to the trough at this point.”
Puerto Rico and its agencies have
operated for years on borrowed
money—accumulating $73 billion in
debt and, since 2000, paying Wall
Street $910 million in fees for arrang-
ing its bond sales, Bloomberg data
show. Its economy has contracted about
11 percent since 2006, according to its
Planning Board. The unemployment
rate of 13.8 percent is more than twice
the U.S. rate.
If the government can’t sell bonds at
afordable rates, it will have to curtail
small- business owners when they need
fnancing. Mandy Calara, who runs the
Forever Yogurt frozen-yogurt chain
in Chicago, says his Kalamata loan
worked out. He borrowed to cover
payroll and rent in November when
harsh weather kept customers home.
Calara says he found Kalamata through
an online service called Biz2Credit
and doesn’t remember the terms of
his deal. He didn’t have time to apply
for a bank loan. “It’s sort of the best of
the bad loans,” Calara says. “It was still
pretty aggressive.”
For all Mandis’s good intentions, it’s
hard to come of as a nice guy in the busi-
ness. Sheila Stiles was one of Kalamata’s
frst clients. Her family frm, Goins
Waste Oil, has been collecting used
motor oil from auto shops in Tennessee
and turning it into fuel for more than
60 years. With sales dropping, Goins
took a Kalamata loan in November to
avoid layofs before Christmas.
Goins borrowed $122,000, agreeing to
pay back $165,920 in about 11 months,
according to a copy of the contract
with Kalamata. Although Stiles says she
was aware of the terms, they turned
out to be more onerous than she had
thought. Goins furloughed employees
so it could aford the payments that
Kalamata automatically withdrew daily
and then weekly from the company’s
bank account, she says. “The way they
present it, it’s so tempting, especially
when you know you’re in such a bind,”
says Stiles, the company’s treasurer.
“He’s taking advantage of the small-
business owners because of
the interest rate he charges.”
The Goins contract shows a
rate of 36 percent. When cal-
culated as an efective annual
percentage rate—which
takes the timing of payments
into account—that doubles
to 72 percent, says Marco
Lucioni, a vice president
at nonproft lender Opportunity
Fund. The Truth in Lending Act requires
that the efective rate be stated on loans
to consumers, but not to businesses.
“Every time you make a payment, you’re
reducing the amount of money you had
available to work with,” Lucioni says, so
you are making the same payment on
what is in efect a smaller loan.
After Stiles and Mandis were
interviewed for this story, Stiles
complained to Kalamata, which said she
could repay the loan more slowly, low-
ering her payments by about $1,000
a week. Kalamata did that voluntarily
and “without imposing any penalty,”
Mandis says.
Kalamata sued the owner of a New
Jersey liquor store for defaulting after
borrowing $100,000 in February. The
annual interest rate on the eight-month
loan, 17 percent in the contract, is efec-
tively 53 percent, Lucioni says.
Mandis says the higher rates are jus-
tifed because the businesses are risky,
post little collateral, and can’t get the
money elsewhere. What he does isn’t
subprime lending because the term
refers only to loans made to people,
he says, and Kalamata’s customers are
businesses. Sometimes the money he
advances isn’t really a loan at all, he
adds—it’s fnancing. “When you put it
in a percentage, it sounds big and eye-
popping, but you need to have a relative
sense of it all,” Mandis says. “Should we
let that company just go bankrupt … or
should we have these alternatives?”
Kalamata’s rates are relatively low for
the industry, according to Rohit Arora,
co-founder of Biz2Credit, who says rates
have topped 200 percent. Jared Hecht,
a co-founder of Fundera, an online
loan middleman that’s planning to work
with Kalamata, says that as the industry
matures, “business owners should theo-
retically be able to run a competitive
process and get the lowest rates.”
After 12 years at Goldman Sachs,
Mandis left in 2004 for a hedge
fund. In 2009 he enrolled at
Columbia University, where his
work for a Ph.D. in sociology
formed the basis for his 2013
book, What Happened to
Goldman Sachs. In it he describes
how the frm adopted a legalistic
approach that enabled it to make
more money. “The sense that
one is doing God’s work or serving a
higher purpose can easily transmute
into a holier-than-thou attitude and an
excuse for any behavior,” he wrote.
He also teaches at Columbia Business
School and has tutored Harlem teen-
agers. “If I’m choosing something to do,
there has to be some intellectual curios-
ity related to it, because that’s how I’m
driven,” Mandis says.
Kalamata is still a small business itself,
with two employees in Bethesda, Md.
Mandis says it has made $6 million in
fnancing. Kalamata’s website features
a family history and a photo of him in
a sweater and tie. “What I thought I
would do with Kalamata is say, ‘Here’s
who I am. I’m a real person,’ ” he says.
“You have to have the values and the
brand that people will come back to.”
—Zeke Faux and Max Abelson
The bottom line Wall Street investors have
plowed at least $1.7 billion into small-business
lending over the past two years.
“Should we let that
company just
go bankrupt… or
should we
have these
alternatives?”
—Steven Mandis
37
The Bloomberg Sports Business Summit stands as
the premier annual event for the industry’s biggest
dealmakers. Bloomberg will again gather commissioners,
owners, and players to discuss the business of sports
and the money behind the game.
SPEAKERS
VAL ACKERMAN / BIG EAST CONFERENCE
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MARC LASRY / AVENUE CAPITAL GROUP
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AMY TRASK / CBS SPORTS
MARC A. UTAY / CLARION CAPITAL PARTNERS
+MORE
Request an invitation.
Sponsored by:
SEP 4, 2014
ALTMAN BUILDING
NEW YORK
Markets/Finance
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services for its 3.6 million residents,
45 percent of whom live in poverty.
The commonwealth has already started
closing about 100 schools to help
balance the fscal 2015 budget. “We need
to have guards in prisons,” says Sergio
Marxuach, policy director at the Center
for a New Economy, a research group
in San Juan that focuses on economic
development. “We need to have public
school teachers teaching.” Anything
else, he says, “could be fair game.”
Like U.S. states, Puerto Rico can’t fle
for bankruptcy protection. Governor
Alejandro García Padilla signed a bill
on June 28 that allows some public
corporations, including its power
company, to restructure debt outside
bankruptcy. The governor described
the move as a way to protect general
obligation debt, but creditors took it
as an afront. Franklin Templeton
Investments and Oppenheimer
Funds are challenging the law in court.
The Puerto Rico Electric Power
Authority, which provides almost all the
island’s electricity, may have to choose
between paying bondholders and
keeping the lights on, Marxuach says.
The utility, which carries $8.6 billion in
debt, has negotiated with creditors to
postpone to July 31 repayment of bank
loans due during the month. Prepa, as
the agency is known, may have to resort
to rolling blackouts in residential areas
so hospitals, schools, and businesses
Population
Economy
Debt
OK
CA
NY
KA
In Over Its Head
Puerto Rico
has a population
the size of
Oklahoma’s and
an economy
smaller than
Kansas’s. It also
has more debt,
$73 billion, than
any U.S. state
except California
and New York.
can function, Marxuach says.
That would “bring home to
a lot of people the magni-
tude of the crisis we’re going
through,” he says. In a state-
ment, Juan Alicea Flores,
Prepa’s executive director, said:
“Prepa will continue to produce and
deliver power.”
A rescue from Washington seems
unlikely. Only the Federal Reserve has
the required resources and authority
to undertake a bailout, according to
Stephen Myrow, managing partner at
Beacon Policy Advisors and a former
Treasury Department ofcial. “But
there is no indication that the Fed has
any appetite to do that,” he says. Pedro
Pierluisi, the commonwealth’s single
nonvoting representative in Congress,
has said he will try to measure the lead-
ership’s interest in helping the island.
He isn’t optimistic that Congress will act.
“I don’t see fertile grounds,” he says.
—Michelle Kaske and Brian Chappatta
The bottom line With $73 billion in debt and a
credit rating of B2 from Moody’s, Puerto Rico
may not be able to issue additional bonds.
mines and oil felds to supply the
country’s burgeoning economy,
Guo, 47, looks overseas for brands,
technology, and fnancial assets
that cater to the nation’s growing
ranks of the afuent. “Our focus
going forward is on sectors where
the life of China’s middle class can
be upgraded: health, travel, leisure,
education, and the Internet,” he says.
“We call it marrying China’s growth with
global resources.”
Borrowing from the approach used by
Warren Bufett’s Berkshire Hathaway,
Fosun buys fnancial companies such
as insurers to secure long-term funding
it can use to invest in consumer brands
and other businesses. Since 2010 it
has invested more than $3.4 billion
overseas, buying JPMorgan Chase’s
60-story tower, One Chase Manhattan
Plaza, in New York, and stakes in French
resort operator Club Méditerranée
and Rafaele Caruso, an Italian maker
of $3,300 suits. “Many people talk about
being Bufett in China, but few can pull
it of,” says Eugene Qian, Citigroup’s
head of global banking for China.
“Fosun is the closest in our view.”
At Fudan University, Guo developed
an interest in philosophy as China was
becoming more open to Western ideol-
ogy. After graduating, he worked at the
university’s Communist Party Youth
League for three years. In 1992, when
late Chinese leader Deng Xiaoping
called for the nonstate-owned economy
to prosper, Guo took up the challenge.
“China’s economy and governance
had made big strides in openness, and
there were a lot of opportunities,” Guo
says in a 13th-foor conference room in
Fosun’s headquarters facing Shanghai’s
Bund waterfront. “So I got together a
few friends, some of us graduated, some
not, and we decided to take the plunge.”
They started with 38,000 yuan
of their own money. Fosun, whose
Chinese name Fuxing means “stars
from Fudan University,” got its frst
break in 1993 when it made 100 million
yuan selling a diagnostic kit for hepati-
tis anti bodies with research help from
Guo’s alma mater. The next big oppor-
tunity came in the early 2000s as China
started privatizing state-owned com-
panies. In 2002, Fosun invested in
Shanghai Yuyuan Tourist Mart, a
jeweler and department-store operator
formerly controlled by the city govern-
ment. The next year, Fosun participated
in the privatization of the company
then known as Nanjing Steel Group,
$80b 20%
$40b 15%
$0 10%
2004 2014 7/2004 5/2014
Gross
public debt
Unemployment
rate
Debt has almost doubled
in the past 10 years, while
unemployment has yet to return
to prerecession levels.
Asset Managers
A Chinese Billionaire
Who Buys Like Bufett
Guo looks for companies that
target the country’s middle class
“I got together a few friends … and
we decided to take the plunge”
Twice a week in the winter of 1987,
students living in the No. 5 dormitory
of Shanghai’s Fudan University
would hear a familiar knock close
to midnight. A slight, bespectacled
philosophy major was making his
rounds selling bread door-to-door. The
student, Guo Guangchang , earned
about 30 yuan ($4.80) a month to help
support himself through college.
“I had a government subsidy then, but
living costs were high,” he says.
Guo has plenty of dough these days.
Chairman of Fosun Group, an invest-
ment company with assets of $48 billion,
he’s China’s eighth-richest person, with a
personal fortune estimated at $5.7 billion
by the Bloomberg Billionaires Index.
In contrast to state-owned companies
that typically buy resources such as
39
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Litigation
Recovering From a
Bad Judgment
A pioneering litigation-finance firm
overcomes a setback in Ecuador
At least the case “led lawyers to
understand that Burford existed”
Burford Capital, a litigation-fnance
company, was just getting aloft in
2010 when it invested $4 million in a
contro versial pollution lawsuit against
Chevron in Ecuador. The transaction
quickly began to sour.
Burford’s chief executive ofcer,
Christopher Bogart,
a former executive
vice president and
general counsel at Time
Warner, says his frm
benefted from extricat-
ing itself swiftly from
the pollution suit and has since
seen its profts expand. Burford’s for-
tunes matter because it’s the largest
competitor in a nascent industry that
provides capital to law frms and cor-
porate litigants in exchange for a share
of eventual recoveries. Others jostling
in this niche include Bentham IMF,
Harbour Litigation Funding, Juridica
Investments, Longford Capital, and
Woodsford Litigation Funding.
In the Ecuador case, Chevron turned
the tables on the main American plain-
tifs’ lawyer, Steven Donziger. In March
the oil company convinced a U.S.
federal judge in New York that the pol-
lution suit had evolved into an extortion
scheme involving coercion and bribery.
The ruling, which Donziger is appeal-
ing, could make it difcult for him to
collect on a $9.5 billion judgment he
won on behalf of thousands of poor
Ecuadorean residents of the rain forest.
Claiming it had been deceived about
rampant fraud in the Ecuadorean
courts, Burford says that shortly after
making the $4 million investment, it
managed to ofoad the stake to an
unnamed investor—someone who must
have a high tolerance for risk. Even as
the frm emerged fnancially whole, its
reputation sufered a blow.
All this unfolded amid skepticism
about the small but growing litigation-
fnance industry. Critics such as the U.S.
Chamber of Commerce claim that third-
party investments in lawsuits encourage
frivolous courtroom hostilities.
Burford, a publicly traded company
in the U.K., did not underwrite Donziger
directly. Instead, it fnanced the activ-
ities of Patton Boggs, a Washington-
based corporate law frm that allied
itself with Donziger to help him enforce
any judgment won in Ecuador. In the
wake of the U.S. court ruling that the
Ecuadorean suit had been permeated
by fraud, Patton Boggs apologized for
its role and paid an unusual $15 million
settlement to Chevron. A weakened
Patton Boggs agreed to merge with a
larger law frm and form what is now
known as Squire Patton Boggs. A
spokesman for the combined frm
declined to comment.
In an interview, Bogart says it’s
Shanghai Yuyuan
Tourist Mart
Invested in 2002
when the department
store was privatized
and is now its largest
shareholder
Nanjing Steel Group
Bought into what is
now called Nanjing Iron
& Steel when it was
privatized in 2003
Club Méditerranée
Spent $56 million for
10 percent of the resort
operator in 2010
Rafaele Caruso
Holds a stake in
the Italian maker of
$3,300 suits
Folli Follie
Owns a stake in the
Greek jewelry and
handbag retailer
One Chase
Manhattan Plaza
Paid $725 million for
the 60-story tower in
downtown Manhattan
Greek commercial real
estate project
Working on an
€8 billion ($10.9 billion)
development near
Athens with Greece’s
Lamda Development and
Abu Dhabi’s Al Maabar
How Fosun Grew
previously owned by
the Nanjing municipal
government.
As Fosun’s founders
planned their overseas
expansion, they consid-
ered diferent business models—from
the conglomerate built by Li Ka-shing,
Asia’s richest man, to buyout titans
such as Carlyle Group and Bain Capital
Partners that use leverage to bolster
returns. They settled on Bufett’s
approach. “We thought of longer-term
solutions to fundraising, and then we
thought of insurance and the Bufett
model,” Guo says. Since then, Fosun
has invested in Xi’an-based Yong An
Insurance and Peak Reinsurance of
Hong Kong. Insurance now accounts for
about 40 percent of
Fosun’s assets.
Fosun’s frst over-
seas deal came in
June 2010, when
it paid €41 million
($56 million) for
10 percent of Club
Med, the resort
owner with oper-
ations in 40 coun-
tries. It has since
amassed minority holdings in com-
panies including Folli Follie, a Greek
jewelry and handbag retailer, and
German private bank BHF-Bank.
Fosun plans to at least double its
assets in the next fve years and is on
the lookout for health-care, tourism,
and fashion acquisitions, Guo says. He
likes companies with brands that can be
introduced on the mainland or exper-
tise that can be used to help businesses
that serve China’s growing middle class.
Club Med, for example, opened its frst
resort in China six months after Fosun’s
initial investment, according to Fosun’s
website. It plans to open fve resorts in
China by 2015, making the country its
largest market outside France.
The sheer diversity of Fosun’s
businesses will probably work against
Guo’s attempts to achieve scale, accord-
ing to Joel Backaler, the author of China
Goes West: Everything You Need to Know
About Chinese Companies Going Global.
Although each business may do well on
its own, he says, the “balancing and the
portfolio approach to managing their
business” require sophistication and
experience that Fosun doesn’t have.
To keep Fosun growing rapidly
without losing its footing, Guo has
turned to tai chi, the ancient Chinese
martial art in which practitioners seek
to achieve harmony between the oppos-
ing forces of yin and yang. Introduced
to tai chi by Alibaba Group founder
Jack Ma, Guo created an area in Fosun’s
Shanghai ofces where executives can
practice. “Keeping the balance of fast-
growing and smooth-growing is always
important,” he says. “It’s almost an art.”
—Bloomberg News
The bottom line Using Bufett as a model, Guo
has built Fosun into a $48 billion company and
amassed a $5.7 billion fortune.
$56m
Amount Fosun
spent to acquire
10 percent
of Club Med
“Our involvement in
the matter and its
public notoriety
certainly increased
the visibility of
litigation finance.”
—Christopher
Bogart, CEO,
Burford Capital
40
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By Evan Applegate
Edited by Eric Gelman
Businessweek.com/markets-and-finance
AbbVie makes a fourth bid for Shire. The Chicago-
based drugmaker raised its ofer by 11 percent, pursuing
Shire for new treatments and lower taxes in the U.K.
Salix Pharmaceuticals lowers its tax bill with a merger.
The U.S. company will move its base to Dublin after
combining with an Irish unit of Cosmo Pharmaceuticals.
Helvetia Holding takes over Nationale Suisse. The
company agreed to pay a 26 percent premium for
its peer, creating Switzerland’s third-largest insurer.
Aristocrat Leisure of Australia acquires Video Gaming
Technologies. The purchase will more than triple the slot
machine maker’s presence in North American markets.
Macquarie Group buys International-Matex Tank
Terminals. The company claimed the 50 percent of the
oil and chemical storage business it didn’t already own.
TeliaSonera expands in Norway. The Swedish mobile
provider acquired Tele2’s Norwegian unit, increasing its
local market share to 40 percent.
Expedia purchases an Australian travel site. The
booking service bought Wotif.com Holdings to boost its
business in the Asia-Pacific market.
Archer Daniels Midland diversifies naturally. The corn and grain
processor agreed to buy Switzerland’s Wild Flavors from Hans-Peter
Wild and KKR, adding a business that supplies natural ingredients and
colors for processed foods. The acquisition should allow ADM to take
advantage of increased demand for “healthy” convenience foods while
reducing its exposure to volatile commodity markets.
signifcant that his frm backed Patton
Boggs, not Donziger. “Our business
is fnancing major U.S. law frms, and
we rely on those frms not only for the
quality of their lawyering but also for
their own factual, legal, and ethical
analyses of the matters they recom-
mend to us,” he says.
Burford reported $40 million in proft
in 2013, a 28 percent increase from a
year earlier. It has 35 investments, with
total commitments of $264 million.
While in hindsight he would not have
invested in the Ecuadorean suit, Bogart
says, “at the same time, our involve-
ment in the matter and its public noto-
riety certainly increased the visibility
of litigation fnance and led lawyers
to understand that Burford existed
and was available to them as a fnan-
cial resource in large, expensive, and
complex cases.”
Burford continues to evolve, Bogart
says, from what he calls “basic litigation
fnance” to “more of a pure corporate-
fnance business, with our capital being
used for a variety of business purposes,
not just litigation expenses, and with
litigation claims being recognized as the
corporate assets they truly are.”
He points to an investment with
Rurelec, a British energy- project devel-
oper pursuing an arbitration claim
against the government of Bolivia
for the expropriation of a power
plant. Burford monetized Rurelec’s
claim by providing the company
with $15 million. On June 2, Rurelec
announced it had received about
$32 million from the arbitration case.
The following day, Burford said it had
received repayment of its $15 million,
plus an $11 million proft.
“We were able to use a pending
arbitration claim to obtain innova-
tive corporate fnancing from Burford
that lowered our cost of capital and
helped our business expand,” Rurelec
Chairman Colin Emson said in a state-
ment. If Bogart and his colleagues can
avoid missteps such as the Ecuadorean
case and continue to show returns of
the sort derived from the Bolivian one,
Burford may yet overcome the criti-
cism that the last thing the civil justice
system needs is additional incentives to
pursue litigation. —Paul M. Barrett
The bottom line A leader in the nascent field
of litigation finance, Burford earned $40 million
in 2013, a 28 percent increase from 2012.
41
Markets/Finance
42
The i nsi de story of Dov
Charney’s overthrow and
t he chaot i c bat t l e f or
control of American Apparel
By Susan Berfield
43
GENIUS?
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hen I first reach Dov Charney
on June 24, he’s scrambling to
raise money, fnd a partner, try
anything to get his company
back. His handpicked board
of directors had ousted him
from American Apparel six days
earlier following an investigation
that turned up several instances
of alleged misconduct. “They’re con-
cerned that an unconventional leader somehow damages the
company’s chances of success. But a contrarian, alternative-
thinking CEO can bring creative ideas that advance the company,
even the industry,” he says. “Oh wait, got to take this.” He hangs
up. Two days later we talk again. He doesn’t say it, but he’s
already worked out a deal with Standard General, a hedge fund
in New York, which has been buying stock in American Apparel
in hopes of infuencing the fate of the troubled company.
The conversation continues over the next several days. He’s out-
raged, crass, unapologetic, funny, disarming, constantly jumping
between conversations, and mostly of-the-record. “It’s my mother,
let me take this, I apologize.” “It’s the fnance guys, call me back in
two minutes.” At one point, there are four people on a call. He puts
us all on hold. Later, it comes out that he’s given Standard General
control of his stake in the company he founded—and, along with it,
control of his future at American Apparel. We speak again. “Just a
second, you might be two minutes on hold, just wait. … Excuse me
one second. … One second … oh s---, one second, please.”
Just two weeks earlier, on June 17, the eve of the company’s share-
holder meeting, Charney, 45, was in a good mood for the frst time
in a while. For much of the past four years, he’d been in crisis as
American Apparel lost $270 million and came close to bankruptcy
twice. But the board had stuck by him, sales had increased this
spring, and summer promised to
be busier yet. Things were fnally
looking up.
Charney packed samples,
ordered an Uber car to get to
LAX, and boarded a red-eye
for New York. After he landed,
he put on a suit and tie and,
weari ng whi te Ameri can
Apparel socks and Common
Projects sneakers, sauntered
into the ofce of the compa-
ny’s lawyers at 4 Times Square.
The shareholder meeting
lasted about an hour. Close
to noon, the five board
members entered the conference room with
Charney, their chairman, for their annual
face-to-face meeting. Allan Mayer, a Holly-
wood public-relations man whom Charney
had put on the board in 2007, gave Charney
an ultimatum: Resign voluntarily, give up the
voting rights to his 27 percent stake, and receive
a multimillion-dollar severance and a four-year
consulting contract. Otherwise, be fred for mis-
conduct. Among the charges in the termination
letter: Charney had the company pay for a few plane tickets
for his family; misused company money in other ways; and
violated the company’s sexual-harassment policy. According
to the letter, the board “recently learned that you presented
signifcant severance packages to numerous former employ-
ees to ensure that your misconduct vis-à-vis these employees
would not subject you to personal liability.”
The board also cited a case that had received a lot of
publicity and had been resolved confdentially. In 2011,
Irene Morales, a sales associate, accused
Charney of using her as a sex slave and
sought damages of a quarter-billion
dollars. An arbitrator dismissed those
claims but found the company “vicari-
ously liable” for the conduct of another
employee who had created a fake blog
in Morales’s name. Then the employ-
ee posted erotic photos of Morales on
it. Charney told some board members
and his lawyers that he had photos of
Morales and of others accusing him of harassment that showed the
women weren’t victims. The board members and lawyers didn’t
object to the idea of him using the photos as part of his defense.
The photos were sent to several newspapers and websites. But
no one imagined that someone would put together a phony blog
and post the photos there.
At the June 18 meeting, Charney refused to accept either of
the board’s choices. He argued that the business was doing well
now, that the supposedly new misconduct was really old mis-
conduct, and in any case it didn’t amount to enough to fre him.
He noted that since he had renewed his employment contract
in 2012, no new sexual-harassment cases had been fled against
him. The board listened but was unmoved. An afternoon dead-
line was extended to early evening. Charney left the conference
room several times to call his lawyer, his parents, some colleagues.
Nine hours after the meeting began, he told the board he wouldn’t
resign. They had a press release ready. It said Charney had been
ousted as chairman, suspended as chief executive, and would
be ofcially fred after a 30-day waiting period, as his contract
required. Mayer and David Danziger, a partner at MSCM, a Toronto
accounting frm, became co-chairmen.
After the board members left, a secretary escorted Charney out
of the building. He walked to the company apartment on the south-
ern edge of Hell’s Kitchen. The next day, Charney’s lawyer, Patri-
cia Glaser, wrote to American Apparel’s lawyer, calling the board’s
behavior “not merely unconscionable but illegal.” She said
the allegations were baseless and involved “ activities that
occurred long ago (if at all) and about which the Board and
Company have had knowledge for years.”
The board had defended Charney through years of nega-
tive publicity and even worse fnancial problems. Why now?
“I know there’s a lot of people who have criticized us very
severely for not taking action earlier than we did,” says Mayer.
“I get it. But there’s nothing I would do diferently. You don’t
want to embark on a course of action that will bring down
the whole house. That’s destroying the village to save it.”
One theory on the timing is that the company
had issued new shares in March to raise cash,
reducing Charney’s stake from 43 percent to
27 percent. There could be other reasons:
concern about a possible bankruptcy that
could force a sale, or additional lawsuits that
could hold the company, and the board,
liable. “All along they were thinking that
anything goes in Charneyville,” says Thomas
White, a professor of business ethics at Loyola
Marymount University in Los
Angeles. “They only started
to worry when they looked
up and saw fnancial disaster.”
After the meeting, the
board aut hori zed FTI
Consul ti ng to begi n a
second, more far-reaching
investigation into Charney’s
behavior. Charney stayed
in New York, desperately
“We’ll eva
or not
From top: Charney at home in
Los Angeles in 2004; the factory
in 2005; Charney at a 2009
immigrants’ rights march in L.A.
J
A





45
looking for a way to
reclaim his position.
At frst it seemed as if
he’d found someone
to back him. Standard
General began acquir-
ing American Apparel shares, then lent Charney $20 million to
buy them from the frm. He had to agree to pay 10 percent inter-
est and use his stock as collateral. The board on June 28 belat-
edly adopted a poison-pill defense to prevent him from gaining
control. By then, Charney owned 43 percent of the company.
Really, though, Standard General controlled the shares, and the
frm wasn’t necessarily backing Charney. “This transaction is not
about the founder, nor is it an endorsement of him,” Standard
General said in a letter to its investors on July 2. A week later,
Standard General and American Apparel reached a deal to bring
in new board members, sort out and shore up the company’s
fnances, and keep the company’s downtown Los Angeles factory
open. Charney will serve as a “strategic consultant” while the
FTI investigation is under way. His role beyond that, if he has
one, will depend on the results.
“They control the shares. I’m a bystander,” Charney says by
phone in one of six conversations we have over two weeks. “My
frst issue is to save people’s jobs, put the company into a stable
fnancial situation. And then we’ll evaluate whether or not I’ll
be the janitor or the CEO or the consultant. … I believe Standard
General will treat me fairly.”
From the beginning, Charney called himself a Yiddish hustler. He
left Montreal for high school in Connecticut, left Tufts University
to start a wholesale T-shirt business in South Carolina, and left
the South for Los Angeles after his frst company ran into fnan-
cial trouble. There he connected with the Korean community
that dominated the fast-fashion business. American Apparel
got of the ground in 1998, and among its frst tag lines was:
“Two Koreans and a Jew making T-shirts.” An ad features a
black-and-white drawing of Charney with a full head of hair
and protohipster glasses.
For fve years, American Apparel was a wholesale business. It,
and he, had already come to public attention, though. The New
Yorker profled Charney and his eforts to create perfect-ftting
T-shirts; Charney took the reporter, Malcolm Gladwell, to a strip
club where the dancers modeled new styles. In late 2003, Charney
opened his frst store, on Sunset Boulevard in the then-seedy
neighborhood of Echo Park. The clothes would be logo-free and
sweatshop-free; the advertising, sexually free, or at least that’s
how he thought of it. “He built an incredibly important brand,”
says Ilse Metchek, president of the California Fashion Associa-
tion. “In terms of infuence in the U.S., it’s as valuable as Gap.”
Today the American Apparel factory—the largest garment
manufacturer in the country—is located in a seven-story,
800,000-square-foot, almost century-old, salmon-colored build-
ing. It has a banner proclaiming: “American Apparel is an Indus-
trial Revolution.” Some 3,300 workers produce about a million
pieces every week—T-shirts, leggings, dresses, shorts, socks, and
underwear in 31,000 styles, sizes, and colors.
American Apparel has 249 stores in 20 countries; last year
sales were $633 million, almost one-third of which came from
wholesale. Its factory workers make an average of $12 an hour,
generous by industry standards. A company slogan printed on
the cafeteria wall says: “We may not be politically correct—
but we have good ethics.”
Marty Bailey, a taciturn Southerner who worked for years
at Fruit of the Loom, is the head of manufacturing. An ofce
near his used to belong to Charney. Guards showed up the
day after Charney was fred and stood by his door for the next
48 hours, according to four executives who were not autho-
rized to speak on the record. The security code was changed,
and a camera was installed nearby. John Luttrell, the chief
financial officer, became the
interim CEO. The frst few days
he walked around the foor with
security guards of his own.
Bailey has been told by Mayer
not to discuss any of this. “This is our
corporate foor,” he says, giving a tour
on June 30. “The, uh, CEO’s ofce is
here. The general counsel. Everyone
else.” Bailey keeps walking.
Mayer, the co-chairman, does
the talking for everyone. His spe-
cialty is crisis management, and his
clients have included the Los Angeles
Dodgers and Universal Studios. He’s
known Charney since 2004, when
the frst story about the chief execu-
tive who couldn’t keep his pants on
was published. In his ofce at PR frm
42 West in L.A., where he’s a princi-
pal partner, Mayer has a small sculp-
ture of a man on a horse with a sword
and a lance: a white knight.
He’s had time to think about
why American Apparel has such an
outsize reputation. “I think it’s the
tension between the transgressive
part of the brand and the idealis-
tic part of the brand that gives it its
special place in the culture,” Mayer says. “If you took out the
sex, it would be kind of boring. And if you took out the idealis-
tic component—our commitment to the sweatshop-free, made-
in-USA philosophy—it would just be sleazy. But you put them
together, and you have something that’s interesting. It’s edgy,
but it’s also strangely wholesome at the same time.”
Several months after the Echo Park store opened, Charney gave
a now infamous interview with Claudine Ko, a reporter for Jane
magazine, during which he masturbated, with her consent, while
carrying on a conversation about business. He engaged in oral
sex with an employee with Ko nearby, too. “It all started there,”
says Roy Sebag, a managing partner at Essentia Equity who
later invested in American Apparel and still speaks with
luate whether
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Charney. “Then he was the douche bag of the year. Everyone
loved to hate American Apparel.”
By the middle of 2005, Charney, then 36, had opened 53 stores
in fve countries, which had sales of $250 million. He had 4,500
employees. He was also facing two sexual-harassment suits, which
he said were bogus. One case was dismissed in arbitration. The
other, brought by an ex-employee named Mary Nelson who accused
Charney of creating a hostile work environment, made its way to
court. Documents revealed that American Apparel had agreed to
settle for $1.3 million without admitting liability. In exchange, the
company could issue a press release saying an arbitration judge
had dismissed the claims. The case eventually ended up in conf-
dential arbitration.
By 2006 the company had begun requiring employees to sign
a document acknowledging that American Apparel is a “sexually
charged” workplace, hoping to protect itself from what Charney
and his lawyers considered shakedowns. “One of the things you
learn when you do crisis management is that where there is smoke,
there isn’t always fre,” Mayer says.
If there’s one thing that everyone agrees on when it comes to
Charney, it’s this: The guy works like crazy. One time, Charney
took a deep interest in the lighting in the stores and studied bulb
temperature and the Kelvin light scale. “The company is his whole
life,” says Eric Beder, an analyst at Brean Capital. “He’s not into
possessions or the money. I talk to CEOs who love their jobs but
have a life. Not Dov.”
American Apparel went public in 2007, and Charney’s stake
turned out to be worth $580 million. Afterward, Charney had
to hire a real CFO, whom he later called “a complete loser” in
a Wall Street Journal article. Charney apologized; the executive
left. With the cash infusion, American Apparel opened more
than 100 stores in 2007 and 2008.
One of Charney’s confdants on the board was Robert Greene,
author of the best-selling 48 Laws of Power, which is about the art
of manipulation. Charney hired him as a personal consultant, but
Greene says the CEO didn’t follow all of his precepts. He was a
volatile leader, says Greene. “There’s nothing in my book really
about that. It’s not about being chaotic and yelling at people,
which he would do.”
Charney describes himself as unconventional, and some
employees found the chaos and freedom in the workplace thrill-
ing. Charney often invited new executives and visiting employ-
ees to stay with him for a few weeks, sometimes to get a feel for
company culture. That included holding weekly videoconfer-
ence calls with managers from home, sometimes in bed, occa-
sionally shirtless. He put his mobile phone number on the com-
pany’s website and would answer no matter who called. Young
women regularly sent him nude photos. “Dov is very intense.
He’s very charismatic. And anybody who is so passionate and
so totally devoted to what he’s doing can be attractive. So he’s
always been subjected to a lot of temptation,” says Mayer.
American Apparel, which boasted about its immigrant work-
force, went through an immigration audit in 2009. It had to lay
of more than half of its factory workers. Another thousand
quit for fear of being swept up in immigration raids. The dis-
ruption led to delayed shipments and an expensive hiring and
training program.
The company lurched from crisis to crisis. Sales slowed, the
fnancial situation deteriorated, and each loan carried higher
interest rates. At one point, Charney personally guaranteed the
leases on some prime retail space for stores. Investors and their
chosen executives came and went. Charney would welcome them
enthusiastically, then quickly come to the conclusion they didn’t
ft in. He’d make it impossible for them to stay, according to fve
executives familiar with Charney’s management style.
Then, in 2013, the company built an automated distribution
center outside Los Angeles in La Mirada that was supposed to save
$5 million a year. But delays, software problems, and insufcient
training hampered operations; some orders were comically con-
fused. One customer received a box with nothing but packing tape.
Charney moved into the facility in August. He had someone
bring a mattress and a hot plate; a shower was installed. He slept
with a walkie-talkie on his chest and, depending on who’s telling,
at least one young woman. Charney regarded his moving into
the distribution center as a sign of his great commitment. The
board saw it as a sign of Charney’s insane management style.
The problems at La Mirada cost the company at least $15 million.
A $13.5 million interest payment—money American Apparel didn’t
have—was due in April.
This February, Greene and Mayer took Charney out to dinner at
a steakhouse in Los Angeles’s Koreatown. They spoke to him about
bringing in some senior executives. Charney was the CEO and the
president. There was no chief operating ofcer, no chief technol-
ogy ofcer. The company never had ofcial designers. The two
weren’t trying to ease him out, only trying to free Dov to be Dov.
Charney seemed to like that idea. There was another possibility:
selling the company. People familiar with American Apparel say
Luttrell, the CFO, favored that, though he said the opposite pub-
licly. Charney wouldn’t even discuss it.
Once again, pressing fnancial matters arose. Charney agreed
to let the company sell more shares, diluting his stake, in the
belief the company would grant him additional shares later. It was
difcult to sell the stock, says Beder, whose frm helped manage
the ofering. “Part of that is because of Dov.” Charney now had
American
i n Per i l
Total debt
Range of
American Apparel
short-sleeve
T-shirt* colors
* #2001 UNISEX T-SHIRT
GRAPHIC BY BLOOMBERG BUSINESSWEEK
DATA: BLOOMBERG, AMERICANAPPAREL.NET,
INTERNET ARCHIVE WAYBACK MACHINE
$200m
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2000 2014 2006
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a 27 percent stake, and for the frst time since the company
went public, he was vulnerable. But he didn’t seem to know it.
All spring, Charney concerned himself with rooting out inefcien-
cies. For a while he was reviewing almost every check American
Apparel issued. That wasn’t making Luttrell too happy. In May,
Charney forced out his general counsel, Glenn Weinman. Charney
said it was because Weinman cost too much. Weinman declined
to comment on the matter.
Soon the board received unpleasant news about two lawsuits—
a potential payment of $700,000 to settle with Morales and new
information in a suit accusing Charney of assault. In November 2012,
Michael Bumblis, a store manager in Malibu, had accused Charney
of rubbing dirt in his face because Charney was displeased with
the store’s condition and performance. Bumblis’s lawyer, Ilan Hei-
manson, says he informed the company of evidence of the confron-
tation beyond the accounts of witnesses. The stores had security
cameras, and Bumblis had access to the video. Among the details
in the complaint was a phone call Charney had supposedly made to
Bumblis about his store’s poor sales. “Get your f---ing s--- together,
fag. Where is your f---ing creativity? Get some f---ing girls in bikinis
to stand on PCH [Pacifc Coast Highway] and have them wave a
f---ing American fag. Are you a fag? Do you not want to see girls in
bikinis? Are you banging that girl you were with in Vegas? What’s
her name?” American Apparel’s lawyer said in a fling that Bumblis
was a poor-performing employee who was dismissed and that his
story is “entirely contrived or wildly exaggerated.”
That case could bring other complications. Heimanson asked
a Los Angeles court to try the case rather than send it to con-
fdential arbitration, as American Apparel requires in all such
matters. The judge ruled that the documents all American Apparel
employees have to sign are “unconscionable,” according to legal
flings. The agreements forbid workers from fling claims against
the company, talking about the company, or sharing any infor-
mation about the personal life of the CEO. If they do, they risk
being sued for $1 million. The company is appealing the ruling. If
it stands, “we’ll be able to shine sunlight on the backroom deal-
ings of American Apparel and Dov Charney,” says Heimanson.
Charney’s termination letter also faults him for alleged fnancial
misconduct. “You authorized payments to induce employees
to sign release agreements that were aimed at protecting you
from personal liability for your misconduct,” the letter says. Two
former company executives say that was American Apparel’s
out-in-the-open, frequently used legal strategy. Employees had
to re-sign their arbitration and confdentiality agreements when
they got raises; if they left the company, they received sever-
ance in exchange for promising not to sue or disparage Amer-
ican Apparel. Everybody knew this, and everyone signed, they
say (including these two executives).
The board also mentions some unauthorized expenses for
employees and family members. Nickel-and-dime stuf, say three
people with knowledge of Charney’s spending. Charney behaved
as if American Apparel was still his company and didn’t always
distinguish between the personal and the professional. The
amounts they’re aware of aren’t enough to be fred over, they say.
FTI Consulting’s probe into Charney’s conduct began on
June 19 and could conclude by early August. Standard General
has said the board it wants to install will determine Charney’s
fate once it’s seen the conclusions. “I’m reminded of that quote
from Nietzsche,” says Mayer. “ ‘The consequences of our actions
take hold of us, quite indiferent to our claim that meanwhile
we may have “improved.” ’ That may well be Dov’s epitaph.”
On July 9, Standard General announced its deal with American
Apparel. It will provide as much as $25 million to the company
and will create a seven-member board that will include experi-
enced retailers and turnaround and corporate governance experts.
Standard General will keep one seat for itself, says David Glazek,
a partner at the frm. Mayer and Danziger will keep their seats,
too. The new board, in turn, may bring in outside help to run the
company. “We look for good businesses with bad balance sheets
that can be fxed,” says Glazek. “Chaos has a cost. We want to
institutionalize things.”
Glazek says Standard General wants to keep the company’s busi-
ness model, too. But it’s made no commitment to the company’s
founder. “Dov found a lifeboat, but he’s still surrounded by sharks,”
says Lloyd Greif, an investment banker in Los Angeles. Meanwhile,
Charney can’t help himself: In recent days, he was spotted at an
American Apparel store in Manhattan. —With Matt Townsend
Charney at the company’s
lawyers’ ofce in New York
on June 18, soon after learning
he was being dismissed
Two 55-gallon cisterns collect all the Florida rainwater Speronis needs for drinking, bathing,
Photographs by Dana Lixenberg
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Daniel Boone
In the
In Cape Coral, Fla., a city of snowbird retirees and strip malls
of the Caloosahatchee River, there’s a part of town that never
quite recovered from the real estate bust. Foreclosure notices
spill from the mailboxes of homes lining the city’s shallow canals
and gather in trash drifts by the front doors. Weeds run riot in
the yards of properties built for no money down in the fush days
and then abandoned when they went underwater.
Even amid the eerie detritus, the small ranch-style duplex
that Robin Speronis moved into in January 2013 is a little unusual.
For one thing, Speronis, an energetic 54-year-old widow with
cropped blonde hair and stark blue eyes, never had the city turn
on the power or water. She set two 55-gallon plastic cisterns on
either side of the entranceway and attached gutter downspouts
to collect rainwater. She perched a small solar charger on a win-
dowsill with wires snaking inside to a battery that in turn powers
a few lights and a laptop. Wireless Internet is siphoned from a
nearby Tire Kingdom. Inside, a propane lantern hangs from
an unused light fxture in the dining area. Speronis is living of
the grid—no power from the city, rainwater her only source for
bathing, drinking, and sewage—in the middle of her tumble-
down subdivision. It has caused a national furor.
Speronis frst took an interest in detaching from the system
during the years she spent caring for her husband, Zenny, who
sufered from a neurodegenerative disorder. As his condition
worsened, she turned to homeopathic treatments and other
unconventional regimens: raw foods, colloidal silver, an avoid-
ance of refrigeration and air conditioning, a focus on the pro-
motion of regular bowel movements. It was a struggle to explain
to the people around her, but she provided for Zenny without
doctors, pharmaceuticals, or any medical assistance until his
death at 84 in 2010. She self-published a book about “freeing” him
from the health-care system and “home deathing him naturally.”
Speronis had worked as a real estate agent and a massage
therapist, but most of her savings went to making her husband
comfortable in his last days. This included the earlier purchase
in 2009 of a $495,000 waterside home on a palm-lined street in
Cape Coral. Speronis knew she didn’t have the money to make
the mortgage payments, so she engaged in what she called a “stra-
tegic default.” Using her knowledge of the real estate industry to
delay foreclosure, she stayed afoat by selling of her possessions.
After the lender fnally took the house in April 2012, Spero-
nis underwent a radical ascetic conversion. She surveyed what
remained of her things and asked, “Do I really need this? Is this
of value to me?” She got rid of everything, from her BMW con-
vertible to her wedding album, and attempted to establish a fully
self-reliant existence. In June of that year, she bought an RV and
moved onto a rented property in a nearby wooded area. She
stayed for seven months, teaching herself to live without most
modern conveniences. “I had never even gone camping,” she
says now, “but nothing was hard. Every time I did something it
was easier than I thought it was going to be. I thought, ‘I can do
this. I can do this myself.’ ” Eventually the land fooded in the
Florida rains, and Speronis stopped paying her rent. She was
evicted and returned to Cape Coral—but not to the grid.
In a new home of Del Prado Boulevard, which she bought
from a friend, Speronis removed and sold the oven, refrigera-
tor, and air conditioning units, even the ducts. The house was
already of the electrical grid. An earlier resident had been stealing
municipal power, and the city had cut the lines and removed the
meters. Speronis subsisted primarily on a year’s supply of dried
and canned food she’d bought while she had the RV. She drank
and bathed in rainwater, flling a four-gallon, solar-heated camp
shower. Her only connection to city services was the sewer:
She fushed waste down the toilet, again with rainwater. “I
What happens when you want
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Cul-de-Sac
to get off the grid, but the
can go weeks or a month without spending a penny,” she says.
In true American fashion, Speronis began writing about her
experiences as a pioneer of the subdivision. She started a blog
called Of the Grid Living in Southwest Florida—One Woman’s
Story. One day last November, Liza Fernandez, a reporter for
WFTX, the local Fox afliate, decided to do a story on her. Near
the end of the broadcast, Fernandez noted that Speronis’s rudi-
mentary setup violated “most codes and ordinances” in Cape
Coral and that “anyone caught living in such a home could be
forcibly removed.”
Speronis appeared unfazed, even a little excited at a chal-
lenge to her lifestyle. “If my father in heaven wants me to be the
test case for something,” she said, frmly, “I’ll be the test case
for something.” Town ofcials were watching.
“The desire to ‘get off the grid’ is anchored deep in the
American psyche,” says Nick Rosen, author of Of the Grid:
Inside the Movement for More Space, Less Government, and True
Independence in Modern America. From Daniel Boone’s sturdy
self-reliance on the Western frontier to Henry David Thoreau’s
individualist morality at Walden Pond, to be alone and discon-
nected is to be an idealized version of an American. An instinc-
tive yearning to slip the chains of society has certainly been
felt by anyone who’s ever gotten a big utility bill, but, as Rosen
notes, “It’s very unusual to do it in a city.”
Estimates of the national of-the-grid population are vague,
hovering between 180,000 and 250,000, almost entirely in rural
settings where public utilities—and government oversight—are
in short supply. Climate-change concerns spur many, as does an
interest in a simpler, low-tech lifestyle. Disaster preppers and
militiamen see it as a hedge against impending social collapse.
Not everyone who wants to go of the grid can. Assembling
the right equipment and supplies can cost tens of thousands of
dollars, but money isn’t the only limiting factor. Sometimes the
grid just won’t let you go. Lawsuits with homeowner associa-
tions are commonplace, as are disputes with local government.
James and Frances Babb, residents of Clarkson Valley, Mo., for
example, have been battling authorities for years over permits
to install solar panels that the city has refused to grant, citing
construction and fre safety issues.
The day after the Fox segment on Speronis aired, an ofcer
from the Cape Coral code compliance division knocked on her
door, rousing her two dogs, Suzie, a chihuahua, and Faith, a
mixed breed. Speronis didn’t answer. The ofcer, taking note
of the water barrels and severed power lines, stuck a placard
on the door declaring the property unft for human habitation.
“Any person entering this property without ofcial authoriza-
tion,” it read, “is subject to removal and/or arrest.”
Speronis’s “test case for something” quickly escalated. Fox
continued to run segments on her, gleefully accusing the city of
retaliating against her after seeing its report. City representatives
ofered a series of unconvincing denials, frst saying they believed
“Nothing was hard. Every time
50
Rainwater shower ②
Solar-powered battery ①
Camp toilet ③
I did something it was easier th
the home was vacant, then citing an open compliance violation—
mulch blocking the municipal right-of-way—and fnally a “citizen
complaint.” Records, however, show the complaint had come
from a city employee who had watched the show and alerted
his colleagues.
Cape Coral argued that it had nothing against Speronis going
of grid, only with how she’d done so. “There are an awful lot of
alternatives out there that meet code,” says Frank Cassidy, the
city’s code compliance division manager. “The problem is that
she is not using those methods.” He ticked of a litany of municipal
resources for cisterns, composting toilets, retroft grants, equip-
ment, housing assistance, and programs to sell excess solar power
to the grid. “The city has the health, welfare, and safety of all its
citizens to consider,” says Rana Erbrick, the city council member
for Speronis’s district. “But there also comes a point where you
gotta do what you gotta do to protect the integrity of the system.”
Statements like that infamed the citizens of Cape Coral, many
of whom were rooting for their local nonconformist. Strangers
began to stop her on the street or honk in support as they drove
past her yard. While the city had certain aspects of the law behind
it, all local residents saw was a widow living alone in a poor part
of town getting steamrollered by the government. Speronis’s
battle caught the eye of the national media, from the environ-
mentalists of Treehugger, a popular website, to the libertarians
of Glenn Beck’s The Blaze. Producers from Doomsday Preppers, a
reality show on the National Geographic Channel that “explores
the lives of otherwise ordinary Americans who are preparing for
the end of the world as we know it,” contacted her but chose not
to flm her. “Guess I wasn’t crazy enough,” Speronis says.
Speronis turned out to have a knack for publicity. She
① “Electrical service disconnected in
this occupied dwelling. Automobile
batteri es bei ng used for l i mi ted
electronic equipment—inadequate
service for occupancy.”
② “Shower baths, bathtubs, laundry
not functional due to no water/sewer
service.”
③ “ Toilet and all other plumbing fixtures
not operational due to no water/sewer
service.”
④ “No water/sewer service—no functioning
plumbing fixtures or facilities. No
fixtures being able to be maintained in
safe, sanitary, working condition.”
⑤ “Coleman outdoor style propane
lantern being hung in kitchen within 6"
of ceiling—fire hazard.”
⑥ “Coleman propane stove and ... propane
fuel containers being used indoors and
not properly vented.”
Propane lantern ⑤
Camp stove ⑥
Disconnected sink ④
an I thought it was going to be.”
51
found a real estate litigator named Todd Allen to take her case
pro bono. Allen had made a name for himself in 2011 when he
showed up at a Bank of America branch with a sherif’s deputy,
two movers, and a gaggle of TV cameras and tried to foreclose on
it. (The Daily Show With Jon Stewart interviewed him.) The Ruth-
erford Institute, a right-wing libertarian organization in Virginia,
took up her cause as well, ofering to serve as legal consultants and
pay court costs. “It’s like these cases where people want a couple
of chickens in their yards and the cities say that’s illegal,” says John
Whitehead, the organization’s founder. “I believe in freedom of
property. Why would any government agency be concerned?”
Speronis cut a defant fgure in TV and radio interviews. “Cape
Coral needs to be afraid of me,” she said. “I’m not afraid of them.”
The arrival of national forces seemed to harden Cape Coral’s
resolve. In January the city amended the original violations,
citing Speronis for 36 code and ordinance infractions, from an
improperly installed electrical system to insufciently heated
water. At a hearing that month, a special magistrate dismissed
33 of them, largely because the city lacked evidence. Code of-
cers had never been to the property, thereby making it difcult
to argue, for example, that the house had faulty wiring when no
one had inspected it. The magistrate did fnd Speronis in viola-
tion of regulations that required city water to fow through her
pipes, even if she had an alternate water supply—the rainwater.
It was, literally, against the law to disconnect from the water
system. “Reasonableness and code requirements,” the special
magistrate declared, “don’t always go hand-in-hand.”
Speronis was given three months to bring the house up to
code or risk fnes, foreclosure, and even imprisonment. Allen
vowed to appeal and also began work on a case against Cape
Coral for malicious prosecution.
City representatives periodically proclaimed their interest
in an amicable resolution. “Our primary objective is voluntary
compliance through education,” says Cassidy, the compliance
manager. “Every house has a story, and we try to fnd that story
to guide them to compliance. We don’t like hearings or esca-
lating remedies.”
But Speronis had confrmed at the magistrate’s hearing that
she was fushing waste into the sewer with rainwater without
paying to use the system, and the city moved against her. A few
days after the hearing, city ofcials showed up at her house, dug
up the front yard, and capped her access to the sewer. Then they
fled a complaint against her with the Florida Department of
Health, alleging that she was creating a health hazard by spread-
ing her waste on the lawn. The charge was untrue. Speronis used
a camp toilet with detachable bags that she tossed into the city
garbage system—which was a code violation, but not one the city
had alleged. The state health department investigated, cleared
Speronis, and said the city had committed its own violation and
created a “sanitary nuisance” by capping the line.
City ofcials began to leak information on Speronis’s troubled
past to the press. Speronis had a 2009 felony conviction stemming
from the theft of a real estate client’s home deposit money. She
attributes this to a banking error caused by the stress of caring
for her sick husband, but she pleaded guilty, gave up her real
estate license, and was placed on probation. More damning for
her image was a 2007 animal cruelty conviction for failing to
provide her dogs with adequate food and water. Speronis says the
animal welfare people didn’t understand her natural methods.
The dogs, which Speronis describes as “my children,” became
a pressure point the city could exploit. Animal control tried on
eight occasions to take the pets, but Speronis hid them with
one of her neighbors—a group that tends to view her as a benign
eccentric. Speronis made friends with a group of retired men
who met early each morning at a nearby Burger King, where
employees allowed Speronis to use the bathroom without pur-
chasing anything. The men all concede that Speronis “liked the
fght” and the publicity. But they also objected to the city’s harsh
tactics. “She ought to be able to do what she wants to do,” says
one of them, Robert Goodridge.
When animal control failed to fnd the dogs, the city contacted
the Florida Department of Corrections, arguing that Speronis’s
failure to cooperate constituted a probation violation. She per-
mitted an inspection by her probation ofcer, who found both
dogs to be in adequate health and declined to act.
And then there was the issue of who owned the house. Sper-
onis maintains that a friend had essentially given it to her—the
sale was recorded with the county for $10—because it was vacant
and in disrepair and he didn’t like her living in the woods. The
friend, a s emiretired landscaper named Ronald Mayo, emerged
to dispute that, telling police that Speronis had forged his name
and a notary seal on the title transfer documents. “She was a
friend, and I was letting her stay there,” Mayo says. “I gave her
a small piece of paper to go to the county to represent me with
the property. Next thing I know, she sold the AC units.”
Speronis denies this account. “Men like Ron, they don’t
understand me,” she says. “They think I’m doing this because I
can’t make ends meet. But it’s fun. I want to do it.”
In late March, Speronis met me at her front door dressed in
faded blue jeans and a bright yellow blouse. She looked thin.
Most of her food stores had been depleted, save for a few sacks
of oatmeal and some canned beans. The “survival seed” garden
she had attempted on the front lawn had failed and was now
a dusty wreck. She interspersed Zen pronouncements about
dispelling “negative energy” in the house and “having beauty
around me” with the slightly manic broadsides of a libertarian
true believer. “I’m here to make a point—to bring justice,” she
said. “You can’t just declare someone outside of the system and
kick them out of their house.”
A little more than a week later, ofcials from the code com-
pliance division, building department, and animal control along
with several police ofcers descended on Speronis’s house with
an inspection warrant. As with the sewer-capping incident, much
of what they were looking for arose from details Speronis pro-
vided at the magistrate’s hearing: the solar panel, the lantern, a
camp stove in the kitchen, the camp shower, and other of-the-
grid fxes. The ofcials found 37 new code violations.
During the inspection, Speronis says, she berated one of the
police ofcers: “I’m that much of a threat? A 54-year-old widow
living by herself? How can you sleep at night?”
“Better than your dogs,” the ofcer responded.
“The most hazardous issues were the use of the stove and the
propane lantern inside, as well as the recharging of the battery,”
says Cassidy. “If she ends up blowing herself up or catching fre
in that house, then it’s not, ‘why are you picking on this woman?’
It’s ‘why didn’t you do something about it?’ ”
Animal control took both dogs to the county shelter for
examination. They returned the chihuahua, Suzie, but kept the
“Reasonableness and code requiremen
special magistrate declared.
52
older dog, 14-year-old Faith, and leaked photos to local media
outlets that showed her without any fur on her hindquarters. “I
don’t care how this lady lives,” says Glenn Johnson, operations
manager at the county animal welfare department. “She has to
take care of her animals by law. She can’t just do what she wants.”
Speronis contends that Faith lost her coat years earlier in
the care of an incompetent veterinarian. “It’s evil,” she says,
breaking into tears. “It’s like when they capped my sewer. I was
upset because the intention was not public safety or welfare,
but to do harm.”
In April, Speronis fred Allen, her attorney, when he suggested
that some of the city’s complaints about the house and the dogs
had merit. “I subscribe to the way she wants to live, and the gov-
ernment is trying to restrict her in ways that don’t make sense,”
he says. “But I’m concerned that she is trying to fght the fght
just to fght it.”
On May 14, Speronis was arrested on a misdemeanor animal
cruelty charge. The city attorney persuaded a judge to hold her
without bail under a 2011 law intended to keep violent probation
violators behind bars. Known as the Widman Act, it was named
after a police ofcer shot and killed by a probationer with a felony
warrant. It was being applied in this case against a woman who
may or may not have given her dog a skin condition.
Speronis languished in jail for more than a month, including
a week in solitary confnement, after she refused to be tested
for tuberculosis. “They have no right to take my blood,” she
said during a phone call from custody. “The health-care system
wants to control my body, and that’s evil.” She turned down
the services of a public defender and declined to accept a plea
nts don’t always go hand-in-hand,” the
bargain that would not have included prison time. “I want a jury
trial,” she said. She also told me she preferred isolation to the
“drama” of the general population. “I have a 10-by-14 cell and
my own shower that I can use twice a week. There’s peace and
quiet.” She used the time alone to begin writing another book
about her experiences. “It’s amazing what happens when you
stand up for your principles, your values. I have no regrets.”
It can be hard to take such pronouncements from Speronis
at face value. While she is likable, articulate, and vulnerable,
her blend of cheerful defance and messianic libertarianism can
read either as inspirational or delusional. Maybe the nature of
the fght was bound to produce a protagonist with faws: Those
who crave disconnection the most may often carry the most
baggage, and only a zealot will fght the government indefnitely.
On June 16 the city abruptly dropped the animal cruelty
charges, saying it lacked proof. Speronis was released from jail
and given back her dog. She returned to the house, vowing not
to make any changes. “They can fne me all they want,” she says.
“I’m not going to let them dictate the way I live.” On July 4, Roger
Desjarlais, the manager of Lee County, which encompasses Cape
Coral, e-mailed Speronis an apology of sorts: “I’m hopeful you
will not judge the entire Lee County organization based on your
experience with our Animal Services department. … We hope
that you, Faith and Suzie are doing well.” That said, the confict
with the city will surely continue. For now, Speronis is home, of
the grid, and outside the law.
53
S
p
e
r
o
n
i
s

s

h
o
u
s
e

i
n

C
a
p
e

Coral, where supporters honk as they drive past.
This Is
Not
A
Grocery
Bag
By Akash Kapur
Photographs by Chiara Goia
54
It’s
A
Future
Highway
A chemist has found a way
to turn India’s litter problem into
much needed roads
55
56
M
A
D
U
R
A
I

R
O
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D
:
C
O
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T
E
S
Y

R
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J
A
G
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P
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V
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V
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N
or as far as the eye can see, there’s stinking, smoking,
untreated garbage. It’s concentrated in the munici-
pal dump, in the South Indian city of Madurai, but
not contained by it. The surrounding felds are also
piled with trash. Stray dogs nibble at mounds of
rotting food. The trees are denuded and covered with shred-
ded plastic, the blue and pink and yellow bags like some kind
of sinister confetti.
The road to the dump, and beyond it to Madurai’s airport, is
like a Hollywood vision of dystopian ruin: lifeless, black, choked
with human refuse. And that’s why Rajagopalan Vasudevan’s
enthu siasm is so jarring. As he makes his way through the rubbish,
he’s like a child on a treasure hunt. “Wonderful resource,” he says,
admiring a jumble of plastic bags, jerrycans, and torn food packets.
“With all this plastic, I could lay the whole road to the airport.”
It is difcult to exaggerate India’s garbage problem. Jairam
Ramesh, the nation’s former environment minister, has said
that if there were a “Nobel prize for dirt and flth,” India
would win it. As much as 40 percent of the country’s munici-
pal waste remains uncollected, according to the Organisation
for Economic Co-operation and Development. Of the waste
that is collected, almost none is recycled. Most of it sits in open
dumps such as the one in Madurai, leaching into the soil and
contaminating groundwater. Some of it is burned, releasing
dioxins and other toxic chemicals into the air.
Much of India’s garbage is made up of plastic—a scourge of
the nation’s new consumer economy. The country’s Central
Pollution Control Board says more than 15,000 tons of plastic
waste are generated daily. Although the nation’s per capita con-
sumption of plastic is low compared with that of the U.S., it’s
expected to double over the next fve years as India continues to
develop. This poses huge environmental, social, and eco nomic
challenges. As the Supreme Court of India recently observed:
“We are sitting on a plastic time bomb.”
Vasudevan sees an opportunity. A professor of chemistry
at Thiagarajar College of Engineering, near Madurai, he insists
that plastic gets a bad rap. Rather than an incipient environ-
mental calam ity, plastic, in Vasudevan’s opinion, is a “gift from
the gods”; it’s up to humans to use it wisely. And he’s devised a
way to transform common plastic litter—not only thicker acrylics
and bottles but also grocery bags and wrappers—into a partial
substitute for bitumen in asphalt.
In recent years his method has been gaining recognition.
He’s become known as Plastic Man and travels throughout
India instruct ing engineers how to apply it. The college holds
a patent for his technique but often licenses it for free. To date,
more than 5,000 kilo meters (3,000 miles) of plastic roads have
been laid in at least 11 states. The Central Pollution Control
Board and the Indian Roads Congress, two leading govern-
ment bodies, have endorsed the method.
Almitra Patel, one of India’s leading experts on garbage, who
has advised several state governments on their waste policies,
considers Vasudevan’s technology a “win-win-win.” It consumes
an unwanted and mostly nonrecyclable resource; it results in
stronger roads; and because it replaces as much as 15 percent of
more expensive bitumen in the mix used to lay roads, the technol-
ogy also holds the potential to lower the cost of infrastructure.
She adds that one of the chief advantages of Vasudevan’s
method is that it can accommodate the multilayered wrappings
often used to pack snacks such as chips and cookies. These wrap-
pings (typically consisting of a layer each of plastic, polyester,
and aluminum) make up an increasingly large volume of waste
in the country. They’re just about impossible to recycle, but
they can easily be shredded and reused in Vasudevan’s roads.
“It’s really a wonderful situation,” Patel says. “I think it is
an absolutely transformational technology that could clean
up India overnight.”
Another advantage of Vasudevan’s method is its simplic ity. It
requires no signifcant technical knowledge and no large invest-
ments or changes to existing road-laying procedures. His whole
operation is a good example of the Indian method known as
jugaad, or “frugal innovation.” Jugaad makes a virtue of neces-
sity: It extols the work-around, the shortcut that uses (and some-
times improves on) limited resources. “I do it all the Indian way,”
Vasudevan says. “What is the use to spend thousands of rupees
when we can do it much more cheaply?”
Vasudevan, 69, spent the frst few decades of his career induct ing
students into what he calls “the wonders of chemistry” before
turning his attention to plastic in 2001. He’s very much the pro-
fessor—voluble, digressive, a little distracted. He laughs easily and
is self-deprecating. “Because of waste,” he jokes about himself,
“a waste has become useful.”
His laboratory sits amid the heavy granite buildings and dusty
playing felds of Thiagarajar College. Students drive around on
scooters, the boys in jeans and T-shirts, the girls in two-piece
salwar kameez outfts that signal modernity. The lab building is
unimposing—more of a shack, with cracked concrete foors and
asbestos roofng. It’s astonishingly low-tech. The inside smells
of tar. It’s here that Vasudevan has arranged a demonstration
of his plastic-to-pavement technique.
As one of his students, a young man named Ramalinga
Chandrasekar, prepares the demo, Vasudevan sits at a table,
in the draft of a rattling foor fan, and opens a Tupperware
Spread in an even layer,
as shown in Madurai in 2013
Stir in tar Add gravel Shred grocery bags and other
low- quality plastic
Bake at 302F so mixture
coats gravel
Vasudevan’s Plastic-to-Pavement Recipe
F
57
box containing shredded plastic and a few pieces of plastic-
coated granite. He runs a couple of stones through his fngers,
caressing them like gems. “Feel it, feel it,” he says, praising the
glossy, slippery fnish.
Chandrasekar sets up a gas burner on the foor and places a
black cast-iron pot, like a rounded wok, on the stove. He throws
a few granite pebbles in and starts stirring with a sawed-of PVC
pipe. As Chandrasekar stirs the stones, Vasudevan checks their
temperature with a handheld infrared thermometer—virtually
the only sophisticated piece of equipment in the lab. (It costs
less than $150.) Chandrasekar explains that the optimal temper-
ature for the mix is about 150C (302F). Lower than that, and the
plastic doesn’t melt evenly; higher, and it can release toxic gases.
When the temperature is just right, Chandrasekar throws in
a couple of handfuls of shredded plastic. Vasudevan looks over
his shoulder. “It’s not well done. It’s not well done,” he mutters,
picking up a metal slotted spoon to stir the mixture himself.
In the early days, Vasudevan says, he would mix plastic
directly into liquid tar, stirring until the plastic melted. He
found, however, that while the method worked with small
samples in the lab, it was difcult to stir the large quantities
of thick, viscous tar used on an actual road. When he began
experi menting with what he calls the dry method—in which
the plastic is melted directly onto the stones—he found that the
plastic adhered better and more uniformly. This reduced air
pockets in the tar and limited water penetration—contributing
to stronger roads. He estimates that he conducted more than
400 experiments before getting his technique right.
It takes another minute, but the plastic begins to coat the
stones to his satisfaction. Chandrasekar adds a ball of bitumen;
it dissolves and fattens, like a black omelet. When the stones are
dark, covered with tar, Vasudevan scoops them out and holds
them under my nose. “You see, you see?” he asks, triumph antly.
He is a proud cook. “What a beautiful coating.”
After he perfected his method, Vasudevan recalls, he
faced difculty getting it implemented. It wasn’t until 2004,
when he got a chance to display his work in front of the chief
minister of Tamil Nadu, the state in which he lives, that he
achieved a breakthrough. She was impressed and directed that
1,000 kilometers of plasticized asphalt should be laid in the state,
the frst of the 5,000 kilometers since completed.
Yet for all the progress he’s made, solving India’s garbage
problem requires more than a technological solution. In a
country where throwing garbage onto the roads and littering
in public areas are acceptable behaviors, it’s going to require
a social transformation. “With respect to the technology it has
been proven already,” Vasudevan says. “Culture is now the
most important part.”
The shed is in a residential area of Madurai. It overlooks a canal
clogged with plastic bags—a familiar, dismal sight. Vasudevan
has brought me to the ofces of a small women’s asso ciation,
a self-help group that has in recent years been collecting and
recycling plastic waste. The blue-tiled room is stacked with bags
containing colorful shreds of plastic. On a wall, a gold frame
contains images of a mosque, Ganesh, and Jesus, side by side.
It’s in places such as this, Vasudevan says, that the most im-
portant work on India’s garbage crisis is being done.
Gurusamy Bodhilakshmi, secretary of Naganakulam
Panchayat-Level Federation of the SHGs (self-help groups),
explains how the women buy plastic from a network of local
businesses and homes and how they conduct awareness drives
in schools and colleges. They are trying to build a local market
around plastic, so it is treated as a commodity rather than as
garbage. The group has had some success. It collects plastic from
about 8,000 households. It buys plastic at 7 rupees a kilo (12¢ per
2.2 pounds) and sells about 1,000 kilos a month, at 30 rupees
a kilo, to government agencies that use it for roads. Many of
the group’s members make a modest living of the enterprise.
Bodhilakshmi’s words are encouraging, but the scale of the
challenge is daunting. Although 8,000 households work with
her group, many more are indiferent or even hostile to their
eforts. Bodhilakshmi says many families, especially among the
better-of, are unwilling to recycle or think about what happens
to their waste. For them, garbage is a problem of the poor.
“The upper classes have everything. They have servants to
attend to their needs, so they don’t bother with anything,” she
says. “Though we are doing work that is sacred, some people
look down at us as if we are doing dirty work. They speak dis-
respectfully to us.”
Vasudevan interjects. “What I always say is, let us just ignore
the upper classes and the middle classes,” he says. “They are
the biggest obstacle. Let us start with people like this, who are
more sincere, and once these people are successful, the move-
ment will spread.”
He says that in his college, he’s often the only one who will
bend down and pick up a piece of litter from the ground (“even
though I am a dean,” he adds). Other staf and students think it’s
beneath them. They just throw garbage onto the foor and expect
someone else to pick it up. When he tries to correct his students,
they tell him that others will mock them if they start picking up
waste. “Humility is essential if we want to solve this problem,”
Vasudevan says. “Without humility, nothing can be done.”
The women of the self-help group line up and show of a
folder with news clippings about their work. Then they give a
demonstration of a cleaning machine they use to remove dust
and debris from plastic. As plastic bags whip around in the
machine, Vasudevan talks about the economic barriers that
stand in the way of large-scale adoption of his method, such
as inefcient markets for plastic and contractors who may not
believe it’s in their best interest to build more sustainable roads.
“I have to discover a technology not only to change the use
of plastic,” he says, running his hand through his thinning hair
and smiling, “but also to change human minds.”
Vasudevan
“What is the use to
spend thousands
of rupees when
we can do it much
more cheaply?”
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CHIC
OPEN-TOED SHOES SUMMER SONG WAR
The plan to make your dream of workplace
serenity come true. By Drake Bennett
It’s Oh So Quiet
Illustration by Justin Metz
Photograph by Boru O’Brien O’Connell
GIRLY VIRAL
ADS
ELEVATOR
ICE BREAKERS
60
I
’m sitting in a small ofce in Chicago, typing on my laptop
and talking on my cell phone. There’s a built-in desk, a
monitor on the wall, shelves to one side, and a highly
ergonomic chair. Colorful striations, meant to evoke a
library’s rows of books, decorate the space. The door and
one wall are frosted glass, turning the people walking
by into soundless, blurry ghosts. It’s all very new and sleek but
also cozy, as if the designers were channeling the aesthetic of a
boutique hotel, which, I’m told, they were. On one of the shelves
near the foor sits a pair of brown wingtips. I have no idea why
they’re there, because this
isn’t my ofce.
In fact, it isn’t really an
office at all. It’s a Susan
Cain Quiet Spaces unit, a
foor model in the show-
room at Steelcase, an ofce
design company. In theory,
corporations will install the units
for recharging, having a private
conversation, or just working
in undisturbed quiet. It’s been
designed in particular for the
inward-focused, deliberate, some-
times solitary types who make up
one-third to one-half of the pop-
ulation and for whom the open-
plan ofce is a particular hell.
The Quiet Spaces’ namesake,
Susan Cain, is a former corporate
attorney and author of the best-
sel l i ng Quiet: The Power of
Introverts in a World That Can’t
Stop Talking, a manifesto for wall-
fowers. She delivered a popular
2012 TED Talk on the same topic,
a jeremiad against modern soci-
ety’s mindless celebration of the
extrovert: We equate volubil-
ity with intelligence, certainty
with judgment, and charisma
with good leadership. “Our most
i mportant i nsti tuti ons—our
schools and our workplaces—
they are designed mostly for
extroverts, and for extroverts’
need for lots of stimulation,” she
said in her talk. Introverts “feel
at their most alive and their most switched-on and their most
capable when they’re in quieter, more low-key environments,”
she explained.
Does that sound like your ofce? It doesn’t sound like mine.
In the prototypical modern workplace, desks are spread around
open foors or clustered in pods. The theory
is that this encourages collaboration and creates the chance inter-
actions among colleagues from which breakthroughs emerge. And
of course, these layouts also allow more workers to be econom-
ically squeezed into less space. As a result, Cain says, the quiet
and calm necessary for deep thinking, and the solitude that nour-
ishes the introverted mind, are obliterated.
In the audience at Cain’s TED Talk was James Hackett,
Steelcase’s chief executive ofcer at the time. The two met after-
ward and talked. “He’s this big, burly ex-football player, and
he’s an introvert,” Cain recalls. The company was already trying
to fgure out ways to bring fexibility to the open-
plan ofce. According to James Keane, Hackett’s suc-
cessor, it’s a matter of “letting people be actively
involved in thinking about how they want to spend
the next couple of hours. Do you
want to be in the cafe? Do you
want to be in a private space? Do
you want to be in an open space?
Do you want to take a walk for an
hour and come back when you’re
feeling more energetic? You know,
giving freedom back to people to
make those choices.”
Steelcase invited Cain to speak
at the company’s ofces in Grand
Rapids, Mich. “I thought of them
as allies from that frst meeting,”
she says. Together, they set out
to design places where the Albert
Einsteins and Eleanor Roosevelts—
both introverts, Cain says—could do
their best work.
There’s some irony in this.
Steelcase was founded in 1912, and
one of its frst products was the
Modern Efciency Desk. As Nikil
Saval writes in Cubed:
A Secret History of the
Workplace, the tradi-
tional desk had been
a Wooton roll-top,
“a massive, high-
backed, grandiose afair riddled
with cubbyholes and with foldout
wings that seemed to reach
around and clasp the sitter in
warm embrace.” The Modern
Efciency Desk was smaller and
barer. It was built not for the one-room countinghouses of
the 19th century but for the expansive corporate bullpens of
the 20th, where clerks sat out in the open in rows while their
supervisors stalked the aisles peering over their shoulders. In
the century since Steelcase invented a desk for the open plan,
the American ofce has only grown more open. Today, with
Etc. Workplace
O
P
E
N
I
N
G

P
A
G
E
:
P
H
O
T
O
S

O
N

C
O
R
K

B
O
A
R
D
:
A
L
A
M
Y

(
2
)
PRIVACY IS “THE BIGGEST GAP
BETWEEN WHAT WORKERS HAVE
AND WHAT THEY WANT”
1958:
No More Walls
German brothers Wolfgang
and Eberhard Schnelle come
up with the Bürolandschaft
(“ofce landscape”) concept.
It replaces private ofces with
free-form, fexible desks, a
communal break room, and a
few mobile partitions.
1967:
Opening Up
DuPont is the frst American
company to realize that a fexi-
ble ofce is a cheaper ofce.
But the open plan doesn’t
mufe telephone calls or type-
writers, and “some crucial
values for the performance of
work were lost.”
1968:
The First Cubicle
Robert Propst, a researcher
at furniture company
Herman Miller, creates the
Action Ofce II. It has three
movable, disposable walls
at obtuse angles, sitting and
standing desks, and push-
pins to add décor.
The writer working
productively—and
alone—in Flow, one of
the Susan Cain Quiet
Spaces for Steelcase
OUTSIDE
THE BOX
In this year’s
Cubed, Nikil Saval
charts the rise of
the modern open
ofce plan.
—Belinda Lanks
61
“I’ve seen various companies trying to
go beyond everyone just having head-
phones, adding a lounge or library where
people can do more quiet, focused work,”
she says. She suggests creating multiple
smaller spaces that are built for something
like a private call or a two-person conver-
sation, freeing up conference rooms for
bigger meetings.
I spent an afternoon in Chicago trying
the Steelcase spaces, collecting my
thoughts in Be Me and
chatting one-on-one in
Green Room. I closed
the frosted-glass door
in Studio and decom-
pressed. I even got some work done in the
ofcelike Flow. Keane, Steelcase’s CEO, is
having a Flow unit built to function as his
own ofce, along with a Green Room for
meetings. If a company really wants to join
the Quiet Revolution, as Cain’s new con-
sulting frm is called, it’s going to need
to order a lot of these rooms. Otherwise
it risks having a
bunch of quietly
seething introverts.
And the units aren’t
cheap: They start at
$15,000, for Flow,
compared with a
couple thousand
dollars for a typical
cubicle setup.
Cain says she
ho pe s o f f i c e s
install enough so
everyone, not just
introverts, can use
the spaces when-
ever t hey need
to. Still, she con-
cedes, “there are
economic realities
that I’m sympathetic to.” According to an analysis released
on July 1 by Reis, a real estate data frm, even as companies
begin to hire again, many aren’t expanding their ofce spaces.
“It is likely that newly created ofce jobs are taking up under-
utilized space,” the report suggests.
Cain won’t be installing Susan Cain Quiet Spaces in the ofces
at Quiet Revolution. “It is a big old house on the Hudson River,
and it’s lovely, with common spaces and private spaces,” she
says. “And you can go and sit on the porch and look at the river
with your laptop.”
Etc.
T
H
I
S

S
P
R
E
A
D
:
P
H
O
T
O
G
R
A
P
H
S

B
Y

R
Y
A
N

L
O
W
R
Y

F
O
R

B
L
O
O
M
B
E
R
G

B
U
S
I
N
E
S
S
W
E
E
K
;
I
L
L
U
S
T
R
A
T
I
O
N
S

B
Y

J
A
C
I

K
E
S
S
L
E
R
“fat management struc-
ture” and “radical trans-
parency,” even CEOs
have put their desks in
the bullpen.
Thi s i s despi te a
growing body of research
that underl i nes the
open plan’s drawbacks.
A 2013 study in the
Journal of Environmental
Psychology, based on
a survey of 43,000
workers, found that
the idea of open plans
improving morale and
productivi t y has no
basis in the research lit-
erature. A 2000 paper
looked at physiological
and mental efects from
being subjected to three
hours of simulated ofce
sounds. Among other
things, the 40 female
participants gave up
faster on a set of unsolv-
able brainteasers—their
willpower presumably
sapped by simply having
to endure the noise.
Research by Anne-Laure Fayard, a management professor at
New York University, showed that while workers in open-plan
ofces do indeed talk to each other more, those conversa-
tions are superfcial, because the conversants know neighbors
can listen in. Workers at one company told her, “We say hi to
more people, but there is no space to go and have a real con-
versation.” Steelcase’s own surveys found similar concerns.
“Privacy has been the No. 1 issue for the past fve years,” says
Chris Congdon, Steelcase’s director of research communica-
tions. “It’s the biggest gap between what workers have and
what they want.”
The Susan Cain Quiet Spaces aim to close that gap. Unveiled
in early June, the series includes fve rooms: Be Me, Flow, Studio,
Green Room, and Mind Share, most of which are on display at
the company’s showroom in the Merchandise Mart in Chicago.
Studio has a low chaise, a plush rug, and a basket of rolled-up
yoga mats in one corner. In Be Me, a daybed takes up one side
of the space, encouraging reclining, even napping. Green Room,
designed for introvert-friendly small meetings, has a sectional
sofa; according to Cain, introverts prefer to converse obliquely,
not face-to-face. All the rooms are fronted in frosted glass—
the opacity can be customized for privacy.
Fayard says eforts such as these are growing more common.
1980s: Tiny Cubes
Workers are hemmed into cube
farms, arranged in “six-packs.”
By the 1990s, cubicles had shrunk
as much as 50 percent; by 2006 the
average size is 75 square feet. “One
wonders to what extent the extrav-
agant growth of the American bath-
room … is a reaction against the
shrinking of cubicles.”
1993: Virtual Failure
Los Angeles ad agency
Chiat/Day eliminates walls,
desks, and cubicles.
Instead, workers are handed
a cell phone and laptop
and told to work together
in a conference room.
The experiment backfres:
Employees stop showing up.
2005: You’re Stuck Here
Google sets the Silicon
Valley standard in Mountain
View, Calif., where
employees move among
meeting rooms, quiet librar-
ies, and tents. That fexibility,
combined with food and ame-
nities, discourages them
from ever leaving.
2014: Ofce
Goodbye Party
“Contingent laborers”—
freelancers, temps, etc.—will
soon comprise 40 percent
of the workforce, according
to one Intuit study. Saval
says cubicles, corner ofces,
and white-collar jobs
could shortly cease to exist.
Doing yoga in Studio
and recharging with a
quick lie-down on the
daybed in Be Me
Etc. Fashion
TOE THE LINE
Elegant sandals that aren’t too sexy for the morning commute



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“Ask people
what their
favorite app or
game is.”
—Randi Zuckerberg, CEO,
Zuckerberg Media
“ ‘How’s your
day?’ If I get a
sigh or an eye
roll, I attempt to
lighten the mood.
If I get a smile,
then we’re of to a
great start.”
—Orly Adelson, president,
ITV Studios America
Survey
THE END OF
THE AWKWARD ELEVATOR
RIDE
Enough about the weather. Successful charmers
share their best close-quarter conversation starters
By Arianne Cohen
“I notice something
unique and fnd
out about it, whether
it’s great shoes or
a bunch of paperwork.
It’s very easy to bring
attention to something
in their world and
enjoy the resulting
conversation.”
—Michael Serruya, co-CEO,
Kahala Franchising
“ ‘What made
you most excited
today?’ The
question makes
people stop
and think, and
their responses
give me insight
to help them
consider
tomorrow with a
new set of eyes.”
—Kathy Bloomgarden
chief executive ofcer,
Ruder Finn
“I’m often wearing
a chef coat, so I’m
easily identifable.
I always ask, ‘Where
are you eating
tonight?’ If they don’t
have plans, I say,
‘Can I make you a
reservation at one of
my restaurants?’ ”
—Daniel Boulud, chef,
Daniel
“ ‘Where do you live?
Where did you grow up?
What do you do?’
With a few simple
questions, we’ll know
each other better.”
—Rich DeVos, owner,
Orlando Magic
“I see whether
the person has
had a chance to
exercise that day.
It’s a relatable
topic that people
enjoy discussing.”
—Jonathan Tisch, chairman,
Loews Hotels & Resorts I
L
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“I fnd out where
they are from and
how they arrived.
This frequently gives
way to a frustrating
story about trafc
or airlines and, for me,
a segue into the
benefts of business
aviation.”
—Rene Banglesdorf, co-founder,
Charlie Bravo Aviation
64
65
The Critic
Jepsen—instead of
well-known acts like
Perry or Rihanna.
This year, musi-
cians such as Harris
are trying to game the
system by throwing in
the word “summer” and
crossing their fngers. A
few weeks ago on the
Spotify Viral 50, which
tracks the most-shared
songs in the U.S., Harris’s
Summer was joined by
My Sweet Summer, a ska
anthem by the Dirty Heads, a band from
Huntington Beach, Calif., and Feels Like
Summer, a rock-lite offering from the
New York band Panama Wedding. This
isn’t a completely novel tactic—it was
frst used for ’60s tunes such as Summer
in the City, Hot Fun in the Summertime,
and Billy Stewart’s funky cover of George
Gershwin’s classic Summertime. DJ Jazzy
Jef and the Fresh Prince also borrowed
that title in ’91 for their biggest hit. The
Boys of Summer (’84) by Don Henley
remains the greatest of such songs,
Summer Girls (’99) by LFO, the worst.
The new Summer could be the frst of
its ilk to come out on top as the ofcial
(unofcial?) Song of the Summer. Like
many recent winners,
it’s by an unknown artist
who managed to produce
something upbeat, emi-
nently danceable, and
uncontroversial enough
for the corporate bar-
becue. Spotify’s Cook
adds that it’s the most-
pl ayed song outsi de
America, where weeks
of vacation and elec-
tronic dance music are
taken for granted. Here in the U.S., its
main rival is the song that’s been topping
Billboard’s chart going on seven weeks.
Fancy, a chandelier-swinging ode to
wasting money, is by a female rapper
named Iggy Azalea. She’s very tall, very
blonde, and from Australia, where it’s
currently winter.
Etc.
IS STUCK IN YOUR
HEAD
Musicians get crafty in an attempt to win this
season’s chart war. By Kurt Soller
LOVE THE WAY
YOU LIE
Analyze your hires
With personality
tests,
Then watch them
all quit.
Honda is so cool!
Says this
unconvincing guy.
Wait, he’s seen
one, right?
Everyone’s lying
And trying to rip
you of.
This book is cranky.
BUSINESS
BOOK HAIKU
T
here’s never been a less subtle
contender for Song of the Summer
than Calvin Harris’s Summer.
The track, No. 8 on the Billboard
Hot 100 as of this writing, has only
eight distinct lines, which repeat
for nearly four minutes. It’s a lot of
time to devote to a story as old as
Grease. “When I met you in the summer/
To my heartbeat sound/We fell in love/As
the leaves turned brown,” sings Harris, a
30-year-old DJ from Scotland. The tune
is set to the same crashing electronic
beats that cemented him as a hitmaker
for Rihanna, Ellie Goulding, and others
who’ve dominated warm-weather air-
waves the past few years.
Pop musicians have capitalized on
summertime vibes since the 1960s, when
the Beach Boys released surfy tunes ready-
made for family road trips. (Record sales
have typically spiked when school’s out,
at least since 1940, when I’ll Never Smile
Again, a complete downer by Tommy
Dorsey, was Billboard’s No. 1 for 12 lazy
weeks.) The ’80s frst saw one song rule
the season—Every Breath You Take (’83),
followed by When Doves Cry (’84)—but
the modern conception of a Song of the
Summer was born in the ’90s. That was
the era of MTV countdown shows, hits
such as Baby Got Back (’92),
Macarena (’96), and the
sweet sound of boy-band-
era Justin Timberlake. Now
that music has migrated to
the Web, the competition
has gotten more intense:
Billboard started a Song of
the Summer chart in 2010.
That year, Katy Perry’s
California Gurls slayed it.
“People identifying the
Song of the Summer has
to do with the fact that artists are now
breaking online, rather than on radio,”
says Shanon Cook, trends expert at the
streaming music service Spotify, which
has seen an uptick in Song of the Summer
hunting by its users. And so the past few
champs have bubbled up from relatively
obscure artists—LMFAO and Carly Rae
ARTISTS
ARE THROWING IN
THE WORD
“SUMMER” AND
CROSSING
THEIR FINGERS
H
arris’s Sum
m
er
cam
e out in M
arch
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Azalea’s Fancy
is currently
topping charts
66
Etc.
THIS MAXI PAD WILL GIVE YOU
CONFIDENCE
The art of wooing female shoppers with empowering ads
By Caroline Winter
Advertising
P
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DATA: YOUTUBE
GIRL POWER
The genre’s most-viewed ads on
YouTube in the last 12 months
share of income than their husbands is up
16 percent in the last fve years,” McCann
says. There’s no data yet on whether the
ads drive sales.
In April 2013, Unilever’s Dove
scored the year’s largest viral hit
(more than 134 million views)
with its Real Beauty Sketches,
whi ch featured women
surprised at how positively
their looks are described
by strangers. The P&G
shampoo Pantene has tried
three female empower ment
ads since November, includ-
ing Labels Against Women, in
which ladies with shiny hair encoun-
ter sexism at home, at work, and in the
streets. A CoverGirl video simply argued,
“Girls can.” And even companies without
female-centric products have gone the
same route: Verizon showed a young
girl admonished for pursuing technol-
ogy and science, and Snickers created
the con fusingly titled You’re Not You
When You’re Hungry, in which starv-
ing construction dudes accost women
with positive comments. “Society
[should] … make way for gender-neutral
introductions, free from assumptions and
expectations,” one yells.
“We’ve always been telling women,
‘You can do it,’ ” says Bonnie Uhlman,
co-author of Hustle: Marketing to Women
in the Post-Recession World. The recent
glut may be linked to Sheryl Sandberg’s
advice for women to “lean in.” “Sandberg
brought attention to the fact that the
words we say to girls are important,”
McCann says.
That hasn’t stopped bloggers from
complaining that the empowerment
videos are gimmicky or condescend-
ing. One Slate headline recently said:
“We’re Wasting Our Best Filmmakers on
Tampon Ads.” But widespread criticism
still drives viewership, and Always is on
track to break P&G’s social media records.
The ad is honest, Elrod says, and “people
like sharing that sort of thing.”
W
hen adults are asked to “run
like a girl,” they
break into a
wimpy jog,
a l l ha i r
tosses
and flail-
ing arms.
Pre pubescent girls put
to the same task pump
their arms and give their
all. So goes the latest viral
ad-of-the-month, created for Procter
& Gamble’s Always sanitary pads.
Running like a girl, explains one tiny
heroine in a red dress, means “run as
fast as you can.”
To direct the three-minute video, the
brand hired Lauren Greenfeld of the 2012
wealth-porn documentary The Queen of
Versailles. Greenfeld “is a woman in a
male-dominated feld and tackles female
societal issues,” says P&G spokeswoman
Tonia Elrod. “Together, we are hopefully
inspiring girls to fght negative stereotypes
that impact confdence during puberty.”
Pantene: Labels Against Women
Dove: Patches
CoverGirl: Girls Can
Always: Like a Girl
Snickers: You’re Not You When You’re Hungry
GoldieBlox: Princess Machine
Dermablend Professional: Camo Confessions
Verizon: Inspire Her Mind
46m hits
2m hits
About a dozen drugstore brands have
tried a similar tack, as online video virality
becomes its own marketing metric. “A
female empowerment story will take of
because the trend has gone mainstream,”
says Nan McCann, co-founder of M2W, the
Marketing to Women Conference. “Many
brands, of course, can see the value of
hitching their wagons to that star.” The
strategy is savvy, not only because posting
online is much cheaper than running
traditional commercials (though some
brands supplement with TV spots), but
also because of the target audience’s
growing spending power. “The number
of women in the U.S. earning a greater
67
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K
Etc. What I Wear to Work
Interview by Arianne Cohen
JYOTHI
RAO
45, executive vice president and
general manager for women’s,
kids’, and strategic brand alliances,
Gilt, New York
Do you get a Gilt
discount?
I do, and it’s fabulous.
And dangerous.
I spend far too much
of my paycheck
shopping on the site.
Is your hair blown-out?
I have my hair profes-
sionally blow-dried once
a week. I think having
your nails and hair done
can do wonders for
looking professional.
How long does it
take you to get ready
in the morning?
Forty-fve minutes, with
several interruptions
from my 3-year-old. She
waits to help me put my
lipstick on.
Any advice for others?
Black-and-white is an
easy go-to combination
to wear at the ofce.
There are ways you
can make it look
powerful and sexy and
not as predictable.
How do you dress
for work?
I try to keep things
polished, but I want
to have an edge.
You have a 13-word title!
What’s your job?
I oversee all aspects of
the business that touch
women’s and kids’ prod-
ucts, so it’s merchandising,
marketing, and business
development decisions,
as well as PR partnerships
and customer experience.
What’s your day?
It ranges from budget
meetings to event
planning and shoots.
And then all the sexy,
fun stuf like fashion
shows. We love throwing
parties for our brands
and for celebrities. I’m
an extreme extrovert, so
I really enjoy it.
CARTIER
What’s today’s edge?
The dress has a mix of firty
and soft in the skirt, and then
has this modern mesh portion
on top that feels strong. The
shoe is a very classic shape,
but the metal hardware gives
them a little rock ’n’ roll feel.
SAINT LAURENT
MAWI
JASON WU
1. “Focus on the job you’re doing and do it really well.” 2. “Treat everyone with whom you work as a colleague, including your subordinates.” 3. “Always c
o
n
d
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y
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.

1996-97
Law clerk, the Honorable
Timothy Lewis, Third
Circuit Court of Appeals

1997-2000
Associate,
Zuckerman Spaeder
2000-01
Associate counsel to
President Bill Clinton
2001
Associate,
Latham & Watkins
2001-07
Assistant U.S. attorney
and deputy director,
Enron Task Force, U.S.
Department of Justice
2007-09
Partner, Latham &
Watkins

2009-10
Principal deputy
associate attorney
general, DOJ
2010-11
Principal deputy counsel
to President Obama
2011-14
White House counsel
to Obama
Richland High School,
Richland, Wash.,
class of 1989
University
of Washington,
class of 1993
Georgetown University
Law Center, J.D.,
class of 1996
Etc. How Did I Get Here?
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KATHRYN RUEMMLER
Former White House counsel; soon-to-be partner, Latham & Watkins
WORK
EXPERIENCE
LIFE LESSONS
EDUCATION
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“Living through those
independent counsel years,
and the surrounding
controversy around the
presidency, was quite
signifcant.”
“I got the clerkship
because I took a Greyhound
bus there. That was
striking to the judge with
whom I interviewed.”
D
e
liv
e
r
e
d
th
e
p
r
o
s
e
c
u
tio
n
’s

c
lo
s
in
g
a
r
g
u
m
e
n
ts
in
th
e

s
e
c
u
r
itie
s
fr
a
u
d
tr
ia
l o
f fo
r
m
e
r

E
n
r
o
n
C
E
O
s
K
e
n
n
e
th
L
a
y

a
n
d
Je
f
r
e
y
S
k
illin
g
A
courtroom
sketch from
the Enron
trial
With fellow
prosecutor
Sean Berkowitz
in 2006
Ruemmler (far right) at a White House meeting
with health insurance executives
“That’s how you give
something real lift in the
White House: You get
everybody in the building
focused on [the issue], instead
of just being in a silo.”
“It’s one of those jobs—
there’s no playbook.
Everyone has to do it with
their own personal style.”
“Most of my
classmates had
parents who were
lawyers, judges,
senators. I was
unencumbered.
Ironically, it made
me be more of
myself.”
“I love to close because
it’s the opportunity
to try to tie the whole case
together and explain
it in a way that’s a
compelling narrative.”
“It’s near the Hanford nuclear
site, where the Manhattan Project
was based. Both my parents
worked in ‘the area.’ I didn’t think
about becoming a scientist.
I wanted to be a lawyer since I
was about 10.”
68
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