p10

HP helps NASCAR drive

social media. Hear the roar.
Its time to build a better enterprise. Together. While most businesses were just
discovering social media, NASCAR and HP took the lead. Together they created the
NASCAR Fan and Media Engagement Center, which harnesses the power of big data with
HP Autonomy to analyze all kinds of mediamillions of tweets and posts, plus print,
television, and video. HP Enterprise Services helped NASCAR connect with millions of fans
and build brands across the whole NASCAR ecosystemall in real time. So on race day,
everybody wins. Building business by building new connections, it matters. hp.com/build
Make it matter.
NASCAR is a registered trademark of the National Association for Stock Car Auto Racing, Inc.
DAYTONA INTERNATIONAL SPEEDWAY wordmark and logo are trademarks owned by International Speedway Corporation.
2013 Hewlett-Packard Development Company, L.P.
How much scrap did
you guys buy?
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Your propensity to
buy a car at 25 is
roughly a quarter of
what it is at age 65
I thought back to that wave I
surfed in Copacabana far more
than I thought about the things
I learned in college. It gave me
a certain self-condence when
it came to taking risks
Ive wanted to go into
fashion since I was
5 years old, when I
helped my mom redesign
her wedding dress
p23 p56 p80
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1
How the cover gets made
Cover
Trail
September 2 September 8, 2013
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Opening Remarks If energy is destiny, Vladimir Putin is doomed 10
Bloomberg View Time Io x Nasdaq The debI-ceiling playbook: Oompromise 14
Global Economics
Oalls Ior reIorm Irom Ohinas business class grow louder 17
Georgias prime ministerand richest manplans to eschew politics to invest at home 18
A plunging rupee wont boost Indian exports as long as ination remains high 20
A dearth of German truck drivers spurs an inux of low-paid foreign rivals 20
Correlations: Peace and democracy 21
Companies/Industries
Baby boomers keep buying cars, Iheir kids, noI so much 23
The supersecret, supercheap weapon of a modern air force, inspired by Hitchcock 24
RadioShack is cleaning up its look and cutting out the clutter in a bid to revive sales 25
Studios gamble they can survive an adults-only NC-17 rating 26
Briefs: The London Whale trading scandal may cost JPMorgan Chase $600 million in nes 27
Politics/Policy
Oongress goes home Ior Ihe summerand sIeers clear oI voIers 29
The perils of bombing Syria 30
Republicans have a change of heart about the sequester 32
Hidden Hands: The judges on the secret U.S. spy court 33
Technology
As Ihe Ballmer era ends, iIs Iime Ior MicrosoII Io Iocus on producIs 35
Why Amazon is building so many enormous warehouses 36
Vending machines get smart 38
Live Internet TV wont mean the end of big cable bills 38
Innovation: The sticker that makes you invisible to mosquitoes 39
Markets/Finance
Rules aimed aI making banks saIer could sIie Ihe overnighI lending markeI 41
Southern European nations woo afuent Chinese with luxury propertiesand visas 42
2014 World Cup tickets present an arbitrage opportunity 43
In Kazakhstan, a lender strengthens its credibility by asking employees to take routine lie-detector tests 44
Bid/Ask: ING sells its South Korean insurance unit to a buyout rm for $1.7 billion 45
Features
Bring on Obamacare Are SIeward HealIh Oares no-Irills hospiIals visionary? 50
Oracle of Brazil How Jorge Paulo Lemann won conIrol oI Heinz, Burger King, and Budweiser 56
Waste Not One Ohinese Iraders journey Ihrough America, in search oI scrap 60
Etc.
SIand ouI Irom Ihe oce drones wiIh Ihis Ialls Iashions 69
Bold Color: Burgundy scarves, belts, shirtsand yes, suitsadd richness to your neutrals 70
Updated Coats: Plaids, patterns, a touch of fur, and vibrant hues give the Columbo look a makeover 72
Animal Prints: The diference between chic and trashy? Nothing too short or tightor polyester, of course 74
Shoes and Boots: Suede is suave, and stacked heels are chunky enough so you dont topple over 76
Before and After: A CEO, an account manager, a VP, and a retailing executive overcome their wardrobe challenges 78
How Did I Get Here? Michael Kors on being ready to roll in the fashion world 80
We need a PuIin cover IhaI
promises a little intrigue.
Which biI oI Ihis image oI a
halI-naked world leader on a
horse donI you nd inIriguing?
Remember Ihe Iime he
played Ihe piano and sang?
Ugh. Like every single PuIin
magazine cover ever done.
This wraps in all oI his Iriends
as well as his unique sensibiliIy.
Which is disIurbingly similar Io ours.
2
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20
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Lemann, Jorge Paulo 57
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M
Machkevitch, Alexander 44
Magnacca, Joseph 25
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Massie, Thomas 32
Mayer, Marissa 35
MBK Partners 45
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McQueen, Steve 26
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Mediacom 38
Mehta, Rajesh 20
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Michael Kors(KORS) 80
Microsoft(MSFT) 35, 38
Middleton, Kate 74
Miller, Alexey 10
MKG 79
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Mosman, Michael 33
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Nasdaq(NDAQ) 14
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Obama, Barack 10, 30
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Palepu, Hitha 79
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Panasonic(6752:JP) 57
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Partners HealthCare 52
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PepsiCo(PEP) 38, 57
Pershing Square Capital
Management 45
Preen 74
Proactiv 38
Putin, Vladimir 10
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Qin Xiao 17
Qualcomm(QCOM) 45
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RadioShack(RSH) 25
Rajan, Raghuram 20
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Ramsay, Dushane 79
Ray, Anandasankar 39
Re/Max 42
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Rodbell, Liz 79
Rogers, Hal 14
Romney, Mitt 52
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RWE 10
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Saakashvili, Mikheil 18
Samaras, Antonis 42
Saylor, Dennis 33
Sberbank(38LF:LN) 10, 44
SciDose 79
Scott, Bobby 30
Scowcroft, Brent 17
Sea 75
Sehring, Jonathan 26
Seiko 75
Shell(RDS/A) 10
Sicupira, Carlos Alberto 57
Sinopec(SHI) 63
Skype(MSFT) 35
Snowden, Edward 10
Soho China 17
Sony(SNE) 38
Soros, George 57
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Standard & Poors(MHFI) 25
44, 52
Steward Health Care System
52
Stone, Sharon 26
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Surface to Air 74
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Target(TGT) 36
Tata Consultancy
Services(TCS:IN) 20
Taylor, Andrew 42
Telles, Marcel Herrmann 57
Tenet Healthcare(THC) 52
3G Capital 57
Time Warner Cable(TWC) 38
TiVo(TIVO) 38
TMS International(TMS) 45
Toyota Motor(TM) 23
TPG Capital 57
Trian Fund Management 57
Twitter 30
U
Uber 45
UBS(UBS) 17
Universal Pictures(CMCSA) 26
UralSib Financial 10
USA Technologies(USAT) 38
V
Vanguard Health
Systems(VHS) 52
VEB 10
Veras, Paulo 57
Vergara, Soa 38
Viacom(VIAB) 38
Vicente Falconi 57
Vista Equity Partners 45
VTB 10
W
Wal-Mart Stores(WMT) 27, 36,
57
Walgreen(WAG) 36
Walton, Reggie 33
Wang, Vera 80
Webber Wright, Susan 33
Welch, Jack 57
Wells Fargo(WFC) 36
Williams, Michelle 26
Wintour, Anna 80
Wittern Group 38
X
Xi Jinping 17
Xue, Charles 17
Y
YouTube(GOOG) 30
Z
Zagel, James 33
Zeng, Johnson 62
ZF Friedrichshafen 20
ZoomSystems 38
Zuckerberg, Mark 35
A
Ackman, William 45
Acne Studios 74
Adele 52
Aesa 74
Air Tractor 24
Airbus(EADS:FP) 20
Al-Assad, Bashar 10
A.L.C. Rizzou 74
Alliance Bank 44
Amazon.com(AMZN) 25, 36
Anheuser-Busch InBev(BUD)
57
Apple(AAPL) 35, 38
Arora, Mandeep 38
Assael 78
Asustek Computer(2357:TT)
35
ATF Bank AO 44
B
Bain Capital 57
Balenciaga 70
Ballmer, Steve 35
Bally 75
Banco Espirito Santo de
Investimentos 43
Banco Garantia 57
Bank of America(BAC) 27
Barclays(BCS) 41
Batista, Eike 57
BATS Global Markets 14
Becerra, Xavier 30
Bergdorf Goodman 80
Berkshire Hathaway(BRK/A)
57
Best Buy(BBY) 25, 36, 38
Beth Israel Deaconess Medical
Center 52
Bezos, Jef 36
Billabong
International(BLLAY) 27
EBay(EBAY) 36
EconGas 10
Eggleton, Michael 44
Ehrenreich, Alden 70
Ellis, Brad 38
Embraer(ERJ) 24
Eni(ENI:IM) 10
ESPN(DIS) 38
Eurasian Natural
Resources (EURNY) 44
ExxonMobil(XOM) 10
F
Facebook(FB) 14, 30
Fassbender, Michael 26
Feldman, Martin 33
Fiat(FI:IM) 27
Fithian, John 26
Forbes, Steve 32
Ford(F) 23
Fox News(FOX) 32
Frandsen, Grey 39
Frost & Sullivan 38
G
G&P Lazarou 42
Gao Xiqing 17
Gates, Bill 35
Gawande, Atul 52
Gazprom(GAZP:RU) 10
General Dynamics(GD) 24
General Electric(GE) 57
General Motors(GM) 23
Gillette(PG) 57
Goldman Sachs(GS) 10, 20, 57
Goldman Sachs Capital
Partners 57
Google(GOOG) 17, 35, 38, 45
Gopalakrishnan, S. 20
Gosling, Ryan 26
GP Investimentos 57
Graves, Joan 26
Greifeld, Robert 14
Gucci 70
H
H&M(HNNMY) 75
H.J. Heinz 57
Halyk Savings Bank 44
Hawke, Daniel 14
He Di 17
Health Management
Associates(HMA) 52
Hees, Bernardo 57
Hellenic Realty 42
Hill Holliday 52
Hirsch, Jim 24
Hobbs 74
Hogan, Dennis 38
Hogan, Thomas 33
Honda Motor(HMC) 23
Hudsons Bay
Company(HBAYF) 79
Hulu 38
Hurd, Mark 35
Hyatt(H) 45
I
IBM(IBM) 35
Ibragimov, Alijan 44
Icahn, Carl 57
ICAP(IAP:LN) 41
IeCrowd 39
IHS 10
Indiegogo 39
Infosys(INFY) 20
ING(ING) 45
Ingersoll, Brett 52
Instacart 36
Ivanishvili, Bidzina 18
J
James, E L 26
J. C. Penney(JCP) 45
Jil Sander 70
Johnson, William 57
Joseph Corp. 74
JPMorgan Chase(JPM) 27
Juwai.com 42
Bill Blass 80
Blackstone Group(BX) 52
BMW(BMW:GR) 20
Boehner, John 32
Bombardier(BDRBF) 24
Brahma 57
Brown, Michelle 39
Bufett, Warren 57
Burberry(BURBY) 75
Burger King 57
C
Canadian Imperial Bank of
Commerce(CM) 43
Canteen Vending Services 38
Cantor, Eric 32
Cashs Scrap Metal & Iron 62
Cline 80
Cerberus Capital Mgmt. 52
Chevron(CVX) 10
China Merchants
Group(CIHKY) 17
China Policy 17
Chodiev, Patokh 44
Chrysler Group(FIATY) 23
Citic Group 17
Citigroup(C) 57
Clinton, Bill 30
Coakley, Martha 52
Coca- Cola(KO) 38
Cole Haan 74
Collyer, Rosemary 33
Comcast(CMCSA) 38
Community Health
Systems(CYH) 52
Connors, Jack 52
Crane Data 41
Crane Merchandising
Systems(CR) 38
Credit Suisse(CS) 44, 57
D
Darling International(DAR) 45
DB Schenker 20
De la Renta, Oscar 80
De la Torre, Ralph 52
Dearie, Raymond 33
Dekra 20
Diller, Barry 38
Direct Edge 14
DM Properties 42
E
Eagan, Claire 33 P
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Politics/Policy
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69
Fall
Fashion
I
ntocaysbusinessworlc,changeisnot
anoptionitsamancate.Recognizing
theneecforchangeancembracingthe
opportunitiesitpresentsisvital,anc
making infRrmec cecisiRns that beneht a
companyisjustpartoftheequation.How
thoseinformeccecisionsarearrivecat,
anchowtheyarecommunicatecacross
theenterprise,hasbecomethepurview
ofanewbreecoftransformationalchief
hnancial Rfhcer (CF0) whR is RutgrRwing
the tracitiRnal cehnitiRn Rf that pRsitiRn.
New research shRws that CF0s are
takingfargreaterresponsibilityforlong
termcorporateplanningancpolicy.The
research,concuctecbyBloomberg/uci
enceInsights,ispartoftheBloomberg
CF0 FRrum presentec by \isa CRmmercial
SRlutiRns, an Rnline cRmmunity Rf CF0s
createc specihcally tR fRster cRnversatiRn
ancconcuctresearchonthistransforma
tiRn. 0f the CF0s surveyec, 94 percent say
theyplayanintegralpartintheircompanys
majorstrategiccecisions.
Crossing over into new roles
CF0s envisiRn their rRle cRntinuing tR evRlve
ancbecomingmorecriticaltotheorganiza
tion.Infact,80percentagreethattherewill
be increasing crRssRver Rf the CF0 anc C00
rRles. / banking CF0 cescribec it by saying.
"There is an Rverlap nRw between the CF0
anc C00. We're meeting with Rur presicent
anc Rther executive vice presicents. ,t's hve
ofussharingequallyinthestrategicplan
ningancmakingsurewereheacingtowarc
thesamegoals.
CF0s are emerging frRm the ecRnRmic
crisiswithawatchfuleyeonthebottomline.
Theyincicatethattheywillmakethemostof
theirresourcesratherthanaimingforhyper
growthinsteaclookingformanagec,stable
growth,ancseekingtechnologysolutionsthat
helpthemmanagegrowthmoreeffectively.
When askec tR evaluate the fRrwarc
lRRking statement that "CF0s will still
neectobethevoiceofreasonancicentify
risk,62percentofresponcentsstrongly
agreec.Infact,givenacomprehensivelist
ofskillsetsancaskecwhichwillbecome
mRre impRrtant fRr CF0s Rver the next hve
years, 69 percent selectec risk manage
ment,puttingitatthetopofthelist.This
was fRllRwec by "cevelRping anc cehning
strategy,at66percent.
The current generatiRn Rf CF0shaving
riccenouttheGreatRecessionseemsin
tentonmakingtheircompaniesbetterable
toweatherfutureeconomicinstability./full
88percentofthemwanttoleavealasting
legacyontheirorganization,notmerelyon
the hnance cepartment.
,n the near term, CF0s aspire tR celiver
grRwth anc prRhtability Rver the next hve
yearscespitetheeconomicancregulatory
challenges they will be facing. "CRntinuec
growthancexpansionwillrequiremore
efhcient ceplRyment Rf technical infrastruc
ture,ancimprovementsinharnessinganc
surfacingBigData,ceclareconehealth
care incustry CF0. \Ricing agreement, a
CF0 in the ecucatiRn incustry believes.
"We will have a higher neec tR perfRrm
businessanalyticsinnewwaystopush
forinnovationancmaintainacompetitive
ecge. With 8.S. mRnetary pRlicy begin
ningtomakecapitallessreacilyavailable,
Rr certainly cRstlier, CF0s say they will
pushforrevenuegrowth,costcontainment
anc better capital efhciencies.
Meanwhile,theirneectoecucateanc
motivatetheircolleaguesenterprisewice
cRntinues tR grRw. "We have a meeting
whereIgooverthequarterlynumberswith
the Rfhcers Rf the cRmpany, statec Rne
banking CF0, "anc , am ceterminec that
theywilluncerstancthesenumbersthey
neectoknowhowwhattheyarecoing
impactsthebusiness.
/ signihcant prRpRrtiRn Rf tRcay's trans
fRrmatiRnal CF0sfRur Rut Rf 10aspire
tR becRme CE0s anc assume the respRn
sibilitiesancchallengesofthetopjob.
ThRse whR cR make the mRve up tR CE0
will naturally be in search Rf a CF0 with a
sharp strategic minc, given that 54 percent
inthesurveystronglyagreecthat,inthe
future, "CE0s will becRme even mRre reli
ant Rn CF0s tR help them execute strategy.
Their Rwn effRrts tR recehne the rRle are
likely tR prRcuce benehts cRwn the rRac, in
the fRrm Rf a CF0 partner whRse cRunsel
ancguicanceprovesinvaluable.
Economic turmoil a driver
of transformation
Thenearcollapseoftheglobalbanking
system helpec prRpel the CF0 intR a critical
anc singular rRle. /s a CF0 frRm the cRn
structiRn incustry assertec. "The ecRnRmic
meltcownlectogamechangingtechnolo
giesthathavetransformeceverybusiness
Transformational CFOs: A Look Ahead
Having weathered the Great Recession, CFOs have emerged as a dynamic force
in the business world. New research indicates that CFOs see this transforma-
tion in their role transforming their companies, as well, as they invest in new
systems and harness new capabilities from data and analytics
of CFOs believe they will need
to invest more in technology
that delivers internal
efciencies
of CFOs will continue to install
systems that consolidate opera-
tions and reporting across the
organization
89%
93%
Importance of technology
to the future CFO
SPECIAL ADVERTISING SECTION businessweek.com/adsections
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S3
prRcess. ,n its wake, the CF0 saic, came
newprocuctsancservicesthatwereim
possible[toimaginejustafewyearsago.
The pRst2008 era hncs the CF0's skill set
uniquelyimportanttolongtermorganiza
tionalplanningancpositioning.Itsevicent
thatreachingsouncjucgmentsrequiresa
provenabilitytoquantifyopportunitywhile
lookingoutforwhichrisksarethelikeliest
ancmostimpactful.
While it changec the CF0's rRle, glRbal
hnancial turmRil alsR spawnec a new anc
morecomplexeraofregulation.The
consequencesofthatregulationsquarely
impact the CF0, whR faces cRnstantly
shiftingcompliancerequirements./skec
whetherregulatorycompliancewillbecome
a stiffer challenge Rver the next hve years,
nR fewer than 86 percent Rf surveyec CF0s
saicitwoulc./ctingonthatassessment,
theyreportmakingnewhiresancseeking
theexpertiseofconsultants,anctheyare
evaluatingsystemsancsoftwaretohelp
their teams mRnitRr anc cRmply. "We've
increasecinternalcapabilitiesthrougha
highlevelhiringofregulatoryprofessionals,
saic a CF0 frRm a chemical cRmpany, "plus
wereutilizingoutsiceconsultinganctaking
amoreactiverolewithgovernmentalagen
ciesthroughourincustrygroups.
CRRrcinating RperatiRnsinclucing cata
collectionancanalyticsacrossmultiple
cRuntries can be cifhcult. Every accitiRnal
countryabusinessoperatesinbringsmore
regulations.Itsamatterofkeepingupto
cateonemerginglegislationancuncer
stancingtheregulatoryenvironmentof
anynewmarketweenter,saicamining
incustry CF0. FRr the cRnsumerfacing
businesses,thereisanincreasecpressure
tocreateasingle,consistentuserexperi
enceworlcwice,cespitemarketquirks
anccifferences.
Investing in technology for solutions
Facec with new respRnsibilities, the prRs
pectofinvestingmoreresourcesintechto
celiver internal efhciencies gRes unTues
tiRnec by respRncent CF0s93 percent Rf
themsaicthiswasnecessary.Regarcing
systemsthateffectivelyconsolicateopera
tiRns anc repRrting, 89 percent view them
asarequirement.
Responsibilityforcomplianceancaccu
rate repRrting tilts the CF0 tRwarc embracing
technology.Technologyhasrevolutionizec
thecistributionofinformationanchasmace
marketsmorecompetitivethanatanytimein
the previRus twR cecaces, saic a CF0 frRm
theagriculturesector.
0any CF0s believe glRbal expansiRn
willcrivetheircompanyssuccessover
the next hve years. /bRut twRthircs Rf
surveyparticipantscescribectheglobal
economyasgettingalittlebetterover
Improving your data
and analytics
Streamlining and automating
payment processes
Making your purchasing
procedures more efficient
Providing control and
visibility over your spending
Source: Bloomberg Audience Insights
44%
38%
37%
35%
Key benets of electronic
payment processing for
the future CFO
Brooks Brothers is Americas
oldest retailer, and has become
a legendary international
retailer while maintaining the
same steadfast commitment
to exceptional service, quality,
style and value.
The recession and 9/11 were
both catalysts for CFOs to help
their companies and their leaders
build better business models and
increase productivity by embrac-
ing technology. CFOs are the glue
in that transformation, the link
between strategy and execution.
Brooks Brothers has historically
been a domestic retailer, but we
believe that to grow the business
we have to expand our horizons.
Were doing that in a number of
ways, such as international ex-
pansion. Perhaps more important
is what we call our omnichan-
nel experience for customers.
Whether they are in a store,
looking at a catalog or shopping
online, it all looks and feels the
same, and the quality of the
service is the same. Its important
to us to be able to serve our cus-
tomers with one view so that they
can enjoy the entire assortment
of what we have to offer.
One on One with a
Transformational CFO
Brian Baumann,
CFO, Brooks Brothers
S4
businessweek.com/adsections SPECIAL ADVERTISING SECTION
the next hve yearsa shRw Rf reasRnec
Rptimism. 0nly 11 percent saic they think
itwillgetalotbetter.
Sincecrossingborcersancoceans
brings accitiRnal unknRwns, the CF0 is
continuallyassessingpossiblecownsices.
Itsaprocessbaseconscenariosancmocels,
callingforaneverceepeninggraspofrisk
managementconceptsthatareaicecby
technRlRgy anc cata. "We will be facing
moreglobalgrowthopportunities,saica
CF0 frRm a large engineering hrm, "resulting
inaneecforbroacerleacershipancrisk
mitigationstrategies.
Electronic payment processing
growing in value
CF0s believe business will get mRre cRm
petitive,ancthatconsumersofthefuture
willbemorecemancing./saconse
quence,competitivecompanieswillneec
tobeevenmorestrategicancbetterable
tR leverage systems anc cash. ElectrRnic
payment prRcessing (EPP) has emergec as
avitallinkinthatchainasoneofthemore
valuabletoolsavailable.
PrRtRcRls fRr businesstRbusiness
paymentshavegracuallyimprovecover
time, but the mRve tR EPP is ceemec a
gamechanger./skecaboutcurrentversus
prRMectec spencing Rn EPP, CF0s spRke
lRucly. Currently, Rnly 42 percent Rf CF0s
saic they use EPP fRr at least half Rf their
Rrgani]atiRn's payments. HRwever, in hve
yearstimethisproportionissettonearly
cRuble, with 83 percent Rf participants
prRMecting that level Rf EPP use.
Responcentsofferecthatincreasec
insightanctransparencyarebigreasons
whythetrenctowarcpayingelectronically
willcontinuetoexpanc.Thecapacityof
EPP fRr "imprRving cata anc analytics was
citec by 44 percent Rf the surveyec CF0s,
ancstreamliningancautomatingpayment
prRcesses was citec by 38 percent. "0aking
purchasing prRcecures mRre efhcient
thrRugh EPP was a ratiRnale given by
37 percent, while "prRvicing cRntrRl anc
visibilityoverthecompanysspencing
receivec a thumbsup frRm 35 percent.
Inthehalfcecacesincetheinitial
respRnse tR the hnancial crisis, EPP has
gainecafootholcanccemonstratecclear
benehts, accRrcing tR the surveyec CF0s,
inclucingtherelativeeaseofmaking
overseaspaymentsthatrequiresecurec
transactiRns anc letters Rf crecit. CF0s alsR
referrectoanicealsituationinwhichpay
roll,expensereimbursementancvencor
paymentsallhappenelectronically.Some
CF0s icentihec the neec fRr EPP sRlutiRns
thatsyncupwiththeirexistingsystems.
LRRking fRrwarc, CF0s believe that new
technologyancsystemsarepivotaltotheir
growingstrategicrole,ancincreatinga
competitiveecgefortheircompany,ancby
leveragingthistechnologywithaproac
tivemincset,theycanbetterinformall
stakeholcersacrosstheenterprise,criving
growthancsuccess.
The economic meltdown led
to game-changing technolo-
gies that transformed every
business process. This will
give rise to new products and
services that were impossible
just a few years ago.
CFO, Construction
Its all about not having
redundant data. You want a
single source of truth, and we
are presently investing very
heavily in installing the tools
that we need to be productive
and effective in managing these
businesses across multiple
countries and platforms.
Its important for our customers
to see that their suits are made
in the U.S., so back in 2008 we
got into the [suit] manufactur-
ing business. Bringing retail and
manufacturing together as one
business created a whole new
set of challenges and opportuni-
ties, for me as CFO, to have the
proper systems and controls in
place to manage inventory.
People are often intimidated
by nance. As the CFO, its im-
portant to help them overcome
that, because you can talk all
day about something and if
people dont understand, it isnt
doing you or them any good.
When I think about our
company transforming from a
U.S. retailer to a global lifestyle
brand that has several different
business models and platforms,
its important for me to never
inhibit that. To be truly transfor-
mational, you have to support
that growth and change to the
best of your ability. There shouldnt be any lines of
delineation between strategy
and execution. If there are, you
wont be as successful as you
would like. Thats why trans-
parency is so crucial.
Visa Commercial delivers a full suite of corporate
payment products and services that enables
companies to optimize purchasing and procurement
processes. Comprehensive analytics capabilities are
delivered in an integrated, end-to-end solution, giving
\RXPRUHWUDQVSDUHQF\LQVLJKWDQGHIFLHQF\
to achieve your organizations goals. To learn more,
visit visa.com/commercial.
10
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For Russian leaders, sticking it to the
Americans has long been a source of both
personal satisfaction and political gain. By
that standard, President Vladimir Putin
is riding high. Hes enraged Washington
of cialdom by supporting Syrian President
Bashar al-Assaddespite his apparent use
of chemical weapons against civiliansand
obstructing eforts to rein in Irans nuclear
ambitions. Activists in the U.S. and Europe
have called for a boycott of the 2014 Winter
Olympics in Sochi over the countrys harsh
new antigay law. The Kremlins decision to
shelter National Security Agency contrac-
tor Edward Snowden, wanted on espionage
charges in the U.S., prompted President
Obama to nix a one-on-one meeting ahead
of the Group of 20 summit in St. Peters-
burg, Russia, on Sept. 5 and 6.
Since reclaiming the presidency in May
2012, Putin has become the biggest im-
pediment to the Obama administrations
foreign policy aims. Thats undoubt edly
played well with Russians yearning for the
days when the country was a super power.
Yet beneath Putins swagger lie weak nesses
at the core of the economy that threaten
Russias futureand with it, his power
base. And for that, he can blame a famil-
iar nemesis: the U.S.
His difculty has nothing to do with
inter continental ballistic nuclear missiles
and everything to do with natural gas thats
cooled to -260F at normal pressure, con-
densed into liquid form, and trans ported
on special tankers to markets around the
world. Americas surprising return as an
energy superpower is complicating life
for the Russian petro state. The rise of a
vibrant, global, and pipeline-free liquefed
natural gas (LNG) market is a direct threat
to Russias interests in Europe, where
Gazprom, the state-owned energy giant,
supplies about 25 percent of the gas. So is
the shift in pricing power from suppliers
to consumers as a result of the huge supply
So Much
For Caviar
By Brian Bremner
10
shock emanating from North America.
Russia is still the worlds biggest overall
energy exporter: Its the No.1 oil pro ducer
and No.2 in gas after the U.S. However, the
countrys known oil reserves primarily
between the Ural Mountains and the
Central Siberian Plateauare enough to
sustain current production levels for just
20 years, according to a study in December
by the European Bank for Reconstruction
and Development (EBRD), vs. 70 years for
Saudi Arabia and 90 years for the United
Arab Emirates. Untapped oil and gas re-
serves in eastern Siberia and the Arctic will
take massive investments to explore.
Putins aware of the problem. For
many years we have had a situation when
prices for our main export goods rose fast
and almost without interruption, and this
made it possible for Russian companies
and for the government to cover high ex-
penses, he told global executives at the
St. Petersburg International Eco nomic
Forum on June 21. But this situation has
changed now. There are no simple solu-
tions and no magic wand we can wave to
change things overnight.
That may be true, but the country has
little time to waste. Many Russians, and
in particular members of the presidents
inner circle, have benefted hugely from
the countrys energy-export windfall. Now
that foundation is slipping away. The ques-
tion is whether Putins power will, too.
When he took over at the start of the
last decade (he served as president from
2000 to 2008 and premier for four years
after that), the global economy was in
the early stages of a commodities super-
cycle. Accel erating global demand, led by
a China growing at about 10 percent annu-
ally, co incided with rising prices for oil,
gas, copper, coal, and other natural re-
sources. Political instability in Venezuela,
the start of the Second Gulf War, and
Hurricane Katrina all constrained supply
and refning capa city, sending energy
markets into overdrive.
Through 2008, Putin oversaw an
average of 7 percent growth in gross do-
mestic product and a huge expansion in
Russias middle class. At its 2007 annual
meeting, Gazprom, the worlds largest
gas producer, served red and black caviar.
Management Committee Chairman Alexey
Miller said the company, whose market
value at the time was $360 billion, would
someday be worth $1 trillion.
Russias phenomenal run of prosper-
ity would have been an ideal time to di-
versify the economy beyond energy, a goal
that harks back to the days of Soviet leader
Leonid Brezhnev. Instead, energys share
of the economy actually increased; as of
late 2012, oil and gas accounted for about
70 percent of exports, compared with less
than 50 percent in the mid-1990s, provid-
ing half of the governments revenue and
roughly 17 percent of GDP, according to
the EBRD. Gazprom alone represents
14 percent of the Russian stock markets
total capitalization. It has been an issue
since the late 1970s and early 1980s, and
it has gotten worse, says Alexei Kokin,
an energy analyst with UralSib Financial.
I dont see that changing.
Russias energy dependency problem
became impossible to ignore in 2009 as
the global recession crushed oil prices,
which fell to $34 a barrel from a precrisis
high of $147. Russias economy contracted
almost 8 percent, the steepest drop among
the G-20 industrialized nations that year.
Since 2010, the economy hasnt come close
to hitting the 5 percent to 6 percent mark
that Putin has said it needs to close the
gap with leading developed nations. On
Aug. 9 the government said the roughly
$2 trillion economy unexpectedly slowed
in the second quarter, growing a below-
expected 1.2 percent from the previous
year, the sixth consecutive quarterly de-
celeration. As for Gazprom, its worth all
of $94 billion, down 74 percent in six years.
Putin, 60, has long viewed the nations
natural resources as a foreign policy lever.
He learned about the economics of scar-
city growing up in the 1950s in a decrepit
communal apartment complex in postwar
Leningrad (now St. Petersburg). There
were hordes of rats in the front entryway,
Putin said in an autobiographical compila-
tion of interviews, First Person, published
in 2000. My friends and I used to chase
them around with sticks. In a 2012 inter-
view he said that his elder brother died
from diphtheria during the Nazi siege of
Leningrad; his father barely survived his
combat tour with the Soviet army.
Many years later, as deputy mayor of St.
Petersburg, Putin wrote an aca demic thesis
advocating that Russia fex its energy
Rising energy production in the U.S. is testing Russias
economic model. Will Vladimir Putin survive the challenge?
11 11
12
muscles. Once in power, he did just that:
In price disputes, Russia turned the taps
of on its gas pipelines to Ukraine in 2006
and 2009 in the dead of winter, causing
shortages elsewhere in Europe. Gazprom
has been able to extract high prices, partic-
ularly in former Soviet states, by indexing
its long-term contracts to the price of oil.
Putin renationalized the oil indus-
try and dialed back the involvement of
Western oil companies. Authorities arrest-
ed and later convicted Yukos Chief Execu-
tive Ofcer Mikhail Khodorkovsky in 2003
on tax charges just as the company enter-
tained selling stakes to Exxon Mobil and
Chevron. Approximately $27 billion in state
tax claims bankrupted Yukos, whose assets
were sold of to other companies. After
pressure from Moscow, Shell gave up part
of its stake in an LNG venture in Sakhalin
to local interests. British Petroleum sold
its stake in an Anglo-Russian joint energy
venture called TNK-BP to Rosneft after a
dispute with investors in the country.
At the same time, Putin placed loyal-
ists throughout most of the oil industry
or secured the allegiance of executives. In
December a report by Yevgeny Minchenko
and Kirill Petrov for Moscow-based consult-
ing frm Minchenko Consulting Communi-
cation Group portrayed Putin as an energy
czar with direct control over long-term
gas contracts, management of the gas in-
dustry, and, basically, Gazprom, as well as
the control over backbone Russian banks
such as VEB, VTB, and Sberbank.
Taxes on the energy industry are vital
to the Kremlin patronage system. They
give Putin the means to woo key constitu-
encies such as the military, security, and
political elites; to improve government
pensions; and to spend in poorer regions
in the Muslim North Caucasus and other
rural areas. During his 2012 campaign, he
promised to improve wages for doctors
and teachers, increase retirement checks,
and invest in Russias military arsenal. The
former KGB career ofcer is un likely to
loosen his grip on the state-owned energy
sector, because that would endanger his
grip on power, says one economic adviser
who declined to be identifed for fear of of-
fending the president.
Five years ago, peak oil theorists pre-
dicted that global production would soon
hit its high-water mark and then decline
inexorably, with the U.S. growing even
more dependent on overseas energy
imports. Those trends seemed to play
into Putins hands. What he didnt antici-
pate was that U.S. oil productionthanks to
horizontal drilling and hydraulic fracturing
technology, in which pressurized water and
chemicals are blasted into rocks to release
energywould increase 46 percent. That
equals the entire output of Nigeria, esti-
mates Daniel Yergin, vice chairman of
consulting frm IHS. Think of it like a non-
OPEC country appearing in North Dakota
or southern Texas, Yergin told executives
at the St. Petersburg forum in June.
Between now and 2018, North America
will provide 40 percent of new supplies
through the development of light, tight oil
and oil sands, while the contribution from
the Organization of Petroleum Exporting
Countries will slip to 30 percent, according
to the International Energy Agency, which
also sees the U.S. emerging as the biggest
oil producer by 2020 and a net exporter of
oil by about 2030. Meanwhile, the agency
trimmed global fuel demand estimates for
the next four years.
The U.S. is also on pace to add 2 trillion
cubic feet per year of natural gas once three
just-approved LNG projects start operating,
an 8 percent increase in total U.S. capacity
based on 2012 production levels. More LNG
facilities are coming onstream in Australia,
South Korea, Mozambique, and Tanzania.
Yergin predicts natural gas, both conven-
tional and liquefed, will be the No.1 energy
source by the end of 2030.
Russias worry is twofold: An expanding
supply of afordable LNG, which is trans-
ported by ship, is forcing Gazprom to either
cut prices or lose share. (Weird and sur-
prising fact: As American utilities shift to
gas, displaced U.S. coal is fooding into
Euro pean markets. The U.S. may supplant
Russia as the worlds No.3 coal exporter
by yearend, according to Goldman Sachs.)
Second, the Russian gas giant is under pres-
sure to adopt spot- market pricing instead
of tying its prices to oil. In June, Gazprom
agreed to revise its gas contracts with
German utility RWE after losing an arbi-
tration case; its renegotiating supply con-
tracts with other utilities, including Eni
and EconGas. The European Union is also
drafting an antitrust complaint against
Gazprom for abusing its dominant position,
say three people familiar with the probe
who asked not to be named. The company
declined to comment. Longer term, the
Russians may even have to contend with
shale energy assets being developed by
Western oil majors in Poland, Ukraine, and
Lithuania, all Gazprom proft sanctuaries.
With the LNG trade expected to almost
double to 450 million tonnes a year, accord-
ing to Bloomberg New Energy Finance, the
Russian government is expected to take
up legislation that would for the frst time
allow companies other than Gazprom,
which has been slow to respond to big in-
dustry changes over the last decade, to
export LNG. Energy Minister Alexander
Novak said in June the country is also com-
mitted to building out its LNG capacity
Russia has just one plant up and running in
Sakhalinand more than doubling Russias
share of the LNG trade from 4 percent to
about 10 percent by 2020. With Gazproms
traditional gas business facing pricing
and demand pressure in Europe, Russian
companies need to be bigger players in
faster-growing Asian markets. We are
really behind the curve and need to accel-
erate, says Ildar Davletshin, an oil and gas
analyst with Renaissance Capital.
The challenge for Putin is to simultane-
ously revive the countrys colossal energy
sectorand then place Russia on a track to
break free of its hydrocarbon depen dency.
The country needs to make huge infrastruc-
ture investments in the east and to expand
nonenergy sectors where Russia has real
potential, such as information technology,
airplanes, helicopters, engines, turbines,
and industrial pumps and compressors.
The countrys recent entry into the
World Trade Organization could be an op-
portunity to reduce or eliminate import
tarifs and trim domestic subsidies. Putins
near-total control of Russias political
apparatushes marginalized, intimi dated,
or silenced any potential oppositiongives
him the space to push through painful
reforms. It would require not only the
kind of tough- mindedness the bare- chested
outdoorsman and YouTube sensation is
known for but also a fair amount of busi-
ness savvy and strategic vision. Failing to
reform risks condemning Russia to a future
of middling growth, declining standards
of living, and diminished stature abroad.
If Putin truly wants to restore the country
to economic greatness, Russia will need
a 12-step program for its energy-addicted
economy. With Anna Shiryaevskaya
and Jake Rudnitsky in Moscow
Russias real GDP,
year-over-year change
10%
10%
0%
Q2 2000 Q2 2013
DATA: RUSSIAN FEDERAL SERVICE OF STATE STATISTICS
Russias Declining Fortunes
LH.com
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By mid-October, according to the U.S. Department of the
Treasury, the U.S. will reach its borrowing limit. Congress must
act as soon as possible to protect Americas good credit, says
Treasury Secretary Jack Lew. Weve all heard these warnings
before, and we pretty much know the script. We even have a
pretty good idea how it will end.
The next round of debt and defcit negotiations will take
place in the context of modest but steady growth in a $16.6 tril-
lion economy and a declining budget defcit equal to 4.2 percent
of gross domestic product as of June, compared with more
than 10 percent of GDP in 2009. Come September, the real fght
will be over how much more marginal savings can be wrung
from domestic programs. It will be a game of small ball, with
a savings target of about $200 billion in a federal budget of
$3.8 trillion. The funds will probably come from farm subsidies,
fees charged for government services, increased cost-sharing by
wealthier Medicare recipients, and possibly a switch to a cost-
of-living formula that slows increases in entitlement spending.
Democrats and Republicans will seek to replace some of
the automatic spending cuts in Pentagon programs imposed
after the two sides failed to reach a budget compromise. Yet
most 2014 spending would continue at the sequester level, al-
lowing lawmakers to claim they ended the mindless cost-cut-
ting while still counting the savings.
The frst move will be made by House Committee on Ap-
propriations Chairman Hal Rogers of Kentucky, who will press
for a one- or two-month extension of government operations,
pushing of the Sept. 30 deadline. The battle over the budget
will then coincide with the battle over the debt ceiling.
That isnt as scary as it sounds. Lawmakers chief priority is
political survival in 2014, and that means keeping the difcult
votes to a minimum. A single vote to raise the debt ceiling, end
sequestration, and trim the defcit allows legislators to claim
they stuck to their principleswithout raising taxes or harming
the investments needed for the economy of the future.
Time to Fix the
Not-So-Nifty Nasdaq
After the exchanges latest fail, regulators
and investors should demand an upgrade
Theres No Need to Fret
About the Debt Ceiling
Congress remains divided on spending, but
both sides have reason to compromise
Does Nasdaq have its priorities straight? The three-hour shut-
down of the exchange on Aug. 22 raises the question anew, but
the Securities and Exchange Commission frst identifed it in
March, when it proposed rules that would set standards for elec-
tronic trading and make exchanges more accountable for pre-
venting outages. The exchanges are pushing back, which means
the SEC has to move quickly.
The culprit behind Nasdaqs failure was a still-mysterious soft-
ware error in its connection with the New York Stock Exchanges
electronic trading system. The breakdown meant that Nasdaq
couldnt collect all the pricing and order data through its securities
information processor, or SIP, and distribute that data over what is
called the consolidated tape. Nasdaq was then unable to meet its
legal obligation to be fair and transparent to all traderswhether
thats a $500 billion mutual fund or Uncle Jack in his bathrobe.
Nasdaq Chief Executive Ofcer Robert Greifeld was right to
call a systemwide halt, even though proprietary data feeds to
professional traders continued. Otherwise, the national market
system that Nasdaq is tasked with running would quickly have
devolved into a private market in which high-frequency traders
and hedge fundsor anyone paying Nasdaq a fee for custom-
ized dataheld all the cards.
There have been many technology-related trading problems
in recent years, including the 2010 fash crash and the fubbed
Facebook initial public ofering (another Nasdaq failure). Last
weeks Nasdaq outage exposes a more serious faw involving a
bottleneck. The data collection system was upended by a single
point of failure. It cant be right that, when one exchanges SIP
connection is broken, the global stock market and trading in
options and related instruments must halt.
When the SEC in May settled charges with Nasdaq over the
fawed Facebook IPO, the regulator was withering. Daniel Hawke,
chief of the enforcement divisions market abuse unit, said, Too
often in todays markets, systems disruptions are written of as
mere technical glitches, when its the design of the systems and
the response of exchange ofcials that cause us the most concern.
News that BATS Global Markets is merging with its
electronic-market rival, Direct Edge, is another reason for SEC
concern. The U.S.s 13 stock exchanges, 50 or so privately traded
dark pools, and dozens of brokerages that internally match bids
and ofers are consolidating in a race to get bigger and faster.
Most transactions take place on supercomputers that match
orders in millionths of a second. A BATS-Direct Edge combina-
tion would vault it ahead of Nasdaq, the No. 2 exchange behind
the NYSE in volume of shares traded.
Yes, the stock markets are complex, and most transactions
occur at lightning speed. And yes, technology will never work
perfectly. Thats all the more reason for the exchanges and
the SEC to make sure the plumbing is as foolproof as possible.
To read Stephen L.
Carters advice for
college freshmen
and Albert R. Hunt
on Syria, go to

Bloomberg.com/view
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If only all projects could be like that.
See how quick it is to save money.
What comes
in on time and
under budget?
log under the pen name Xue Manzi, has
had trouble, too. He was recently called
in by the authorities for a meeting where
ofcials advised him and other blog-
gers to cease their disruptive activities.
Xue did not: On Aug. 23 he was arrested
in Beijing for allegedly hiring a pros-
titute. He hasnt been seen since. On
Chinas blogosphere, his arrest has re-
ignited debate over a government back-
lash against the growing assertiveness of
businessmen in politics.
Unlike Xue, the Boyuan Foundation
tries to engage the government rather
than antagonize it. Because of the ped-
igrees of founders He Di and Qin Xiao,
Boyuan has access to high ofcials and
a network of academics who supply it
with original research about China.
The foundation got its start in 2007
when two prominent bankers decided
they wanted a forum where ofcials
could discuss public policy with outside
experts. He Di, ex-head of Swiss bank
Chinas Rich
Want Their Say
Self-made men and princelings argue for reform in ever-louder voices
Its like saying at the age of 60 youre buying a Harley-Davidson
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of the Boyuan Foundation, take an in-
stitutional approach to reform and seek
ways to engage the government. Most
of these executive-activists back whats
known in China as universal valuesthe
rule of law, free markets, and freedom of
speech, assembly, and religion.
Lees two microblogs have more than
66 million followers, an audience nearly
as big as the Communist Partys mem-
bership. In between notes on his family,
Lee points out cases of corruption
and censorship and advocates greater
freedom of expression. In the past half
year, the government imposed a tem-
porary gag on his social media activities
after he criticized the states backing
of a search engine run by the Peoples
Daily. (Lee is back blogging.) An army
colonel has accused Lee of being an
American spy.
Celebrity venture capitalist Charles
Xue, the Chinese American author of a
popular and politically sensitive microb-
Pan Shiyi is a real estate tycoon whose
company Soho China has built some
of the most fashionable developments
in the country. Pan has a political side,
too, which he expresses in a blog fol-
lowed by 16 million Chinese. After Pan
posted a call for increased transparency
on how authorities monitor pollution,
the governments of Bejing and 73 other
cities started releasing more daily pollu-
tion data. He was also invited to tour the
ofces of the environmental protection
agency for Beijing after a heated online
exchange with its spokesman.
Such an episode would have been un-
thinkable in China 10 years ago, given
the tight censorship. But China now has
an emerging business class that wants to
infuence the debate on pollution, eco-
nomic reform, U.S.-China relations, and
broader political change. Some, such as
Pan and Lee Kai-Fu, ex-head of Google
China, use the Internet to spread their
views. Others, including the founders
September 2 September 8, 2013
He Di co-founded
the Boyuan
Foundation
Correlations: A
possible recipe for
greater world peace 21
Georgias billionaire
statesman 18
Indias exporters ask
what went wrong with
a weak rupee 20
A trucker shortage
threatens Germany 20
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UBSs China operations, and Qin
Xiao, ex-chairman of China Merchants
Group, are part of the in crowd. Their
childhood friends are some of Chinas
most powerful men, including Zhou
Xiaochuan, governor of the central
bank, and Wang Qishan, the Politburo
member running the anti corruption
drive. Boyuans board includes Gao
Xiqing, head of Chinas sovereign wealth
fund, and former U.S. National Security
Advisor Brent Scowcroft.
The new minister of fnance, Lou
Jiwei, wrote a book for the foundation
about how to use taxes to address rising
inequality. You cant have social justice
without a more fair and transparent tax
system, says Ding Xueliang, a professor
at Hong Kong University of Science and
Technology who researches state capi-
talism for Boyuan.
Both He and Qin were afected
by the Cultural Revolution, Mao Ze-
dongs catastrophic efort to purge the
party of suspect elements. He Di spent
eight years working in a factory and
farm. He enrolled when the universi-
ties reopened, served as assistant to
the director of the Institute of Ameri-
can Studies, earned a masters in inter-
national politics from Johns Hopkins
University, and in 1997 joined UBS. He
played a key role in the banks biggest
China deals.
After the Asian crisis of 1997
prompted ofcials to seek his advice on
keeping China free of fnancial conta-
gion, He thought a place for private-sec-
tor economists to meet with government
ofcials would serve both sides. A
decade later, he stepped down from UBS
and set up the foundation. The goal
was to be one of the voices to cause the
debate. Maybe in 10 years well be like
Brookings, says He. The Brookings In-
stitution was set up by a philanthropist
in 1916 to analyze public policy.
Joining He was Qin, a prince-
ling with family ties to President Xi
Jinping. Dubbed Chinas intellectual
banker by Chinese fnancial maga-
zine Caixin, Qin, besides his work at
China Merchants, served as president
and vice chairman of Citic Group, the
state-controlled investment conglomer-
ate. In the Cultural Rev-
olution he joined the
Red Guards, the shock
troops of Maos assault
on Chinese society.
Instead of embracing
the violence often un-
leashed by the Guards,
The billionaires
house outside
Tbilisi is a
$50 million
complex
Qin and some classmates protected
older party ofcials from persecution,
according to Caixin.
Qin was sent to the countryside and
returned to school after the Cultural
Revolution ended. He joined Citic in
1995 and earned a Ph.D. in economics
from Cambridge University in 2002.
When he retired from China Merchants
in 2010, he didnt go quietly. In a com-
mencement address at elite Tsinghua
University, he said that the China
model of development didnt work. Qin
instead embraced universal values, a
loaded term seen by some Chinese as
a back-door way to undermine Chinas
power. Its like saying at the age of
60 youre buying a Harley- Davidson,
says David Kelly, research director at
China Policy, a research and advisory
company. Universal values is a wedge
issue, exactly like abortion in America.
Qins critique angers some of his
oldest friends. Are you still a Commu-
nist Party member? Do you have faith?
fellow Red Guard Dan demanded, ac-
cording to online accounts of an ar-
gument they had at a public forum in
April. Qin said: You sent your wife and
kids to America. Do you have faith?
Will the authorities crack down on
He and Qin? Says Hong Kong Universi-
tys Ding, Boyuan comes from a senior
leadership background. That gives it
some political protection, a great asset
for its survival in an unpredictable
environment. Shai Oster
The bottom line Prominent Chinese nanciers
and business executives have provoked the
government with their calls for reform.
Wealth
A Billionaire Spreads
Riches by the Black Sea
Georgias wealthiest citizen has
big plans for his tiny country
I get no pleasure from politics,
its not in my character
Down an unmarked path, through two
electronic gates, lies the lush, 94-acre
coastal estate of Bidzina Ivanishvili, the
billionaire prime minister of ex-Soviet
Georgia. His wealth equals 35 percent
of the countrys $15.8 billion economy.
What Ivanishvili will do next with his
billions is a hot topic in a country that
has had more than its share of drama.
The businessman emerged from years
of obscurity in 2011 to announce that he
was fnancing a political coalition to win
2012s parliamentary elections against
the party of Georgia President Mikheil
Saakashvili. The Georgian Dream coali-
tionthe name comes from a rap song
by Ivanishvilis sonbeat the presidents
party and took control of the legisla-
ture. Saakashvili remained president,
but with the parliament in opposition
hands, he had to accept Ivanishvili as
his prime minister starting in October
of last year. The tycoon got to name a
cabinet of his own ministers; Saakashvili
was isolated in the presidential palace.
Saakashvilis term ends in November,
and Ivanishvili says he will step down
Are you still a
Communist Party
member? Do you
have faith?
Kong Dan
18
Global Economics
Ivanishvili
collects modern
art, including
work by Robert
Indiana
before the new year prior to the end of
his term. I get no pleasure from politics,
its not in my character, he says, sitting
on his terrace overlooking the Black Sea.
Ivanishvili says hell continue keeping
tabs on the government, though he dis-
misses speculation that he will be of-
stage, secretly running Georgia. Why
should I be an informal leader when I
can be the formal leader? he asks.
Ivanishvili certainly doesnt need a
prime ministers salary. His Black Sea
estate includes a private beach, two
pools, two guest houses, and a menager-
ie of lemurs, zebras, peacocks, parrots,
and famingos. His main residence
outside Tbilisi is a $50 million complex
designed by Japanese architect Shin
Takamatsu. His $1 billion art collection,
in London for safekeeping, includes a
Picasso bought for $95 million in 2006.
Ivanishvili says hes spent $3 billion of
his own money in Georgia, buying boots
for soldiers and patrol cars for police as
well as restoring museums, theaters, and
churches. Hes paid for roads, hospitals,
and schools in his birthplace of Chorvila.
He says he is committing $1 billion to a
new $6 billion private equity fund that
will invest in tourism, agriculture, indus-
try, and energy projects alongside the
government. The idea is to persuade in-
vestors their money is safe in Georgia,
which has a bright future as a regional
trade and energy hub, says central bank
chief Giorgi Kadagidze.
To Saakashvili, Ivanishvilis billions
put Georgias status as a model of de-
mocracy at risk. If your personal
wealth is a signifcant part of your
countrys GDP, then the temptation is
too big to take over without proper qual-
ifcations and to monopolize, he says.
Western investors have largely steered
clear of Georgia since the arrests of
dozens of former ofcials started late
last year, including an ex-prime minister,
after the Ivanishvili government took
power. The charges were for alleged
abuse of ofce and graft: The one trial
held so far ended in the acquittal of an
ex-defense minister and seven other
former ofcials. Saakashvili himself
may face corruption charges after he
loses immunity on leaving ofce, says
Ivanishvili. Saakashvili calls the accusa-
tions against him ridiculous.
The drop in fresh outside capital has
halved the countrys growth rate to an
estimated 3 percent this year. Growth
averaged 6 percent from 2004 to 2012.
Saakashvili won praise from abroad for
curbing corruption, privatizing state
companies, and eliminating red tape.
He was also accused of cracking down
on the opposition and the media. Mass
protests erupted a few weeks before last
years election over leaked footage of
prison guards beating and raping male
inmates with broom handles.
Ivanishvilis successor as prime minis-
ter is expected to be one of his allies, al-
lowing the billionaire to wield infuence
over what will probably be a weak gov-
ernment run by the Georgian Dream co-
alition, says Alexander Rondeli, a Geor-
gian political analyst. Ivanishvili is a
really smart businessman who had
to resort to ruthlessness at times in
Russia, where he made a fortune
19
Global Economics
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Transport
Toot-Toot. Germany
Wants More Truckers
Europes No. 1 economy is plagued
by a shortage of drivers
Eastern European truckers work
under nomadic conditions
The big trucks that barrel down Germa-
nys autobahn are generally driven by
highly trained professionals. The trouble
is, fewer young people are opting for a
life on the open road. Theres a serious
driver shortage in Germany, says Gerard
van Kesteren, chief fnancial ofcer of
Kuehne & Nagel International, which
operates 10,000 trucks and trailers and
includes BMW and Airbus as custom-
ers. It means we have to pay somewhat
more to get drivers. And because the
margins are so thin, we have to pass this
additional cost on to clients.
Forty percent of Germanys truckers
will retire in the next decade, accord-
ing to a study by car parts supplier ZF
Friedrichshafen. The end of compulsory
military service has also hurt, since
20 percent of commercial vehicle opera-
tors earned their licenses in the army.
Other costs are rising, too. Diesel
prices are up more than fourfold over
the past decade, and highway tolls for
trucks have increased. At Kuehne &
Nagel, whose No.1 market is Germany,
the rail and trucking business was its
only unproftable operating unit out
of four last year. DB Schenker, the
biggest trucking company in Europe,
has launched a radio campaign to
attract new drivers and get the atten-
tion of high school graduates. Its re-
cruitment literature talks up the
romance of trucking.
Germanys would-be truck drivers
must earn certifcates proving they un-
derstand customs regulations, are able
to practice fuel-efcient driving, and
in the 1990s, according to former
Georgian Economy Minister Kakha
Bendukidze. Ivanishvili co-founded a
bank that invested in privatized mines
and factories. In 2003 he returned home.
Saakashvili stripped Ivanishvili of
his citizenship in 2011: The parlia-
ment changed the constitution to allow
European Union citizens to occupy po-
litical ofce (Ivanishvili had obtained
a French passport earlier). Authori-
ties later briefy impounded a Geor-
gian bank that the billionaire owns. He
wants to live in a Georgia which is safe
for him, his family, and his wealth, es-
pecially taking into account that his
wealth is above any other wealth in
Georgia, says Bendukidze. In politics
he will become like a godfather.
Henry Meyer, with Helena Bedwell,
Hellmuth Tromm, and Alex Sazonov
The bottom line Quarrels between Saakashvili
and billionaire Ivanishvili are scaring away
foreign investors.
Trade
Exports Wont Give
India An Easy Way Out
Ination ofsets any export boom
the weak rupee could produce
A stronger and stable currency
is better for businesses
Its standard macroeconomics: When
a countrys currency declines, its
exporters usually get a boost in the price
competitiveness of their goods in global
markets. By that rule, India should be in
the midst of an export boom. The rupee
since the start of the latest quarter has
dropped 13.7 percent against the dollar.
On Aug. 28 the rupee had the steepest
one-day drop in two decades.
Exports did go up in July, rising
11.6 percent from the previous year, the
largest gain in more than 12 months. Yet
the July gain comes after a period of
weakness, with Indias exports having
dropped 1.8 percent in the 2012-13
fscal year. More concerning, the coun-
trys trade defcit reached 9 percent of
its gross domestic product in the frst
quarter. The sustained and large de-
preciation of the [rupee] since mid-2011
does not appear to have had any near-
term impact on the current- account
defcit, Mumbai-based Goldman Sachs
economist Tushar Poddar wrote in an
Aug. 26 report. Chances of a short-term
rebound driven by a weaker currency
may be doubtful, he says.
One culprit is Indias infation rate,
which jumped 9.6 percent in July. Any
beneft [from the weak rupee] will be
ofset by the fact that there is a huge in-
fation problem and the cost of man-
ufacturing is very high for local com-
panies, says Indranil Pan, chief
economist at Kotak Mahindra Bank
in Mumbai. Rising raw-material costs
pose a hurdle for Rajesh Mehta, exec-
utive chairman of Rajesh Exports, a
Bangalore maker of gold and diamond
jewelry. There is no big beneft for ex-
porters, he says. A stronger and stable
currency is better for businesses.
For Indian exports to blossom, local
companies need trading partners in
healthy economies. There arent many
around, according to Raghu ram Rajan,
the economist who in September takes
over as central bank governor. The
whole world is in a slow-growth phase,
Rajan said in a March interview.
Indias structural problems also
make it harder for exporters to cash in
on the weak rupee. Information tech-
nology outsourcers such as Tata Con-
sultancy Services and Infosys that
employ low-cost workers in Banga-
lore and other cities have grown, but
manufacturers have sufered from
Indias sorry history of underinvest-
ing in ports, roads, and other infra-
structure. The infrastructure defcit,
says Moodys Investors Service sov-
ereign analyst Atsi Sheth, lowers
growth potential and discourages
foreign direct investment. Thats one
reason India, unlike China and other
Asian neighbors, is not a big exporter
of computers, consumer electronics,
toys, or sporting goods.
The government wants to invest
heavily on infrastructure in a special in-
dustrial corridor between Delhi and
Mumbai. Higher costs in China are
leading some labor-intensive man-
ufacturers to
look for alterna-
tives, creating a
huge opportuni-
ty for India, says
S. Gopalakrishnan,
president of the
Confederation
of Indian Indus-
try. To proft from
the opening, he
says, India needs
to revise rules that make it difcult
for large employers to hire and fre
workers. With national elections next
year, though, such politically charged
reforms are unlikely in the short term.
Bruce Einhorn and Kartik Goyal
The bottom line Despite a two-year drop
in the rupees value, Indias trade decit is
9 percent of GDP.
13.7%
Drop in Indias
rupee since
the start of the
latest quarter
20
Global Economics
Edited by Christopher Power
Businessweek.com/global-economics
know trafc laws. Securing a license can
cost up to 8,000 ($10,700). Truckers
caught working without certifcates
can be fned 5,000. Certifcation takes
three years of training.
The dearth of German drivers has
prompted an infux of foreign com-
petitors, with European Union freight
companies able to operate through-
out the blocwith some restrictions
since a law change in 2007. The foreign
truck companies meet the demand that
German transport companies cannot.
Yet both management and workers
in German trucking companies say
that many foreign rivals compete un-
fairly, even dangerously. Labor costs in
some eastern EU nations average one-
ffth the level in Germany, where they
can amount to half of trucking compa-
nies expenses. According to EU reg-
ulations, drivers from member states
in the east can work for three-month
stints in Western Europe. Their base
pay is as little as 223 a month, with 6
paid for every 60 miles traveled, while
veteran German truckers make as much
as 2,300 a month. The skimpy pay plan
encourages Eastern European drivers
to skip EU-mandated rest periods and
work as many as 60 hours a week,
beyond the regulatory limit of 48 hours.
These drivers tend to live in their
cabs on weekends, when heavy trucks
are banned from German roads. Parked
of the highway, they have little access
to sanitation and small chance of a
solid nights sleep. They are working in
Germany under nomadic conditions,
like migrant workers in China, says
Karlheinz Schmidt, president of BGL, a
German logistics trade group.
Companies in Latvia are hiring Fili-
pino drivers in what amounts to illegal
employment, says Schmidt. EU law,
he says, requires a company to seek
worthy job candidates within the union
before looking outside. BGL has re-
sponded to the foreign infux by launch-
ing a pilot project to train 12 young
people from Spainwhere unemploy-
ment is 26.3 percentto fll driving jobs
in Stuttgart. In 10 years Germany will
be short 150,000 drivers, according to
Dekra, an auto parts company. Finding
replacements will take more than a pilot
project. Richard Weiss
The bottom line It costs close to $11,000 to
get a truck drivers license in Germany. Foreign
rivals dont operate under such a burden.
Correlations
Peace Edges Out War
Since the early 1990s, the world has experienced a decline in both the
number of armed conflicts and their intensity, according to conflict re-
searcher Monty Marshall. While political scientists dont agree on which
of two leading factors deserves more credit, a rapid increase in global
trade and the expanding number of democracies worldwide appear to
have increased the likelihood of nations to seek peaceful resolutions.
Evan Applegate
GRAPHIC BY BLOOMBERG BUSINESSWEEK. DATA: CENTER FOR SYSTEMIC PEACE, WORLD TRADE ORGANIZATION
Not only are there
fewer conflicts, but
theyve become less
destructive. According
to the Center for
Systemic Peace,
the average intensity
of wars has fallen
sharply over the past
two decades.
At the 1992 peak,
just under one-third
of nations with more
than 500,000 people
were experiencing
major political
violence.
Iran-Iraq War
Gulf War
Invasion of Iraq
Vietnam War
First
Congo War
Rwandan
Genocide
Partition of India
$16t
$8t
$0 0
40
30
20
10
50
50%
2012 1946
1946 1979 2012
Number of civil and external conicts, globally
World goods exports, 2012 dollars
War vs. Trade
The Democracy Efect
Democracys share of world governance
A rise in the number of democratic nations
correlates with a decrease in the number of
conicts. This outcome seems to bolster
democratic peace theory, which has its origins
in 18th century political thought.
1993: conict begins to drop
Global Economics
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Last year, Dave Rodham bought two
Ford Mustangsa red one because
it looked cool and a white one with
a big V-8 engine because it sounded
cool. They were his 50th and 51st car
purchases. I have to have a new car
every year and a half to two years,
explains the 63-year-old, of Virginia
Beach, Va., who says he pays cash.
After I retired 10 years ago, I didnt
have anything else to do, so I went out
and bought new cars.
For generations, auto buying de-
clined for consumers entering their
golden years. Now, baby boomers
are refusing to go gently into that car-
buying night. The 55- to 64-year-old
age group, the oldest of the boomers,
has become the cohort most likely to
buy a new car, according to a recent
study by the Univer sity of Michigans
Transportation Research Institute.
Graying boomers replaced the 35- to
44-year-old age group, the most likely
to buy four years ago.
The Boomer Car Boom
The fndings show that boomers auto-
motive passionsand pocketbooks
have plenty of miles left. The study also
suggests that the billions the auto indus-
try spends to woo the elusive Genera-
tion Y might generate a higher return on
investment if they were aimed at their
parents. You shouldnt be chasing the
younger people, you should be looking
at the older people, says Michael Sivak,
author of the study. Baby boomers are
trying to extend their youth as long as
they can, both in terms of taking care of
their bodies and in their expenditures.
The dicey economic times have ex-
tended the working years and peak
earnings period of the 76 million Amer-
icans who were born during the post-
World War II birth boom from 1946
through 1964. Peoples nest eggs
were decreased, including their re-
tirement portfolios, by the recession,
says Lacey Plache, chief economist
for auto researcher Edmunds.com.
We can expect these people to be in
the workforce longer and, as a result,
buying cars longer.
Theres also a strong psychological
motive driving boomers back to the
dealers lot year after year: Their auto-
mobiles defne them. For people who
grew up and lived in the 20th century,
the car wasa visible expression of
you and your person ality, says John
Wolkonowicz, an automotive histori-
an and former Ford Motor product
planner. A 20-year-old doesnt see the
car the same way.
In recent years, fewer young
people are interested in driving. Just
79 percent of people between 20 and
24 had a drivers license in 2011, com-
pared with 92 percent in 1983, accord-
ing to the Michigan study. Conversely,
the oldest boomers are trooping down
to the Department of Motor Vehicles in
growing numbers to remain licensed to
drive. Almost 93 percent of those aged
60 to 64 had a drivers license in 2011,
up from 84 percent in 1983.
Another Mother
For Peace
People 55 and older have replaced younger folks as the top purchasers of new autos
We can expect these people to be in the workforce longer and, as a result, buying cars longer
23
That helps explain why consumers
aged 55 to 64 had the highest rate
of vehicle purchases in 2011 and the
youngest age groups had the lowest.
Even consumers 75 and older bought
cars at a higher rate than 18- to 34-year-
olds, the Michigan study found. I have
a son who lives in San Francisco. When
I get a new car, and I tell him what I
got, he couldnt care less, Sivak says.
To him, its a means of getting from
A to B. He goes to great lengths about
taking a BART [Bay Area Rapid Transit]
or bus, even though it takes him an
hour longer. He does have a car but
uses it very rarely.
Automakers have spent billions
coming up with youth-oriented ve-
hicles and marketing campaigns that
ended up selling better to boomers.
A decade ago,
Honda Motor
rolled out the boxy
Element sport-
utility vehicle, with
clamshell doors
and rubber foors
that could be hosed
out by on-the-go
Gen Xers. Instead,
Hondas boomer
loyalists bought the
car until it was discontinued in 2011.
One of the dirty little secrets of the
auto industry is all these cars are po-
sitioned in advertising and public re-
lations as something a 25-year-old will
buy, says John Morel, a market re-
searcher for Honda. But your pro-
pensity to buy a car at 25 is roughly a
quarter of what it is at age 65. By defni-
tion, very few cars sell in high volume
to twentysomethings.
Toyota Motors Scion line,
marketed to Gen Y, has also sputtered.
Scion sales fell 9.3 percent in July
after a 25 percent plunge in June and
are down 1.8 percent for the year, at
41,261, according to re searcher Auto-
data. Toyota sold 73,505 Scion models
in 2012, down more than half from a
peak of about 173,000 in 2006. Scion
still has a devoted follower, however,
in Michael Leek, a 60-year-old city
planner in Shakopee, Minn. He drives
a Cherry Coke red Scion tC that
he upgraded with gray pinstripes,
a lowered suspension, and a growl-
ing, chrome-tipped exhaust. Now hes
shopping for a new Scion FR-S sports
car. City planners ought not to like
cars as much as I do, and guys who
are 60 should be getting over it, but I
havent, Leek says.
Toyota is embracing its boomer
buyers with the $27,850 Venza sport
wagon, which is easier for aging
drivers to climb into than a high-riding
SUV. Toyota in 2011 pitched the Venza
with TV commercials that made
fun of the millen nials for believing
they remained the center of the uni-
verse after they left the nest, says Bob
Zeinstra, the auto makers national ad
and strategic planning manager. One
spot depicted a young woman alone
in her apartment, bragging about her
Facebook friends and fretting over her
lonely parents, who are shown horse-
back riding and mountain biking.
Boomers are looking for vehicles
that help them stay active and young,
because thats the image they want
to have of themselves, Zeinstra says.
Venza sales rose 11 percent last year,
to 43,095. Deliveries this year through
July totaled 23,498, about the same as
in the prior-year period.
General Motors, Ford, and Chrys-
ler Group have had a troubled history
with boomers, who migrated to Japa-
nese and German models in the 1980s
after being let down by poor quality
from Detroit. That trend is turning,
with U.S. automakers felding some of
their best cars in a generation, such
as GMs Chevrolet Impala sedan and
Fords Fusion family car.
This year, Ford has sold 23 percent
of its models to 55- to 64-year-olds,
outpacing the total auto industry,
which sold 22.2 percent of all vehi-
cles to that group, according to Amy
Marentic, a Ford marketing manager,
who cited data from researcher R.L.
Polk. But the automaker says buyers
nearing retirement no longer just
buy the big boulevard cruisers their
parents coveted for their golden years.
Fords Escape, a small SUV, has
become a boomer magnet since a re-
design in 2012 made it more carlike
and less rugged-looking, Marentic
Aviation
A Crop-Duster With
Terrorists on Its Radar
Tiny civilian planes are increasingly
being revamped for military use
A U.S. pilot wouldnt go in one of
these for love or money
Air Tractor President Jim Hirsch isnt
in the business of making pretty air-
planes. His crop-dusters are big, slow,
and sturdyperfect for fying low over
cornfelds and landing on dirt air-
strips. Hes betting that means theyre
pretty well suited to blowing up ter-
rorists, too. The company is afxing
armor plating, sensors, and weapons
ranging from .50 caliber machine
guns to air-to-ground missiles onto
planes originally designed to douse
cropland with chemicals and spray
water on brush fres. Its sold 24 of the
says. The average age of Escape
buyers this year is 52, up from 51 in
2012. And 45 percent of the Escapes
boomer buyers opt for the fully loaded
Titanium package, starting at $29,100.
Boomers have done everything difer-
ent than previous generations, so why
would we expect their retirement to be
any diferent? asks Susan Pacheco, a
Ford generational marketing executive.
Their automotive needs are what we
base our product strategy around. If
you dont market to them, it would be
a very big mistake. Keith Naughton
The bottom line Consumers aged 55 to 64 are
far more likely to buy a new car than drivers
under 34. Automakers have taken notice.
18-24
25-34
35-44
45-54
65-74
75+
55-64
0 3 6
Age
From the Farm
To the Battleeld
Pesticides
Weapons
Older Car Buyers Drive Sales
New vehicle purchases per 100 drivers
93%
Share of 60- to
64-year-olds with
drivers licenses, vs.
75 percent for 18- to
24-year-olds
6.9
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Companies/Industries
Retailing
Classing Up
RadioShack
The retailer bets that less-crowded
shelves are the key to a turnaround
My mother went there to get...
batteries for a hearing aid
In 2007 the satirical Onion news paper
published a parody interview with
RadioShacks then-chief executive
ofcer, Julian Day. There must be some
sort of business model that enables
the company to make money, the
fake interview imagined Day saying,
but Ill be damned if I know what it
is. Six years later, current CEO Joseph
Magnacca still faces the all-too-real chal-
lenge of fguring out how the money-
losing electronics retailer can coexist
with big-box stores and online rivals.
RadioShacks $96 million in red ink
during the frst half of 2013 was more
than triple the prior-year periods loss.
The chains stock market capitalization
is 2 percent of what it was 14 years ago.
Magnaccas solution is Lets Play!
a business plan designed to make the
retailer a neighborhood technology
playground. Prototype stores have a
cleaner look, a change from the tangled
collection of cables, cords, adapters,
and batteries that most customers as-
sociate with Radio Shack. Shoppers
can connect their
iPhones to a wall
of speakers for
test drives, while
sensors on the
gear selected
call up informa-
tion on a screen
above. Five such
stores reimagined
for upscale, high-
trafc areas such
which was looking for a light, armed
reconnaissance plane for the Afghan
military to use in combating insur-
gents in remote regions. But Brazil-
ian manufacturer Embraers Super
Tucano, developed from a plane used
to train pilots, was the ultimate winner
of that contract.
Rather than scrap the militarized
plane, Air Tractor searched for buyers
overseas. This is a very Third World
concept, says Richard Aboulafa, vice
president at aerospace consultant Teal
Group. A U.S. pilot wouldnt go in
one of these for love or money. When
youre in the First World, you have
access to a fantastic jet with amazing
and sophisticated equipment and data
links to sensors that tell you what to do
and how to do it.
Air Tractor isnt alone in trying to
weaponize existing commercial planes.
Embraer and Gulfstream, a unit of
General Dynamics, have adapted
their business aircraft, more typi cally
seen transporting corporate moguls
and movie stars, for military use.
Embraer ofers airborne early warning
and reconnaissance versions of its
ERJ 145 passenger jet, which in civil-
ian life is a mainstay of airlines short-
haul feets. Bombardier, the worlds
largest maker of corporate jets, is mar-
keting modifed versions of its Chal-
lenger midsize plane as a high- altitude
search-and-rescue aircraft, and its
smaller Learjets as signal-intercepting
spy planes, says Ben Boehm, a vice
president who is leading the weapon-
ization efort. Duties such as coastal
patrols can also be performed by
the 80-seat Q400 turboprops that
now serve regional airports, he says.
Bombardier projects that sales of
such models ultimately may grow to
20 percent of its aerospace revenue,
1999 2013
RadioShacks
Market Cap
$16b
$8b
$0
aircraft to the United Arab Emirates air
force and last year hired a marketing
executive to travel the world in search
of additional sales.
Air Tractor, based in Olney, Tex.,
seeks to join a growing group of aero-
space companies that are adapt-
ing commercial aircraft they already
make to meet military needs. The goal:
expand sales to cash-pinched govern-
ments looking for alternatives to the
costlyand often lengthyprocess of
developing warplanes from scratch.
Its not an expensive, fast, high-fying,
shiny fghter plane, Hirsch explains.
Nonetheless, there are a lot of folks in
a lot of places where this does ft as a
very economical solution.
Before adding weapons systems,
Air Tractors AT-802U plane costs about
$2.5 million, Hirsch says. That com-
pares with $137 million for Lockheed
Martins F-35 fghter, the cutting-edge
jet being developed for the U.S. and
its allies for use in ground attacks and
other missions. Militarized versions
of commercial planes also beneft by
being able to share parts with their
civilian cousins, making them much
cheaper to repair.
Being able to compete on price is at-
tracting governments facing budget
constraints. Global military spending
fell 0.5 percent last year, to $1.75 tril-
lion, the frst drop since 1998, accord-
ing to a study in April from the Stock-
holm International Peace Research
Institute. Western and Central Euro-
pean countries led the cuts, slashing
expenditures by 10 percent since 2008,
while outlays fell 6 percent in the U.S.
Asian and Middle Eastern governments
are boosting spending.
Air Tractor originally developed
the weaponized crop-duster in the
hopes of selling it to the U.S. Air Force,
which totaled $8.63 billion in 2012.
Every single government is realizing
they have to reconcile how they spend
their dollars, says Boehm. Theres a
growing trend to look for of-the-shelf,
commercially certifed product lines.
Tim Catts
The bottom line The weaponized version of
Air Tractors crop-duster costs $2.5 million,
vs. $137 million for an F-35 ghter plane.
25
Companies/Industries
as Manhattans Upper West Side are
already open; 15 more are scheduled to
open by the holiday shopping season.
The company plans another 2,000 less-
slick store redos (without speaker walls
and interactive features), starting in the
New York area, New Jersey, and Texas.
Cutting clutter should be easier,
since Magnacca plans to reduce the
number of stocked items at stores to
3,000 from 4,000, a tactic retailers
sometimes use to raise cash. The CEO,
RadioShacks fourth in three years,
announced the hiring of turnaround
adviser Alix Partners, naming one of
the frms managing directors, Holly
Etlin, as interim chief fnancial ofcer.
The chain has also hired investment
bank Peter J. Solomon to explore
a refnancing of its debt to reassure
vendors and landlords, says a person
familiar with the situation who was not
authorized to speak on the record.
The inventory sellof shouldnt be
viewed as a warning of a cash shortage,
the person says, but as a sign that Radio-
Shacks new merchandising strategy
doesnt require many of the old prod-
ucts that are being liquidated. Radio-
Shack believes it has enough cash to last
through 2014, the person adds.
Nonetheless, Standard & Poors down-
graded RadioShack bonds in August to a
CCC rating, suggesting a possible default
within 12 months, absent a major busi-
ness turnaround or increased liquidity.
Michael Pachter, a managing director at
Wedbush Securities, says that running
4,311 U.S. stores is so costly that Radio-
Shack cant match Amazon.com or
Best Buy prices. Its an electronics
convenience store, and its the end of
an era for those, Pachter says. My
mother went there to get replacement
batteries for a hearing aid, but my kids
get their batteries on the Internet.
As of June 30, the company had
$432 million in cash and $386 million of
credit available. Against that, it report-
ed $628 million of liabilities due within
a year, now down to $547 million. Its
2012 annual report listed obligations of
$834 million due in a year, now
down to about $450 million.
RadioShack began life in 1921 as
a Boston-based mail-order retailer
serving radio ofcers ab oard ships
and amateur ham operators. It
opened the frst U.S. audio show-
room in 1947 and sold the frst
mass-produced per sonal com-
puter, the TRS-80, in 1977. In the
1980s it became one of the frst
Shame
Killer Joe
Earned almost
$18m
Earned less than
$4m
retailers to sell mobile phones, which
still account for half its sales. In the
1990s the companys attempts to
expand beyond its diminutive stores
included its Incredible Universe elec-
tronics superstores and the Com puter
City chain. Both ventures fopped.
Radio Shacks shareholders have paid
the price. The stock has fallen from
$78.50 in December 1999 to about $3.25
currently. Its market capitalization is
just $322 milliondown from a peak of
$16 billion in 1999. Linda Sandler
The bottom line RadioShack, with sales down
32 percent since 1996, is cutting the number of
products in its stores by a quarter.
An NC-17 Can Swing Both Ways
its second NC-17 rating of the year, for
Blue Is the Warmest Color , because of its
explicit sexual content. The movies dis-
tributor, Sundance Selects, said on
Aug. 20 that it will not compromise di-
rector Abdellatif Kechiches vision of the
flm and reedit it to secure an R rating.
An NC-17 rating no longer holds the
stigma it once did, says Sundance
Selects President Jonathan Sehring.
The rating, which prohibits anyone
younger than 17 from seeing the movie
in a theater, has long been equated in
the average moviegoers mind with chill-
ing levels of violence or sex uality akin
to pornography. A flm like Blue Is the
Warmest Color gives me hope, says
Joan Graves, head of the MPAAs inde-
pendent ratings board, which would like
to see NC-17 used far more often. Its a
very fne flm that will get a lot of media
attention as being good.
Blue Is the Warmest Color, sched-
uled to be released in October, won the
Palme dOr prize at the 2013 Cannes
Film Festival, shocking some viewers
there with the length and graphic
nature of its lesbian sex scenes. An
NC-17 rating was widely expected from
the 12-person board, whose members
are required to be parents with chil-
dren aged 5 to 15. In Hollywoodwhere
a movies fnancial performance often
trumps everythingan NC-17 rating
usually portends strategic editing to
earn an R rating that will allow teens to
see it accompanied by an adult.
That calculus could be changing,
slowly. Many credit Shame, director
Steve McQueens 2011 flm about a
sex addict, played by Michael
Fassbender, with changing attitudes
about the rating. Shame received
mostly positive reviews and grossed
almost $18 million glob ally, according
to researcher Box Ofce Mojo.
The rating system is voluntary, al-
though the MPAAs six member studios
must have ratings for their releases.
Movies
A Future for Adult Films
That Arent Porn?
An NC-17 rating is still seen by some
as a box ofce killer
Theres a commercial purpose to
have moviesonly for adults
When the X-rated Midnight Cowboy
took home the Best Picture Oscar in
1969, it became the frstand last
movie rated for adults-only to win
Hollywoods top honor. Soon the
X rating, which was never copyrighted
by the Motion Picture As-
sociation of Americas
rating board, was hijacked
by the porn industry. The
classifcation, renamed
NC-17 in 1990, has been
stuck on the fringes of
moviedom ever since.
Now, with more acclaimed flms re-
ceiving the once- toxic label, NC-17
movies may return to the mainstream.
The ratings board recently handed out
26
Companies/Industries
Briefs
The Whales Wake
By Kyle Stock
Edited by James E. Ellis
Businessweek.com/companies-and-industries
H JPMorgan Chase may pay fines of as much
as $600 million to put its London Whale trading
kerfuffle behind it. The U.S. Department of Justice
is working with various U.S. and U.K. agencies to
craft a single global settlement. Meanwhile, the
bank is fighting a U.S. housing regulators request
for at least $6 billion to settle civil claims over toxic
mortgage bonds. R Big Tobacco is back on
TV after 43 years. Reynolds American, the com-
pany that makes Camel cigarettes, will air a 60- second spot
in September for its new Vuse
e-cigarette. The U.S. Food and
Drug Administration is drafting
its first rules for the new de-
vices and considering market-
ing constraints. The U.S. gov-
ernment banned cigarette ads on television and radio in 1971.

J
Bank of Americas Merrill Lynch agreed to pay $160 mil-
lion to settle a racial bias lawsuit filed on behalf of 700 of its
black financial advisers. The 2005 suit, which has gone
through a series of appeals, accused Merrill Lynch of steer-
ing black employees into clerical positions and shuffling lucra-
tive investment accounts to white brokers. q Fiat said
it would extend a temporary layoff of 5,300 workers at its
main Italian factory, as a six-year slump in European car
sales continues. The employees were sup-
posed to return to work in October, but Fiat
wont bring them back until at least late 2014.
fk Wal-Mart Stores, a frequent target of
labor-rights groups, said it will extend bene-
fits to its workers same-sex partners. The re-
tailer circulated the news to its 1.3 million U.S.
employees this week via postcard. Unmarried
partners of the opposite sex will also get ben-
efits, providing they meet certain criteria.
There are plans to print
ve new J.D. Salinger
books, three years after
the reclusive authors
death, says a new
biography. If the books
are as popular as The
Catcher in the Rye,
sales could top
180 million copies.
You create
opportunities by
performing, not
complaining.
Muriel Siebert, the rst
woman to buy a seat on
the NYSE and founder
of Muriel Siebert & Co.,
who died on Aug. 24.
$0
The value of the
Billabong surf apparel
brand, according to the
Australian companys
latest writedown.
Billabong Internationals
shares have fallen
36 percent this year.
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An NC-17 has been doled out only 103
times in the ratings 23-year history.
Filmmakers who dont want the mar-
keting baggage associated with it
often release their movies without a
rating. Reedits, in consultation with
the board, are common. The recent
remake of Evil Dead was cut to obtain
an R rating, as was the 2006 release
Basic Instinct 2, with Sharon Stone.
Some movie makers have chosen to
fght an NC-17. The expected box ofce
blow was one reason behind the vigor-
ous appeal in 2010 of the NC-17 initially
given Blue Valentine, starring Michelle
Williams and Ryan Gosling. The board
relented and granted an R, one of
the nine successful appeals since the
NC-17 rating was adopted. Williamss
performance was nominated for an
Academy Award, and the flm went
on to earn $12.4 million. Some flms
that retained an NC-17 havent fared as
well: William Friedkins Killer Joe, given
the rating due to its violence,
earned less than $4 millionnot
even half its budget.
An NC-17 rating can be prob-
lematic for studios, because
some media outlets wont run
ads for the flms and some thea-
ters wont screen them. I have
debated this with studio execu-
tives all across Hollywood, says John
Fithian, president of the National Asso-
ciation of Theatre Owners, who argues
that the NC-17s dormancy is making
the R rating overly broad. Theres a
commercial purpose to have movies
that are only for adults.
Film industry insiders say the true
test may come from a big-budget picture
with prominent stars willing to market
their NC-17 flm aggressively and help
educate the public that adult content
doesnt mean a flm is disgusting or
trashy. Some speculate that Fifty Shades
of Grey, the adaptation of E L Jamess
erotic novel, could be that movie. Fifty
Shades, set for an August 2014 release,
is being distributed by Universal Pic-
tures Focus Features art unit. If the
70 million copies sold of the Fifty Shades
mommy porn trilogy are any indica-
tion, the big-screen version could earn
a tidy sum, toohandcufs, sex toys,
spankings, and all. Justin Bachman
The bottom line Only 103 films have received
NC-17 ratings in the adults-only movie
classifications 23-year history.
CEO
Wisdom
27
Companies/Industries
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Hidden Hands: The
governments secret
court for spies 33
Republicans have
a crush on the
sequester 32
How far will the U.S.
go to stop Syria? 30
September 2 September 8, 2013
When members of Congress go home for the summer, they take Washington with them
Conrm the theme(s) prior to the event and make sure the participants will be 100% on message
29
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Foreign Policy
The Trouble With
Attacking Syria
Without clear goals, the U.S. could
be drawn into a years-long war
I dont believe this ought to be used
to heavily inuence the outcome
After two and a half years of war, the
regime of Syrian President Bashar al-
Assad crossed a red line with its Aug. 21
rocket attack on a Damascus suburb. The
U.S. says its undeniable that Assad used
chemical weapons against his own citi-
zens, killing as many as 1,300. U.S. Secre-
Representative Scott Rigell
admits hes a talker. He owns
auto dealerships, where a knack
for storytelling comes in handy.
So when the Virginia Republican
takes the foor at an Aug. 22 break-
fast with constituents in Norfolk,
he sets a timer to keep his inner sales-
man from carrying on too long.
The event is billed as a chance to
talk town hall style with the congress-
man. But the venue is more classroom
than auditorium, and its far from a
come-one-come-all crowd. Instead, its
a friendly audience, about 40 members
of the local American Institute of Archi-
tects chapter that asked for the meeting.
Rigell speechifes for a good 15 minutes
about how Congress is broken, a non-
controversial topic that plays well in his
district, which voted him into a second
term last year and also reelected Pres-
ident Obama. He takes just four ques-
tionsabout the federal budget, the cost
of education, energy policy, and civic
duty. His answers are light on specif-
ics and steer back to his theme of fxing
Washington. Were better than this as
Americans, he says.
Scenes like this played out across the
country in August, as members of Con-
gress, home until Sept. 9 for a fve-week
recess theyve rebranded as a district
work period, travel around hearing
the concerns of ordinary voters. Thats
the way it used to be, anyway. Gone are
the packed, freewheeling town halls
of the past, where
voters stood up at
microphones and
pelted elected of-
cials with questions
on just about any-
thing. Members of
Congress largely
put an end to un-
scripted, up-close-
and-personal events
after the traumatic
summer of 2009, when dozens of law-
makers were shouted down by mad-
as-hell Tea Partiers and citizens angry
that the proposed Afordable Care Act
was going too far or not far enough. It
was a toxic mess, says Jim Manley, a
former aide to Senate Majority Leader
Harry Reid. Former Representative
Mike Castle, a moderate Delaware Re-
publican whod held hundreds of town
halls during his 20 years in Congress,
recalls that at one event, captured on
YouTube, people started yelling at him
about Obama care death panels and
the presidents fake birth
certifcate. Castle, who lost
his primary that year, says a
dozen colleagues who saw
the video told him after-
ward, No more live town
halls. Im done with that.
This summer is all about keeping a
safe distance from voters and sticking
to the party script. Before Congress left
town, House Democratic and Republi-
can leaders handed out tool kits full of
talking points and specifc event ideas,
along with sample editorials written and
ready to be planted in hometown news-
papers. This enables them to stay within
the preprogrammed Washington bubble
even when theyre outside the safety of
the Beltway.
Both parties tool kits urge members
to focus on small gatherings with friend-
ly audiences, keeping in touch with the
public on Facebook and Twitter. Dem-
ocrats were told to play up Obamacare
benefts. Find a woman in your dis-
trict who has a pre-existing condition,
such as being a breast cancer survivor,
and who has had a hard time fnding in-
surance, and hold a press conference,
party leaders suggest. Talk about immi-
gration reform in meet-and-greets with
successful immigrant entrepreneurs
from the district or from the state. Have
them tell their inspirational story.
Republicans advise members to seed
events with business owners sufering
under excessive Washington- imposed
regulations that are hindering their
ability to expand. For a suggested
ObamaCare Media Tour, in which pre-
selected companies are tapped to talk
about how the law is hurting business,
the kit stresses: Confrm the theme(s)
prior to the event and make sure the
participants will be 100% on message.
And for a gas and groceries tour about
rising prices, members stafs are told to
be sure the business owners are com-
fortable with the Member visiting their
location, and confrm they are comfort-
able with the overall messaging theme.
Heeding the Democratic handbook,
Representative Bobby Scott of Virgin-
ia has been posting online videos pro-
moting Obamacare (the most recent has
racked up 34 views) and holding info
sessions about the laws benefts.
In Florida, Republican Marco Rubio,
who put his conservative credentials on
the line by leading the Senates immi-
gration reform bill, has downplayed the
topic during a 330-mile trek through the
state. (Immigration is pointedly missing
from the GOPs list of recommend-
ed topics.) In a 35-minute speech to the
Rotary Club of Jacksonville, he spent less
than 90 seconds on the issue.
Representative Xavier Becerra, a
California Democrat, held a town hall
meeting by telephone on July 23a
convenient and efcient alternative to a
traditional town hall, the party tool kit
says. Callers frst screened by an aide
were allowed to ask Becerra a question.
A woman who asked about Obama-
care putting a chip under your skin
and linking it to anything you own was
quickly cut of. Becerra politely replied
that as far as he knows, chip implan-
tation wasnt a feature of the law. Next
question, please.
Markwayne Mullin is one member of
Congress who isnt shying away from
voters. The Oklahoma Republican was
frst elected to the House in 2012. Hes
hosted 26 town halls across his district
this summer, often doing more than one
a day. All are invited, and anyone can
grab the mic. Hundreds have showed
up. Mullin has received some uncom-
fortable questionsa birther tried to
corner him about the presidents citizen-
shipbut overall its been remarkably
civil. People during my campaign were
telling me, The only time I see my con-
gressman is during the election, Mullin
says. I didnt want to be like that, to be
so fake and have people think I just want
to be around them when Im trying to
get reelected.
Julie Bykowicz, with Michael C. Bender
The bottom line Republicans and Democrats
have scrapped sprawling, free-form town halls
for highly scripted summer recess events.
Find a woman in
your district who
has a pre-existing
condition ... and
hold a press
conference.
tipsheet written
by Democratic
leaders
At his recess
events,
Representative
Rigell sticks to a
safe theme
30
Politics/Policy
Politics/Policy
tary of State John Kerry called it a moral
obscenity. Americas European allies
have been even more bellicose. British
Foreign Secretary William Hague said
on Aug. 26 that the use of chemical
weapons on a large scale like this cannot
go unaddressed, regardless of whether
the United Nations Security Council
authorizes military action.
U.S. ofcials point to a template for
a potential strike against Syria: NATOs
78-day bombardment of Serbia in 1999
in response to the ethnic cleansing
of Kosovo carried out by forces loyal
to then-Yugoslav President Slobodan
Miloevi. A senior administration of-
cial told the New York Times on Aug. 23
that Kosovo is a precedent for a mil-
itary operation without UN approv-
al. Kosovos minister of foreign afairs,
Enver Hoxhaj, argues that the NATO
intervention in Kosovo serves as a
model for our allies in the West and the
Arab world to end Syrian sufering.
There are good reasons why the
Kosovo campaign has captured the
imagination of those studying options in
Syria. Most obviously, it was carried out
over the objections of Russia, which was
Serbias biggest benefactor in the late
1990s, as it is for Assad today. NATOs
bombs succeeded in driving Miloevis
forces out of Kosovo and halting their
rampage against ethnic Albanian civil-
ians, which claimed the lives of 10,000
and displaced as many as 800,000. The
operation required no land invasion,
left no Western casualties, and cost less
than $5 billionabout a thousandth of
the cost of the wars in Iraq and Afghani-
stan. Miloevi was subsequently indict-
ed for war crimes and died in the Hague;
an 11-foot-tall statue of Bill Clinton now
stands in the Kosovar capital of Pristina.
For liberal hawks, including those now
serving in the Obama administration, the
Kosovo war was the high- water mark of
humanitarian interventionism. Yet for all
its merits, the Kosovo example is a cau-
tionary one. Although no U.S. lives were
lost, the air campaign over Serbia wasnt
bloodless: Some 500 civilians were
killed by NATO strikes, including three
Chinese journalists who died when U.S.
warplanes mistakenly hit the Chinese
Embassy in Belgrade. The end of hostil-
ities signaled the start of an open- ended
NATO peacekeeping mission that con-
tinues to this day, and even the pres-
ence of tens of thousands of allied troops
hasnt prevented former ofcers in the
Kosovo Liberation Army from engaging
in horrifc acts of criminality. Nor did the
Wests intervention force Miloevi from
power: He held on for another year and
a half and was ousted only after he tried
to steal an election. The governments of
Kosovo and Serbia signed an accord in
April to begin the process of normalizing
relations. This took a mere 14 years.
Given the scale of bloodshed and
degree of enmity between Syrias
warring sects, its difcult to imagine
Victims of the
Aug. 21 chemical
attack on a
Damascus suburb
The U.S. cant bring an
end to the war in Syria
without a more robust and
costly commitment to
defeating Assad
31
drag is the result of the sequester and
how much is attributable to the earlier
10-year, $1 trillion spending cut Obama
and Republicans agreed to in 2011.
The government has been a brake on
economic growth for most of the last
two years.
Stuart Hofman, chief U.S. econo-
mist at PNC Financial Services Group,
estimates that without the sequester,
government spending would have
added about 180,000 jobs to the
economy since March, when the cuts
took efect. In July the Congressional
Budget Ofce projected that an
immediate can-
cellation of the
sequester would
boost real GDP
by 0.7 percent
and add an extra
900,000 jobs to
the economy by
the third quarter
of 2014. To say the
sequester is good
for the economy
is wrong on a scale thats impressive,
says Neil Dutta, chief U.S. economist at
Renaissance Macro Research.
Boehner, who has repeatedly said
the sequester should be replaced with
more targeted spending cuts, has had
trouble persuading Tea Party conserva-
tives to get in line behind him over the
upcoming budget negotiations. Eighty
House Republicans signed an Aug. 21
letterwritten by Meadowsurging
Boehner to demand that President
Obama defund the Afordable Care
Act or face a government shutdown on
Sept. 30, when Washingtons authori-
ty to spend money will run out unless
Congress approves additional funds.
Boehner has said he wont do that.
Massie says House Republican
leaders approached him in July to
ask if hed be willing to vote to kill
the sequester if Democrats agreed to
long-term entitlement cuts. Massie
said no, mostly because he doesnt
believe theyd ofer cuts deep enough
to make the trade worth it. The seques-
ter is doing the job just fne: Weve
done it, he says, and the world is still
rotating on its axis.
Matthew Philips
The bottom line Conservatives are touting the
once-unthinkable idea that Congress should
let the $1.2 trillion sequester cuts stand.
180k
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Congress
Republicans Rally
Around the Sequester
Tea Partiers in Congress say the
draconian cuts boost the economy
Theyre wrong on a scale thats
impressive, says one economist
On Sept. 1 the automatic federal spend-
ing cuts known as the sequester will be
six months oldwhich is six months
older than they were ever supposed
to be. Congressional leaders never be-
lieved the nine-year, $1.2 trillion cuts to
federal agencies, including the Penta-
gon, would actually go into efect. They
were intended to be so unthinkable that
Democrats and Republicans would be
forced to reach a budget deal by March
2013 to avoid triggering them. Let me
make clear: I dont like the sequester,
House Speaker John Boehner said in
February. I think its taking a meat ax
to our government, a meat ax to many
programs, and it will weaken our na-
tional defense.
As Congress prepares for yet another
standof this fall over raising the U.S.
debt ceiling and writing the 2014
federal budget, Boehner and other
GOP leaders say they still hope for
a deal to end the cuts, which House
Majority Leader Eric Cantor of Virginia
has called harmful. But a small
group of House conservatives, new to
Washington and aligned with the Tea
Party, argue the sequester has been
good for the economy. They want
to leave it in place to keep slimming
down the government. I think the
cuts are helping us, says Representa-
tive Mark Meadows, a freshman from
North Carolina.
By helping lower the federal budget
defcit, Meadows says, the sequester
gives businesses confdence that Con-
gress is serious about getting our fscal
house in order, which he argues will
lead to sustained economic growth.
Kentucky Representative Thomas
Massie, who arrived in Congress last No-
vember after winning a special elec-
tion, agrees. I didnt create the seques-
ter, he says, but if this is the only way
to curb spending, then Im fne with
it. Appearing on Fox News on Aug. 17,
former GOP presidential candidate and
Forbes Media Chairman Steve Forbes
went even further, saying the spending
cuts are boosting the nations gross do-
mestic product. Thats one reason why
were going to get a little bit of growth
this year, Forbes said.
Over the frst half of 2013, the federal
governmentwhich usually contrib-
utes to economic growth through
spending and employmenthas been
a drag on the economy, subtracting
0.8 percentage points from GDP
growth, according to the U.S. Bureau
of Economic Analysis. That wouldnt
be a big deal if the economy were
growing at around 4 percent, as it
did during the mid-to-late 1990s. But
GDP grew just 1.1 percent in the frst
quarter of 2013 and 1.7 percent in the
second. Its not clear how much of that
a political resolution. Kosovo is a re-
minder that even overwhelming air
power has limitsand that the U.S. cant
bring an end to the war in Syria without
a more robust and costly commitment
to defeating Assad. Richard Haass, the
president of the Council on Foreign Rela-
tions, supports missile strikes to degrade
Assads military capabilities but says,
I dont believe this ought to be used to
heavily infuence the outcome within
Syria. That would just get us going down
the road of being enmeshed in a civil
confict there. Instead, he told report-
ers on Aug. 26, the Obama administra-
tion should make good on what the
president said hed do several months
ago and provide arms to those elements
of the Syrian opposition that espouse
agendas the U.S. can live with.
That strategy, too, is fraught with
risks, including the high likelihood that
those weapons will someday end up in
the hands of rebel groups with ties to al-
Qaeda. But it still may be the most palat-
able on a menu of unappealing options.
There are lessons worth learning from
NATOs limited war in Kosovo. Just dont
expect to see any statues of Obama in
Damascus. Romesh Ratnesar
The bottom line A U.S. strike to stop Assads
use of chemical weapons is unlikely to change
the dynamic of Syrias civil war.
Edited by Weston Kosova and Kristen Hinman
Businessweek.com/politics-and-policy
Estimate of jobs
that would have
been added since
March without
the sequester
32
Politics/Policy
Hidden Hands
Spy Court
The proceedings of the federal court that rules on the govern-
ments requests to eavesdrop on foreign terrorists take place in total
secrecy in a windowless room in Washington. Established by the
Foreign Intelligence Surveillance Act of 1978, the court hears one
side of the case onlythe gov-
ernments. The judges almost
never turn down the requests,
prompti ng cri ti ci sm that i ts
little more than a rubber stamp
for the administration. Thats
untrue, says Steven After-
good, who directs the Federation of American Scientists Project on
Government Secrecy. These judges are not hacks. I think they do
a serious job with the tools that they are given, he says. Its just
that the framework is peculiar and problematic.
That became clear on Aug. 21, when the Obama ad-
ministration disclosed the court had reprimanded the
National Security Agency for misleading the judges. On three occa-
sions the NSA had misrepresented the scope of its
espionage, the court said, and violated the Constitu-
tion by collecting e-mails of Americans who werent
suspected of terrorism. Its hard to evaluate whether
the judges have real authority to keep
spy agencies in check. Lawmakers
must ultimately decide whether the
court has enough power, Aftergood says. Its an
occasion for Congress to ask itself, Is this what we
had in mind? Kristen Hinman
Former director of
the Illinois State
Police who penned
a 2002 crime
novel, Money to
Burn, about a
$100 million heist
at Chicagos
Federal Reserve
Bank
Presided over the
Paula Jones sexual
harassment case
against President
Clinton, whom she
later held in
contempt of court
for declaring, in a
sworn deposition,
that he hadnt had
sexual relations
with Monica
Lewinsky
Presided over
both of Roger
Clemenss perjury
trials
Overseeing the
U.S. governments
case against
Najibullah Zazi,
a Colorado man
who pleaded
guilty to
conspiracy in a
plot to attack the
New York subway
system
Reggie Walton
Washington, D.C.
Federal judge since
2001; FISA term
ends 2014
James Zagel
Illinois, Northern
District. Federal judge
since 1987; FISA term
ends 2015
Mary McLaughlin
Pennsylvania, Eastern
District. Federal judge
since 2000; FISA term
ends 2015
Thomas Hogan
D.C. Federal judge
since 1982; FISA term
ends 2016
Susan Webber Wright
Arkansas, Eastern
District. Federal judge
since 1990; FISA term
ends 2016
Martin Feldman
Louisiana, Eastern
District. Federal judge
since 1983; FISA term
ends 2017
Michael Mosman
Oregon. Federal judge
since 2003; FISA term
ends 2020
Claire Eagan
Oklahoma, Northern
District. Federal judge
since 2001; FISA term
ends 2019
Rosemary Collyer
D.C. Federal judge
since 2002; FISA term
ends 2020
Raymond Dearie
New York, Eastern
District. Federal judge
since 1986; FISA term
ends 2019
Dennis Saylor IV
Massachusetts. Federal
judge since 2004; FISA
term ends 2018
The way it works is
peculiar and
problematic.
Steven
Aftergood
1. If a FISA judge makes a decision that a spy agencyor a corp -
oration ordered to turn over data to the governmentdoesnt agree
with, they can le an appeal with the Foreign Intelligence Surveillance
Court of Review.
2. The three-judge panel hasnt had much work. There are only two
known cases when its been called on to issue a ruling. In both, the
review court sided with the government and allowed the spying
to proceed.
Meet the judges
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All judges dont
rule on every case.
Only one is on duty
at a time.
3
They rotate
to Washington
every 11 weeks for
a one-week shift,
serving a single
seven-year term.
1
U.S. Supreme Court
Chief Justice
John Roberts picks the
11 judges from federal
district courts around
the country.
The life of a
FISA court
judge
Dont
like the
courts
ruling?
33
Politics/Policy
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Innovation: How to
become invisible to
mosquitoes 39
Internet streamers vs.
the cable companies
38
Vending machines get
brainier 38
Amazons warehouse-
building frenzy 36
September 2 September 8, 2013
With the Ballmer era ending, its time to reinvent the company
Were in the era of the product person rising to the top
Whip out the elegant, light, superthin
Asus Zenbook on an airplane, and youre
sure to attract stares. The PC stands out
even more with Microsofts Windows 8
software, its touchscreen full of colorful
tiles promising a glimpse of the future.
But that view starts to get foggy when
Windows 8 tries to work with Microsoft
Ofce 2013, lagging or freezing up as it
attempts a task as ambitious as saving a
document. This dividebetween how
good Microsofts products look and how
badly they still behavepartly led to
Chief Executive Ofcer Steve Ballmers
Aug. 23 announcement that hell leave
within a year.
Ballmer will hand his succes-
sor Windows 8, the Windows Phone
mobile operating system, and the
forthcoming Xbox One video game
console. These are good and often
beautiful products. Really. The not-
so-small task for Ballmers replace-
ment will be to turn those innovations
into something more: easy, fun, useful
products that dont disappoint.
In the immediate aftermath of the
announcement, critics were quick to
dish out the standard suggestions to
fx Microsoft: bring in someone like
former IBM CEO Sam Palmisano, jetti-
son the money-losing consumer opera-
tions, and focus on corporate software
and services. These are reasonable
strategies that would look good in the
short term. But Microsoft would still
have to sell products that dont quite
stack up against the more polished
oferings from Apple, Google, and
other rivals.
Ballmer has already done some
of the hard work. In July he led the
company through a massive reorgani-
zation that vaporized traditional busi-
ness units (Windows, Ofce) to get ev-
eryone working together on products.
Top executives will now oversee tech-
nology areas such as devices, soft-
ware, and services. They lost some
good people, but the reorg broke up
long-standing political fefdoms,
says Jefrey Sonnenfeld, a profes-
sor of management at Yale Universi-
ty. Now theyre organized the right
way for someone to come in and make
it work. Microsoft has also overhauled
most of its major product lines in the
past year. Its next CEO will inherit a
business that, while slumping, still
Saving Microsoft
From Extinction
35
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E-Commerce
Amazon Goes on a
Building Spree
The company spends billions on a
new wave of exurban warehouses
Opening them and replicating
them happens very fast
For a company whose showrooms are all
online, Amazon.com spends a stagger-
ing amount on bricks and mortar. The
e-commerce giant has invested roughly
$13.9 billion since 2010 to build 50 new
warehouses, more than it had cumula-
tively spent on storage facilities since its
1994 founding, bringing the total to 89
at the end of 2012. (Its announced fve
more in the U.S. this year.) Amazon aims
to be able to deliver most items the day
theyre ordered, so it can keep rivals
such as EBay and Wal-Mart Stores
from peeling of customers. EBay ofers
same-day delivery in some cities, and
Wal-Mart is moving more sales online.
What Wal-Mart and EBay are working
on is, can they be faster than Amazon?
says Wells Fargo analyst Matt Nemer. It
might not be the highest-margin sale in
the world, but they can potentially get
something to you in an hour.
Amazon introduced its expedited-
shipping program, Prime, in 2005.
Prime ofers two-day service for $79 a
year, plus $3.99 or more per order for
same-day or one-day delivery; non-
Prime Amazon customers pay $8.99 and
up for same-day delivery. But Amazon
cant guarantee top speed for most
items or locations. To be fair, the same
produces enough proft to make any
executive drool.
To avoid blowing this once-in-a-
lifetime opportunity, Ballmers suc-
cessor must frst acknowledge that the
current lifeblood of those proftscus-
tomers who feel locked into Microsofts
consumer and business productswont
last much longer. Theres no reason
consumers have to buy Microsofts
products anymore when they can head
to Apple, Google, or cloud country, or
just squeeze more years out of their old
PCs. Few companies buy smartphones
and tablets for employees as they do for
PCs, so Microsoft will have to earn every
point of market share in these booming
markets the hard way, by making stuf
thats way ahead of the competition.
That means modeling itself to some
extent on Apple, which, despite its
recent stock slump, remains the fnest
product shop in tech.
Lesson No. 2: Learn to say no. A lot.
Microsoft will never have only fve
product lines like Apple, given its huge
swath of businesses ranging from key-
boards to obscure data center soft-
ware. Still, the company needs to
pare down its menagerie of brands
SkyDrive and Live.com probably dont
ring a bellto push a couple that con-
sumers can remember, if not rally
around. Microsofts Skype boasts
around 300 million users and engen-
ders the kind of loyalty most of its
products lack. Longtime tech inves-
tor Roger McNamee, a co-founder of
private equity frm Elevation Part-
ners, wrote in an e-mail that Microsoft
should elevate Skype over Windows
as a fresh, vibrant brand, creating a
central Skype browser and a range of
Skype phones, including some for low-
er-income consumers in emerging
markets. Nirm Shanbhag, managing di-
rector of consultancy Interbrand, says
Microsoft needs a brand that extends
beyond a product, something repre-
sentative of a larger platform.
That would pave the way for an even
more radical notionpackaging all of
Microsofts consumer products in a
single bundle, the way selling Word with
Excel and PowerPoint was once revolu-
tionary. The company has taken steps in
this direction, ofering some free Skype
minutes with a yearly subscription to
its online version of Ofce, but it ought
to take bundling further. Why not use
the strong Xbox brand to pitch college
students on a package that includes
an Xbox One, a smartphone, a Skype
number, and a student version of Ofce?
Such bundles could expose people
to services that work well but havent
found an audience, like Xbox Music,
which ofers song streaming and down-
loads. Subsidizing these deals would
be expensive in the short term, but
Microsoft needs to do something drastic
to boost its mobile fortunes while it still
has a mountain of cash ($77 billion).
To prosper on the merit of its prod-
ucts, Microsoft needs them to work to-
gether without freezing PCs with a click
of the save button. As its next CEO, or
at least that persons right hand, the
company needs a harsh, demanding
product expert willing to ignore internal
politics, focus group fndings, or com-
plaints about impossible deadlines. Such
leaders (Steve Jobs, Mark Zuckerberg,
Marissa Mayer) are rare; Microsoft argu-
ably hasnt had a world-class one since
Bill Gates in his mid-80s prime. But only
a boss who insists that products be great
the frst time around can squelch the
dread that has long accompanied a new
Microsoft release.
Finding that person requires Micro-
softs board to resist the temptation to
bring in one of the usual suspects, an
experienced general manager such as
Palmisano or Oracle Co-President Mark
Hurd. While such able managers could
hone Microsofts fnancials, the company
needs a development-focused execu-
tive at the helm to address its fundamen-
tal problems. Were in the era of the
product person rising to the top, says
Martha Josephson, a recruiter with head-
hunter Egon Zehnder. The best sales ex-
ecutive in the world cannot solve a lack
of product vision.
Almost as important is a fresh face.
Sure, Gates has morphed from techs
Dr. Evil to St. Bill, and Ballmer has
poured billions into new businesses
in an attempt to keep the former mo-
nopoly from sliding into irrelevance.
But Microsoft needs someone who can
persuade people to give it one more
chance. Peter Burrows, Ashlee Vance,
and Dina Bass
The bottom line Microsofts next CEO should
spend big to boost its products and give the
company a fresh start.
Sizing Up Ballmer
Bill Gates was a
tough act to follow.
From 1986, when
Microsoft went
public, to 1999, his
last full scal year
as CEO, sales grew 9,873%. Heres how
the company performed under Steve
Ballmer vs. other tech executives during
his tenure:
Growth in annual sales since FY 2000
Reed Hastings Netix 9,956%
Jef Bezos Amazon 2,320%
John McAdam F5 Networks 1,163%
Jen-Hsun Huang Nvidia 1,041%
Alan Treer Pegasystems 470%
Larry Ellison Oracle 267%
Steve Ballmer Microsoft 239%
Steve Sanghi Microchip Technology 219%
William Smith Jr. Smith Micro Software 207%
John Chambers Cisco Systems 157%
36
Technology
holds for Wal-Mart, which charges $10
to deliver an online order from one
of its 4,700 stores within the day, and
EBay, which charges $5 for same-day de-
livery from retailers including Target,
Walgreen, and Best Buy.
To help speed delivery, Amazon is
building its warehouses bigger, though
the company wouldnt say how much
bigger, and boosting its storage capaci-
ty with foor-to-ceiling shelves. We now
get about twice as much product in this
building as we would have four or fve
years ago, says Dave Clark, vice presi-
dent of worldwide operations and cus-
tomer service, standing in a new Chat-
tanooga warehouse that occupies more
than 1 million square feet. Software that
can sort items by delivery date and opti-
mize storage space has helped Amazon
roughly double the number of items
it can ship per facility, says Clark. The
warehouses are operational within 10
months, down from two years before
the building spree started. Weve
standardized them in such a way that
opening them and
replicating them
happens very fast,
Clark says.
Item storage,
shipping, and de-
livery have become
Amazons top oper-
ating expenses,
jumping more
than 40 percent a
year from 2010 to
2012 and contributing to a $39 million
loss last year. Building on pricier land
closer to cities drives up near-term ex-
penses. Costs will rise more as the
company adds 5,000 full-time jobs in
17 U.S. warehouses to its 20,000 exist-
ing employees, along with 2,000 cus-
tomer service workers (including some
part-time and seasonal hires). Upstarts
such as online grocery deliverer Insta-
cart are moving in the opposite direc-
tion. We dont have to build warehous-
es, lease a feet of trucks, or manage
perishable inventory, says Instacart
Chief Executive Ofcer Apoorva Mehta,
a former Amazon employee. Unlike
AmazonFresh, which ships groceries
in Seattle and Los Angeles, Mehtas San
Francisco-based startup guarantees de-
livery in less than two hours, using con-
tract shoppers who drive their own
cars to customers.
Amazon has a strong record of
trading short-term losses for market
share and sustained profts later, and
investors are giving CEO Jef Bezos the
beneft of the doubt. Since the start
of 2010 the companys stock has more
than doubled. With warehouses close
to the top 20 U.S. metropolitan areas,
Amazon could reach 50 percent of
Americans with same-day delivery,
compared with 15 percent now, says
supply chain consultant MWPVL Inter-
national. That would require 12 ware-
houses beyond those built and an-
nounced, MWPVL says.
As they expand, Amazons ware-
houses will become more efcient,
says Clark. The company last year
5,000
New full-time
employees
Amazon is hiring
as it expands
warehouses
Soon, Amazon may
be able to reach
50 percent of
Americans with
same-day delivery
37
Technology
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Streaming
The Great Bandwidth
Race Is On
Internet TV may threaten the Web
usage limits cable companies want
The question becomes this:
What will appear rst?
Live Internet-based television is fnally
close at hand. ESPN said on Aug. 21 that
its holding discussions to ofer its chan-
nels through Web-based TV services.
That comes on the heels of news that
Sony reached a preliminary Net distribu-
tion deal with Viacom, and that Google
was talking to the National Football
League about buying streaming rights to
its games. Rumors persist of an Apple
service that will stream sports, news,
and other shows live or on demand
without a traditional channel structure.
Such deals dont mean the end of
monthly cable bills, though. Big cable
companies also provide Internet service
and are pushing customers to switch
to billing based on data use instead of a
monthly fat rate. Given how much band-
width streaming video gobbles up, this
could mean big money for Comcast,
Time Warner Cable, and Mediacom
when customers exceed a set data limit.
On Aug. 19, Time Warner Cable began
ofering $5 to $8 monthly discounts to
customers who agree to a limit on their
data use. The plan allows light Internet
users to pay less, but heavier users will
pay moremaybe a lot more, depend-
ing on how much they exceed their data
limit. Replacing HD video from cable
with Internet programming would likely
eat up about 648 gigabytes of data per
month for a typical viewer, Comcast
Coca-Cola,which runs its own vending
network, says it plans to roll out tens
of thousands of machines this year
that accept smartphone payments and
track users purchases to ofer an occa-
sional discount or free drink. Coke has
spent a year testing 200 machines in
Austin, Tex. PepsiCo is using a handful
of malls to test machines with screens
that allow customers to play video
games with free drinks as rewards; the
screens also run soda ads that feature
actress Sofa Vergara. Sales at vending
machine maker ZoomSystems are
growing more than 25 percent a year,
with its machines selling products from
Apple, Best Buy, and Proactiv at air-
ports, hotels, and casinos. The Wittern
Group is pushing its machines into hos-
pitals, to dispense items such as scrubs.
Web connectivity can cut vending op-
erators logistics costs, allowing them
to track inventory online and central-
ize decisions about when to restock and
what to put in each machine, rather than
sending trucks to check each one. Some
operators can reduce their truck feets
as much as 40 percent, says Mandeep
Arora, chief executive ofcer of Canta-
loupe Systems, which sells networking
services to machine operators. We can
send an SMS if theres a jam or a machine
loses power, Arora says. Cantaloupe
charges $10 to $15 a month for each of
the 100,000 new machines it networks
and monitors, while rival USA Technol-
ogies charges about $10.
Retroftting an older machine to add
Web connectivity can cost as much as
$500, and a new smart machine can
run over $10,000, more than double the
price of a conventional one. For some
operators, thats a deal-breaker: Many
own fewer than 20 ma-
chines and have thin
margins. Still, op-
erators need to
upgrade to survive,
says Dennis Hogan,
CEO of Canteen
Vending Servic-
es, which manages
more than 200,000
vending units in the
U.S. The indus-
try is going through
some consolida-
tion, Hogan says. Those companies
that are willing to invest in technology
are thriving.
Vending machine operators are likely
to pass those costs on to card-swiping
consumers. While large operators could
take as long as six months to manually
change prices on older machines, net-
working allows instant price changes.
As fuel and chocolate costs rose,
vending machine candy prices jumped
87.6 percent last year, according to Au-
tomatic Merchandiser magazine. Editor
Emily Refermat says: Vending operators
historically were nervous to raise prices,
and now they are realizing they have to
to stay in business. Olga Kharif
The bottom line Vending machine operators
are turning to networking and digital screens as
they struggle to reclaim cashless customers.
bought Kiva Systems, whose packing
robots are already used by acquisitions
Zappos and Diapers.com, and Amazon
is bulking up its grocery business with
more refrigerators and trucks. Like car
models, Clark says, Well very quickly
incorporate what we learned this fall
from the 2013 buildings and launch the
2014 model. Danielle Kucera
The bottom line To speed delivery and fend
of EBay and Wal-Mart, Amazon has spent
$13.9 billion on warehouses since 2010.
Networks
Vending Machines Get
Brain Implants
Makers and operators roll out
interactive, credit-friendly units
We can send an SMS if theres a
jam or a machine loses power
More than 40 percent of U.S. adults
say they can go a week without paying
for something with cash, accord-
ing to a survey conducted by Rasmus-
sen Reports last year, but most of the
roughly 5 million vending machines in
the U.S. still accept only coins or bills,
even as prices rise. Vending industry
sales fell 18.3 percent between 2007 and
2011, to 1990s levels, before recovering
slightly last year, to $19.3 billion.
To boost sales, vending compa-
nies are installing new machines that
accept credit cards and mobile pay-
ments and feature digital screens, video
cameras, and smartphone charging sta-
tions. Machines that accept plastic can
lift sales 25 percent to 30 percent, esti-
mates Michael Kasavana, a professor at
Michigan State University who studies
self- service technology. Kasavana says
revenue per transaction rises 15 percent
to 20 percent when the machines can
prompt consumers to buy a Snickers
bar along with their bag of Doritos. The
vending industry has had to respond to
the change in consumer preferences in
order to remain relevant and proftable,
says Brad Ellis, president of Crane Mer-
chandising Systems, one of the largest
makers of vending machines.
Market researcher Frost & Sullivan
says there were 500,000 to 700,000
so-called smart vending machines
in operation last year and estimates
therell be as many as 2 million by 2018.
By 2018 there will
be an estimated
2 million smart
vending machines
in the U.S.
38
Technology
Edited by Jef Muskus
Businessweek.com/technology
Innovation
Mosquito Cloak
Next Steps
Grey Frandsen, ieCrowds chief marketing ofcer,
says if Olfactors eld trials in Uganda are successful
this fall, Kite could go to market within a year. There
are still unanswered questions, but it shows a lot of
promise, says Nicole Achee, a medical entomologist
at the Uniformed Services University of the Health
Sciences. If they show having this on your shirt
protects your feet, your ankles, thats amazing.
Olga Kharif
2.
Impact The patch
could help ght such
mosquito-borne
diseases as dengue
fever and malaria.
The latter sickened
219 million people
and killed 660,000
last year, according
to the Centers for
Disease Control and
Prevention.
Innovators Michelle Brown, Anandasankar Ray
Ages 41, 39
Brown is chief scientist and Ray co-founder of
Riverside (Calif.)-based Olfactor Laboratories.
Form and function
Kite Mosquito Patch, a nontoxic 1.5-inch-square
sticker, renders a person invisible to mosquitoes
for up to 48 hours.
Cost The company
says its patches will
be competitive with
other anti-mosquito
products, though
it wouldnt name a
price.
Funding Three-year-
old Olfactor and its
startup incubator
ieCrowd have raised
more than $3 million
in private investment
and grants, and
more than $500,000
on crowdfunding site
Indiegogo. Backers
include the National
Institutes of Health.
1.
This acts like a
mask rather than
as a repellent.
Ray
says. Under its capped 300 GB data plan,
set to go into efect in test markets such
as central Kentucky and Savannah, Ga.,
on Sept. 1, that would cost all its custom-
ers an extra $60 a month. (The company
will let them of the hook the frst three
times.) Comcast declined to comment.
Phone companies already bill this
way, and cable companies have advocat-
ed charging by Web use for years, but
they may have hurt that efort by taking
so long. As Internet TV becomes a more
serious competitor for traditional cable
service, regulators could object to data
limits as a way for cable companies to
squeeze out competition. In an Aug. 20
report, an advisory committee to the
Federal Communications Commission
said the agency should be concerned
that Internet providers could render
competitors such as Hulu or Netfix
unwatchably expensive or slow.
The Barry Diller-backed streaming
site Aereo, which relays TV signals live,
might also face second-class treatment
from Internet providers. (Broadcasters
are currently suing Aereo for copyright
infringement; Aereo denies their claims.)
The report said the FCC should investi-
gate whether providers ought to raise
caps as average broadband use rises.
Cable analyst Craig Mofett of Mofett Re-
search says regulators will be less likely
to approve usage-based pricing if there
are already viable Internet TV services
on the market, because it would be seen
as a way to hamper a direct competitor.
In efect, we are now in a race, says
Mofett. The question becomes this:
What will appear frst?
Data caps could also force content
companies to pay Internet providers for
faster delivery, says Michael Weinberg,
vice president of open-Internet advocate
Public Knowledge. This could stife in-
novation and limit consumer choice by
pricing out upstarts. There are already
signs of such moves: Comcast lets its
Xfnity customers stream its content via
TiVo or Microsofts Xbox 360 without
counting it toward their data cap, and
Time Warner Cable announced a similar
exemption on Aug. 27. If the market
sustains that kind of thing, if it doesnt
punish you, it means there isnt much
of a market, says Weinberg.
Joshua Brustein
The bottom line Viable online TV products
may thwart Internet service providers new
push toward usage-based pricing.
Payload The patchs
chemicals temporarily bind to
a mosquitos CO2 receptors,
disrupting them so that the
bug cant zero in on its prey.
Target Mosquitoes detect
humans by smelling for the
carbon dioxide we exhale,
using receptors called
maxillary palps.
Technology
39
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closed-end funds are subject to investment risks, including the possible loss of principal invested. Shares of closed-end investment companies frequently trade at a discount from their net
asset value. Past performance is no guarantee of future results. When evaluating investment choices, investors should be aware that some closed-end funds include only net investment
income in regular payments, while others may include income and/or a portion of realized gains, and/or capital (representing unrealized gains or paid-in/retained capital) in each regular
payment. Nuveen Securities, LLC is a subsidiary of Nuveen Investments, Inc.
Mosaic courtesy of Martha Crandall via the Chicago Mosaic School 2013 Nuveen Investments, Inc.
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can complete your fnancial picture
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September 2 September 8, 2013
Bid/Ask: MBK Partners
acquires ING Life
Insurance Korea 45
Buy a house and your
visa is free 42
Brazils unintentional
World Cup discount 43
How to really keep
a banker honest 44
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Considering the trillions of dollars of
Treasury bonds the federal government
has been selling to pay for its budget
defcits, youd expect there to be plenty
of them for use by dealers in the fnan-
cial markets. Instead theres a drought,
one thats likely to get worse before it
gets better, and its already interfering
with the functioning of what an adviser
to the Treasury Department in a recent
document called the silently beating
heart of the market.
The shortage is a result of a decline
in Treasury issuance as well as banks
strengthening their balance sheets
in preparation for rules designed to
prevent a recurrence of the 2008 fnan-
cial crisis. The rules, likely to take efect
next year, will further reduce liquidity in
the Treasury market and could have the
unwanted side efect of slightly pushing
up borrowing costs and making inter-
est rates more volatile. You could argue
that youve reduced systemic risk, says
Joseph Abate, a money-markets strate-
gist at Barclays. But when liquidity in
the Treasury market goes down, that
translates into higher mortgages and
reduced access to consumer credit.
Treasury securities play a central role
in high fnancethe beating heart
that the Treasury Borrowing Advisory
Committee describedbecause theyre
all but certain not to sufer default and
are easy to buy and sell in large quanti-
ties. A hedge fund or bank that wants to
borrow $100 million overnight to make a
payment or speculate will pledge some
of its holdings of Treasury bills, notes,
and bonds as collateral. Techni cally
it sells the Treasuries and buys them
back at an agreed-upon price in whats
called a repurchase agreement, or repo.
Money-market funds, pension funds, and
insurance companies that have excess
cash will take the other side of the repo
transactionlending the $100 million
and temporarily taking the Treasuries
as security. Often they will reuse the
collateral they receive by pledging it
as collateral for a loan of their own. The
big banks serve as middlemen.
Wall Street is frighten ingly reliant
on short-term borrowing to fnance
what are often long-term investments
which is why a freeze in the short-term
lending markets can be catastrophic.
During the 2008 credit crisis, Treasury-
backed lending never went away, but
A Treasury
Shortage
Squeezes the
Heart of
The Market
New rules may put a crimp in crucial overnight lending
A real trade-of between bank safetyand market functioning
41
there was a dramatic decline in repo
loans backed by assets such as mortgage-
backed securities because lenders lost
faith in the quality of borrowers collat-
eral. That abrupt drying up of nonbank
credit was a factor in the worst eco nomic
downturn since the Great Depression.
U.S. regulators as well as the Swiss-
based Bank for Inter national Settle ments
are tightening
standards for repo
lending to prevent
a repeat of the
meltdown. Repo
lending and related
forms of fnance
such as commer-
cial paper are
known as shadow
banking, because
they operate in par-
allel with the deposit-taking and lending
that conventional banks do. The new
rules covering leverage and liquidity will
make it more costly for banks to perform
their crucial middleman role by squeez-
ing the profts out of low-yielding, high-
volume activities such as repo dealing,
says Hugh Carney, senior counsel at the
American Bankers Association.
Treasuries will be in shorter supply
because regulators wont allow lenders
to reuse the securities they receive
as collateral to secure loans of their
own. Whats more, new rules aimed at
making derivatives trading safer will
require traders to post hundreds of bil-
lions to trillions of dollars of high- quality
collateral, further draining the pool.
The banks are the guys who are playing
the role of the big shock absorber, and
the new rules will create a real trade-of
between bank safety on one hand and
market functioning on the other, says
Gregory Whiteley, who manages govern-
ment debt at DoubleLine Capital.
Even though the rules have yet to
take efect, Treasury bonds have been
scarce this year. Repo lenders usually
earn interest. But frequently in 2013
they have paid borrowers in their ea-
gerness to get their hands on their
Treasury collat eral, which they then use
for secured borrowing, hedging, spec-
ulating, and other varieties of fnancial
engineering. On June 4, for example,
the overnight repo rate on 10-year
Treasury bonds closed at 3 percent an-
nualized, according to data from ICAP,
a broker. Unless they want to regular-
ly issue more 10-year notes, which is un-
likely, I dont think there is really much
they can do, Barclayss Abate said at
permits to foreign investors, and Spain
is about to kick of its program. The
main targets are wealthy Chinese, who
have been snapping up properties from
Vancouver to London as Beijing tight-
ens controls on real estate speculation
on the mainland. Luis Hortelo, a broker
with Re/Max in Lisbon, says his Chinese
clients know exactly what they want: a
modern property to rent out during their
absence and a visa to travel in Europe.
In Portugal buyers must pay a
minimum of 500,000 ($670,000) for
a property to be eligible for a fve-year
residency permit. A total of 102 visas
has been granted since the program
began last year, according to the
Portuguese Immigration and Borders
Service, mostly to Chinese buyers.
Edmund Zhao, a real estate developer
from Hangzhou in eastern China,
expects to receive his permit any day
now after paying 700,000 for an apart-
ment in the resort town of Cascais.
Zhao must spend
at least seven days
in Portugal during
the frst year and
14 days every two
years thereaf-
ter. His visa will
also let him travel
freely through
the Schengen
Area, made up of
26 European coun-
tries that have abolished immigration
controls at their borders. I want to
move there with my wife and parents
as soon as possible, says Zhao, 38, who
wants to send his future children to
European schools.
Searches for Portuguese properties
on Juwai.com, a Chinese real estate
website aimed at international home
buyers, rose more than threefold from
January through April, says Andrew
Taylor, its co-chief executive ofcer.
Home prices in Portugal are less ex-
pensive than in some parts of China;
300,000 buys a 2,000-square-foot villa
facing the sea, according to Wang Ning,
a manager in the international property
department at SouFun Holdings, owner
of Chinas biggest real estate website.
That amount buys a 730-square-foot
apartment in central Shanghai.
In Spain, where a decade-long prop-
erty boom has collapsed and sent
home prices down about 30 percent,
lawmakers are set to pass a measure that
will let foreign investors apply for renew-
able two-year residence permits if they
the time. In government debt auctions,
there have been fve bids for each six-
month Treasury bill for sale, up from a
2-to-1 ratio a decade ago.
The abrupt shrinkage of the budget
defcit this year caused the Treasury
Department to cut back on issuance of
debt in the shorter maturities that are
sought after on Wall Street. Foreign
demand has been strong, partly
because some European government
securities that had been used as col-
lateral are no longer considered safe
enough. Finally, the Federal Reserve, in
its eforts to stimulate the economy, has
been soaking up $85 billion a month of
Treasuries and mortgage-backed secu-
rities. Some market participants argue
that the Fed is planning to taper its
bond purchases in part to relieve the
collateral scarcity.
Shadow banking such as repo lending
is too important for regulators to shrink
it drastically, says Pete Crane, the presi-
dent and chief executive ofcer of Crane
Data, which follows money markets. He
says regulators are sufering from ultra
paranoia. Even if they tried to shut
down shadow banking, he says, it would
reemerge, possibly in more dangerous
forms. Carney, the American Bankers As-
sociation lawyer, makes a similar point:
There is a fear that a lot of these activ-
ities will fee outside the purview of the
regulatory agencies. After seeing what
happened in 2008, though, regulators
have decided that shadow banking is po-
tentially too destabilizing to be left alone.
Peter Coy, with Liz Capo McCormick
The bottom line Wall Street is so eager for
Treasuries that there are ve bids for every six-
month T-bill, up from two a decade ago.
Treasury Repo
Volume
4/2006 8/2013
$2tr
$1tr
$3tr
Real Estate
For Sale: 10-rm villa
w/pool& golden visa
Needy European nations are
courting afuent Chinese
I want to move there with my wife
and parents as soon as possible
Southern Europes cash-strapped
governments are wooing wealthy home
buyers from overseas by ofering so-
called golden visas to purchasers of high-
end properties. Portugal, Greece, and
Cyprus are ofering temporary-residency
Minimum Real
Estate Purchase
for a Visa
Greece
250,000
Cyprus
300,000
Portugal
500,000
Spain
500,000
42
Markets/Finance
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pay at least 500,000 for a property. Pia
Arrieta Morales, a director at Christies
International afliate DM Properties in
the resort town of Marbella, says brokers
in Spain received a food of inquiries
when the plan was announced last year.
Cyprus is already booming with
Chinese investors, says Nikolas
Michalias, a local real estate appraiser at
G&P Lazarou who spends half the year
in China promoting golden visas tied
to real estate investments. Every day
there are more than 20 Chinese nationals
landing in Cyprus to search for property.
Greece, which introduced its golden
visa in April, has seen a much more
muted response, even though Prime
Minister Antonis Samaras person-
ally pitched the program during a state
visit to China this spring. The frst fve-
year residency permit was awarded
last month to a Chinese man, the Greek
newspaper Kathimerini reported on
Aug. 13. The visa legislation in Greece is
still very recent and has so far had very
little impact on the real estate market,
says Ioanna Plakokefalou, general
manager at Hellenic Realty in Athens.
She says that while her agency has
felded some inquiries from Chinese as
well as Russian investors, turning leads
into sales will depend on the politi-
cal and economic situation in Greece.
Henrique Almeida, with Bonnie Cao
and Jefrey St.Onge
The bottom line Portugal, Greece, and Cyprus
are wooing wealthy Chinese to bolster their
sagging housing markets.
Currencies
An Arbitrage Play in
World Cup Tickets
The Brazilian reals plunge creates
a bargain for locals
People will be transferring dollars
at the market rate to buy in reais
Brazils free-falling currency is creating
a boon for soccer fans seeking tickets
to next years FIFA World Cup, which
will be held in 12 Brazilian cities from
June 12 through July 13. The reals
tumble has opened up a 20 percent
diference between local and over-
seas prices. What an arbitrage oppor-
tunity, says John Welch, a strategist at
Canadian Imperial Bank of Commerce
in Toronto who was raised in Brazil
and plans to attend the tournament.
Without a doubt, some people will be
transferring dollars at the market rate
and then buying tickets in reais.
Soccer governing body FIFA used a
rate of 2 reais per dollar in setting of-
cial prices for the tickets, which start
at $90 for early matches and climb
to as high as $990 for the fnal. FIFA
determined its exchange rate for the
real in May based on a year-ahead fore-
cast by 30 inter national banks, the as-
sociation said in an e-mailed statement.
The real dropped as low as 2.45 to the
dollar on Aug. 21, the day after tickets
went on sale, before recovering to 2.35
on Aug. 26. By converting dollars to
reais at that rate and buying the seats
in Brazil, the cost of the most expensive
tickets would drop to $783. Only resi-
dents of Brazil can buy tickets in reais,
and theyre limited to one for them-
selves and as many as three named
guests, limiting organizers exposure
to currency fuctuations, FIFA says.
The real has tumbled 13 percent
against the dollar in the past three
months, the most among the worlds
most traded currencies. Its bearing
the brunt of the investor exodus from
emerging markets as the U.S. Federal
Reserve prepares to reduce the money
it pumps into the world economy.
Growth in Latin Americas biggest
economy has stag nated, further has-
tening the fow of capital from the
country. Brazils gross domestic
13%
The decline of the
real against the
dollar in the past
three months
Brazils Neymar
Markets/Finance
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or who wont take it and is making
decisions worth millions and millions
of dollars, says the CEO, who submits
himself to a polygraph exam once a
year. If they are not taking it, thats
fne and I wont be penalizing them,
but I wont be making them chairman
of a credit committee.
More than 600 people left Eurasian
Bank the frst year the lie detector was
in use, reducing the number of employ-
ees to 2,010, a company spokesman
wrote in an e-mail. Its workforce now
numbers more than 5,700. Members of
Eurasian Banks management board,
branch heads, and executives on credit
and procurement committees are asked
to take the test. The bank is highlight-
ing its crime-busting tool in marketing
materials for a planned $300 million
Eurobond sale this year, says Eggleton.
The bank was the third-least corrupt
among 24 commercial lenders in the
February 2012 Sange poll, which asked
500 Kazakhstan businessmen and
mortgage borrowers whether bank em-
ployees had sought payments to facili-
tate credit.
A polygraph is an extreme measure,
but large global institutional investors
that we talk to are increasingly con-
cerned about the efects of bribery
on businesses, especially in frontier
markets like Kazakhstan, where corrup-
tion is a serious problem, says Hugh
Wheelan, managing editor of Paris-
based Responsible Investor magazine.
Kazkommertsbank, the countrys
%
tickets
1 in 7
borrowers pays a
bribe to secure a loan
in Kazakhstan,
according to a poll
Eggletons lie detector
600
employees left the
bank the rst year the
lie detector was used
Sensors attach
to the hands, arms,
and chest
product expanded 1.9 percent in the
frst quarter from the previous year, of-
fcial data showed on May 29, below the
2.3 percent growth forecast by econo-
mists. The central bank has taken steps to
stem the currencys decline, which threat-
ens to push infation above the 6.5 percent
upper limit of the ofcial target range.
On Aug. 22 the central bank said it would
spend as much as $60 billion in foreign ex-
change markets to support the real.
Canadian Imperial Banks Welch,
whos married to a Brazilian, says the
real is way undervalued. His frm had
the third-most-accurate forecast for
the currency in the second quarter,
and he sees it strengthening to about
2.15 per dollar by yearend, depending
on the governments policy response
to the slide. It will be very difcult for
the real to get back to 2 reais per dollar,
says Jankiel Santos, chief economist at
Banco Espirito Santo de Investimentos.
Not even winning the World Cup will
be enough to reverse pessimism with
regard to inconsistencies on the eco-
nomic policy front. Joshua Goodman
The bottom line With Brazilian growth slowing,
the real is trading at about 20 percent below the
level FIFA used to set World Cup ticket prices.
Corruption
ALieDetectorCleans
UpaKazakhstanBank
Testing of employees boosts
condence in a troubled lender
Its like having a video camera,
which ofers a bit of protection
When Michael Eggleton arrived in
Almaty, Kazakhstan, in 2009 to take
over as chief executive ofcer of
Eurasian Bank, he knew something
drastic had to be done to repair the
lenders image. The bank, Kazakhstans
10th largest, was losing money, and
Eggletons predecessor had been ar-
rested on suspicion of embezzlement
in connection with $1.1 billion in losses
at Almaty-based Alliance Bank, which
he led from 2002 to 2007. (He was later
convicted.) Three other Kazakhstan
lenders had just defaulted on a total of
about $20 billion in debt. So Eggleton
few a polygraph machine into the
Central Asian country. We had just
come through one of the biggest
economic crises in the world, and I had
just arrived in a new country, says
Eggleton , 44, a former Merrill Lynch
and Credit Suisse banker who was born
in the U.S. There was no confdence in
the banks. I was trying to address con-
cerns of the market.
Kazakhstan, with about 3 percent
of the worlds proven oil reserves and
1 percent of its gas, ranks 133rd out of
176 nations on Transparency Inter-
nationals 2012 Corruption Perceptions
Index, behind Uganda and Nicaragua.
Graft is pervasive in banking, with
every seventh borrower paying a bribe
to secure a loan, according to a poll
conducted last year by Sange Research
Center in Almaty. Eurasian Banks
owners, Alexander Machkevitch,
Alijan Ibragimov, and Patokh
Chodiev, also control London-based
mining company Eurasian Natural
Resources Corp., which is under in-
vestigation by the U.K.s Serious Fraud
Ofce for alleged bribery in Kazakhstan
and the Democratic Republic of Congo.
The company said in August that it will
cooperate fully with the probe.
The use of a polygraph has led to a
drop in theft, in cluding kickbacks for
lending, says Eggleton, who declines
to provide fgures. He started using
the device routinely in January 2010.
Although the annual test is voluntary,
employees who refuse to take it arent
eligible for bonuses or promotions,
he says. I have a problem with
someone who has failed the test
44
Markets/Finance
Bid/Ask By Evan Applegate
Edited by Eric Gelman and Cristina Lindblad
Businessweek.com/markets-and-nance
$2.6b
$800m
$690m
$613m
$504m
$305m
$258m
Oil & Natural Gas takes stake in a Mozambican gas eld.
Indias biggest energy exploration company has
spent $6 billion this year to acquire stable reserves.
Qualcomm sells Omnitracs. Vista Equity Partners
bought the chipmakers eet-tracking division, which
helps trucking businesses keep tabs on their vehicles.
The Pritzkers acquire a steel mill servicer. The owners
of the Hyatt hotel chain added the U.S.s largest mill
support rm, TMS International, to their holdings.
Maple Leaf Foods sells of more of itself. Darling
International bought the food processors animal
rendering business in Maples third sale of the quarter.
William Ackman cries uncle and sells J. C. Penney stake.
Pershing Square Capital Management took a 50 percent
loss on the retailer after a disastrous two-year investment.
Oneok Partners buys a natural gas processing plant.
The energy companys investment arm wants to capitalize
on increased gas drilling in Wyomings Powder River Basin.
Uber hauls in cash. The car service app raised
$258 million in a round of funding led by Google Ventures.
Uber may use the money in its battle with taxi regulators.
ING sells its South Korean insurance unit. Second times the charm
for a motivated seller: Eight months after the sale of ING Life Insurance
Korea to KB Financial Group fell through, buyout firm MBK Partners
agreed to acquire it. As a condition of accepting a $13 billion bailout
from the Dutch government, Amsterdam-based ING must sell more
than half its Asian insurance operations before the end of the year.
$1.7b
biggest by assets, began testing some
employees in 2003. The practice was
introduced by former law enforce-
ment ofcers, according to spokesman
Sergey Chikin, who says the exams
are used to control and improve the
banks processes as well as a preven-
tive measure. The Kazakhstan unit
of Russias largest lender, Sberbank,
began polygraph testing last year, says
a spokeswoman. Among the countrys
six biggest banks, only Halyk Savings
Bank and ATF Bank dont use or have
any plans to introduce lie-detector
tests. As is well-known, the polygraph
is not a perfect system, and there are
often cases of mistakes, Vyacheslav
Abramov, a spokesman for ATF Bank,
wrote in an e-mail.
Eggleton says the tests are 80 percent
accurate. He adds that he hadnt been
aware that Kazkommertsbank was
using a polygraph when he began the
program. It was one of the ideas I had
seen from TV serials, and I had heard
examples of it used in companies and
banks but not as an actual systemat-
ic practice, Eggleton says. Its like
having a video camera, which ofers a
bit of protection.
The U.S. banned private employers
from forcing workers to take poly-
graph exams in 1988 because of the
tests unreliability. In Kazakhstan, a
polygraph can be used if the employee
agrees and if questions dont involve re-
ligious or political matters or inquire
about membership in organizations
such as trade unions, according to
the Prosecutor Generals Ofce. The
answers dont have any legal force, a
spokesman for the ofce said by e-mail.
The banks fnancial results have im-
proved under Eggleton, and Standard
& Poors on July 16 upgraded the banks
outlook to positive from negative,
citing improved proftability, capital,
and market share. The polygraph was
not a factor in the rating change, says
Annette Ess, a Frankfurt-based credit
analyst at S&P. We are aware of the
use of the lie-detector machine, and
we think its impact is marginal, she
says. We will only see its efects in a
few years when existing loans mature.
Nariman Gizitdinov and Jason
Corcoran
The bottom line Eurasian Bank, which has used
lie detectors since 2010, was ranked as third-
least corrupt among 24 Kazakhstan lenders.
45
Markets/Finance
W
When two business initiatives that are good
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thing. In the case of manufacturing and sus-
tainability, thats exactly whats happening
at Chevrolets Detroit-Hamtramck Assembly
Center in Michigan, where all Chevrolet Volts
produced for the global market roll off the
assembly line. A revolutionary vehicle pro-
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American roots, Volt is a full-performance
and full-speed electric vehicle with extended
range. Volt is also an industry leader in
customer satisfaction.
The Volt was invented in the
U.S., so it makes sense that we
build it here, says Pamela Fletcher,
([HFXWLYH&KLHI(QJLQHHU(OHFWULHG
Vehicles at Chevrolet.
Its a true sign of American ingenuity on
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technology and manufacturing.
In its simplest form, Volt operates two
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about 38 milesthen, automatically, the
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driven belt, which results in a lighter overall
workload and better fuel economy.
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the Volt stands alone, and the fact that it
has won just about every major automotive
award since its introduction in 2010 proves
it, says Fletcher. Popular Science recog-
nized the Volt as one of its Best of Whats
New in 2010 for its innovative technolo-
gy. But its the creative mindsand count-
less hours devoted by our engineers in the
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Wal l St ree
Prescri pt i
For
Hospi t al s
By Devin Leonard
Photographs by
Harry Gould Harvey IV
Bostons Steward Health Care
System has a business model
for the Obamacare era. Is it
a bold vision or a private equity
investment gone wrong?
et s
on
A nurse monitors several
ERs at Stewards EICU
alph de la Torre is dressed in a gray
pinstripe suit, white shirt, and orange
tie. His graying hair has been careful-
ly trimmed. He looks like a Wall Street
guy, and talks like one, too. I know the
numbers like the back of my handthe
quality scores, the heart failure scores,
says de la Torre, chairman and chief ex-
ecutive ofcer of Steward Health Care
System, the Boston-based hospital chain
owned by Cerberus Capital Management. I know the fnan-
cials. I feel compelled to know this business as well as anybody.
De la Torre says hes created the ultimate business
model for the age of Obamacare: a national chain of no-
frills hospitals. He unveiled his plan in January 2011 at the
JPMorgan Healthcare
Conf erence i n San
Francisco, vowing that
Steward would
compet e ag-
gressively on
price with the
large university-
afliated teach-
i ng hospi tal s
that dominate
most met ro-
politan areas.
In a world
of Neiman
Marcuses,
were OK with
being Filenes,
he said. De la
Torre said that
Steward would
del i ver l ow-
cost, state-of-
t he- ar t care
t hrough t he
use of advanced
electronic
medical records
systems, new
preventive med-
icine approach-
es, and the stan-
dardizing of everything
throughout the chain,
from billing to emergen-
cy room procedures.
He joked about public-
ly humiliating employ-
ees who fell short of
his safety standards. It
works, he quipped.
De la Torres experi-
ment began in 2008, when the Archdiocese of Boston hired him
to rescue the six money-losing hospitals in its Caritas Christi Health
Care system. Two years later, de la Torre orchestrated the sale of the
facilities in a deal valued at $895 million to Cerberus, a New York
private equity frm and hedge fund best known for buying a major-
ity stake in Chrysler on the eve of the fnancial crisis and losing its
car manufacturing business in bankruptcy. Bloomberg News report-
ed that it recouped most of its losses when it sold Chryslers fnanc-
ing unit in 2010. Cerberus also has investments in hotels, movies,
and guns. It transformed Caritas into a for-proft venture and kept
de la Torre in charge of the newly created Steward.
Armed with Cerberuss cash, de la Torre bought more hos-
pitals and lured doctors away from Stewards competitors. He
made a huge splash in the marketplace, says Ellen Bender, a
health-care consultant in the Boston area. Hes really been the
person to watch in the last few years.
Under the Afordable Care Act, the White House is encourag-
ing the formation of large groups of hospitals and doctors that
can manage lots of patients, as insurance companies move from
simply reimbursing providers for tests and procedures to paying
them to keep people healthy. The Obama administration refers
to these groups as accountable care organizations, or ACOs. Its
one of the White Houses chief strategies for lowering health-care
costs. We created the concept of the ACO on paper in 08, de
la Torre says. Our business plan is an ACO on steroids.
What could be more reassuring than a hospital chief who
says he can carry out
health-care reform while
turning a proft? If de la
Torre keeps it up, hes
going to fnd himself in
charge of Obamacare,
Boston magazine gushed
last year when it fea-
tured him in its list
of the citys 50 most
powerful people.
These days, however,
Steward looks less like
an exemplary exper-
iment in health-care
reform and more like a
troubled private equity
buyout. Steward is a
force in Massachusetts,
where it owns 11 hos-
pitals and had revenue
of $2 billion last year.
But the acquisitions de
la Torre tried to do in
other states either fell
apart or never got off
the ground. In March,
St andard & Poors
warned that the heavily
leveraged company
had weak cash fow.
I dont think they have
any secret sauce, says
Paul Levy, the former
CEO of Beth Israel Dea-
coness Medical Center
in Boston who now
blogs prolifcally about
health-care matters.
There have been few private equity buyouts of hospital com-
panies. Hospitals are heavily regulated. Those that accept Medi-
care must provide emergency services to patients regardless
of their ability to pay. That alone would make it something of a
feat for Cerberus to turn a proft. Thats one reason, says Kevin
Schulman, a professor of medicine and business administration
at Duke University, everybodys watching this one.
De la Torre, 47, grew up in Florida. His father, the late Angel de
la Torre, was an internist from Cuba who immigrated to America
in 1960 with so little money that he had to borrow change to call
someone to pick him up from the airport. He went back to medical
school and eventually became director of cardiology at St. Vin-
cents Medical Center in Jacksonville, Fla. As a boy, Ralph de la
52
In March,
S&P warned
that the
heavily
leveraged
Steward
had weak
cash flow
R
Steward has invested in out-
patient surgical centers like this
one at Good Samaritan Hospital

53
Torre worked as an orderly, passing out catheters to doctors to
open up blocked heart valves.
In 1992, de la Torre earned a joint degree in medicine and tech-
nology from Harvard Medical School and Massachusetts Institute
of Technology. He did his residency at Massachusetts General
Hospital and in 1999 took a job at Beth Israel Deaconess Medical
Center. We were looking for a technically gifted surgeon, and
he ft the bill, says Frank Sellke, former chief of cardiothoracic
surgery at the hospital.
Cardiac surgery is highly competitive. So was de la Torre. Several
times a month he few to a Memphis lab where he practiced on ca-
davers. He created a minimally invasive keyhole surgery tech-
nique, repairing heart valves without slicing through patients
breastbones. De la Torre brought the same enthusiasm to his leisure
pursuits. He downed energy-boosting protein shakes and power-
lifted weights; he traveled
by helicopter to remote
mountainous areas to test
his snowboarding skills.
Some of de la Torres
ex-colleagues describe
him as Machiavellian.
After a few years, Sellke
says, he heard rumors
that his colleague was
angling for his job behind
his back. I thought it was
a joke, Sellke says. It
turned out the joke was
on me. In 2006, de la
Torre became chief of the
cardiothoracic surgery de-
partment. Sellke depart-
ed for Brown Medical
School, where he holds
the same title. I defnite-
ly felt betrayed, he says.
Steward says de la Torre
had nothing to do with the
appointment.
De la Torre
felt increasingly
attracted to the
administrative
side of the hospi-
tal, which he found
as challenging as
the operating room.
The stuf I didnt
learn [in school] is
the stuf that fasci-
nates me, he says.
I dive into finances.
I dive into legal. I dive
i nt o managed- care
constructs.
He also ingratiated
himself with the citys most infuential fgures, such as Jack
Connors, co-founder of the advertising agency Hill Holliday. In
2008, Connors, who has close ties to the Archdiocese of Boston,
told de la Torre that the Archdiocese was conducting a search
for a new CEO at Caritas, which was on the brink of insolvency.
The guy is very bright, Connors says of de la Torre. I mean,
he could have been a rock star or a rocket scientist, you know?
De la Torre says that some in Boston thought he was crazy
for taking a job at a hospital system that he describes as highly
distressed. He fgured that the moment was right. Two years
earlier, then-Massachusetts Governor Mitt Romney had signed a
law making insurance available to all the states citizens, much as
Obamacare is intended to do now throughout the country. De la
Torre was determined to get out in front of the reform movement.
He wasnt the only one trying his hand at health-care reform.
Most of the states big hospitals were tossing around new ideas.
De la Torre did it more loudly. We cant tweak elements of the
system while leaving the rest intact, he wrote in January 2009
in an open letter to President Obama published in this maga-
zine. Its time to overhaul the entire model.
It was around this time de la Torre says he drew up his ACO
plan. To begin the transformation, he had to upgrade the compa-
nys electronic medical records system so that Caritas doctors could
share patient information. De la Torre invested $35 million in the
project, almost all the organizations cash. He also spent money on
billboards outside hospitals with digital clocks that showed the short
wait times in the ER.
He hoped to raise
more money by selling
bonds, but borrowing
costs became prohibi-
tively expensive once the
fnancial crisis set in. He
attempted to sell Caritas
to Vanguard Health
Systems, a for-proft hos-
pital chain in Nashville.
Vanguard was one of the
few hospital companies
controlled by a private
equity investor. In this
case, it was Blackstone
Group. But Vanguard
was spooked by Cari-
tass fnancial condition.
De la Torre says his only
alternative was to fnd
another private equity
investor with an appe-
tite for risk. It turned out
to be Cerberus. When
we began our diligence
four years ago, Stewards
business plan and model
was clearly ahead of its
time, Brett Ingersoll,
head of global private
equity for Cerberus,
wrote in an e-mail.
Massachusetts At-
torney General Martha
Coakley, a Democrat
whom de la Torre had
raised funds for in the
past, embraced the plan.
Her ofce regulates charitable institutions, including Caritas. With
her blessing, Cerberus in November 2010 announced it would
acquire Caritas and rebrand it as Steward. The company prom-
ised to pay of Caritass outstanding debt, assume responsibility
for its pension plan, and invest $400 million in fxing up its ailing
hospitals. There were strings attached: Coakley prohibited Cer-
berus from selling the company or loading it up with debt to fund
a special dividend payment for three years.
Four Cerberus executives joined Stewards board. De la Torre
says he consults with thembut only up to a point. I mean,
theyre smart people, he says. But Im the health-care expert.

The Boston health-care market has long been dominated by some
of the best hospitals in the country, such as Massachusetts General,
De la Torre, in his ofce in
Boston, has worked in health
care since childhood
He could have been a
rock star or a rocket
scientist, you know?

where the singer Adele went for throat surgery, and New England
Baptist Hospital, where the Boston Celtics go for knee repair. Most
people with high-priced insurance gravitate to these large teach-
ing hospitals with big reputations. The regions smaller commu-
nity hospitals fght over the scraps.
Stewards hospitals were at the bottom of the food chain, and
de la Torre needed to change that. With Cerberuss capital behind
him, Steward launched an ad campaign with a Super Bowl spot
in February 2011 in which actors playing patients spoke glowing-
ly about the arrival of a new kind of health care.
The marketing push was accompanied by a furry of purchases.
By the end of 2011, Steward had bought four more hospitals; one
of them, Quincy Medical Center, included an abandoned build-
ing occupied by squatters. Steward decided to tear the building
down rather than fx it up. De la Torre argued that he could quickly
render those hospitals
ACO-worthy.
Steward also boosted
the number of physicians
afliated with the hospi-
tal to increase its patient
fow. The company lured
300 primary doctors
away from Partners
HealthCare, owner of
top-rated Massachu-
setts General, and Beth
Israel Deaconesses, de la
Torres former employ-
er. Part of Stewards re-
cruiting pitch was that
the doctors would be
affiliating with the re-
gions most progressive
hospital company. In two
cases, Steward sweet-
ened the deal
with $36 million
to purchase the
assets of physi-
cian practices,
including their
real estate.
Steward
partnered with
two local insur-
ers to provide
coverage for
small business-
es and doubled
the size of its
home health-care op-
eration. If you take a
managed-care system,
an insurance company, a
physician company, and
a hospital company and
you put them in a blender, thats us, de la Torre says. In De-
cember 2011, the Centers for Medicare and Medicaid Services be-
stowed its imprimatur on Steward when it selected the company
as one of 32 participants in the Pioneer ACO program, an initia-
tive to explore ways to lower Medicare costs through the very
model that de la Torre champions.
De la Torre continued to push Steward to become a reform
laboratory. The company has a team of nurses who spend their
days calling discharged patients from all of their hospitals to
check in. Not everyone appreciates the calls. Sometimes they
say, Im not talking to you. I dont want Steward calling me
anymore. Im tired of you people, laughs Jeanne Hill, a thick-
skinned Steward nurse. She says she has saved lives by hound-
ing patients who are reluctant to call an ambulance after their
conditions worsen.
Steward patients in more serious shape receive home visits.
In July, Colleen Prinzivalli, a pharmacist care manager, dropped
by to see Mildred Mackie, a 77-year-old who had recently had a
heart stent replaced at Stewards St. Elizabeths Medical Center
in Boston. After she was discharged, Mackie found herself getting
easily exhausted while sweeping the kitchen foor. Determined to
prevent another hospital visit, Prinzivalli sat down with Mackie
in her living room, combing though through roughly 15 diferent
bottles of pills. She discovered that Mackie was on two difer-
ent drugs that slowed her heart rate when she needed only one.
A week later, Prinzivalli returned. Do you mind looking
through your medica-
tions one more time?
she asked. Mackie was
taken aback. You want
the whole thing? she
asked. Yeah, Prinzival-
li said. The two women
reviewed each bottle
again. When it was time
for Prinzivalli to leave,
she told Mackie not to
be a stranger. Were
not a 911 service, she
said, but you can call
us if you have any ques-
tions about the meds.
Mackie says she spoke
to Prinzivalli on the
telephone in August,
but she hasnt needed
any further visits. She
doesnt have to come by
anymore, says Mackie.
Im fne.
Steward has gotten some
good publicity about
its reform efortsAtul
Gawande, a surgeon at
Brigham and Womens
Hospital and New Yorker
writer, recently high-
lighted the company in
that magazineyet some
of its self-proclaimed in-
novations are becoming
the industry standard.
Paul Ginsburg, president
of the Center for Study-
ing Health System Change in Washington, says all of Stewards
competitors have set up ACOs and are doing similar things to
control costs and prevent hospital readmissions. You could call
it the norm in Boston, he says. Steward says its several years
ahead of its rivals.
Meanwhile, the national chain that de la Torre has talked
about hasnt materialized. He looked at hospitals in New York,
Florida, Rhode Island, and Maine, to no avail. Maybe it didnt
work, but at least he was out trying to buy some more hospi-
tals, his friend Connors says. I think thats the part that he
loves the most.
Its difcult to see how being on the rugged edge of health-
care reform is helping Stewards bottom line. The company
had revenue of $1.6 billion in 2011 and lost $50 million. Last
54
In 2008, de la Torre became
head of St. Elizabeths and ve
other hospitals near insolvency
This isnt McDonalds.
Its not Starbucks.
This industry doesnt
work that way

year its revenue climbed to $2 billion, and losses narrowed

to $33 million. De la Torre insists the company will be proft-
able this year. (Steward made a similar projection last year to
Rhode Island when it was trying to buy a hospital there, and
still ended up in the red.)
In March, Steward did a $250 million junk bond ofering. Stan-
dard & Poors cautioned that Stewards debt, including lease and
pension obligations, was fve times its cash fow and said the
company was setting of additional alarm bells by loaning money
to its top executives as part of its management retention plan
instead of paying them in cash. Its something we dont see a
heck of a lot of, says John Babcock, an S&P credit analyst. Even
so, Steward says it had more than enough buyers for its bonds.
De la Torre dismisses concerns about Stewards debt levels.
He says the com-
panys results
will improve as
more insurers
embrace the ACO
model . But i ts
not clear how ef-
fective ACOs will
be at containing
costs. In July, the
Centers for Medi-
care and Med-
i cai d rel eased the
result of the frst year
of the Pioneer ACO
project. The results
were widely consid-
ered a di sappoi nt-
ment: Together the
32 participants saved
$88 million, and nine
of the participants left
the program. Stewards
f our Boston- based
competitors who re-
mained in the Pioneer
program made their
results public. De la
Torre says hes proud
of Stewards results,
but the company wont
release them. Steward
says it wants to share
the information with
its doctors frst.
De la Torres other
problem is that some
of his hospitals have
major troubles. Accord-
ing to the Massachusetts
Center for Health Infor-
mation and Analysis,
seven of Stewards hos-
pitals lost money last year. In May, a team of inspectors from the
state Department of Mental Health paid a surprise visit to the
psychiatric ward for the elderly at Quincy Medical Center and
found disarray. According to a state report, One patient was
found sitting in her bed covered with feces. She stated the staf
would not answer the bell.
The local media decried the negligence at Quincy Medical. In
July, Daniel Knell, the hospitals president, tendered his resigna-
tion, citing several incidents [that] have ignited public debate.
A spokesman for Steward says the company is proceeding with its
plan to upgrade Quincy Medical. But such incidents reveal how
difcult creating an integrated hospital chain can be. Jef Gold-
smith, a health-care analyst in Charlottesville, Va., says people
often fail to understand that each hospital is its own ecosystem.
This isnt McDonalds, he says. Its not Starbucks. This indus-
try doesnt work that way.
Were a startup, de la Torre says. Weve only been in ex-
istence for two and a half years. He says the transformation of
Steward is still in the early stages. Its unclear how much longer
de la Torre has to realize his ambitions. Market conditions suggest
that Cerberus will try to unload Steward after the no-sell agree-
ment expires in November. Several large for-proft hospital compa-
nies have been on the prowl for acquisitions. One is Tenet Health-
care, which announced a plan in June to purchase Vanguard for
$1.8 billion. Another is Community Health Systems, which is in the
throes of a $3.9 billion
merger with Health
Management Asso-
ciates. Either one
might be eager to
devour Steward when
they are done with
t hei r current
expansions.
The y ha v e
their hands full
now, but that might
be different in six
months to a year,
says David Cyganow-
ski, managing direc-
tor of Kaufman Hall &
Associates, an Illinois
health-care consulting
frm. Tenet and Com-
munity Health Systems
had no comment
about a possible deal
with Steward.
Many people in
Boston are f ai rl y
certain that Steward
is for sale. Would I
be willing to bet that
itll belong to some-
body else within the
next three years?
says Connors. Abso-
lutely. Id bet on that
tomorrow.
De la Torre down-
plays the possibility
of Cerberus selling
his company. They
believe in the model,
he says. They believe in what were achieving, and they believe
in the long-term strategy. When they sell is up to them, but I
can honestly tell you it wouldnt afect the operations of the
company.
Cerberus had no comment on a possible sale. In an e-mail,
Ingersoll wrote: The team has kept its entrepreneurial spirit
and drive, and we are extremely pleased at their performance as
well as the markets validation of Stewards innovative model.
De la Torre might welcome an opportunity to cash out. No
one ever said it was easy to transform the health-care business.
And perhaps de la Torre will get a chance to try again. This
is just one mans opinion, says Connors. But I think whatev-
er happens, Ralph will keep fnding a larger microphone and a
larger platform to do just that.
55
Steward nurses follow up
with patients from all hospitals
from a call center

I dont want Steward

calling me anymore.
Im tired of you people
HE PLAYED WIMBLEDON.
HE SPEARFISHES.
HE SURFS 30-FOOT WAVES.
HIS COMPANIES ARE WORTH
$187 BILLION.
HE CONTROLS YOUR KETCHUP,
YOUR BEER, YOUR WHOPPERS.
WARREN BUFFETT CALLS
HIM CLASSY. HE IS...
THE MOST
INTERESTING
BRAZILLIONAIRE
IN THE WORLD
BY ALEX CUADROS

57
King. In August, Hees fred 600 members of Heinzs ofce staf
in the U.S. and Canada, or 9 percent of its North American work-
force. About 350 of those jobs were in Pittsburgh. Then he started
knocking down the walls between ofces to create an open-air
plan and promote communication. He also axed 11 senior exec-
utives and replaced them with top performers from inside the
company. Much of this resembles the changes Lemanns people
made at Burger King, where its forbidden to make color copies
without permission, and Anheuser, where employees no longer
have access to free beer. According to a book published in Brazil
this year, Sonho Grande (Big Dream), Lemanns partner Sicupira
has a favorite phrase: Costs are like fngernails: You have to cut
them constantly.
The formula has done wonders for the profitability of
Anheuser-Busch InBev, the company created by Anheusers 2008
merger with InBev; its stock price has increased about 150 percent
in the past fve years. Burger King is already valued at more than
twice the $3.3 billion the three musketeers bought it for in 2010.
Burger King had languished for eight years under the own-
ership of the private equity frms Goldman Sachs Capital Part-
ners, TPG Capital, and Bain Capital. In two years under Hees the
company more than doubled its margins, as measured by Ebitda
(earnings before interest, taxes, depreciation, and amortization),
Wall Streets preferred gauge of cash fow. He did this in part by
recasting Burger King as an owner of franchises rather than an op-
erator of restaurants and sold of locations owned by the company.
This allowed Hees to shove about 28,000 employees of Burger
Kings balance sheet. It also meant the company didnt need to
spend as much to refurbish aging restaurants; instead, it ofered
incentives and lined up loans for franchisees to revamp their lo-
cations, replacing dull old plastic countertops with shiny metal-
lic surfaces and futuristic stripes of neon. Seeking to draw in a
wider crowd, Hees scrapped an advertising strategy that catered
to young males and got rid of that creepy bearded mascot, the
King. And he expanded abroad, forming joint ventures in emerg-
ing markets including Brazil, where local partners put up most
if not all of the cash.
Hees didnt know anything about fast food before becoming
CEO of Burger King. He started his career as a logistics analyst
at a Brazilian railroad Lemann and his partners took over in the
1990s, rising to CEO after just seven years. Putting a railroad guy
in charge of a fast-food chain makes no sense at frst blush, but
this, too, is a typical Lemann move. Whats important is not
knowing hamburgers, its knowing how to lead a company, says
Paulo Veras, an Internet entrepreneur who for several years led
one of the trios foundations. Its the kind of intelligence that
transcends any specifc business segment.
Lemann was born and raised in Rio de Janeiro. The surname is
Swisshis father, a dairy entrepreneur, was born in Switzerland,
as were his maternal grandparents. Lemann went to the Amer-
ican School of Rio de Janeiro, where he was voted most likely
to succeed, even though he spent much of his time surfng and
playing tennis. He played at Wimbledon and competed in the
Davis Cup twiceonce for Brazil and once for Switzerland (he has
dual citizenship). In 1958 he was accepted by Harvard Universi-
ty at a time when few Brazilians went; as he explained in a 2011
speech to a group of high school students in So Paulo, he prob-
ably got in because of his tennis game.
In the speech, Lemann said he didnt like Harvard. He hated the
cold and missed the waves of Leblon beach in Rio. So he designed
a system to get his bachelors degree in just three years: Before
signing up for a class he gathered information on the syllabus by
interviewing the professor and students whod already taken it. He
also discovered that the fnal exams from previous years were ar-
chived at the library and noted that they varied little from year to
year, allowing for easy cramming. Harvard was mainly worthwhile,
he said, because it forced him to get creative so he could fnish early.
A
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After they sold H.J. Heinz to Warren Bufett and a bunch of Brazilians
in June, the ketchup manufacturers outgoing board of directors
met for dinner at Pittsburghs Duquesne Club to congratulate them-
selves on a job well done. Twenty-three billion dollars had just
changed hands. The takeover price, at $72.50 a share, was almost
20 percent higher than the companys recent all-time high. We said
were all going to miss each other, but we felt we had done right
by the shareholders, says Dean OHare, whod sat on the board
since 2000. Heinz is an institution in Pittsburghthe Steelers play at
Heinz Field, locals of means like to get married at Heinz Memorial
Chapeland Bufetts presence allayed fears that the 144-year-old
company would be dismantled. Seeing the name on the letter was
very important to us, OHare says.
The only really un-Bufettlike aspect of the deal, other than the
high price, was the Brazilians. Not because of their nationality, but
because they were the principals at 3G Capital, an investment frm
best known for the leveraged buyout of Burger King in 2010. Had the
Oracle of Omaha changed his mind on private equity, which he once
compared to a porn shop? At Berkshire Hathaways annual share-
holders meeting in May, Bufett explained why he seemed to be
breaking his own rules: his confdence in 3Gs 74-year-old chief inves-
tor and strategist, Jorge Paulo Lemann. He called Lemann classy.
As a sign of Bufetts esteem, 3G and Berkshire have equal stakes
in Heinz despite Berkshire putting up three times as much cash.
Heinz, Bufett said, would be Lemanns show.
In the U.S., Lemann is virtually unknown, even though he
and his two longtime partners, Marcel Herrmann Telles and
Carlos Alberto Sicupira, now control three icons of U.S. consum-
er culture: Heinz ketchup, Burger King, and, after the $52 billion
takeover of Anheuser-Busch in 2008, Budweiser beer. The com-
bined market value of the companies they run is $187 billion
larger than that of Citigroup.
In Brazil, Lemann is a business-class hero. Hes the wiry, white-
haired conglomerateur whos part Bufett, part Sam Walton, part
Roger Federer. (In his younger days he was a fve-time Brazilian
national tennis champion.) Lemann is shorthand for pitiless
efciency. Last year he became the richest man in Brazil, taking
the title from oil and mining tycoon Eike Batista, whose empire
has since collapsed. Worth some $20 billion, Lemann is No.32
on the Bloomberg Billionaires Index, seven slots behind George
Soros and three ahead of Carl Icahn. Arminio Fraga, who worked
under Lemann in the 1980s, later served as central bank chief, and
now runs one of the countrys largest asset-management frms,
is one of a generation of Brazilian entrepreneurs who look up to
Lemann. He carried out a revolution in the way people think
about business, Fraga says.
Lemann and his partners founded 3G in New York in 2004 to buy
U.S. companies with the cash theyd earned from more than two
decades of takeovers and turnarounds in Brazil. The name is a ref-
erence to the number of principals in the frm (the Brazilian press
often calls Lemann, Telles, and Sicupira the three musketeers) and
to Banco Garantia, the investment bank where they developed
their management philosophy. Starting in the 1970s, Lemann built
Garantia into Brazils premier fnancial frm. Since selling the bank
to Credit Suisse in 1998, he and his partners have focused on acqui-
sitions outside the fnancial industry, such as Heinz.
Lemann declined to be interviewed for this article. When con-
tacted by Bloomberg Businessweek, some of his friends and business
associates said theyd been asked by Lemann not to speak with
journalists about him. Heinz likewise declined to make its exec-
utives available for comment, though a handful of press releases
since June 7, when the companys shares ceased trading and Heinz
ofcially went private, hint at the sort of shake-ups that Lemann
and his partners specialize in.
Their frst move was to replace Heinzs long-serving chief
executive ofcer, William Johnson, with Bernardo Hees, a former
Brazilian railroad executive who had most recently run Burger
S
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LEMANNS DEALS
One day, when he was in Rio on summer vacation from Harvard,
a powerful storm had created waves more than 30 feet tall that
broke perilously late, right on the beach. Used to 10-foot waves,
he decided to go for it anyway. I took the wave and felt the blood
go to my feet. It was a lot faster than I was used to, and a lot taller,
but I went for it, and I managed to get out before it crashed. My
adrenaline was at the maximum, he told the Brazilian high school
students, a broad smile across his wrinkled face. At key moments
in his career, I thought back to that wave I surfed in Copacabana
far more than I thought about the things I learned in college. It
gave me a certain self-confdence when it came to taking risks.
After graduating in 1961, Lemann juggled a tennis career with
a series of jobs in Brazils fedgling fnancial industry. In 1971 he
joined with a few other traders to take over an inconsequential
brokerage known as Garantia. Luiz Cezar Fernandes, one of those
original traders, says Lemann instituted the partnership model of
Goldman Sachs, with a twist. Instead of simply awarding shares
once a year for a job well done the way Goldman did, Lemann
ofered the best performers the chance to use their bonus to buy
shares. Because they ofered lower salaries than the competition,
this meant that becoming a partner was a risk. You had to give
up buying a house, a car, says Fernandes. As Garantia grew, it also
meant that becoming a partner would make you very rich on paper.
Seniority didnt matter: To reward top-performing newcomers, the
bank would shrink the bonus pool for laggards.
Lemann always made a point of personally hiring employees,
whom he considered potential partners. In the past, Brazils best
jobs were in the local ofces of multinational corporations, but by
the 1980s, Garantia had become one of the most sought-after em-
ployers for smart young men. (There are few women in Lemanns
world, even today.) Rsums didnt matter much. Candidates had
to go through a gauntlet of interviews with 8 or 10 partners who
had an acronym for the profle they were looking for: PSD, for poor,
smart, deep desire to get rich. Sometimes the partners posed odd
or even ofensive questions just to throw interviewees of balance
and see how they reacted. Paulo Lerner, who worked at Garantia
in the early 90s, remembers being asked whether he had sex with
his girlfriend. He wasnt too fazed, and he made it through, one of
a handful among the hundreds who applied each year.
Garantia was a place where the words fantico and obsessivo
were considered compliments. The frst person to go home
for the day often received ironic applause. No one came and
handed anything to you on a platter, says Lerner. A lot of people
couldnt handle it.
The Garantia style was personifed by Sicupira, who joined in 1973.
At 17 he had emancipated himself from his parents and founded
a brokerage, selling it the following year. He frst met Lemann
because they are both avid spearfshermenSicupira once caught
a 301.2-kilo (664-pound) blue marlin, which set a world record.
In 1982, Sicupira led Garantias frst major foray outside fnance,
the acquisition of an ailing retail chain known as Lojas America-
nas, or American Stores. It was the frst hostile takeover in Brazil,
where stratospheric interest rates and the general chumminess
of business had long kept such moves in check.
Sicupira knew little about retail. He was, however, well aware
of a Lemann maxim, one of 20 laid out in a document distributed
to Garantia executives: Innovations that create value are useful,
but copying what works well is more practical. So Sicupira
wrote letters to the CEOs of the worlds largest retailers, asking
if he could pay them a visit to learn about their business. One
responded personally: Sam Walton, founder of Wal-Mart Stores.
Lemann and Sicupira visited Walton in Arkansas and saw
frsthand how the American billionaire squeezed suppliers, con-
trolled inventories, and paid obsessive attention to cost. They
also saw how he leveled with employees and customers. Waltons
philosophy worked for Wal-Mart, so Sicupira copied it. Much
as Walton promised his executives he would dance the hula on
Wall Street if Wal-Mart reached a certain mark of proftability
and followed throughSicupira, upon achieving a 6 percent
Ebitda margin at Lojas Americanas, did the samba in carnaval
dress in downtown Rio.
Sicupira also incorporated some of the Garantia culture, low-
ering executives base salaries, cutting perks, and implementing
big, target-based stock incentives. Lojas Americanas top man-
agement mutinied, calling for the return of the cushy old system.
After the executives made their demandsand went out for lunch
Sicupira fred them and locked them out of the building. Sicupira,
Telles, and Lemann still own Lojas Americanas. Its share price
has increased tenfold in the past decade.
Lemann once told Brazils HSM Management magazine how
hed visited Konosuke Matsushita, the founder of Panasonic, a
few years before his death in 1989. Suddenly he starts telling
me about his plans for the next 500 years of his company, as
if that were normal, Lemann said. This was at a time when
hyperinfation kept most Brazilians from planning for the future
at all. Lemann also considered General Electrics annual reports
a kind of bible and adopted Jack Welchs 20-70-10 rulepromote
the top 20 percent of your employees, maintain the middle 70,
58
H.J. HEINZ
BOUGHT JUNE 2013 FOR $23 BILLION WITH
BACKING FROM WARREN BUFFETT
BURGER KING
BOUGHT OCTOBER 2010 FOR $3.3 BILLION IN
A LEVERAGED BUYOUT
AB INBEV
SOLD BRAZILIAN BREWER AMBEV TO
BELGIUMS INTERBREW IN 2004,
CREATING INBEV, THEN ORCHESTRATED THE
$52 BILLION TAKEOVER OF ANHEUSER-BUSCH
IN 2008. LEMANN IS THE LARGEST
INDIVIDUAL SHAREHOLDER
LOJAS AMERICANAS
RETAIL CHAIN ACQUIRED IN 1982
FOR $24 MILLION. BRAZILS FIRST
HOSTILE TAKEOVER
SO CARLOS
SPUN OFF FROM LOJAS AMERICANAS IN 1989
TO MANAGE REAL ESTATE ASSETS
BANCO GARANTIA
ACQUIRED AS A BROKERAGE IN 1971 FOR
$800,000. SOLD TO CREDIT SUISSE IN 1998
FOR $675 MILLION
59
and fre the rest. Claudio Galeazzi, a management consultant
who led Lojas Americanas in the late 1990s, compares Lemann
and his partners to sponges. They werent ashamed to copy
the best examples of management, he says. Then they made
it better, applying their own ink.
The seed for what would become AB InBev was Brahma, a Bra-
zilian beer manufacturer that Lemann acquired in 1989, putting
Telles in charge. They hired a management consultant named
Vicente Falconi, who put in place a system where, instead of
basing budgets on the previous years, managers started at zero
every 12 months and had to make a case for why they should get
more. Hees used the same system at Burger King. People say the
customer comes frst and all that, says Falconi, who still advises
Lemanns companies, but actually its cash.
Through it all, Lemann kept up his tennis. Even while oversee-
ing Garantia, Lojas Americanas, Brahma, and, starting in 1993,
a buyout frm called GP Investimentos, Lemann played almost
every morning at 6:30 a.m. The adrenaline eventually took its
toll. Although obsessed with ftness and healthy eating, he suf-
fered a heart attack in 1994, at 54. For perhaps the frst time in
his life, he was forced to slow down.
At the time, Garantia was at its peak. Margaret Thatcher had
recently paid a visit, signaling its clout. It was a pioneer in Brazil
for making risky bets of the sort favored by U.S. investment banks,
and in 1994, according to Sonho Grande, it cleared $1 billion in
proft. Its traders got cocky. Without properly hedging itself,
Garantia sold huge amounts of in-
surance on Brazilian government
bonds, and when the Asian fnan-
cial crisis exploded in 1997, sending
interest rates soaring in emerging
markets around the world, the bank
lost hundreds of millions of dollars
in a single year. It was the banks
frst loss in two decades, and its aura
of invincibility was ruined. The next
year, Lemann and his partners sold
it to Credit Suisse for $675 million, a
fraction of the price they might have
gotten before the losses.
Then life got worse for Lemann.
In 1999 criminals attempted to
kidnap his three young children. A driver was taking them to
school when two cars blocked the street. The would-be kidnap-
pers opened fre. Although the driver was wounded, he managed
to get the children to safety. Lemann would soon move his family
to Switzerland, but on the day of the shooting his children did
not miss school. Nor did Lemann himself miss any meetings,
according to Sonho Grande and a former associate who asked not
to be named. To his business partners, the only sign something
was amiss was that he arrived late.
The sale of Garantia was a blow to Lemann, but it left him with
cash to invest, so he started buying shares in Gillette, the razor
manufacturer, and won a seat on the board. This is where he met
Bufett, who had invested $600 million in the company in 1989.
They had similar boardroom styles, says James Kilts, Gillettes
chairman and CEO from 2001 to 2005. He praises Lemanns intel-
lectual curiosity and nimbleness in an industry where he had no
expertise. Once, in a debate over the wisdom of buying the largest
battery manufacturer in China, Lemann prevailed on his fellow
board members by saying the strategic value of the acquisition
outweighed concerns over price. Kilts says the bet ultimately paid
of. He had this ability to step back from a situation and capture
the essence, Kilts says. Hes a great listener, not a big talker.
At his own companies, Lemanns single-minded focus on cash
fow explains how, after the takeover of Anheuser-Busch in 2008,
AB InBev had little trouble paying down its massive debt amid
the global fnancial crisis. It could also explain why consumers
in the U.S. have lately taken to suing the company for allegedly
watering down its Budweiser. People who know Lemann say he
personally avoids the products he now peddles; hes a teetotaler
who prefers a bottle of water and a salad. According to Sonho
Grande, he ate his frst Burger King hamburger only after acquir-
ing the company and commented that he found it too big. What
he liked about Burger King was how it generated cash.
Veras, the Web entrepreneur, says Lemann and Sicupira have
a saying: Any organization, to be successful, must grow. Once
theyve streamlined away a companys inefciencies and theres
nothing left to improve, however, the only way to keep growing
is through acquisitions. Its essential to keep this immense
machine operating and renewing itself, says Thomaz Wood
Jr., a management professor at So Paulos Fundao Getlio
Vargas business school. Its a heady but vicious work environ-
ment; Wood says he wouldnt recommend his students take jobs
at Lemanns companies.
AB InBev is the worlds largest brewer. It sells almost one in
every fve beers consumed on earth. Those huge economies of
scale allow it to return more value to shareholders, but Wood sug-
gests the benefts have mostly accrued to Lemann, Telles, and
Sicupiras bank accounts. This is more than an abstract discussion.
In 2009 the three men paid 15 million reais ($6.4 million) to Bra-
zils securities regulator to settle allegations that they had abused
their control of AmBev, the product of their merger of Brahma with
another Brazilian beer company. The regulator, known as CVM,
said they had used stock options to boost their holdings in
AmBevs voting shares before selling it to Belgiums Inter-
brew in 2004, to the detriment of minority investors. None
of the three admitted wrongdoing as part of the settlement.
Heinz is diferent from Lemanns past acquisitions in that
theres less fat to trim. This has a lot to do with billionaire
investor Nelson Peltz. His frm, Trian Fund Management,
bought a 5 percent stake in 2006 and helped usher in ag-
gressive cost savings and asset sales, allowing for more mar-
keting spending as well as higher dividends and share buy-
backs. Analysts credit him for the rally in the share price in
the years before Lemann and Bufett acquired the company.
How, then, to wring more value from Heinz? Peter Rossman,
a spokesman for the IUF, an international association of
unions in the food industry, says Heinz workers are nervous,
though its factory jobs have so far gone untouched.
If AB InBev is any indication, Lemann didnt buy Heinz just to
downsize it. OHare, the longtime Heinz board member, says 3G
relayed the message that it plans to use the company as a plat-
form for acquisitions. Fernandes, the onetime partner at Garan-
tia, says hed bet money that Lemann will try to take over PepsiCo.
(A spokesperson from PepsiCo declined to comment.)
Lemann once told a Brazilian tennis magazine he decided
to pursue business only after he realized he was unlikely to be
one of the worlds 10 best tennis players. He said, I saw that I
would never be an astroa star. People who know him say he
hates seeing his name on rich lists, but it seems more an aversion
to publicity than an aversion to riches. Hes an empire builder.
People in the U.S. are moved by the American dream, says
Fernandes. Jorge Paulo, as soon as he fulflls one dream, hes
on to the next.
PEOPLE SAY THE
CUSTOMER COMES FIRST
AND ALL THAT, BUT
ACTUALLY ITS CASH

LEMANN IN 2013
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One businessmans
appetite for the stuff
Americans throw away
Big
Waste
Country
quest to satisfy
Chinas insatiable
By Adam Minter
Photographs by
Thomas Prior
Just before 8 a.m., Johnson Zeng eases his
rented Chevrolet into a space in front of
Cashs Scrap Metal & Iron in St. Louis. Hes
in the market to buy scrap metal he can ship to
China, and this is the first stop of
the day in the middle of a two-and-a-half-week
road trip to regular suppliers that started
in Albuquerque and will end in Spartanburg,
S.C. But that, Zeng says, is nothing. My last
trip with Homer, he recalls, referring to
Homer Lai, the scrap importer in Chinas Guang-
dong Province who provides him with most of his
business, we drove 9,600 miles in 26 days.
The result? Millions of pounds of metal worth millions of dollars
left the U.S. for China.
Zeng is one Chinese trader, in one rental car, traveling across
the U.S. in search of scrap metal. By his estimate, there are at
least 100 other Chinese traders like him driving from scrap yard
to scrap yard, right now, in search of what Americans wont or
cant be bothered to recycle. His favorite product: wires, cables,
and other kinds of copper.
Its an essential trade. In 2012, China accounted for
43.1 percent of all global copper demand, or more than fve
times the amount acquired by the U.S. that same year. A modern
economy cant grow without copper. One way to get that metal
is to dig holes in the ground; the other is from scrap. Since the
mid-1990s, China has taken both approaches, with scrap ac-
counting for more than half of all Chinese copper production
every year (peaking at 74 percent in 2000). Because China is still
a developing economy, it doesnt throw away enough stuf to
be self-sufcient. Thus, for the last decade its imported more
than 70 percent of the scrap copper it uses. Meanwhile, the U.S.,
which throws away far more scrap metal than it can ever use,
has become the worlds most attractive market for the savvy
Chinese buyer.
In efect, Zeng and his peers are the vanguard of sustain ability,
the greenest recyclers in an era when that means something.
Hes the link that binds your recycling bin, and your local junk-
yard, to China.
Zeng clicks away at his BlackBerry in his parked car, checking the
London metal prices that set the global market for scrap metal.
Market is down. He sighs. But we will still try. Hes a young-
looking 42, but when his lips purse with concernas they do
nowhis cheeks puf out slightly, highlighting the lines at the
corners of his eyes.
The BlackBerry buzzes. Homer calling, he says with a whisper
as he presses answer and switches to his native Cantonese.
Zeng and Homer are interested in whats known in the scrap-
metal industry as low-grade. Its an important term that means
diferent things to diferent people. In general, low-grade scrap
requires signifcant workmanual, chemical, or mechanicalto
turn it into copper clean enough to be melted in a furnace. Tele-
phone lines and Christmas tree lights are low-grade because some-
body, somewhere, has to fgure out how to proftably strip the in-
sulation from the metal.
For Americans who care about recycling and preserving re-
sources, the most important thing to know about low-grade scrap
is this: Itd end up in a landfll if it werent exported. Demand for
copper in the U.S. is too low, and labor is too expensive, to be
worth any scrap yards time.
As Chinese low-grade scrap buyers go, Zeng is midsize at best.
The previous night he told me hell try to spend $1 million on low-
grade scrap for export to China this week.
Zeng wraps up his phone conversation with Homer and
slips the BlackBerry into his shirt pocket. Hes waiting by his
computer, he says as he grabs the car door handle. Ill send
him photos.
I check my watch. Its just before 10 p.m. in China. Hes
staying up?
Of course! Some of the material, I dont know what it is. Only
he knows. So I call him. Hes the expert. Homer is a former
barber turned South China scrap-metal magnate. He learned the
business by sorting imported scrap metal by himself; after a few
years he knew the value of what Americans throw away better
than the Americans.
Zeng steps out of the car and opens the trunk. Inside is his
suitcase and a hard hat. From his suitcase, he gets an orange
safety vest of the kind worn by highway construction workers
and slips it over his freshly ironed blue-and-white-checked shirt.
Then he reaches into his wallet and takes out a business card,
which he inserts into the clear plastic holder sewn into the vest.
JOHNSON ZENG
PRESIDENT
SUNRISE METAL RECYCLING
VANCOUVER, B.C.
At that, he shuts the trunk and walks through the front door
of Cashs. Theres a window on the other side, a slot through
which documents and money can be exchanged, andon a rickety
chaira sleepy man in a hard hat and greasy clothes who tries
to avoid my stare.
Hello? Zeng says through the slot.
A middle-aged female face appears in the window, laughing,
apparently in mid-conversation. Can I help you?
Zeng stands straighter, smiles broadly, and slips a card through
the slot. Good morning, maam! He drags out each syllable with
a fawning infection. Im Johnson with Sunrise! I have an appoint-
ment with Michael [not his real name]!
The woman looks at the card. Hes not in.
I see Zeng finch. No problem, maam! Do you know when
hell be in?
Lemme check. She walks away from the window.
His smile drops. Always like this, he whispers. Always.
The door opens just slightly to reveal a tall, muscular man in
his early 30s wearing a red T-shirt. His hand remains on the knob,
and his body leans in the direction of the place from which he
came. Hi, Johnson, Im in the middle of payroll. He nods at a
ratty leather sofa in the middle of a bedroom-size ofce. Ill be
with you as soon as I can.
As he walks of, Zeng fashes a broad, toothy smile. Take
your time! No problem!
We sit.
I made an appointment last week, he whispers, his normal
soft infection returning with a touch of bitterness. Its always
like this. Always.
63
E
m
p
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o
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s

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t

s
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a
p

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.

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&

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i
n

S
t
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s
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,

N
.
C
.
66
I look down at the worn and uneven linoleum foor, perma-
nently stained with what seems like decades of grease and dirt.
Whatre we looking for today?
Zeng and I peer up from the sofa and the man in the red T-shirt
is standing above us, wearing a hard hat and holding a clipboard.
ICW, Zeng replies, using the universal shorthand for insu-
lated copper wire. Also, radiator ends. Red T-shirt hands me a
hard hat, and we follow him out a door at the back of the ofce
and into a narrow, cramped warehouse lined with dozens of
cartons the size of washing machines stufed with scrap metal
of various types.
The light is dim and mostly comes from the sunlight stream-
ing through the loading docks. Red T-shirt knows were behind
him, but he walks quickly. Zeng goes at his own pace, his eyes
moving up and down the various piles of scrap. Red T-shirt
points at a carton of cables wrapped in dirty canvas. Lot of
this just came in.
Zeng takes the BlackBerry from his breast pocket, holds it over
the box, and snaps a photo. Elevator wire, he says, double-
checking the image before pressing send. Goes to Homer. He
moves to the next box, which contains a mix of wires of various
types and colors.
In the U.S. and Europe, this mix of wire is classifed as ICW
and sold at a single price, despite diferent percentages of copper
in each wire type. Once it goes to China, the red wire will be sep-
arated from the green, thick from thin. Each type will have its
own price andoftenits own market. For Zeng, thats a matter
of paying, say, $1 per pound for something that contains products
priced at 60, 80, $1.20, and $2.20 per pound in China. For the
most part, non-Chinese dont know about these micro markets,
and even if they did, they wouldnt have access to them because
of language and culture. How much do you have? he asks.
Red T-shirt looks at his clipboard. About 8,000 pounds. How
about jelly? Weve got probably 10,000 pounds of that. He points
to a box of 2-inch-thick cables cut into 1-foot segments that ooze
both a Vaseline-like substance and hundreds of tiny wires. In a
past life those small wires transmitted telephone conversations
underground, and the jellya petroleum productrepelled the
moisture that threatened to corrode them. American wire recy-
clers dont like it because the jelly gums up the blades in their re-
cycling equipment, so its shipped to China, where its cut apart
by hand and washed clean with soap.
Zeng snaps a photo and transmits it. Then he notices some-
thing: Ah, Christmas tree lights.
The lights are loose in a box, and Zeng reaches to pull away at
the knots, hoping to see if theres anything beneath them. Not
good quality, he whispers to me. They should be baled. That
is to say, they should be compressed into a cube so that nothing
can be hidden beneath them in a box. Zeng looks over to Red
T-shirt. Maybe should be priced less.
Nah, Christmas tree lights are Christmas tree lights, Red
T-shirt responds.
Zeng stares at the box and clucks his tongue. He wants them.
This is how it goes for the next 10 minutes: Red T-shirt shows
Zeng cable television wire (not interested), cable television boxes
(very interested), power lines (very, very interested), and other
essential accessories of daily life that eventually get thrown away.
Zeng takes photos of everything and carefully writes down avail-
able volumes.
Do we have enough for a container? Red T-shirt asks.
Its a key question. A standard 40-foot overseas shipping
container of the sort that Zeng will send to Homer in southern
China can hold 40,000 lb. But heres the catch: The high cost
of moving containers from one scrap yard to another means
that each container must be flled up in only one scrap yard,
and that means Zeng needs to buy 40,000 lb. of scrap metal at
Cashsor nothing at all.
He runs his fnger down his notes and purses his lips. We still
need 10,000 lb. How about some Christmas tree lights? Do you
want to sell them?
Lets go inside, and Ill check how much we have.
We follow Red T-shirt back into the ofce and take a seat on
the sofa. But theres no time to relax: Homers number is fashing
on Zengs BlackBerry. Must have some new prices, he says and
answers. The conversation lasts less than 10 seconds. Homer is
cautious today, he tells me as he hangs up.
He opens his notebook and takes out a sheet of paper marked
Purchase Order. Its a crude form, obviously made at home
on a PC, andin addition to Zengs name and companyit con-
tains the three columns that matter: material, weight, and price.
Slowly, he writes:
JELLY WIRE WITH STEEL 10,000 LB. 55
GREASE WIRE 5,000 LB. 135
#2 INS. COPPER WIRE 8,000 LB. 150
Hes beginning the fourth item when he receives another call
from Homer. Its another 10-second machine-gun burst of Can-
tonese. Whatever was said, its enough for him to cross out the
frst jelly wire price and raise it to 56. He writes down an addi-
tional seven categories, and by the time hes done hes ofered
to buy close to $60,000 worth of scrap. Maybe not competitive
enough today, he worries. Lets see.
Red T-shirt looks around the corner. Stu will be with you in
a moment, Johnson.
Zeng nods to himself. We used to be able to buy fve to eight
containers at a time from this yard, he tells me. Now lucky to
get one. More competition. Some days the yards have two or three
teams of [Chinese] buyers come. Sellers market.
He places his hands on his knees, takes a deep breath, and
then pulls up the current London prices on his BlackBerry. For
a moment, its quiet but for the distant roar of a machine on the
other side of the walls.
In one week, Zeng says he spends $1 million
on low-grade scrap for export to China
67
I spend six days on the road with Zeng, watching as he scrounges
for containers of scrap metal worth as much as $100,000 each,
eating of-menu at Chinese restaurants, and sleeping in Red Roof
Inns. Some days we drive six hours only to fnd that the scrap
Zeng had been promised was sold a few hours earlier to another
roving Chinese buyer; other days, Zeng spends the equivalent of
a Lamborghini on scrap.
He says that all of the time on the road can be lonely and frus-
tratingespecially if youve been doing it for fve years. He has a
wife and son in Vancouver, but he spends only about six months
of the year with them.
This isnt the future that Zeng foresaw in Shantou, the modest
city in northeastern Guangdong Province where he was born.
Hes a polymer scientist by training, and after graduating from
college he worked his way up the corporate ladder, eventually
landing a senior management position at Sinopec, a state-owned
oil conglomerate.
It was a good, stable life, but Zengs wife was eager for change,
a life away from China, he tells me during a long drive through
Kentucky. After much discussion and contemplation, Zeng moved
his family to Vancouver.
That was the easy part.
He went from being a young man on the move with a guaran-
teed future in a state-owned company, to working odd jobs, in-
cluding time spent as a renovation contractor, a fruit salesman in
Chinatown, and several years working in the dairy department
of a supermarket.
Then one morning in 2006 he was reading a Chinese-language
newspaper and came across an advertisement for a trader
that specifed neither the company nor the goods traded. This
sounds good to me, he recalls thinking. Trader! Its my favor-
ite job! Marketing!
The company was looking for someone to join its sales teams
prowling North America for scrap metal, and he was ofered
C$1,200 ($1,143) for three months work, plus a $300 bonus if the
work took him state-
side. Zeng accepted the
job, and after a weeks
worth of training he
was out on the road in
a rented car. Two years
later he left the trading
company and teamed
up with Homer, who
had his own scrap yard
in Guangdong. After I
went on my own with
Homer, he tells me,
I spent seven months
on the road. One time
I spent seven weeks on
the road with Homer
without going home
once.
How much scrap
did you guys buy?
He thi nks for a
moment. Hundreds
and hundreds of con-
tainers.
In the offi ce of
Cashs Scrap Metal &
Iron we wait 5 minutes,
then 10 minutes, but
nobody comes to take
Zengs purchase order.
While we wait, he
stares at the London
prices. Then he looks at the Chicago prices. He asks if I mind
Chinese food for lunch, and of course I tell him I dont.
Johnson? bellows a big voice. Cmon in!
Zeng rises from the sofa and strides into a corner ofce that
overlooks a large, messy desk where Stu Block, the portly, curly-
haired founder of Cashs, leans back in an ofce chair. There are
three other men in the room, and they smile as if theyve just
been privy to a particularly dirty joke that theyve promised not
to share. Hello, sir! How are you today? Zeng says, handing over
his purchase order. Block runs his eyes over it with a crooked
smile. All right. Let me think. I need to see where the markets
going. Ill have somebody call you later.
I turn to Zeng. I look at Block. Thats how he responds to
a $60,000 purchase order for something that cant be sold to
anybody in the U.S.? Who the hell else is going to take those ratty
old Christmas tree lights?
Thank you, sir! Zeng says. Ill call later.
Take care, Johnson.
We walk out the door, and as soon were on the sidewalk I
burst out: He barely looked at your prices! Hes not interested?
Probably not. Too many other buyers. I can tell other buyers
were here yesterday. There wasnt as much scrap as usual. He
opens the car and places his hard hat and vest on the back seat.
Its OK. Tomorrow we will arrive somewhere before they do.
As we settle into the car, he reaches into the glove box for the
GPS. It contains the names of dozens of scrap yardsZengs sup-
plier networkand he punches up the next one were due to visit.
I was surprised to see so many Christmas lights, I tell him.
Big waste country, the U.S., he answers. They make these
things but have no way to recycle them.
Appropriately, Zengs phone buzzes with Homers number.
Maybe he has some new prices for me. Lets see.
Excerpted from Junkyard Planet: Travels in the Billion-Dollar Trash
Trade, to be published in November 2013 by Bloomsbury Publishing
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CAMEL
JACKETS
STAND OUT
FROM THE
OFFICE DRONES
(102 WAYS INSIDE)
70
Etc. Fall Fashion
TREND
JOHN VARVATOS SPREAD-COLLAR SHIRT $245
PAUL SMITH WOOL SUIT $2,380
BANANA REPUBLIC TARTAN TIE $59.50
Previous Page: Suit, Banana Republic; Sweater, J. Crew; Shirt, Michael Kors; Tie, Michael Kors; Shoes, J. Crew
PAUL SMITH ACCESSORIES SCARF $125
GUCCI EVERGREEN PEACOAT $4,800
SHIPLEY & HALMOS BOOSTER SHIRT $235
JOSEPH ABBOUD FLAT-FRONT TROUSERS $125
BALLY MAED BAG $1,195
JOHN VARVATOS V-NECK CASHMERE SWEATER $498
5 SHADES OF
BURGUNDY
HAIKU
IN THE WILD
QUOTE
Burgundy, a key color in
fall collections from Gucci,
Jil Sander, and Balenciaga,
is a new fall staple. Its
an easy way to add richness
to your basic work neutrals,
and it blends well with
navy, gray, and black. A full
burgundy suit makes
a statement (though for
most, it might work better
as formal wear). Less
adventurous dressers can
incorporate a touchin
a tie, a scarf, or the stripe
on a preppy sweater.
I dont know
how to put this,
but Im kind
of a big deal.
I have many
leather-bound
books, and
my apartment
smells of
rich mahogany.
Ron Burgundy,
Anchorman
Merlot
Sherry
Actor Alden
Ehrenreich, in an
Albert Hammond Jr. for
Confederacy suit, at
the Beautiful Creatures
premiere in March
Manly
burgundy!
Rich, deep
red conveys
power
And a sense
of style
Mauve
Pink smoke
Pale pink
BURGUNDY
SPLURGE
SPLURGE
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;
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;
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71
BOAST
WIDE-STRIPE
SWEATER
$175
H&M CORDUROY
SUIT JACKET
$99
PAUL SMITH
DEXTER BOOTS
$570
MASSIMO ALBA
ALUNGA PANT
$425
H&M CORDUROY
SUIT PANTS
$49.95
UNIQLO
BURGUNDY BELT
$19.90
ORIGINAL PENGUIN
GINGHAM SHIRT
$89
SHADES OF GREY
WHITE OXFORD
$99
MARK MCNAIRY
DERBY SHOE
$370
BARGAIN
BARGAIN
71
72
Etc. Fall Fashion
GUCCI TARTAN CABAN COAT
$3,390
JIL SANDER PLAID COAT
$3,570
BILLY REID PLAID CAR COAT
$795
PRADA COAT WITH VELVET COLLAR
$3,290
CARVEN WOOL COAT
$890
STEVEN ALAN QUENTIN TRENCH
$565
HERMES GABARDINE PARKA
$3,400
GENERAL IDEA DUCKDOWN COAT
$500
BALENCIAGA NYLON PARKA
$4,500
PLAI D
CAMEL
ANORAK
Forget your
dads pajamas
patterned jackets
of diferent lengths
and colors are
this seasons hit.
Just keep it simple
underneath.
Updated takes
on khaki coats
were all over the
runways. This
years models have
interesting details
and a slightly
looser ft.
This sporty
silhouette isnt
just for weekends
anymore. New,
sleeker versions
can be worn with
tailored slacks and
ftted sweaters.
18 STATEMEN
TRENDS
FOR HI M
BARGAIN
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73
REED KRAKOFF DOUBLE-BREASTED
JACKET $3,490
RACHEL COMEY HAVEN COAT
$690
MARNI WOOL BELTED COAT
$3,970
KAREN WALKER SCARLET
FLEECE WOOL COAT $1,020
ROCHAS COAT
Price upon request
STELLA MCCARTNEY JENNA COAT
$3,855
HELMUT LANG META COAT
$895
ASSEMBLY RAGLAN TRENCH
$664
DKNY RUNWAY COLORBLOCK COAT
$995
FUR
COLLAR
VI BRANT
HUES
COLOR
BLOCK
Just a little bit! Fur
collars, falls most
ubiquitous outer-
wear trend, add
formalityand
warmthto even
the most basic
ofce get-up.
Theres no better
way to brighten
up a dreary day
(or outft) than
a bright jacket.
Dont worry about
matching, but
beware of clashing.
Color blocking is
still going strong.
These coats should
hit below the
kneeany shorter
and the efect
wont read.
NT TOPPERS
TRENDS
FOR HER
SPLURGE
74
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:
A
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(
5
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Etc. Fall Fashion Etc. Fall Fashion
Heres the thing about
animal prints: They can
look totally chic or
completely trashy. That
makes wearing them to
work particularly fraught.
The trick is ft and fabric
nothing too tight or short,
and nothing polyester.
Opt for body-skimming
shapes made of silk,
cashmere, or high-end
cotton. For just a hint, go
for an animal print
shoe or structured bag,
worn with a neutral outft.
White tiger Dalmatian Cheetah
Cow
Zebra
Girafe
Snake Leopard
Tiger
TREND
ANIMAL PRINTS
PREEN BLOUSE $1,173
A. L.C. SWEATER $495
ACNE STUDIOS JACKET $1,600
MARISSA WEBB BLOUSE $425
REBECCA MINKOFF SHORTS $448
SURFACE TO AIR LONGSLEEVE TEE $190
REED KRAKOFF PLEAT SKIRT $4,290
AESA NECKLACE $225
COLE HAAN LAFAYETTE TOTE $498
KAREN WALKER FELT COAT $1,020
JOSEPH SILK CREPE PANTS $795
KNOW YOUR ANIMAL PRINTS
SPLURGE
10 ANIMAL
PRINTS
NOT TO BUY
Bat
Manatee
Pig
Squirrel
Flying
squirrel
Squid
Coyote
Frog
Toad
Barnacle
IN THE WILD
Kate Middleton in
a Hobbs Dalmatian
print coat
75
SEA SLEEVELESS TOP
$265
SCOSHA BRASS
NECKLACE
$295
SEIKO MEN S
QUARTZ WATCH
$175
H&M CREAM
BLOUSE
$39.95
BURBERRY PRORSUM
ANIMAL PRINT DRESS
$5,500
BALLY COBDAR
CALFSKIN HEEL
$650
SEA DRAWSTRING
CHEETAH PANTS
$345
LOEFFLER RANDALL
LANA WEDGE
$425
BARGAIN
BARGAIN
SPLURGE
75
76
Etc. Fall Fashion
Stacked heels are everywhere,
andthank Godtheyre chunky,
playful, and easy to walk in. These
ankle boots, which range from
rounded to pointed toe, can be worn
with pants and skirts.
After years of stif, high-shine
loafers, brushed-suede lace-ups are
back. Arriving in every color
from brown to mint green, they
have a casually cool vibe
when paired with formal suits.
REBECCA MINKOFF
MASTER BOOTIE
$395
COACH SUEDE
HONEY BOOTIE
$355
MARK MCNAIRY
DERBY SHOE
$370
A. P.C. CALFSKIN DERBY
$470
Pump
1. For serious stains
blood, red winetake your
shoes to the cobbler.
2. If its a minor mark,
buf the area with a shoe brush.
3. If the stain persists,
rub it with a nail
fle, being careful not
to press too hard.
4. You can try a pencil
eraser, too.
5. For street grime, mix
equal parts of white vinegar
and water and brush
the mixture across the shoe;
let dry before wearing.
Materials Instructions
KNOW YOUR HEEL SHAPES
HOW TO CLEAN SUEDE
STACKED-
HEEL
BOOTS
TREND
SUEDE
SHOES
TREND
Eraser
Nail fle
White
vinegar
Shoe
brush
Closed-toe high
heels, shorter
than a stiletto
Round heel
with a wide
heel base
Shorter heel,
1 to 3 inches
high
Tallest heel,
with a narrow
heel post
Square-shaped
heel, shorter
than a pump
Heel is solid
from the foot
to the foor
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Wedge
Cone
Puppy
Kitten
Stiletto
77
VALENTINO
GARAVANI BOOTIE
$975
POUR LA VICTOIRE
LIM BOOT
$310
BALLY DEIDA BOOT
$895
BOSS BOOT
$475
PEAL & CO. FOR
BROOKS BROTHERS
SUEDE WINGTIP BOOT
$598
MAISON MARTIN MARGIELA
GREEN SUEDE SHOE
$675
BARGAIN
SPLURGE
78
Etc. Fall Fashion
AFTER
This outft
defnitely softened
my look. Its very
casual-fun. Im
usually into
French cufs and
pinstripes, and
this check shirt
with the narrower
tie is a nice
change. It would
absolutely work at
the ofce. Its
playful and would
be well-accepted.
AFTER
I would wear this
to work. Its femi-
nine yet profession-
al and a little bold.
Rich fabrics and
colors are so up my
alley. I do obsess
over my age, but
as Ive grown more
confdent in my
role, Ive started to
embrace the fact
that I look younger
than everyone else
in the room.
MAGNANNI
OXFORDS
$395
UNIQLO
CHECKED SHIRT
$19.90
EQUIPMENT
SIGNATURE SILK
BLOUSE
$208
3.1 PHILLIP LIM
COCOON PARKA
$1,500
HOW TO
WEAR IT
Fall fashion to the rescue! Real people with work wardrobe
issuestoo stodgy, too old, too casual, and too summeryare saved
by this seasons trends
BURGUNDY
BOLD COLOR
STACKED HEEL
FUR COLLAR
S
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Lawrence Lewis
53, chief executive
ofcer, Assael
Before: I wear a suit
and tie to work every
day. Then I show
playfulness by
accenting it with
bright ties, pocket
squares, cuf links
pearl ones from
Assaeland socks.
My look is very
conservative.
BOSS HUGO BOSS
PASOLINI
CHARCOAL SUIT
$795
POUR LA VICTOIRE
LIM BOOTS
$310
UNIQLO LEATHER
BELT
$19.90
THE MEN S STORE
AT BLOOMINGDALE S
BRUSHED TIE BAR
$30
79
AFTER
I think this look
is sleek and work-
appropriate. Its
not exactly what
Im used to, but
the colors are
really awesome.
I love this green
peacoat. Also, this
shirt fts perfectly
its crazy! Im going
to throw out all my
button-downs and
go to Uniqlo and
get a ton of these.
AFTER
I absolutely adore
this Calvin Klein
look. Its in align-
ment with what I
usually wear. One
of the things I really
like is that its long-
sleeve. You dont
see many long-
sleeve outfts, and
I tend to get cold in
the ofce. I live in
my heels at work,
and these exotic
pumps pop.
DIANE VON
FURSTENBERG PANEL
MARTA LEATHER
SKIRT
$598
THEORY
BURGUNDY TIE
$105
THEORY ZAINE
ECLIPSE TROUSER
$195
UNIQLO SMALL
DOT SHIRT
$29.90
SANTONI
SKYLER SUEDE
OXFORDS
$565
CALVIN KLEIN
JANNAH KNIT
SKIRT
$795
SUEDE SHOES
BURGUNDY ANI MAL PRI NT
Dushane Ramsay
28, account
manager, MKG
Before: Our ofce
dress code is
bring your funky
self, but some-
times Im like, Oh,
man, I look like Im
going to the beach. I
also have problems
fnding button-
downs that ft.
Hitha Palepu
29, vice president
of business
development,
SciDose
Before: I like to dress
a little edgy, but
still be classic, femi-
nine, and appropri-
ate for my conserva-
tive industry. I might
dress slightly old for
my ageI dont want
people to focus on
the fact that Im 29.
Liz Rodbell
55, incoming
president, Hudsons
Bay Company
Before: My ward-
robe is profes sional
and modern. Im on
the petite side, so
I tend to wear slim
looks, neutral colors,
and leather jackets.
Because I work in
fashion, I always
have to be on-trend!
CARLOS CAMPOS
WOOL COAT
$820
CALVIN KLEIN
JONDAH KNIT TOP
$1,195
RACHEL ROY
ARON PUMPS
$275
80
Etc. How Did I Get Here?
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1975
Tennis club night
manager
1975
Salesperson,
Lothars
1981
Starts Michael Kors
womenswear line
1997-2003
Creative director,
Cline
1999
Council of Fashion
Designers of America
Award for womenswear
designer of the year
2002
Launches menswear,
Michael Michael
Kors, and Kors Michael
Kors lines
2011
Michael Kors goes public,
raises $944 million
2004-12
Judge on
Project Runway
WORK
EXPERIENCE
LIFE LESSONS
John F. Kennedy High
School, Bellmore,
N.Y., class of 1976
Fashion Institute
of Technology,
New York, 1977
EDUCATION
I found myself fghting the
teachers over how a lapel had
to be cut or what a traditional
suit had to look like. I actually
had a teacher tell me, You
need to get out there and work.
Youre ready to roll.
Korss company
fled for Chapter 11
in 1993, emerging
from bankruptcy
shortly thereafter
1. Stay true to yourselfthats what ends up working. 2. Really get to know who your customer is. 3. Be a champion for young talent.
Kors with two models at his frst
fashion show in 1984
Ive pretty much known
I wanted to go into fashion
since I was 5 years old,
when I helped my mom
redesign her wedding dress.
The guy at the
pro shop told
me they werent
selling any clothes,
and I told him,
Well, theyre ugly.
He let me take
over. The next
thing you know,
were selling out.
I walked into
Bergdorfs with a
few samples
that Id made with
rented sewing
machines and told
them I wanted
a trunk show,
because I knew
Bill Blass and
Oscar de la Renta
did trunk shows.
They said sure.
The kind of fashion Ive always
believed insportswear thats
luxurious and glamorous but also
practicalis what women
around the world want to wear.
When Heidi Klum frst
contacted me about it,
I was afraid reality TV
would turn fashion design
into a joke, but it was
actually a great idea.
Kors with Wintour in 1989
Anna Wintour
has been an amazing
confdante over the years.
I met Vera Wang when
she was an editor at Vogue
and I was at Lothars. She
came in one day, and we had
such a fabulous time that
she invited me to the Met Gala.
It was a tough decision
to leave, but I simply
couldnt keep designing
two labels. It was always
of the plane, back on
the plane. I was popping
melatonin like Tic Tacs.
[Bergdorf Goodman
vice president of
fashion] Dawn
Mello asked who
designed the jeans
in the window. I told
her I did, and she
said, Well, if you
ever start your own
business, call me.
MICHAEL KORS
Honorary chairman and principal designer, Michael Kors
SAS Institute Inc. product or service names are registered trademarks or trademarks of SAS Institute Inc. in the USA and other countries. indicates USA registration. Other brand and product names are trademarks of their respective companies. 2013 SAS Institute Inc. All rights reserved. S1037769US.0113
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