Bloomberg Businessweek - February 10, 2020 USA PDF

○ Industrials down, consumers up 14 ○ A new way to launch satellites 20 ○ The ransomware economy 46
February 10, 2020
THE CORONAVIRUS IS JUST THE BEGINNING.

WE ARE SO NOT READY FOR THIS 8
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February 10, 2020
◀ Syndikat, the
smoky living room of
Berlin’s Schillerkiez
neighborhood, faces
eviction by a mysterious
foreign landlord
1
PHOTOGRAPH BY JOHANNA-MARIA FRITZ FOR BLOOMBERG BUSINESSWEEK
FEATURES 40 Ken Fisher’s Still Got Assets

A sexist quip sent some investors running—but plenty of others stuck with him
46 My Brief Life in the Ransomware Racket

Hacking is so easy now, our un-tech-savvy reporter could do it. Almost
52 In Berlin, the Rent Is Too Verdammt High

The once-cheap city is taking a novel approach to rising housing costs
◼ CONTENTS Bloomberg Businessweek February 10, 2020
◼ IN BRIEF 5 Boris vs. EU, Part 2 ● Trusted-untrusted names in news ◼ COVER TRAIL
◼ AGENDA 6 NATO meets ● Alibaba earnings ● On to New Hampshire! How the cover
◼ REMARKS 8 Battling the new coronavirus requires a true trans-Pacific gets made
partnership ● The outbreak’s effect on the economy ①

“So this week’s cover
story is about the new
BUSINESS 14 The industrial sector has consumer envy coronavirus. We’ve got
1 16 Ikea liberates Russia’s apartment-block archipelago
some time, so let’s get a
head start on this one.”
18 CEO Hans Vestberg is taking Verizon to the edge “I’m on it!”
②
TECHNOLOGY 20 ▼ Just past a Pottery Barn in the East Bay, rocket maker
2 Astra is plotting a satellite-launching spree
[7 days to deadline]
“Wow! Nailed it!”
“See ya next week! I’m

going to Miami.”
[12 hours to deadline]
“I have another idea!”
“Getting tight, but

let’s try.”
③
2
FINANCE 24 Warren Buffett cancels his newspaper subscription

3 27 To get more women in seats, boards look down the ladder
ECONOMICS 28 Trump won’t be able to prime the pump before November “I actually quite like it.”
ASTRA: PHOTOGRAPH BY JASON HENRY FOR BLOOMBERG BUSINESSWEEK. VIRUS, TOP: NEKO/ALAMY. VIRUS, BOTTOM: COURTESY NIH
30 Russia, shrinking again, decides to keep immigrants out…
“Me, too!”
31 …Uruguay, its growth slowing, tries to lure foreigners in
POLITICS 32 The Iowa caucus was anything but Iowa nice “We probably don’t want
to say ‘winning.’”
35 Chaos? There’s an app for that
“Fine, we can go back to
the other one.”
SOLUTIONS/ 36 Micro weather forecasts, inspired by adventure sports
SMALL BUSINESS 38 Worker-owned co-ops thrive as baby boomers retire
“Wait! I have an even
39 The Israeli startup hoping to thwart mass shooters BETTER idea.”
“Remind me why
◼ PURSUITS 59 Some unexpected ways you can invest your bonus I bother to start early.”
62 It turns out you can buy a good name
64 The bro-och: Adornment for a dowager or dude
66 Take a leap with a perpetual calendar watch
67 Lose your wallet
◼ LAST THING 68 A decade after the Deepwater spill, BP is still paying
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Bloomberg Businessweek February 10, 2020
IN BRIEF By Benedikt Kammel
○ With the new ○ Argentina is renegotiating ○ The U.S. is divided—

its debt to avoid another between those who lean
coronavirus sovereign default. The Democrat and Republican—
outbreak gripping country’s largest province on the news sources they
China, investors offered better terms to know and trust, says a Pew
bondholders who agree Research Center study.
are pulling out. to accept a delayed
Share of respondents who’ve heard
payment. President Alberto of each outlet who say they trust its
BUTTIGIEG: JEREMY HOGAN/GETTY IMAGES. PEET’S: MICHAEL BEZJIAN/GETTY IMAGES. SCHIFF: ALEX WONG/GETTY IMAGES. *NEWS SOURCES ORDERED BY SHARE OF TOTAL RESPONDENTS WHO HAD HEARD OF THEM. THE DAILY CALLER AND SEAN HANNITY’S RADIO SHOW
Fernández, who took office political and election coverage*
in December, must dig his CNN

country out of a debt hole of
HAVE BEEN OMITTED, AS THE SHARE OF DEMOCRATS AND LEANERS WHO SAID THEY TRUST THOSE SOURCES WAS LESS THAN 1%; THE SHARE WHO’D HEARD OF THEM AND TRUST THEM COULDN’T BE PRECISELY CALCULATED. DATA: PEW RESEARCH CENTER
Fox News
The country’s $7.5 trillion stock market

$311b ABC News
NBC News
had its worst rout in years; thousands ○ Pete Buttigieg emerged with a
of shares fell by their daily limit at the narrow lead from the Iowa caucus that
start of the trading week. 11 was marred by a faulty voting app. 32 CBS News
MSNBC
○ Tesla is having a blowout ○ Worldline, the ○ Germany’s Reimanns, the
2020, its stock more than family behind the sprawling USA Today
doubling since the start of French payment coffee empire that includes
the year before dropping company, agreed Caribou, Peet’s, and other
PBS
sharply on Feb. 5. to buy local rival brands, is considering The New York Times
an IPO of the business,
Ingenico. according to people familiar Time
with the plans. A sale, which 5

The Washington Post
2/5/20 could raise about €3 billion
$734.70 in Amsterdam, would be The Wall Street Journal
one of the biggest IPOs in
Europe in more than a year. BBC
Newsweek
The €7.8 billion ($8.6 billion) deal
will form one of the world’s largest
The New York Post
payment-services providers. Europe’s
biggest transaction so far this year,
it follows a spate of other major BuzzFeed
12/31/19 purchases in the consolidating
$418.33 electronic-payments market. HuffPost
NPR
○ “A man without character Rush Limbaugh Show (radio)
or ethical comp The Guardian
Politico
find his way. You Univision
sider
Business Ins
are decent. He is Breitbart
Vice
not who you are The Washington Examiner
The Hill
Democratic Representative Adam Schiff, who led his party’s impeac chment
managers, made a final plea to senators to convict and remove Pres sident Vox
Trump on charges that he tried to rig the 2020 elections in his favor.
IN BRIEF
○ Bernard Ebbers,
former CEO of
○ Swiss ○ The physical cash
holdings of German banks
○ Prime Minister
Boris Johnson
WorldCom, died private bank rose to a record
signaled a tough
at 78, a little more
than a month after being
released from prison.
Ebbers had spent 13 years
Julius Baer
said it will cut €43.4b
in December, according to
negotiating stance
with Brussels
behind bars for securities 300 jobs. data from the Bundesbank. over the next few
fraud, which surfaced in months.
2002 when WorldCom
disclosed it had misreported
$3.9 billion in expenses,
forcing the company into
In a reversal for an institution that had
bankruptcy. expanded rapidly over the past decade,
new CEO Philipp Rickenbacher aims Now that the U.K. has left the
to slash 200 million Swiss francs European Union, he says he won’t
($208 million) in costs over the next agree to the bloc’s rules to get a
three years. favorable trading deal.
○ India’s government ○ Tony Fernandes stepped

unveiled infrastructure down as CEO AGENDA
spending of almost of AirAsia, the
Malaysia-based
$24b
The budget aims to boost
discount carrier he built
over almost two decades.
He departed days after
6 the economy, whose Airbus, which admitted to
growth is slower than it illegally lubricating aircraft
has been in more than sales for years with bribes,
ILLUSTRATION BY MINET KIM. EBBERS: CHRIS HONDROS/GETTY IMAGES. FERNANDES: PAUL MILLER/BLOOMBERG. CAMPBELL: LOIC VENANCE/GETTY IMAGES
a decade. agreed to a record $4 billion
settlement with authorities
in France, the U.K., and
the U.S. Fernandes denied
allegations of wrongdoing,
saying he resigned to assist
the investigation.
A Storm Brews on Lake Zurich
○ De Grisogono, a jewelry ○ The YouTube video Credit Suisse reports quarterly earnings on Feb. 13, but
brand favored by Naomi platform has more than investor focus will be less on the numbers and more on
Campbell, Salma Hayek, the power struggle building between CEO Tidjane Thiam
and other celebrities
for red carpet outings
worldwide, filed for
20m
paying subscribers,
and Chairman Urs Rohner.
Alibaba releases NATO Defense The New Hampshire

third-quarter earnings Ministers meet in primary on Feb. 11 could
bankruptcy in Switzerland. according to parent on Feb. 13. Chinese Brussels on Feb. 12-13. shake up the field of
The company, which was company Alphabet, which retail is taking a hit, The U.S. has pushed Democratic presidential
with shoppers reluctant for the organization to hopefuls. Senator Bernie
founded in the 1 , b
broke out detailed numbers to spend as the broaden its scope in the Sanders, of neighboring
had spent for the unit or the first time. coronavirus outbreak Middle East and help Vermont, won the
spreads. 11 tackle terrorist threats. contest in 2016. 32
nths uTube de $15.1 billion
oking for in 2019, les than some
a buyer. analysts h estimated. Samsung unveils new Hedge funds and Sweden’s Riksbank
Galaxy mobile products other rich investors sets interest rates on
in San Francisco in the U.S. stock Feb. 12. The world’s
on Feb. 11. It’s set to market disclose their oldest central bank has
showcase its S20 family multimillion-dollar lifted borrowing costs
of phones, which have moves on Feb. 14, when out of negative territory,
improved cameras, and they file so-called 13F but they’re likely to stay
the foldable Z Flip. forms with the SEC. at zero in the near future.
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◼ REMARKS
8
◼ REMARKS Bloomberg Businessweek February 10, 2020
We’re Not
Ready for This
The rich world has the scientific smarts to improve global
● As epidemics spread with
biosecurity. And, in fact, there’s been real progress, with bet-
unprecedented speed, public policy ter information sharing and the introduction of improved
is not keeping pace gene-sequencing technologies. What’s missing is a long-
term focus. With each new outbreak comes global panic and
momentary resolve, only to give way to studied inaction once
● By Brian Bremner, Robert Langreth, the crisis subsides. We’re nowhere near being prepared for a
and James Paton true pandemic, such as would occur if deadly bird flu mutated
to become more transmissible between humans.
Microsoft Corp. co-founder Bill Gates, whose foundation
In the evolutionary arms race between humanity and the has spent vast sums developing vaccines and drugs against 9
microbes, the bugs are making a comeback. Yes, we’ve con- emerging strains and promised up to $100 million to respond
quered diseases such as smallpox and polio, and deaths to the epidemic, warned in a 2018 speech that the “world
from communicable diseases have been falling worldwide. needs to prepare for pandemics in the same serious way it
But since 1970, more than 1,500 new pathogens have been prepares for war.” We certainly weren’t on war footing for
discovered, according to the World Health Organization, the viral outbreak in China.
and “epidemics in the 21st century are spreading faster and One obvious lesson is the need to shut down or heavily
farther than ever. Outbreaks that were previously localized regulate food markets where live animals and freshly slaugh-
can now become global very rapidly.” tered, unwrapped meat commingle amid throngs of shop-
In late 2002 an airborne illness, dubbed severe acute pers. These so-called wet markets, common in China and
respiratory syndrome, emerged in China’s southern Southeast Asia, are unsanitary and teem with germs, mak-
Guangdong province, then quickly spread across the border ing them the perfect breeding ground for deadly pathogens.
and killed 774 people from Asia to Canada. In 2009 a novel About 70% of all pathogens identified in the past 50 years
influenza virus, H1N1, advanced worldwide in nine weeks are of animal origin, and the novel coronavirus causing
and may have resulted in as many as 575,000 fatalities. The havoc in China is closely related to strains known for infect-
new virus from central China that’s sparked global alarm, a ing primarily bats, pigs, and other species. It has the ability
coronavirus known as 2019-nCoV and a close cousin to SARS, to migrate from animals to humans—and from one human
reached four continents in about five weeks. to another.
As newer threats surface, such as Middle East respiratory Many early cases have been linked to a market in Wuhan
syndrome (MERS) in 2012, older scourges like cholera, plague, that sold wild animals for food. “I think they should close
and yellow fever flare up with disturbing regularity. Even them all,” says Marie-Paule Kieny, director of research at
PHOTO ILLUSTRATION BY 731; PHOTO: GETTY IMAGES
worse, the antibiotics that revolutionized health care in the Inserm, France’s national health research organization.
last century are losing their punch as new strains of infec- “There’s no risk-proof world, but as much as possible,
tious diseases, especially tuberculosis, become more resistant reducing the threat is the way to go.”
to multidrug treatments. “We’ve created an interconnected, Another target is better livestock management in less
dynamically changing world that provides innumerable developed parts of the world, especially India, where over-
opportunities to microbes,” says Richard Hatchett, a former use of antibiotics by poultry producers has given rise to
U.S. adviser on public health emergencies and head of the antibiotic-resistant bacteria, a 2016 Bloomberg News inves-
Coalition for Epidemic Preparedness Innovations in Oslo. “If tigation showed. Some 2 billion people don’t have access
there’s weakness anywhere, there’s weakness everywhere.” to toilets; inadequate sanitation results in 432,000
Recent Outbreaks
Selected global epidemic
events from 2011 to
2017*
West Nile
Meningitis
Yellow
Flu† Typhoid Chikungunya Ebola Zika Cholera
100 fever
50 MERS
Marburg
◀ Less contagious More contagious ▶
deaths annually from diarrhea and is a major factor in starting imminently in China are promising. “We have an army
tropical diseases. of people working 24/7 now opening up manufacturing lines
China is a one-party state whose leader, Xi Jinping, is presi- and doing whatever we can to get as much available as quickly
dent for life. Yet that power means little if deployed too late in as possible,” says Chief Medical Officer Merdad Parsey. Yet the
a contest against a mutating virus. In December a mysterious drug may already be the focus of an intellectual-property dis-
pneumonia started to surface among patients in Wuhan, and pute: China’s Wuhan Institute of Virology has applied for a pat-
municipal and provincial health-care regulators were noti- ent on its use against the coronavirus.
fied before the end of the month, according to people famil- Smaller companies might be more likely to enter the field,
iar with the early phase of the epidemic. but that would require government financial incentives, not
Yet a complete travel lockdown of Wuhan, a flourishing unlike the kind the U.S. Department of Defense offers to arms
megacity of 11 million, didn’t take place until Jan. 23. By that makers for critical national security needs. “No one goes out
time, cases had already surfaced in other parts of China just and buys missiles in the free market,” says Michael Osterholm,
ahead of the Lunar New Year holidays, an epic travel period director of the Center for Infectious Disease Research and
10 and the largest annual human migration in the world. “The Policy at the University of Minnesota. “There’s no capital-
*FIGURES AS OF JANUARY 2018; 2017 DATA ARE NOT COMPLETE. IF A DISEASE CAUSED MORE THAN ONE EPIDEMIC EVENT IN ONE YEAR IN A COUNTRY, IT’S COUNTED ONLY
coronavirus had been spreading in the city and surrounding ism, it’s all procurement. Creating a business model is one
ONCE FOR THE YEAR IT OCCURRED THERE. †EVENT OCCURRENCES SHOWN FOR INFLUENZA A. DATA: WORLD HEALTH ORGANIZATION, INFORMATIONISBEAUTIFUL.NET
areas for more than a month before effective measures were of the challenges.”
taken,” says Yang Gonghuan, former deputy director of the More can also be done to identify pathogens before they
Chinese Center for Disease Control and Prevention. As a result, unleash their furies. “We are reactive rather than proac-
“the base of infection growth has been enormous.” tive,” says Amesh Adalja, senior scholar at the Johns Hopkins
It takes political will to get out in front of an epidemic. University Center for Health Security. Diagnostic tests able
Robust vaccine development matters, too, and therein lies to identify the precise species that cause a patient’s illness
another problem. When it comes to pandemic shots, as with aren’t used that widely. If more testing were done on patients
treatments aimed at preventing malaria and tuberculosis, with suspicious symptoms, we might have a better sense of
“there are essentially no incentives for big multinationals,” says the pathogens lurking out there, he says.
Thomas Breuer, chief medical officer for the GlaxoSmithKline Encouragingly, information sharing has improved since
Plc vaccines unit. Glaxo remains focused on higher-margin SARS. Early in the current crisis, after Chinese scientists
products, such as cancer drugs. While the company is sharing had isolated the new coronavirus, its genetic sequence was
its know-how with groups racing to develop a coronavirus vac- promptly submitted to several online data-sharing portals
cine, it licensed its promising TB vaccine to the Bill & Melinda where public-health specialists swap information.
Gates Medical Research Institute. “The long-term financing That helped researchers get a better read on the virus’s
around this cannot rest entirely on the shoulders of compa- behavior and gather information to work on medicines,
nies like GSK,” Breuer says. according to Arnaud Fontanet, an epidemiologist and direc-
Since the outbreaks of SARS and the often fatal Ebola virus, tor of Institut Pasteur’s center for global health research in
U.S. federal money for developing drugs and vaccines for Paris. He’s confident there soon will be antibody tests that
emerging diseases has increased, and drugs that may combat will allow doctors to know whether someone had the virus
coronaviruses are ready for trials. One is remdesivir, a treat- in the previous three months, even if they showed no symp-
ment from Gilead Sciences Inc. that failed tests in people with toms. Disease chasers, Fontanet says, have also been able to
Ebola. The first U.S. coronavirus patient, in Washington state, model the spread by following airline connection data. In the
received the drug after his condition worsened. He improved Ebola crisis, mobile phone usage helped track transmissions.
the day after he was infused, according to results reported in British scientists are helping China track the spread of the
the New England Journal of Medicine. new coronavirus from its origin in Wuhan to countries around
Gilead says it’s shipped enough of the drug to China to the world. Viruses such as 2019-nCoV constantly incur small
treat 500 patients and is working to produce more if the trials mutations in their genetic material. While the alterations
make little difference to the organism’s structure or function,

they’re almost like the rings of a tree in that they can tell
scientists how long the virus has been around and how it got
there, as well as how quickly it’s spreading.
Spotting copies of the same version of the virus helps dis-
ease trackers identify chains of transmission that may have
been hidden. “Often when you have a new flare-up of dis-
The
ease in an area that hasn’t seen cases, you need to find out
if it was transmitting all along and we didn’t know about it,
or is it an introduction from somewhere else,” says Andrew
Economic
Rambaut, a professor of molecular evolution at the University
of Edinburgh. “If you can find the contacts, you can break
those chains of transmission.”
Pain Is Mild,
Rambaut and his colleague Nick Loman, a professor of
microbial genomics and bioinformatics at the University of
Birmingham, train health workers to use a low-cost, portable
So Far
“lab in a suitcase” to decode genomes in places such as West
Africa, where the Ebola virus killed more than 11,000 people
in an outbreak that lasted from late 2013 to 2016. By tracking
individual strains of the virus, identified by certain mutations,
they were able to show that some transmission occurred from
● But no one knows how bad the
people crossing borders and establish that in some cases the
disease was passed from mother to child. outbreak will be, and the damage
The lab includes a sequencer, called MinION, made by to globalization could linger
Oxford Nanopore Technologies Ltd. in Oxford, England, that’s
about the size of a mobile phone and allows researchers to 11
identify differences among viral strains. “You can sequence ● By Peter Coy
12 to 24 samples in a day, and you get a good estimate of the
whole genome,” Rambaut says. Those sequences can be com-
pared with other existing strands of DNA to track the virus’s For businesspeople around the world, the new coronavirus
movement and evolution, he says. that sprang from China is producing a severe case of cognitive
Despite such gains, huge weaknesses remain in disease dissonance. Their eyes are telling them things are bad: rising
fighting worldwide. Although Ebola had been around for fatalities, history’s biggest quarantine, sealed international bor-
decades before the West Africa epidemic, the virus spread ders, broken supply chains, shuttered businesses. But econ-
undetected for three months in Guinea, allowing it to gain omists are telling them the epidemic will lower China’s 2020
a foothold in cities. The U.S. eventually spent $5.4 billion in economic growth by just a couple tenths of a percentage point
emergency aid to try to get it under control. and global growth essentially not at all.
Building a global health-care fortress against dangerous So, which is it, a global crisis or a tempest in a Wuhan tea-
pathogens won’t happen overnight—and will never be fool- pot? A lot hangs on the answer.
proof. Yet whatever the ultimate cost, it will be far less than The oddly calm economic forecasts are based on the
the economic hit from a prolonged global pandemic that assumption that the draconian measures imposed around the
kills millions. “The foundation for better preparedness is world to isolate the sick and the potentially exposed will suc-
investing in stronger primary health-care systems which ceed in killing off the outbreak, at which point there will be
provide surge capacities that can be mobilized for effective a sharp economic recovery. That’s what happened after the
response to contain outbreaks,” Muhammad Ali Pate, global 2002-03 outbreak of a closely related coronavirus that caused
director for health, nutrition, and population at the World severe acute respiratory syndrome (SARS).
Bank, wrote in an email. The base case of the professional economists at Bloomberg
At some point, the outbreak will subside, and the world will Economics is that China’s gross domestic product will expand
move on. And that’s precisely the problem. “It’s a battle you 5.7% in 2020, vs. a pre-epidemic forecast of 5.9%. In their “pro-
never win,” says Peter Doherty, a researcher in Melbourne who longed outbreak” scenario, with containment not occurring
won a Nobel Prize in 1996 for discovering how the immune sys- until the second quarter, the economy grows just a tad less—
tem recognizes virus-infected cells. “Organisms mutate, apart 5.6%. “Outside China and a few close neighbors, the impact
from anything else, so it requires constant vigilance and con- would be difficult to see in the full-year growth data,” the econ-
stant research.” —With Jason Gale, Dandan Li, Thomas Mulier, omists wrote on Jan. 31.
John Lauerman, Marthe Fourcade, and Yinka Ibukun This quick-bounce-back scenario may well turn out to be
correct. While the number of new infections continues had to shut a big store in Wuhan that opened just four months
to rise, the daily rate of increase in China seems to have ago. Apple Inc., which earns about a quarter of its operating
shrunk a bit if the numbers can be trusted. “There’s some income in China, said on Feb. 1 it was temporarily closing all
reason for optimism, but it’s not conclusive at this stage,” of its offices and stores there out of an “abundance of caution.”
said Michael Gapen, head of U.S. economics research for Airlines have cut flights in and out of the country. With trans-
Barclays Investment Bank, on Feb. 3. “This week and next portation demand drying up, the price of Brent crude oil plum-
week are probably the most crucial.” meted to $55 a barrel on Feb. 4, from $69 on Jan. 6.
There are a lot of ways things could sour. The virus might Even news about the virus that looks positive is less so on
spread more than expected, flaring up in countries that are second thought. Consider that, as of Feb. 5, the Philippines
less capable or less willing than China to impose a stringent had reported only three cases of the virus, Cambodia one, and
cordon sanitaire. Businesses built to survive brief disruptions Indonesia zero. Given the close ties all three countries have to
will go bankrupt if the epidemic drags on. And in the long China and their lack of sophisticated surveillance technology
run, even after this epidemic ends, it could leave scars, par- and procedures, it’s likely that cases are simply being missed.
ticularly in China itself. Corporate executives will be less keen What’s more, some leaders in the developing world seem dan-
to do business with the world’s workshop if it’s also perceived gerously blasé. Cambodian Prime Minister Hun Sen said at a
as the world’s incubator of deadly viruses. press conference on Jan. 30 that people shouldn’t wear face
Right now no one can be sure which way the story will masks because they create a climate of fear.
go, as forecasters are the first to admit. “Rapid containment It’s conceivable that the disease could eventually become
and escalating contagion are both possibilities, and would more of a problem outside China than inside it. In Africa, “it is
result in widely different growth forecasts,” the Bloomberg very possible that we have cases that are going on on the con-
Economics forecasters, Chang Shu, Jamie Rush, and Tom tinent that have not been recognized. We have to admit that,”
Orlik, wrote in their Jan. 31 report. John Nkengasong, director of the Africa Centres for Disease
What’s clear is that the viral epidemic is already hurting Control and Prevention, told reporters on Jan. 28.
business. On Feb. 4, Hyundai Motor Co. said it was suspend- The U.S. is better situated than Africa, but still vulnera-
ing production lines at its car factories in South Korea because ble. Although President Trump bragged to Fox News in a pre-
12 of a shortage of parts made in China. Levi Strauss & Co. has Super Bowl interview that “we’ve pretty much shut it down,”
A supermarket in
Hong Kong on Feb. 5
KEITH TSUJI/ABACA/SIPA USA/AP PHOTO

his administration has gotten rid of much of the apparatus for How Bad Is It?
fighting epidemics like this one. The Washington Post reported Contagiousness and lethality of airborne viruses
in May 2018 that the top White House official on pandemics,
Rear Admiral Timothy Ziemer, had left the administration Fatality rate, log scale
and was not being replaced, and the global health security 100%
Bird flu Declared
team he oversaw had been disbanded. Hantavirus Smallpox eradicated by
Evidence is mounting that the new virus is less lethal than the World Health
MERS SARS Organization in
the one that caused SARS, but possibly more contagious. 10
1980
People can pass it along when they have only mild symptoms Spanish flu
or, in some cases, no symptoms at all. SARS wasn’t like that. 1 2019 novel coronavirus* Measles
So even though technically SARS is more transmissible in a
wholly susceptible population—with a higher “basic repro- Swine flu
Flu
duction number”—the new virus is more contagious under 0.1
real-world conditions. Its lack of lethality will hold down the

Chickenpox/
death toll, but the contagiousness will require continued iso- 0.01 Mumps shingles
lation, quarantines, and social distancing.
0 5 10
At least that’s the current thinking. Success in fighting
People one person will infect in a completely susceptible population
the virus depends not only on what people do, but also on
the characteristics of the virus itself, which are still not fully *ESTIMATE BASED ON PRELIMINARY FIGURES.
DATA: PHILOSOPHICAL TRANSACTIONS OF THE ROYAL SOCIETY, WORLD HEALTH ORGANIZATION, INTERNATIONAL
understood. “It’s all about the bug,” says Dr. Mark Denison, JOURNAL OF INFECTIOUS DISEASES, CENTERS FOR DISEASE CONTROL AND PREVENTION, CLINICAL MEDICINE &
RESEARCH, PAEDIATRIC RESPIRATORY REVIEWS, EMERGING INFECTIOUS DISEASES IN ASIA, INSTITUTE FOR HEALTH
director of the division of pediatric infectious diseases at

METRICS AND EVALUATION, BMC MEDICINE, EPIDEMIOLOGY, INFORMATIONISBEAUTIFUL.NET
Vanderbilt University School of Medicine. “We’re along for measures now, unpopular as they may be in places, will pay
the ride and responding as best we can.” off by extinguishing the virus and allowing normal economic
The number of people a virus will kill can’t be predicted activity to resume. He’s clearly unhappy that other countries
solely from its basic reproduction number and its lethality—i.e., are cutting their ties with China, which will delay the econo-
the percentage of people who die after becoming infected. As my’s recovery. The Trump administration on Jan. 31 said for- 13
the chart at right shows, the Spanish flu, which killed about eign nationals who’d been in China in the last two weeks will
50 million people after World War I, was neither exception- “generally” be denied entry into the U.S. China’s Ministry of
ally contagious nor unusually lethal. It “happened to arrive in Foreign Affairs accused the White House of spreading fear
a setting when it could establish infections in a lot of people, and said other countries should not “take advantage of peo-
in all parts of the world,” C. Brandon Ogbunu, a professor of ple’s precarious position.”
ecology and evolutionary biology at Brown University, wrote Trump’s restrictions on travelers from China are consid-
in an email. “And so, a 1-2% mortality rate ends up being a lot erably more popular in the U.S., which so far has managed
of people.” Spanish flu is the nightmare scenario for an uncon- to keep a handful of imported cases of the virus from flaring
strained spread of a virus through vulnerable populations. up into outbreaks. American authorities hope the country
How to fight the new virus is a contentious issue that will can stymie the virus completely, or at least stall its spread
become even more contentious if the measures adopted to date until a vaccine is available.
prove insufficient. The ethical question is the extent to which One Trump administration official spotted a silver lin-
one group’s civil liberties can be abridged for the sake of the ing in the outbreak. Commerce Secretary Wilbur Ross told
greater good. In medicine, there’s “a fundamental moral axiom Fox Business network on Jan. 30 that he thinks it will help
that individual persons are valued as ends in themselves and to “accelerate the return of jobs” to the U.S. and Mexico.
should never be used merely as means to another’s ends,” says (He added that “every American’s heart has to go out to
a 2007 essay by Dr. Martin Cetron of the Centers for Disease the victims.”)
Control and Prevention and Dr. Julius Landwirth of the Yale Ross’s timing may have been poor, and he ignored the
School of Medicine. “Public health, on the other hand, empha- harm that the coronavirus is doing to U.S. companies that
sizes collective action for the good of the community.” sell to, buy from, or produce in China. But he’s proba-
China’s measures are imposing a real cost, both human bly correct that the fear of pandemics will shorten supply
and economic. In Wuhan, the capital of Hubei province, chains, encouraging companies and countries to produce
test kits and medical supplies are scarce. The sense of being more close to home. The coronavirus may further fray the
trapped in a zone of infection is feeding understandable bonds between the U.S. and China that have been stretched
resentment. That could eventually boil over. In the Ebola by Trump’s trade war and the mounting military rivalry
outbreak of 2014, residents of the West Point neighborhood between the two nations.
of Monrovia, Liberia’s capital city, rioted after they were put That, more than any fleeting effect on quarterly GDP, may
under a surprise quarantine. be the longest-lasting business impact of the virus known
President Xi Jinping is betting that tough containment provisionally as 2019-nCoV. <BW>
Two
Insurance
B
N
NA
FI
Diversified
financials
U Economies
S IO NA
RY
I
● The industrial downturn R DIS
CR
ET
ME
has barely registered on CO
NS
U
the still-roaring consumer Consumer
N
Utilities
spending spree services
Pharmaceu-
ticals, biotech- HEALTH CARE
E
nology, and life
sciences
Change in fourth-quarter earnings from

14 2018 to 2019 by S&P 500 industry group
+80% 60% 40% 20%
On Jan. 31, Caterpillar Inc. warned that sales of its in January, according to University of Michigan data.
S heavy machinery would slump for a second straight

year in 2020 amid “continued global economic
uncertainty.” On the same day, Amazon.com Inc.
added $72 billion in market value—about the size of
One reason there hasn’t been a broader reces-
sion is that manufacturing’s share of the economy
continues to shrink. Factory output accounted
for 11% of U.S. gross domestic product in the
Caterpillar—after reporting robust holiday season third quarter, which is tied with the second quar-
sales. That contrast shows just how much the U.S. ter for the lowest level since 1947, according to a
industrial and consumer economies have diverged. Bloomberg News analysis of data from the U.S.
The manufacturing sector went through a mild Department of Commerce. Another is that this
recession last year as President Trump’s trade wasn’t a typical slump. What happened in 2019
war with China added costs to supply chains and was a “policy-driven slowdown,” says Gina Martin
curtailed business investment. New data from the Adams, chief equity strategist at Bloomberg
Institute for Supply Management show U.S. factory Intelligence—that is, the trade war.
activity barely expanded in January after contract- While U.S. whiskey, motorcycles, and myriad
ing in the last five months of 2019. Yet this industrial other products are subject to European Union
downturn was at most a blip for the still-roaring tariffs, the consumer sector emerged largely
consumer spending spree. unscathed from the spat with China. Trump’s
While CSX, 3M, and other industrials joined threat on Aug. 1 to apply a 10% tariff on $300 bil-
Caterpillar in making sluggish sales predictions, lion of Chinese products including toys and
McDonald’s and Starbucks reported healthy gains iPhones was watered down and then partially
for the final three months of the year. Even Target rescinded. The industrial sector, by contrast, bore
DATA: COMPILED BY BLOOMBERG
Corp., which warned last month of weaker-than- the brunt of the back-and-forth in 2018 and 2019
expected demand for toys and electronics over the as it dealt with broad U.S. taxes on aluminum and
holiday season, still projected sales at stores open steel imports and tariffs on $250 billion of mostly
Edited by
at least a year to be up more than 3% in 2019. U.S. manufacturing-related products. Those Chinese
Bret Begun consumer sentiment reached an eight-month high imports remain subject to 25% tariffs.
Banks
Real
S
AL estate Semiconduc-
CI
N tors and
GY
N TECHNOLO semiconductor
INFORMATIO
equipment
Technology
hardware and
equipment
Transportation INDUSTRIALS
Capital goods
Consumer
Software
durables
and services
and apparel
Automobiles and Commercial and Energy
components professional
services
Food and
staples
Retailing
Household retailing Telecommunica-
One
and personal tion services
N
products TIO
I CA S
N E
M MU VIC
R
CO SE Materials
Food,
Health-care beverage, and
tobacco
Recession
equipment
Media and
and services
entertainment
CONSUMER
STAPLES
15
0% -20%
The tariffs stalled an industrial recovery that the scarcity of talented aerospace workers out there,
was gaining traction following a mini-recession in we’re not going to.”
2015-16 amid plunging oil prices. Already, compa- Most industrial CEOs say they expect a challeng-
nies were dealing with rising labor, raw material, ing economic environment to linger at least through
and logistics expenses. But the will-he-or-won’t-he the first half of the year. Emerson Electric Co. and
debate around Trump’s tariff push created an 3M Co. announced fresh restructuring plans in their
impossible environment in which to make major earnings releases that will almost certainly include
purchases of expensive machinery. Industrial com- job cuts. But a continued slow bleed in manufactur- The will-he-or-
panies’ sales suffered. ing combined with moderate cost-cutting probably won’t-he tariff
A belief that things would recover quickly if the won’t be enough to tip the overall employment pic- debate created
U.S. and China reached a trade deal changed how ture negative, Adams says. With the Federal Reserve an impossible
companies responded to the slowdown. Executives signaling that it’s unlikely to raise interest rates soon, environment
didn’t want to be caught flat-footed by a swift recov- things would have to change materially in the next in which to
ery or left without workers in a tight labor market. six months for that manufacturing weakness to leak make major
Thus far, people have largely stayed employed into the consumer sector, she adds. purchases
and been active consumers. Even with all the vola- One wild card is the coronavirus and the impact
tility in 2019—which also included a six-week General it could have on consumer sentiment, particularly
Motors Co. labor strike and the global grounding of in China. Unlike the trade war, the outbreak threat-
Boeing Co.’s 737 Max jet—the manufacturing industry ens to hit consumer-facing companies equally as
ended 2019 with a net gain of 46,000 jobs, based on hard if not harder than industrial ones, with Apple,
preliminary data from the Bureau of Labor Statistics. McDonald’s, and Starbucks shuttering locations in
Asked on a Jan. 28 earnings call if aerospace supplier China and U.S. airlines halting travel to the country.
United Technologies Corp. would lay off employ- �Brooke Sutherland
ees to help it cope with the Boeing production halt,
THE BOTTOM LINE Worries that the slowdown in industrials
Chief Executive Officer Greg Hayes said “that would would drag on the consumer economy haven’t materialized in part
be the easiest thing to do, but quite frankly, given because manufacturers have avoided mass layoffs.
BUSINESS Bloomberg Businessweek February 10, 2020
Ikea Solves Soviet ○ The retailer launches a
SAMENESS web service for customers

in cookie-cutter apartments
Ikea has been diversifying its business model as ended in August. Russia is Ikea’s fastest-growing
fewer consumers trek to the big-box suburban market after Hungary, and the company is weigh-
showrooms that helped turn it into a furniture giant. ing whether to expand the offering to places with
In Russia, it found a way to replicate part of that similar communist-era housing stock, including
shopping experience on the web—thanks to a pref- Germany, Poland, and China. Three Ikea makeovers
erence for uniformity among Soviet city planners. “Many people couldn’t believe that they could for the P-44, the most
common apartment
About 60% of Russians live in standard, Soviet-era do anything good out of this standard typical plan- configuration in Moscow
apartment blocks, which have a limited number of ning,” says Pontus Erntell, head of Ikea’s Russia Buildings with P-44
designs and floor plans. Ikea has replicated the lay- business. “The idea was to show that there can be apartments are typically
17 floors
outs on its Russian website and given them virtual lots of different things to do and to inspire people to
About 1,500 towers
makeovers, letting a customer select suggested items do something to change their lives in their homes.” were built from 1978
and furnish her apartment with a few mouse clicks. The Swedish furniture giant is trying to remain to 2000 in the Greater
Moscow area
The service, called Kvartiroteka—“selection the world’s top furniture retailer without rely-
They were designed
of apartments” in Russian—has brought 2.8 mil- ing so much on its roughly 30,000-square-meter by the Moscow
lion visitors to Ikea’s site since last June’s launch, (323,000-square-foot) blue-and-yellow stores, Scientific-Research
and Design Institute
mostly new customers, and contributed to a where customers fuel up on Swedish meatballs of Typology and
17% jump in sales in Russia in the fiscal year that before navigating a maze of showrooms and a Experimental Design
16
PHOTO: SERGEI BOBYLEV/GETTY IMAGES. ILLUSTRATION: COURTESY IKEA

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BUSINESS
BW Talks Hans Vestberg

self-service warehouse. Although the traditional
stores still account for about 90% of Ikea sales Verizon Communications Inc.’s chief
worldwide, foot traffic has stagnated in recent executive officer talks about partnerships
years as more young people move into urban
areas, drive less, and buy more things online. with Disney, Apple, and Amazon, as well as
The company has set up smaller outlets in cities the wonders of “edge computing” (think
and expanded its e-commerce platform to fight low latency—that is, quick response times)
aggressive online rivals such as Wayfair Inc. and
Amazon.com Inc. “Almost all retail is moving to coming to the consumer marketplace.
have greater digital engagement, and those who do —Carol Massar and Jason Kelly
not follow are likely to be left a long way behind,”
says Charles Allen, senior retail industry analyst at
○ The Swede, 54, was CEO of Stockholm-based
Bloomberg Intelligence. “Ikea was slightly late but
telecommunications giant Ericsson from 2007
is making a lot of investment to catch up.”
to 2009 ○ He took the top job at Verizon in 2018
The Kvartiroteka service offers a choice of
after serving as chief technology officer ○ He
designs for common apartment layouts in 14 types
was president of the Swedish Olympic Committee
of buildings. One suggested layout for a family
from 2016 to 2018
home shows a children’s room adapted for two
kids of different ages to share. A curtain divides
the room in two and displays recommended ward-
Are you seeing payoffs from the edge computing. And we’re
robes, chests of drawers, and mounted shelving partnerships yet?
units that fit well in the space. In the hallway, just seeing the start of it.
shelves under the ceiling save space, and hooks on Apple Music, definitely.
the wall can hang skateboards. Disney+ is still in its infancy, How is the move from 4G to 5G different
When Victoria Sanina wanted to renovate her but we are happy with it. from 2G to 3G to 4G?
18 standard 12-square-meter bedroom last fall, she

5G was meant to be a
drew inspiration from Kvartiroteka. The 28-year- How about your edge-computing deal wireless technology for
old graphic designer lives in Chelyabinsk, far from with Amazon Web Services? Will it
fulfill the promise of swift connectivity industries. It was never
any of Ikea’s 14 big-box stores in Russia. She saw an between device and data? thought that consumers
image with nightstands attached to the wall instead
would get the benefit. But
of standing on the floor. “I thought, that’s elegant, This is exciting. We are
phones are better every time
and things won’t get lost behind them,” she says. bringing their cloud service
we get a new generation.
“I ordered them online with light fittings that turn together with our 5G.
Twenty 5G phones are going
them into sources of light in the room.” Sanina Amazon couldn’t have
to launch this year. If you have
says her aunt, who lives in a typical five-floor block done it by itself because
a 4G phone, you probably
known as the 1-335 series, is considering a ready- it doesn’t have wireless.
have 40 to 50 megabits per
made Ikea design to renovate her entire apartment. Verizon couldn’t have done
second. I get 2 gigabytes per
Residents of Moscow, St. Petersburg, and it by itself because we don’t
second on my 5G phone.
Tyumen who use Kvartiroteka can seek further have cloud software. Today,
advice from a consultant at one of five smaller Ikea a developer can click on our
“design studios” in the cities’ centers. The stores first 5G edge site in Chicago You still have some media properties
such as Yahoo, HuffPost, and AOL.
may help keep people like Veronika Sumina shop- and start developing an
ping at Ikea. The 31-year-old financier, on mater- application with low latency. I can go to a customer and
nity leave in Moscow, recalls when going to one of say, “Hey, I’m not only gonna
the superstores was a big event. “You could have What does that enable you to do? sell you connectivity and 5G,
spent half a day there—looking at the interiors, I also have the advertising
sitting down on a sofa and taking a photo, eating Autonomous cars. Real-time platform.” We’re happy with
Swedish meatballs and shopping,” she says. “Now augmented reality and virtual the assets. They’re coming
it’s not comfortable for me anymore to go a large reality. Artificial intelligence. from double-digit declines to
Ikea store and spend a lot of time there navigat- All of that can come from very small declines.
JESSICA GOW/GETTY IMAGES
ing with a baby carriage.” —Ilya Khrennikov, with

Hanna Hoikkala
○ Interviews are edited for clarity and length. Listen to Bloomberg Businessweek With
THE BOTTOM LINE Ikea, battling aggressive online retailers, is Carol Massar and Jason Kelly, weekdays from 2 p.m. to 5 p.m. ET on Bloomberg Radio.
boosting sales in Russia with a digital tool for standard apartment
blocks that could be expanded to Germany, Poland, and China.
REAL
SUSTAINABILITY
ANSWERS
BEFORE
IT’S ASKED
We adopted sustainability practices such as zero routine flaring decades

before they became industry standards. As a result, a recent study of over
100 oil fields in 20 countries showed that our crude oil has the lowest carbon
intensity among large producers, proving our commitment to reducing
greenhouse gas emissions and powering a more sustainable future.
THIS IS REAL ENERGY.

THIS IS ARAMCO.
Bloomberg Businessweek Febr 10, 2020
20
○ Astra, Darpa’s rocket startup

of choice, is preparing to launch
Edited by
Jeff Muskus satellites into orbit in record time
TECHNOLOGY Bloomberg Businessweek February 10, 2020
The 40-foot-long, 4-foot-wide rocket loomed over

the quiet suburb of Alameda, Calif., on the morn-
ing of Jan. 18, near the Pottery Barn Outlet. A hand-
ful of engineers and metal wrenchers got to work
early, setting up the rocket and connecting it to a
mess of electronics and tubes. The device stood up The satellite haulers
straight, with the help of some black metal scaffold-
ing. Its bottom third gleamed aluminum; the rest, SpaceX’s Falcon 9
actor-teeth white. Over the course of the day, the Payload 50,265 lb.
team pumped in various gases and liquids to pre- Cost per launch $62m
pare the rocket’s valves, chambers, and other com- Height 230 feet
ponents for a crucial test.

Shortly after midnight, the rocket was ready for
Rocket Lab’s Electron
an exercise called a cold flow, meant to ensure that
Payload 331 to 496 lb.
its propellant tanks can handle liquid fuel. Once the
Cost per launch $7.5m
team had filled the rocket, taken the needed mea-
Height 56 feet
surements, and checked for leaks, they simply evacu-
ated the machine by releasing huge volumes of liquid
nitrogen into the air. The thing about liquid nitro- Astra
gen is that it must be kept supercold to remain liq- Payload 165 to 450 lb.
uid. It boiled instantly on contact with the outside Cost per launch $2.5m
air, creating a billowing white cloud that stretched Height 40 feet
out more than 200 yards. With the team’s floodlights
beaming down on the test site, this odd fog monster
easily could have been seen by anyone living in the
houses as close as 2,000 feet away. Soon, though, 21
the rocket was trucked off toward its next tempo-
rary home, a spaceport in Kodiak, Alaska.
Until speaking with Bloomberg Businessweek,
Astra, the 3-year-old rocket startup behind the test,
had operated in secret, nitrogen clouds aside. The
company’s founders say they want to be the FedEx
Corp. of space. They’re aiming to create small, cheap
rockets that can be mass-produced to facilitate daily
spaceflights, delivering satellites into low-Earth orbit
for as little as $1 million per launch. If Astra’s planned An Astra rocket
undergoes testing in
Kodiak flight succeeds on Feb. 21, it will have put Alameda
PHOTOGRAPH BY JASON HENRY FOR BLOOMBERG BUSINESSWEEK; DATA: SPACEX, ROCKET LAB, ASTRA
a rocket into orbit at a record-setting pace. Chief
Executive Officer Chris Kemp says he’s focused less
on this one launch than on the logistics of creating
many more rockets. “We have taken a much broader
look at how we scale the business,” he says.
Going fast in the aerospace business is a rarity and
doesn’t usually work out so well. But the U.S. govern-
ment has made speedy rocket launches something
of a national priority, and Astra is a Department of
Defense darling right now. The Pentagon’s R&D arm,
the Defense Advanced Research Projects Agency, or
Darpa, made Astra one of three finalists in a contest
called the Launch Challenge. The terms: Whichever
startup could send up two rockets from different loca-
tions with different payloads within a few weeks of
each other would win $12 million.
Astra is the only finalist still in the running. Virgin
Orbit LLC, part of billionaire Richard Branson’s
◼ TECHNOLOGY Bloomberg Businessweek February 10, 2020
spaceflight empire that’s been working on its Virgin Galactic, and Firefly Aerospace after learning
rocket for about a decade, has withdrawn from the electronics in the Marines. “I didn’t know the first
contest. Vector Launch Inc., the third finalist, filed thing about rockets, whenever I got into it,” he says.
for bankruptcy in December. That’s left Astra in a “But with these startups, you’re involved pretty
competition against itself and physics, which may quickly in just about every single aspect.”
be why Kemp, a relentless ball of confident energy Astra has raised more than $100 million from
who dresses all in black, is uncharacteristically try- investors including Acme, Advance, Airbus Ventures,
ing to set modest expectations for the Kodiak launch. Canaan Partners, Innovation Endeavors, and Salesforce
“It would be unprecedented if this was a success- co-founder Marc Benioff. Billions of dollars have flowed
ful orbital flight,” he says. “We want to emphasize into commercial spaceflight ventures in the past few
that this is one of many launches we will do in an years, often to newcomers that, like Astra, have shied
ongoing campaign.” from competing directly with Elon Musk’s SpaceX
The 42-year-old CEO spent almost five years at and government-backed makers of large rockets.
NASA, but he’s not a rocket scientist by training. He The jumbo end of the market centers on rockets
joined NASA in 2007 after running a string of inter- that fly roughly once a month and cost $60 million
net startups, eventually becoming the space agency’s to $300 million per launch, typically carrying tons of
chief technology officer. While at NASA he shepherded cargo. Astra says its daily launches, meant to carry
an open source software project called Open Stack, about 450 pounds of cargo to orbit, will be pitched
which turned into a data center and cloud comput- to the dozens of companies making a new breed of
ing phenomenon. He left in 2011, hoping to capital- small satellites, such as Planet Labs, Spire Global,
ize on Open Stack’s success, but his next company, and Swarm Technologies.
Nebula, found itself outgunned by Amazon.com Inc.’s Whereas conventional orbital networks are com-
cloud computing services; Oracle Corp. acquired posed of a relative handful of satellites the size of a
Nebula’s piece parts in 2015. Unsure what to do next, car, Planet and its rivals produce tens to hundreds of
he spent a couple of years hunting for fresh ideas, basketball-size satellites for use in specific orbits to
22 which is when he ran into Adam London, Astra’s photograph, track, and connect things on Earth in
co-founder and CTO. near-real time. At the moment no one really knows
London is the rocket man, a 46-year-old with a how big or viable the market for smaller rockets to
doctorate in aerospace engineering from MIT and ferry these satellites might be. Rocket Lab, a com-
a talent for calculating drag coefficients and gravity pany founded by Peter Beck in Auckland in 2006, is
losses in his head. He spent 12 years running a small the only small-rocket maker that’s actively launch-
rocket company called Ventions in the heart of San ing. Rocket Lab enjoyed a banner 2019, putting six
Francisco. Ventions’s handful of employees focused rockets into space, and has about a dozen more
on miniaturizing rocket technology in their make- launches scheduled for this year. Its success has
shift lab, living on NASA and Darpa contracts and placed immense pressure on companies such as
the odd consulting gig. By 2016, London had grown Astra and Virgin Orbit to catch up. “Our strategy
determined to build the rocket of his dreams, but he Astra has operated in secrecy partly to avoid being is to always
needed a lot more capital. Kemp and his talent for pushed to set unrealistic deadlines. Most of its work- focus on the
winning over investors seemed like a good match, so ers have online résumés that list their employer as bottom line”
after many chats, they joined forces. “I liked Chris’s “Stealth Space Company,” and there hasn’t been a
enthusiasm, his ability to think about the story, and website. At the former Alameda Naval Air Station,
certainly his network,” says London, the measured Astra took over a decrepit building used decades ago
counterpoint to Kemp’s bravado. to test jet engines indoors, which has helped keep its
The rest of Astra’s 150-person team includes some secrecy intact. The facility has two long tunnels that
legit aerospace veterans—former SpaceX employees send fire and scorching hot air up through exhaust
such as Chris Thompson (part of the SpaceX founding towers and thick concrete walls capable of absorbing
team), Matt Lehman (propulsion), Roger Carlson (the the explosive impacts of tests gone wrong.
Dragon capsule), and Bryson Gentile (the Falcon 9 This setup has allowed Astra to conduct thou-
rocket). But there’s also a large contingent that came sands of runs on its rocket engines without its neigh-
from gritty, bootstrapped rocket outfits or from other bors noticing much of anything. It’s also meant Astra
fields entirely. Much of the engine building has been can put the engines through their paces on-site and
done by Ben Farrant, a former Navy engine man make adjustments to the hardware quickly, instead of
who’s spent the bulk of his career in the auto racing going to the Mojave Desert or an open field in Texas
world tuning vehicles. Les Martin, a launch and test where other rocket makers typically run engine trials.
infrastructure engineer, built test stands for SpaceX, Kemp says Rocket Lab’s going launch rate of about
February 10, 2020
◀ Astra is betting it can

launch a second rocket
from a Darpa-chosen
site within just a few
weeks
$7.5 million a pop is too high and that the company’s ◀ London (left) and
Kemp developed their
Electron rocket has been overengineered. Instead small-rocket startup in
of using carbon fiber for the rocket body and fancy secret for three years
3D-printed parts as Rocket Lab does, Astra has stuck

with aluminum and simplified engines built with com-
mon tools. London’s team has tried to make the Astra
radios, igniters, and even the rocket transport vehi-
cle low-cost, high-performing, and easy to re-create.
Alongside its rocket test building, Astra has been 23
assembling a 250,000-square-foot manufacturing facil-
ity that Kemp says will be able to churn out hundreds
of rockets a year. “Our strategy is to always focus on
the bottom line,” he says. “Nothing is sacred. We’re
able to profitably deliver payloads at $2.5 million per
launch, and our intent is to continue to lower that
price and increase the performance of our system.”
The proof is in the orbital launch. Most spaceflight
companies’ first crafts go boom in a bad way, but
Rocket Lab has an almost flawless launch record. Beck,
a self-taught rocket engineer, says his perfectionism
is a selling point. “If someone wants to build a rocket Pentagon agency will then select another launch
that is super inaccurate, let them,” he says. “I’m not site—probably somewhere in California, Florida, or
built to build shit.” Astra’s previous two launches, Virginia—and give Astra a few weeks to get a fresh
each of a smaller version of its current rocket, tum- rocket to the new launchpad. It would be an incred-
bled back onto the Kodiak coastline in 2018, break- ibly quick turnaround for an industry in which 6 to
ing apart in spectacular pyrotechnic displays. 12 months is a typical time span needed to calibrate
“That is what was expected,” Kemp says. “Many the specifics around new launch sites and payloads.
PHOTOGRAPHS BY JASON HENRY FOR BLOOMBERG BUSINESSWEEK
of our objectives on those launches were achieved, Astra has several rocket bodies awaiting the chal-
and I guarantee we couldn’t have built our orbital lenge on its Alameda factory floor. Kemp says the
rocket in three years if the team hadn’t benefited company has signed contracts for more than a dozen
from that experience.” London is more circumspect— launches with paying customers, and it plans to cre-
but comparably optimistic. “I did expect or at least ate a launchpad in the Marshall Islands to match
hoped we would be in orbit by now,” he says. “But the one in Alaska. So far, he says, there are no plans
outside of things being a little harder than you would to launch directly from the Alameda Pottery Barn.
like, the broad direction and slope of things line up �Ashlee Vance
pretty well with our original plan.”
THE BOTTOM LINE If Astra can complete the Pentagon’s Launch
To win the $12 million, Astra will need to place a Challenge, it may become a credible competitor to Rocket Lab, the
satellite of Darpa’s choosing into the right orbit. The early leader in the small-satellite-launching business.
3
F
I
N
A What Use Does Wall
N Have for
C
E
24
Berkshire’s 31 daily newspapers and some other pub-

● Warren Buffett just gave
lications for $140 million. Buffett set up the sale in a
up on local news. But other way that allows him to make money from the deal
investors look even less friendly for years to come. Lee will pay Berkshire a 9% annual
interest rate on a 25-year loan that it will use partly to
pay for the deal and partly to refinance Lee’s other
Warren Buffett always had a soft spot for newspa- debt and provide cash. Berkshire will also keep the
pers. He didn’t just own a lot of them. He described newspapers’ real estate and lease the buildings
himself as a newspaper addict and fondly recalled back to Lee. “Berkshire Hathaway wouldn’t be the
delivering them as a teenager. For many years he company it is without making money in any envi-
hosted a newspaper-throwing contest at the annual ronment,” says Ken Doctor, a longtime newspaper
meeting of his Berkshire Hathaway Inc. conglom- analyst. Some aspects of the Lee deal, such as the
erate, challenging anyone to toss a rolled-up paper refinancing, could also make it easier for the chain
closer to the front door than he could. to get through a difficult time for the industry.
Edited by
Now he’s getting out of the business. On Jan. 29, Still, the transaction was another disappoint-
Pat Regnier Lee Enterprises Inc. announced that it’s buying ing milestone for those who still love and depend
February 10, 2020
Street
Newspapers? ▼ Fifty top U.S.
newspapers*
● 100% owned by
a hedge fund
● 32% hedge fund-
owned
● 23% hedge fund- 25
owned
● 6% hedge fund-
owned**
● Recently acquired in
a deal financed by
a private equity firm
● Owned by a billionaire
businessman
ALLIANCE FOR AUDITED MEDIA AND COMSCORE REPORTS. **A HEDGE FUND-CONTROLLED FIRM OWNS 6% OF LEE ENTERPRISES,
● Family-owned
PHOTOGRAPHS BY JANELLE JONES FOR BLOOMBERG BUSINESSWEEK; PROP STYLIST: JENNY WICHMAN. *2018 PEW ANALYSIS OF
● Other ownership
on their hometown paper. As private equity to know what’s going on in your town—whether the
and hedge fund investors gained control of the news is about the mayor or taxes or high school WHICH OWNS OR IS ACQUIRING THESE PAPERS. DATA: COMPANY REPORTS, NEWS REPORTS
business, Buffett once stood out as someone who football—there is no substitute for a local newspa-
believed in the mission of newspapers and had the per that is doing its job,” he wrote in a shareholder
wealth to invest in a potential turnaround. And he letter released in 2013.
was famous for his patience—in the past, he’s said But as readers flocked to the internet, his com-
he’s “reluctant” to sell even subpar businesses. “If ments grew increasingly pessimistic. His publica-
one of the richest men on the planet has soured on tions started cutting jobs. In 2012, Berkshire shut
newspapers, what chance do newspapers have?” down the News & Messenger, based in Manassas,
wrote Tom Jones, a media writer at the Poynter Va. About two years ago, Buffett said he was sur-
Institute, a journalism school and research center. prised that the circulation decline hadn’t let up.
Buffett’s days as a newspaper baron began five His business partner, Charlie Munger, suggested
decades ago with his acquisition of the Omaha Sun. their emotions might have clouded their judg-
Over the years, the billionaire investor argued that ment. “The decline was faster than we thought
despite circulation and advertising declines, local it was going to be, so it was not our finest bit of
newspapers still had some advantages. “If you want economic prediction,” Munger said at Berkshire
◼ FINANCE Bloomberg Businessweek February 10, 2020
Hathaway’s 2018 annual meeting. “To the extent have devised additional strategies to make money.
we miscalculated, we may have done it because Alden also owns a real estate business that buys and
we both love newspapers.” leases newspaper offices and printing plants. Apollo
Buffett’s exit wasn’t a total surprise. He was Global Management, a private equity firm, issued
already inching out the door: About 18 months ago, a loan to New Media Investment Group to buy
Berkshire asked Lee, which owns the St. Louis Post- Gannett at an 11.5% annual interest rate, an even
Dispatch and more than 40 other dailies, to man- higher rate than Buffett’s 9% loan to Lee. Fortress
age most of its papers. In a statement, Buffett said collected about $20 million in both 2018 and 2019 for
he was confident that his newspaper empire was managing New Media Investment Group, according
in the right hands: “We had zero interest in selling to Doctor, the media analyst. “If you can extract the
the group to anyone else for one simple reason: cash as you’re managing the decline, you can make
We believe that Lee is best positioned to manage a lot of money,” he says. “But they do not posit a
through the industry’s challenges.” long-term strategy and turnaround.”
Buffett’s former newspapers may soon find Financial firms have also assumed control of
themselves under pressure from other investors. newspapers because they’re willing to shrink them,
Just hours after the deal was announced, MNG Doctor says. “The reason you see them in the busi-
Enterprises Inc. disclosed it had bought a 5.9% ness and not others is because they do the dirty
stake in Lee, becoming its third-largest shareholder, work of continuing to cut an operation,” he says.
and said it wanted to talk with Lee’s management Many newspapers were once owned or
about the Berkshire deal, among other issues. controlled by families who stayed in the industry
MNG is majority owned by Alden Global Capital, for decades. Buffett had served as a bridge between
a New York hedge fund, and has a stable of about the old and new generations of owners. He
50 daily newspapers, including the Denver Post. It’s believed in the role of newspapers but could still
gained a reputation for making deep cuts to news- be gimlet-eyed about the business. “If horses had
rooms, and its journalists once protested outside its controlled investment decisions, there would have
“To the
26 New York offices, carrying signs that read “Invest or been no auto industry,” he said in a shareholder
extent we
Sell Now” and “Stop Bleeding Our Newsrooms Dry.” letter published in 2015.
miscalculated,
Alden didn’t respond to a request for comment. Buffett didn’t breathe new life into his news-
we may
Alden’s investment might be the start of a battle papers the same way billionaires Jeff Bezos
have done
for what to do with the Berkshire papers and other and Patrick Soon-Shiong have since buying the
it because
Lee assets. Alden could buy a larger stake, gain Washington Post and Los Angeles Times, respec-
we both love
board seats, and pressure Lee to make further cuts tively. Buffett’s papers sometimes struggled to
newspapers”
or sell. A year ago, Alden made an unsuccessful embrace change, with his hometown newspaper,
takeover bid for the Gannett Co. newspaper chain. the Omaha World-Herald, continuing to publish an
Gannett was eventually bought by New Media afternoon edition until 2016.
Investment Group Inc. In November, Alden bought Journalists at the World-Herald didn’t want a
a 32% stake in Tribune Publishing, becoming its national chain to own them. Todd Cooper, who
largest shareholder. In response, two Tribune jour- leads the paper’s union, says they’d been in touch
nalists published an op-ed in the New York Times with Buffett and his deputy Ted Weschler to see
in January calling for a new “civic-minded local if they would be willing to sell if the union could
owner,” saying Alden’s influence could lead to a find another buyer. They’d even started to petition
“ghost version of the Chicago Tribune.” local foundations last year to take over the paper.
Alden is one of several Wall Street firms that have “We just felt that the best fit for journalism and the
gained control over the newspaper industry. Others future of journalism is either single local owner-
include Chatham Asset Management LLC, the larg- ship or ownership groups, or nonprofits, founda-
est shareholder in McClatchy, publisher of the tions,” Cooper says.
Charlotte Observer and Miami Herald. New Media He says he was blindsided by the news about
Investment Group Inc., which became the largest the sale to Lee. Buffett was an investor who had
U.S. newspaper chain after the Gannett merger, is long ties to the industry, yet even he wasn’t able to
managed and controlled by the private equity firm make it work. “He loved journalism and probably
Fortress Investment Group. still loves it,” Cooper says. But “he’s totally a num-
The financial firms’ strategy centers largely bers guy.” —Gerry Smith and Katherine Chiglinsky
around buying other newspapers to boost rev-
THE BOTTOM LINE Financiers are still interested in newspapers,
enue, then cutting costs by centralizing opera- but some journalists think the papers would be better off in the
tions and laying off journalists. But some investors hands of local owners or nonprofits.
FINANCE Bloomberg Businessweek February 10, 2020
Looking Beyond
○ If companies want more diverse directors,
CEOs for Boards they can tap rising stars instead
Outside corporate board gigs are a classic perk of Financial Officer Kathleen Oberg joined the board
being a chief executive officer. The side jobs offer of software company Adobe Inc. in January 2019.
extra pay, as well as a way to network—perhaps for Others went to businesses closer to Marriott’s con-
the next big job. But all those top bosses filling up sumer focus. Stephanie Linnartz, a group president
directors’ seats has a predictable effect: Since CEOs in charge of consumer strategy, has been a Home
are overwhelmingly white and male, they tend to Depot Inc. director since May 2018. “The human
reinforce the lack of diversity on corporate boards. touch is very similar between our two companies,”
That makes a push by Marriott International Inc. she says. “I think I’ve been able to bring back some
to get lower-level executives to join boards a big- best practices from Home Depot and vice versa.”
ger deal than it might seem. CEO Arne Sorenson Most companies are willing to let key executives
says his aim is to give the hotel company’s rising serve on one board, but usually that’s the limit, says
stars valuable experience. Incidentally, though, of Julie Daum, who leads the North American board
the five who have found board positions, three are recruiting practice at executive search firm Spencer ○ Oberg
women and one is a black man. The same trend is Stuart. And companies want to avoid situations
showing up at other large U.S. companies: Among that might carry a reputational risk. “They don’t
the 10 companies with the most employees serving just say you can go out and serve on any board,”
on other boards, the executives with directorships she says. Because of those risks—and long hours—
are overwhelmingly women or people of color, some companies still won’t entertain the possibil-
according to data compiled by Bloomberg. ity of their executives moonlighting as directors,
There’s a long way to go before boards become says Lisa Blais, who leads U.S. board recruiting for 27
genuinely diverse. Goldman Sachs Group Inc. made Egon Zehnder in Boston.
news in January when it announced it would no lon- But outside board service is a tool companies
ger underwrite initial public offerings for U.S. and use both to groom future CEO candidates and to
European companies without at least one director retain executives for whom a promotion is not ○ Linnartz
who is a woman or a person from an underrepre- yet available, says James Drury, whose executive
sented group. Although women make up half the recruiting company specializes in helping compa-
workforce, they didn’t exceed a quarter of S&P 500 nies find boards for their executives to serve on.
directors until just last year. Such a role can be lucrative: The average
For the first time, a majority of new total compensation for an S&P 500 direc-
directors last year were either women or tor passed $300,000 this year for the first
men of color. Boards are casting a wider time, according to Spencer Stuart. For
net, in part, as a response to pressure companies seeking to fill boards, going
from investors such as BlackRock Inc. down a rung or two from the CEO has its
and State Street Global Advisors, which own advantages. Such people may bring
cite better returns for more diverse com- more specific skills, such as in human
panies. For different reasons—such as resources, says Blais.
the drain on CEOs’ time and energy—big While the effort at Marriott doesn’t
PHOTOS: COURTESY MARRIOTT. ILLUSTRATION BY KHYLIN WOODROW
investors have also been pushing compa- have a diversity goal, executives who
nies to rein in their CEOs’ outside board aren’t white men benefit more because
service. A decade ago, half the CEOs in the S&P they are in demand, Sorensen says. Meanwhile,
500 served on at least one outside board, and many the willingness of companies to let their non-CEO
were on at least two. Last year, almost 60% weren’t executives join boards means that many directors
on even one outside board. are joining a board for the first time. “If they don’t
Sorensen was one of the first Marriott executives give us a first shot at it, it’s never going to change,”
to serve on an outside board. He’s now a director says Linnartz. “I’m definitely trying to pay it for-
at Microsoft Corp. He felt it made sense to encour- ward to other women.” —Jeff Green
age other executives to get similar experience: Board
THE BOTTOM LINE Big companies are encouraging more
service could expose them to industries they need executives to take outside directorships, and many are women or
to stay in touch with, including technology. Chief people of color.
E
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28
M
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S
financial crisis. But Republicans lost control of the
○ With Democrats in control of budget machinery in Congress last year, when the
the House, more fiscal stimulus House convened under its new Democratic majority.
is likely off the table Ever since then, with his own options for juic-
ing the economy having narrowed, Trump has been
on a crusade to lower interest rates—a lever that’s
Governments up for reelection typically do what controlled by the Federal Reserve and its chairman,
they can to nudge the economy into high gear just Jerome Powell. “The idea that a Democratic House
as voters are starting to pay attention. On that front, is going to sign off on another Trump tax cut seems
things already look pretty good for Donald Trump. extremely far-fetched,” says Jared Bernstein, a senior
One problem for the president ahead of the vote in fellow at the Center on Budget and Policy Priorities.
November is that his most powerful tool is now in “I don’t think there’s much stimulus there in any
the hands of his enemies. recognizable sense that doesn’t require legislation.”
Fiscal stimulus is the main reason for faster Bernstein is personally familiar with Trump’s
growth on Trump’s watch. In 2018 tax cuts coupled predicament: In 2011, as chief economist to Vice
Edited by
with higher spending helped the U.S. economy President Joe Biden, he was part of a team tasked
Cristina Lindblad match its best performance in the years since the with finding ways to boost the economy that could
◼ ECONOMICS Bloomberg Businessweek February 10, 2020
bypass the House. Republicans had just seized especially with several long-standing Republican ▼ Average quarter-
over-quarter GDP
control there, led by members of the Tea Party lawmakers retiring. growth during
movement who opposed new government spend- Even just the release of tax plans could lift the expansion period
ing. The list the group came up with was “uncom- stock market, and that in turn could boost consumer Government
contribution
fortably short,” he recalls. confidence, according to Kyle Pomerleau, a resident
Barack Obama won a second term in 2012 any- fellow at the American Enterprise Institute. That’s 2.6%
way, and if the economy is a guide (it often but not what happened after Trump’s election, he says, and 2.2%
always is), then Trump is well placed to follow suit. “you could imagine it happening again.”
He gets good ratings on the economy, and he’s cam- A $2 trillion overhaul of U.S. infrastructure is
paigning on unemployment being near all-time lows another fiscal stimulus that’s been touted since
and stock prices at all-time highs. Still, economists Trump’s first days in office. A cross-party deal in
reckon gross domestic product will expand at a 1.8% Congress proved elusive then and would be tougher
pace through the first three quarters of 2020. That in an election year—and even if it happened, only the
would be slower than the same period in 2019—and most shovel-ready of projects could get under way 0.3%
not much different than 2016, when elections didn’t before voting. -0.1%
go well for the incumbent party. If there was a lever to move the dollar, Trump Under Under
Obama* Trump
The Trump administration’s use of deficit spend- would surely pull it. The president often com-
ing a decade into an expansion has been unortho- plains that the strong greenback is hurting man-
dox. Some analysts have warned it could leave the ufacturers. He hasn’t come up with a mechanism
government short of budget firepower in the event for weakening it, beyond tweeting his displeasure
of a recession—and drive inflation and interest rates at the Fed, though the Commerce Department
higher. Those threats haven’t materialized yet, and is weighing tariffs on countries seen as unfairly
economists are coming around to the idea that the manipulating their currencies.
U.S. has room to spend. There is one wild-card idea that Trump could
Trump has also added tariffs to the toolkit. He’s potentially execute on his own—one borrowed from
shown that a president can run trade policy almost Democratic rivals. Senators Bernie Sanders (I-Vt.) 29
single-handedly, and since the escalation with China and Elizabeth Warren (D-Mass.) propose to write
was largely of his doing, he can probably control tim- off most or all of the $1.6 trillion in student debt.
ILLUSTRATION BY SCOTT GELBER. DATA: U.S. BUREAU OF ECONOMIC ANALYSIS, U.S. TREASURY; *AVERAGE DURING ECONOMY EXPANSION, Q3 2009 TO Q4 2016
ing when it comes to de-escalation. Trump has privately expressed concerns that he
U.S. business has put some investment on hold doesn’t have a plan to counter them and asked aides
because of the trade war, so trade peace would likely to come up with one that will lower costs for student
boost the economy—but that may not happen before loan borrowers, the Wall Street Journal reported.
the election. Most analysts haven’t upped their Forgiving the debts would boost the economy
forecasts for U.S. growth this year as a result of the like a tax cut, Moody’s Investors Service says.
“phase one” deal signed with China last month. A Roosevelt Institute study released in December
Even so, a follow-up before November could help explained how it could be done without Congress.
Trump’s reelection campaign, says Brian Riedl, a The idea has a populist flavor that might appeal to
senior fellow at the Manhattan Institute: “The more Trump. But there are plenty of obstacles, includ-
the president can show he’s moving toward a resolu- ing likely legal challenges and hostility from some
tion on trade, that will help him in the battleground Republican voters.
states and make the case for a second term.” Trump has other tools under his direct control,
On fiscal policy, too, Trump may have reached including executive orders and policy at the federal
the point where he can offer promises for a sec- agencies run by his appointees. The Federal Housing
ond term rather than action in his first. His admin- Authority could loosen credit requirements for
istration has been dangling the prospect of more homebuyers, for example, or the U.S. Department
tax cuts—especially for the middle class—ever of Labor could make more workers eligible for over-
since pushing the last round, which favored the time pay. It’s just that those tools are small-bore com-
wealthy, through Congress late in 2017. Last month pared with cuts in interest rates—or in taxes. “You
at Davos, Treasury Secretary Steven Mnuchin said a hear Trump yelling at Jay Powell every waking hour
“Tax 2.0” proposal may be unveiled within months. because his ammunition is pretty much tapped,”
Congressional Republicans hope to campaign on the Bernstein says. “He can’t go back to the fiscal well.”
plan to regain control of the legislature. The GOP �Laura Davison and Ben Holland
would need to pick up about 20 seats in November
THE BOTTOM LINE Trump can make promises about what he’d
to regain a majority. Most political analysts think do in a second term, but his tools for boosting the economy before
it’s unlikely the party can win that many races, November are limited.
Russia’s Shrinking Welcome Mat

● Migrants from Central Asia face increasing obstacles to obtaining work permits
Russian President Vladimir Putin is taking a page point in 13 years, Russia’s population recorded its
from Donald Trump’s tough-on-immigration play- first dip since 2008—a decline that continued last
book. That’s bad for people like Umed and millions year. By 2050 the nation of approximately 146 mil-
of migrants from other former Soviet republics lion inhabitants will have 10 million fewer people,
who’ve flocked to Russia in search of work. The according to Russian and United Nations forecasts.
Tajikistan native, who declined to give his full Russia has made huge strides in curbing alco-
name, had been working as a delivery driver in hol consumption and smoking, boosting life expec-
Russia when he was deported in 2015. “They don’t tancy to more than 73 years, from a low of 65 soon
want Muslims to live in the country,” says Umed, after Putin came to power. The government has
who now resides in Kazakhstan. had less success in raising the birthrate. It plunged
Immigrants are Russia’s best hope to replenish to 1.2 births per woman at one point in the 1990s,
a 75 million-strong workforce that’s shrinking by which is why Russia suffers a shortage of women
800,000 people a year. Yet their numbers are barely of childbearing age. And while the rate is now com-
growing as Putin’s government has tightened regu- parable to that of Western European nations, it
lations, largely in an attempt to curb the number of remains below the so-called replacement rate.
migrants from Central Asia. This is a major headache “Migration should be the top priority,” says
for Russian companies, many of which are struggling Anatoly Vishnevsky, director of the Institute of
30 to fill jobs even though the economy is stagnant. To Demography at the Higher School of Economics in
cope with a shortage of drivers, food delivery service Moscow. Yet the foreign-born population is static:
Yandex.Eats plans to deploy suitcase-size robots that It was 12 million in 2019 (equal to 8% of the total),
will take orders to apartment building entrances. the same as in 2000, according to UN estimates. In
Grocery chain Magnit is plastering flyers around the U.S. it rose from 35 million to 51 million over the
apartment blocks and putting ads in local newspa- same period. ▼ Russia population
pers hoping to lure stay-at-home mothers and stu- The demographic situation could be “turned
Putin first
dents to take part-time shifts. around if the authorities didn’t worry about a back- inaugurated
“Business needs the extra manpower, but lash,” Vishnevsky says. The bulk of migrant workers as president
in 2000
the authorities are desperate to avoid provoking in Russia hail from Central Asia, but strict controls
voter anger” ahead of 2024, when Putin faces the block most from acquiring citizenship or even long- 148m
challenge of how to stay in power once he runs term residency papers—and the rules have been
up against presidential term limits, says Alexei tightening for the past five years. Regulations intro-
Makarkin, deputy director of the Center for duced in 2015 require those applying for long-term
Political Technologies, a research organization work permits to pass a Russian-language exam and 145m
in Moscow. “Times are hard, and that’s bolster- obtain medical insurance. Fees for temporary work-
ing anti-immigrant sentiment.” At his annual press ing papers can total about 5,000 rubles ($80) per
conference in December, Putin said the large num- month. The entire system is riddled with corrup-
ber of migrants from Central Asia provokes “irrita- tion, say immigrant-rights advocates. 142m
tion among the local population.” The government has tried to lure as many as pos- 1991 2019
Just two years ago he boasted that his govern- sible of the 30 million native Russian speakers living
ment had managed to reverse the demographic outside the country’s borders, yet in the past dozen
slump triggered by the collapse of the Soviet Union. years less than 1 million so-called compatriots have
But in his most recent state-of-the-nation speech accepted Moscow’s invitation to resettle. (That num-
he warned of a fresh population crisis. “We have ber doesn’t include 227,000 inhabitants of Eastern
entered a very difficult demographic period,” Putin Ukraine who agreed in 2019 to become citizens of
said, unveiling benefits to encourage families to Russia but may never actually move there.)
have more children. “Russia’s future, her historical Vyacheslav Postavnin, a former deputy head
prospects, depend on how many of us there are.” of the Federal Migration Service, says authori-
In 2018, as the flow of migrants fell to its lowest ties should be working to ensure immigrants from
non-Slavic cultures integrate successfully. But Argentina and Brazil, it’s one of South America’s
nothing has been done despite a mass outbreak wealthiest nations. The coast is lined with stun-
of nationalist riots targeting Muslim immigrants in ning beaches, the countryside dotted with pictur-
Moscow six years ago. “Migrants still live in a par- esque farms and vineyards. Plus, Uruguay has so
allel universe,” he says. �Henry Meyer and Ilya far avoided the social unrest that convulsed other
Khrennikov, with Naubet Bisenov, Ilya Arkhipov, nations in the region last year. On the economic
Stepan Kravchenko, and Zoya Shilova front, the view is less pleasing. Growth has aver-
aged a meager 1.3% the past five years, and unem-
THE BOTTOM LINE Many Russian businesses have become
dependent on migrant workers from Central Asia. But Putin’s
ployment stands above 9%. The public-sector deficit
government is intent on reducing those workers’ numbers. is approaching 5% of gross domestic product.
Attracting residents wouldn’t be a miracle cure,
but it couldn’t hurt. “As people with high dispos-
able income settle here, that will have an immedi-
ate impact on the economy,” says incoming Tourism
Surf, Turf, and Minister Germán Cardoso, because they’ll buy
homes, enroll their children in private schools, and
Low Taxes employ domestic help.
Long a haven for tax-dodging Argentines,
Uruguay has taken steps to curb money launder-
● Uruguay’s incoming government wants to lure ing and has been sharing more information in
rich foreigners to help shore up the economy
The way Uruguay’s president-elect sees it, his

country faces a couple of pressing problems: too
few residents and too little investment. Why not 31
solve both in one stroke by making the South
American nation of 3.5 million people so attractive
to well-heeled foreigners that they’ll pack up and
move there? “It’s generally accepted that Uruguay
would benefit from 100,000 or 200,000 more peo-
ple,” said Luis Lacalle Pou during a Jan. 22 radio
interview, explaining changes he wants to make to
the country’s tax-residency rules.
Greece, Spain, and Portugal have gone down
this road, wooing the wealthy with relatively
loose requirements for official residency status. recent years about Argentine residents with that ▲ Punta del Este
In Portugal, you can invest as little as €350,000 country’s tax agency. Lacalle Pou’s tax-residency
($387,000) in property to qualify. To be eligible for plan hasn’t gone down well with Argentina’s new
tax residency under Uruguay’s current rules, a for- leadership. In a recent TV interview, President
MARK JOHANSON/TNS/ZUMA PRESS. DATA: RUSSIAN FEDERAL STATE STATISTICS SERVICE
eigner must spend more than 183 days a year there, Alberto Fernández urged his counterpart to “think
as well as purchase real estate worth more than twice” before undoing years’ worth of efforts by
$1.8 million or invest more than $5.4 million in a predecessors to shed Uruguay’s reputation as a
business. Expats pay a flat 12% tax on income earned “fiscal paradise.”
from offshore assets after a five-year grace period. The governing coalition will hold majorities in
Destino Punta del Este, a nonprofit that pro- both chambers of congress, so getting legislation
motes the resort city, has asked the incoming gov- approved shouldn’t be difficult. Even so, success
ernment to reduce the residency requirements to isn’t assured. “We have to see how many people
90 days and $500,000. “Not many people are going participate and what is the economic result of the
to come way down here to a small country like activities they undertake,” says Julio de Brun, a for-
Uruguay if it’s not competitive,” says Juan Carlos mer head of the central bank. But, in general, “I see
Sorhobigarat, the group’s chairman. Lacalle Pou, it as something positive.” �Ken Parks
who takes office on March 1, hasn’t said how low
THE BOTTOM LINE Uruguay’s president-elect wants to follow in
he wants to go. the footsteps of Greece and Portugal and change tax-residency
Uruguay has lots going for it. Nestled between rules to make it easier for affluent foreigners to settle there.
P
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The Mess
S ● A muddled outcome and moving the party forward in settling on a nominee,
it did the opposite.
low voter turnout made the Absent a clean result, candidates like Joe Biden
country’s first presidential and Minnesota Senator Amy Klobuchar who
placed well below the first tier escaped the reck-
primary contest an unmitigated oning that ordinarily accompanies disappointing
disaster for Democrats finishes. A decisive Buttigieg or Sanders victory
typically would have produced a fundraising
windfall, glowing media coverage, and a strong
The Iowa caucuses usually play a critical role in the bounce in the polls—since 1976, the Iowa winner
presidential primary process by testing the candi- has gained an average of more than 12 points in
dates, winnowing the field, and slingshotting the national polls in the month following the cau-
top two or three finishers to national prominence. cuses. With no one getting that boost, no one will
The results coming out of Iowa often shape the be forced from the race.
national narrative for the rest of the race. But this For the party’s left wing, the results were a
year’s app-induced fiasco, which produced a low- frustrating muddle. The tepid third-place finish
confidence split decision between Pete Buttigieg of Massachusetts Senator Elizabeth Warren rati-
and Bernie Sanders, won’t even fulfill that basic fied the belief that she’s fallen back from last fall’s
function. The only certainty coming out of Iowa front-runner status and isn’t broadening her coa-
was that all of the candidates are now going on to lition into a unifying movement that could go all
Edited by
New Hampshire. the way. And while Sanders remains a viable threat
Weston Kosova Instead of clarifying questions of viability and to win the nomination, he didn’t demonstrate
◼ POLITICS Bloomberg Businessweek February 10, 2020
33
Iowa Made
anything like the runaway strength his backers Buttigieg—have endured and suffered from. Now, ▲ Boxes of voter
registration forms in a
hoped for and his opponents feared. After spend- amid the cloud of confusion and recriminations Democratic Party office
ing $50 million in the last three months of the year, from the Iowa results, some Democrats say he may in Des Moines
it looks as though the Vermont senator will end up escape that fate until it’s too late for centrists to stop
drawing about half the level of support in Iowa that him. “Warren spent two months undergoing rigor-
he did four years ago. That means a lot of his 2016 ous scrutiny for [supporting] Bernie’s Medicare for
followers switched their allegiance—hardly the stuff All policy, scrutiny that was never applied to him,”
of “revolution.” says Brian Fallon, a former top Hillary Clinton aide
Moderate and centrist voters may have it even who’s neutral in the race. “It’s a symptom of the fail-
worse. While Biden’s strength in national polls has ure of D.C. Democrats to take his chances of win-
been the one constant throughout the past year, ning the nomination seriously enough.”
his poor caucus showing, scattershot organiz- Sanders’s fundraising strength and passionate
ing, and lackluster fundraising bring new doubts base of supporters make him a serious contender,
about whether voters will ultimately decide that the even if it takes a little longer to secure the nomina-
77-year-old former vice president has the stamina tion. That’s left establishment Democrats struggling
to face off against Donald Trump. The map will to embrace the possibility of a socialist standard-
soon improve for Biden when Southern states start bearer. “Bernie would have a hard time winning
DANIEL ACKER/BLOOMBERG
voting, but he’ll have to stave off an exodus of sup- the election,” says former Pennsylvania Governor
port before then. Ed Rendell, a Biden supporter. “But if he wins the
Sanders rose to the top of Iowa and New nomination, I’d do the best I could for him. I’d be
Hampshire polls because he faced nothing like the all in for Bernie. It’s a wild thought.”
attacks on his policies that Biden—and Warren and Could Buttigieg parlay his Iowa showing to
34
Buttigieg
rival Sanders in upcoming contests? Perhaps. In

the weeks leading up to Monday night’s first-in-the-
nation Democratic contest, Sanders had seemed to
BUTTIGIEG: AL DRAGO/BLOOMBERG; SANDERS: JOE RAEDLE/GETTY IMAGES; APP: DANIEL ACKER/BLOOMBERG

be pulling away from the field. Buttigieg appeared
to be sinking, especially after Warren branded him
a privileged enabler of tech and finance titans who
showered him with money in a lavish “wine cave”
fundraiser. Yet the 38-year-old former mayor of
South Bend, Ind., relied on his moderate appeal
and dedicated turnout operation to overperform
in rural and suburban areas across the state.
Betting that fortune favors the bold, Buttigieg
also relied on moxie, marching out amid the
caucus-night chaos to declare a victory that was far
from certain, infuriating the Sanders campaign and
other top finishers. “We don’t know all the results,”
he declared to the crowd, auto-tuning his rhetoric
to match the soaring cadence of former President
Barack Obama. “But we know, by the time it’s all
said and done, Iowa, you have shocked the nation—
because by all indications, we are going on to New
Sanders
Hampshire victorious!”
Buttigieg’s stubborn unpopularity among the

black voters who’ll be critical in deciding South What Was With the App?
Carolina and Super Tuesday states poses what still
could be an insurmountable hurdle. And thanks
to the delayed caucus results, Buttigieg, for whom ● In Iowa, a bug in some code brought
developing a national campaign infrastructure was democracy to a standstill
already challenging, can’t expect to benefit from
the sudden influx of money and support usually
directed at the Iowa winner. Shadow Inc., the company whose app was sup-
This could open the door for someone who posed to help the Iowa Democratic Party quickly
already has a national campaign team, virtual compile results in the state’s 1,765 precincts, instead
control of the TV airwaves, and almost unlimited roiled the state’s caucuses and upended the open-
resources: Michael Bloomberg. A late entrant to ing act of the 2020 Democratic presidential primary.
the field who didn’t compete in Iowa, the former “I’m really disappointed that some of our technol-
New York City mayor has a message of competent ogy created an issue that made the caucus difficult,”
managerial centrism and a willingness to spend says Gerard Niemira, 37, chief executive officer of the
$1 billion to defeat Trump, which could be newly political technology company. “We feel really terri-
attractive to Democrats spooked by the debacle ble about that.”
they just witnessed. (Bloomberg is the founder So, what happened, exactly? “The problem was
and majority owner of Bloomberg LP, the par- caused by a bug in the code that transmits results
ent company of Bloomberg Businessweek and data into the state party’s data warehouse,” he says.
Bloomberg News.) By 9 p.m., problems with the app had delayed the ▲ Even more reasons to
His viability at this point is still theoretical: To be official results, leading to confusion and anger. hate technology
the Sanders-slayer and centrist alternative to Biden Niemira says the bug in the code was discovered and
and Buttigieg, he’ll first need to persuade primary fixed by about 10 p.m. Ultimately, most caucus offi-
voters to pull the lever for him. At the first sign that cials reported by phone. 35
voters are willing, he’ll also have to contend with The bug wasn’t the only issue with the app,
a populist backlash from energized partisans on however. Some caucus chairs also had trouble
the left wing. signing in and complained of insufficient train-
Besides the failure to clarify much of anything, ing. The difficulty of logging in to Shadow’s cau-
the Iowa caucuses amplified a set of issues that cus app stemmed in part from the technological
Democratic officials are quietly worried about. A tools meant to safeguard the caucuses from foreign
full year of campaigning has done nothing to set- interference, according to Niemira. Chairs needed a
tle the central debate within the party between specific precinct ID, two-factor authentication, and
those who believe a nominee must steer left- a personal identification number. “We’d had peo-
ward to excite and attract new voters and those ple using this app for weeks,” Niemira says. “It had
who believe that such a course would guaran- a ‘sandbox’ mode to practice with. What we were
tee President Trump another term. Iowa’s neck- seeing early on caucus day was people having diffi-
and-neck finish between Buttigieg the moderate culty logging in for the first time.”
and Sanders the radical is the party’s conundrum Denver-based Shadow was founded last year
come to life. and builds technological tools for Democratic can-
Then there’s the matter of excitement—or lack didates and progressive causes. (Its major funder
of it. On a day when Gallup measured Trump’s is Acronym, a nonprofit group that invests in pro-
approval rating at an all-time high of 49%, Iowa gressive technology companies.) “We exist to help
Democrats showed up to caucus in only mod- campaigns,” Niemira says. “It really pains me that
est numbers. Not long ago, state party officials we did the opposite.” Shadow, which hadn’t pre-
expected turnout to rival or exceed the record viously done election-related work, he says, built
level of 240,000 set during Obama’s first run in the app specifically for the Iowa caucuses and had
2008. Instead, turnout was closer to 2016’s level of another in the works for the coming Nevada cau-
170,000. Democrats are counting on a growing blue cuses. The Nevada Democratic Party has said it no
wave of enthusiasm to oust Trump. Iowa denied longer plans to use Shadow’s technology. �Joshua
them that, too. �Joshua Green Green and Eric Newcomer
THE BOTTOM LINE Iowa usually helps determine presidential THE BOTTOM LINE A political technology startup created an
candidates. For Democrats, this year’s outcome seems to have app for the Iowa caucuses that delayed official results, leading to
added only more chaos to the race. confusion and anger.
SmallBusiness
S
O
L
U
T
I
O
36
N
S A Weather
PHOTOGRAPH BY FILIP ZUAN FOR BLOOMBERG BUSINESSWEEK. ILLUSTRATION BY ARNE BELLSTORF
Startup Takes
Flight
Windy.com is moving beyond extreme-sports fans
February 10, 2020
with its hyperlocal forecasts
Edited by
David Rocks
◼ SOLUTIONS Bloomberg Businessweek February 10, 2020
A few years ago, Ivo Lukacovic hauled 25 pounds of gear where the wind is carrying nitrogen oxide, sulfur, carbon
up Switzerland’s Gotthard Pass expecting to spend the monoxide, and other dangerous pollutants. That kind of
day snow-kiting—gliding from peak to peak tethered to info will become increasingly valuable as countries step
a sail the size of a bedsheet. But instead of the favor- up efforts to monitor and verify pledges to cut emissions,
able conditions he’d seen in the forecast, he found him- says Vincent-Henri Peuch, chief of the Copernicus service.
self blinded by a freezing fog and had to give up for the The goal is to help regulators pinpoint greenhouse gas
day. Although he always obsessively combed the predic- emissions like “drops of ink released in a pool of water.”
tions spit out by NASA supercomputers or crunched by Lukacovic faces growing competition as dozens
Swiss climate scientists to find just the right conditions, of companies analyze climate information to improve
“I’d often still fail,” Lukacovic says. “I needed to create decision-making by everyone from transportation plan-
my own version of the weather forecasts.” ners to real estate agents. Assist, a software house
Unlike most other snow-kiters, Lukacovic had both backed by consultant Capgemini SE, is using Copernicus
the coding chops and the money to do that: He’s a air quality data to help airlines reduce maintenance
programmer who founded and still owns the Czech costs. France’s Mon Toit Solaire uses its measurements
Republic’s biggest internet portal, Seznam.cz. Six years to improve placement of solar panels. Finnish startup
ago he launched Windy.com, a website that aggregates AeroZee offers pinpointed information on air pollution
vast amounts of data to create hypergranular forecasts to potential homebuyers.
and assessments of climate conditions ranging from sta- And a host of services are broadly available to the
ples such as temperature, rainfall, and cloud cover to public—AccuWeather and the Weather Channel offer vast
detailed looks at dew point, fire risk, air pollution, and amounts of free info and boast financial firepower, having
more. “We’re the only service in the world right now that received backing from the likes of IBM, NBCUniversal,
can sell this very complicated data to common peo- and Blackstone Group. Lukacovic says his service can
ple,” says Lukacovic, 45. “That’s where we want to stay thrive because its website and app use proprietary
a leader.”
Windy employs 15 full-time coders who translate raw
files into richly animated weather illustrations, with flowing 37
arrows that indicate wind speed and direction, a rainbow
A lost day of snow-
of colors for data such as snow depth, and a sidebar kiting inspired
indicating anything from dust density to active fires. Surging Lukacovic to start his
forecasting business
interest in data about extreme weather on a warming
planet—hurricanes, floods, and heat waves—has helped
double the site’s traffic in the past year, to 1.5 million visitors
a day. Although he declines to provide details, Lukacovic
says Windy has collected some €400,000 ($440,000) in
contributions and concluded several deals with companies
that topped out at about €100,000 each. The vast
majority of users today pay nothing, but he’s considering
a €20 annual subscription for as-yet-unspecified premium
services. Windy would be “very profitable,” Lukacovic says,
if just 3% of users signed up.
“Windy was a real game changer,” says John Kealy,
a former meteorologist at the U.K.’s Met Office who’s compression and transmission systems that let its
now researching mathematical forecasting models at complex graphics load quickly, even on a sailboat in a
the University of Exeter. “It bridges the gap between thunderstorm or a mountainside in a blizzard. The goal
national weather services and the public in a way I hadn’t is to cater to people whose safety and well-being often
seen before.” The Prague-based company taps into the depend on knowing the weather, and who would be willing
mountains of climate information becoming available as to pay for information delivered in a simple, digestible
space agencies invest billions in new satellites. Windy draws format. “We do not plan to compete with the big guys,”
data from the U.S. National Oceanic and Atmospheric Lukacovic says. “Our target users are people like sailors,
Administration, Meteoblue AG at Switzerland’s University of pilots, firemen—and kiters.” �Jonathan Tirone
Basel, and the Copernicus Atmospheric Monitoring Service,
a nonprofit that offers feeds from European satellites.
THE BOTTOM LINE As the planet warms, surging interest in weather events
The latter provides Windy with air quality and pollution such as hurricanes, floods, and heat waves has helped double the site’s traffic
data, allowing Lukacovic to create animations that show in the past year, to 1.5 million visitors a day.
Sharing a Share More entrepreneurs

are opting to transform
Of the Company their small businesses

into cooperatives
In 1995, Susanne Ward opened Rock City, a homey cafe in co-ops to get loans and for small businesses to finance
the Maine fishing town of Rockland offering morning coffee, a conversion, which typically costs about $30,000 for
warm lunches, and evening performances by local musi- technical assistance and closing expenses, according
cians. Fast-forward 20 years, and Ward was tiring of the to the CDI. The U.S. Department of Agriculture in 2017
grind and wanted to cash out and travel, but she feared a modified its lending rules to allow former owners to stay
buyer might change the character and charm of the busi- involved in a co-op for five years after conversion. And
ness she’d spent much of her adult life nurturing. So she a 2018 law requires the Small Business Administration
floated the idea of converting Rock City to a cooperative to make loan-guarantee programs more accessible to
owned and managed by the staff, and after some initial worker-owned co-ops and directs the agency to promote
resistance, 17 of the 35 workers opted to join. “We’re small employee ownership through its investment funds.
and live in a rural area where good jobs with retirement pro- Businesses with a long history in their market tend
grams are few,” Ward says. “None of my employees could to transition best, and most remain small so each
have bought a business like Rock City on their own. Buying worker can afford a meaningful share. Almost three-
it as a group allowed them each to have ownership.” fourths of American workers would prefer to work for an
It’s an idea with growing appeal for small-business employee-owned company, according to a survey by the
owners. The U.S. has about 800 worker-owned co-ops, up Employee Ownership Foundation, and studies have found
from 350 a decade ago, employing more than 8,000 peo- that worker ownership increases productivity, profits, and
38 ple and generating almost $500 million in annual revenue, wages and creates stability.
the U.S. Federation of Worker Cooperatives estimates. Entrepreneurs who need help with rapid expansion
Co-ops run businesses ranging from housecleaning to but have difficulty recruiting and retaining managers are
taxi services to construction. The smallest have fewer also contributing to the shift. Aja Hudson founded a land-
than a half-dozen worker-owners, while the biggest are scaping company in New York’s Catskill mountains 19 years
sizable players in their industries. Founded 35 years ago ago, and as the business thrived she found herself hav-
to boost employment and wages in low-income areas, ing to turn away potential customers. Four years ago she
Cooperative Home Care Associates in New York City has converted the company, now called Earth Designs, into
more than 1,000 worker-owners caring for the elderly, ill, a cooperative she owns with nine employees. “It was too
and disabled. “In many communities, there’s a hunger for much for me to manage by myself,” Hudson says. The tran-
jobs that offer both dignity and a chance at ownership sition from owner to co-owner “required a tremendous
and control,” says Joseph Blasi, director of the Institute amount of patience and many more meetings than any of
for the Study of Employee Ownership and Profit Sharing us expected,” she says. “But every time, the group was able
at Rutgers University in New Jersey. to rise above it, and the rewards have been great.”
While most companies operating as cooperatives have Since the conversion, Earth Designs’ staff has grown
shared management and ownership from the beginning, from 9 to 25, and sales last year approached $2 million,
more conversions are likely as baby boomers—who own almost four times what they were in 2015. Before the
two-thirds of small businesses in the U.S.—move toward transition, Erin Domagal had worked as a crew manager,
retirement. Many have no succession plan, and finding a overseeing projects in the field; after buying a stake in
buyer isn’t always easy, especially in rural areas where the business, she became creative director. She’s work-
high-quality employees are scarce and many young ing harder, she says, but she earns more and the job
people have moved to cities in pursuit of opportunities. feels more meaningful. “It takes more work to engage
“The typical succession strategy in a lot of rural Maine is this deeply,” Domagal says. “Our employees value the
liquidation and closure,” says Rob Brown, a director at the way they are seen and heard within the company, which
ILLUSTRATIONS BY ARNE BELLSTORF
nonprofit Cooperative Development Institute (CDI), which they’ve never experienced at other jobs.” �Karen Angel
provides training and technical assistance to co-ops in
New England. “The business owner isn’t realizing the
THE BOTTOM LINE Conversions of small companies to co-ops are likely to
wealth they should be, and employees lose their jobs.” become more common as baby boomer business owners retire. Many have no
Recent federal legislation has made it easier for succession plan, and it can be tough to find a buyer, especially in rural areas.
A Panic
officers who intervened in a stabbing spree at a nearby
rabbi’s home in December.
Last year the U.S. saw 400-plus shootings in which
Button for
four or more people were injured. That’s boosted demand
for improved security in public places, with revenue in the
business on track to grow 52% by 2025, to $61 billion
Shootings
globally, researcher MarketsandMarkets predicts. Dozens
of companies have jumped in, providing everything from
bulletproof backpacks and hoodies to full-time monitor-
ing systems. Rave Mobile Safety and Alertus Technologies
offer panic-button software similar to Gabriel’s. Avigilon,
a unit of Motorola Solutions Inc., sells video and surveil-
Israeli startup lance equipment. Athena Security says it can program
Gabriel offers cameras to detect hundreds of types of guns and imme-
protection from diately alert police if they sense a threat. “The market is
attacks but ripe for good products,” says Noel Glacer, head of a secu-
frets about the rity industry recruitment firm, whose son was a student at
reasons for its Marjory Stoneman Douglas High School in Parkland, Fla.,
growth when a gunman killed 17 people there two years ago. “I
tell people, if you think it won’t happen to you, that’s what
I thought. And then it did.”
Yoni Sherizen’s startup has grown from two employees While testing its system at new installations, Gabriel
to seven in the past three years, he’s close to sealing his conducts drills to help students, teachers, and other com-
biggest deal to date, and investors value the business munity members understand what to do in a shooting and
at $13 million. Yet every time he signs up a customer, he to give administrators a chance to familiarize themselves
worries about the cost of success. with the equipment and software. Gabriel’s network also 39
His company, Gabriel—named after the horn-blowing addresses a frustration for police: Most Orthodox Jews
archangel—helps protect places such as community cen- avoid sites such as Twitter and Facebook for religious
ters and synagogues from attackers. “Unfortunately, bad reasons, but that’s where authorities typically post emer-
news brings a lot of attention to a product like ours,” says gency updates. Rabbis have deemed Sherizen’s app
Sherizen, a 41-year-old American-born rabbi who lives on appropriate for their followers.
a kibbutz in central Israel. So far, all of Gabriel’s customers Sherizen got the idea for the company in 2016 after a
are Jewish groups in Florida, Michigan, and New Jersey pair of Palestinian gunmen attacked a Tel Aviv restaurant,
concerned about anti-Semitic violence, and Sherizen killing four people. The same year he and co-founder
hates the idea of profiting from shootings and the fear Asaf Adler started Gabriel, now based in a suburb of
they spawn. “I wrestle with that all the time,” he says. Tel Aviv, with backing from friends and relatives. He just
Gabriel’s sole product is a hardware and software raised $3 million in funding from new investors as he
package that includes panic buttons to be placed around seeks to move beyond the Jewish community, pitching
a site, each with a fisheye camera that gives police and his product to schools, churches, mosques, malls, night-
security managers a view of the scene. Community mem- clubs—anywhere people gather. “We chose the name
bers can download a mobile app that has its own alert Gabriel because it’s cross-religious,” Sherizen says.
button, so they can send real-time updates on escape After the October 2018 shooting at the Tree of Life syna-
routes or safe places to hide. The price starts at $10,000 gogue in Pittsburgh, which claimed 11 lives, Sherizen gave a
a year for 10 devices and associated services. series of interviews in which he identified his first customer.
Ramapo, a town with 90,000 Jewish residents 30 miles The leaders of that community were furious, concerned
north of New York, had been in talks with Sherizen for that he’d effectively issued a challenge to anti-Semites to
months. After three attacks on Orthodox Jews in the met- beat their defenses, he says. He immediately apologized
ropolitan area last fall, “panic set in,” says Mona Montal, and asked journalists to scrub mentions of the name. “I
chief of staff for the town’s supervisor. Ramapo is poised have to safeguard my customers’ interests,” Sherizen says.
to install Gabriel’s system at more than 200 locations— “They are a target for a lot of people.” �Yaacov Benmeleh
synagogues, schools, and banquet halls—serving more
than 50,000 people, which would represent a sevenfold
THE BOTTOM LINE The business of protecting public spaces is expected
expansion of the company’s sales. “I hope we never use to grow 52% by 2025, to $61 billion, as dozens of companies offer everything
it,” Montal says on her way to an event honoring the police from bulletproof backpacks to video monitoring systems.
Bloomberg Businessweek
A Crude, Sexist
Joke Cost Ken
Fisher $4 Billion
In Assets
Some big investors were quick to drop

the money manager. But his sales
machine is doing just fine
By Sabrina Willmer
February 10, 2020
HeStillRuns 41
$121 Billion
en Fisher ranks among the most successful money many books or his column that ran for years in Forbes. With
managers in America. But you can reach one of his help from the soaring bull market, his assets under manage-
main offices only by driving up a steep and curv- ment have more than quadrupled since 2009, to more than
ing country road in Northern California. A com- $121 billion at the end of December. He’s also gotten rich, with
pound of simple wood-shingled buildings, it sits atop a peak an estimated net worth of about $4 billion.
with sweeping views of redwoods and Half Moon Bay. “Kings Fisher seems like a figure from an older Wall Street, before
Mountain Country Store,” reads a weathered sign near the low-cost index funds began to replace investment gurus such as
entrance, lined with moss-covered boulders. him. He’s still able to charge lucrative fees for actively manag-
An avowed cheapskate who buys shoes at Walmart, Fisher ing money. He also brings to mind the age before the rise of the
picked up this property years ago at a fire-sale price. It had been corporate HR department and the #MeToo movement. Some
a commercial chinchilla farm in the 1940s. Fisher, 69, grew up former employees describe Fisher Investments’ corporate cul-
here in San Mateo County and remembers the freedom he had ture as a “boy’s club,” where the use of crude language had long
as a child, hitchhiking in the area or taking the train to nearby made some women, and men, uncomfortable. For some insti-
San Francisco as a 10-year-old. “It was just a marvelous world tutional investors hearing about Fisher’s comments in October,
that used to exist—just so free and so different,” he says. walking away from the firm was a fairly simple decision. Many
Speaking of the business he built, he says, “I had this vision, of them—especially retirement funds that represent diverse
which was like a sort of preindustrial age family, like a farm.” memberships—want to show they support equality for women.
His wife and children have all worked for the company, Fisher But another part of Fisher’s business is serving about 70,000
Investments, and the Fishers once lived at this Woodside, Calif., individual investors. That kind of money turns out to be a
compound, where a statue of a bull fighting a bear adorns a lot stickier—it doesn’t leave easily. In part that may be due to
back patio. Some of his former employees—referring to the way inertia, but it’s also because of the relationship an investment
many are molded in the founder’s image, or Fisherized—have adviser can build with clients. And Fisher has a kind of genius
called his firm the cult on the hill. for communicating to small investors that he’s on their side. “He
Late last year the outside world came crashing into this idyll, is awesome,” says Kathryn Cardona, a retired teacher and cli-
after comments Fisher made at a San Francisco conference ent in rural Oregon, who heard Fisher speak at a luncheon. “He
42 sparked anger on Twitter and then were reported by Bloomberg can talk about money and not make it boring. He cracks jokes.”
News and others. Fisher cautioned against using financial plan- Fisher Investments says it’s brought in hundreds more clients
ning—which involves getting people to talk about their money— representing billions in new money since early October. Fisher
as a way to sign up new investing clients, comparing that isn’t going anywhere—at least as long as this bull market lasts.
approach to picking up a woman in a bar. But he was crude
about it, making a reference to “trying to get into a girl’s pants,” isher’s father, Philip, was legendary on Wall Street.
one horrified attendee told Bloomberg. (A recorded excerpt of He was an early practitioner of what’s now known as
his remarks broadcast later by CNBC captures Fisher saying you growth investing and wrote a bestselling 1958 guide
wouldn’t go up to a woman and ask what’s “in your pants.”) In to stockpicking that influenced Berkshire Hathaway
an interview with Bloomberg at the time, Fisher said his com- Inc.’s Warren Buffett. But, whereas Philip offered his invest-
ments had been taken out of context. ment services to no more than a dozen clients, Ken has a pas-
Large clients including Fidelity Investments and Goldman sion for mass marketing. Small investors make up more than
Sachs Group Inc., as well as some public pension funds, pulled two-thirds of Fisher Investments’ business, which Ken founded
nearly $4 billion from his company in a month. Then and now in 1979 out of his basement.
he says he made similar comments many times, and no one had “Ken himself says, ‘I send junk mail,’” says Meir Statman,
complained. Still, he apologized, though he also repeatedly said a finance professor at Santa Clara University, who has collab-
his remarks were misinterpreted. “By saying those inappropri- orated with Fisher on investment research. “There are many
ate things, I was demonstrating inappropriateness,” he says, in a professionals who are bashful about marketing. We tend to
two-hour interview, his first extended remarks since the crisis. “I underestimate the effect of marketing in financial services, as if
said, ‘It would blow up in your face. You’d come off like a jerk.’” it were all about alpha,” he says, “alpha” being investor jargon
In his view, some big investors bolted only because of pressure for beating the market.
from the press. “Literally we have people that have told us they In 1995, Fisher sent 5,000 letters to high-income prospects—
wouldn’t fire us if it wasn’t for you people writing about this,” doctors, specifically—at a cost of about $1 a piece. The positive
he says, his general counsel and an outside lawyer by his side. response he got made an impression, and direct mail has cap-
Fisher speaks in a gravelly, stentorian voice, like an anchor- tivated Fisher ever since, so much so that he’s used it as a kind
man’s. In fact you might have seen him commenting on finan- of incantation. In the early 2000s he was known to say some-
cial news shows, in his boxy suit and a wide gold bull-and-bear thing that sounded like, “God, I’m someone. God, I’m some-
power tie. Or maybe you’ve seen him in one of his ubiquitous one. God, I’m someone,” but it’s really “GDDMSAHNWAM.
ads or learned about him from the bulk-mail pitches he sends GDDMSAHNWAM. GDDMSAHNWAM.” It’s an acronym and
out on heavy embossed paper. Perhaps you’ve read one of his distillation of his dream: “globally dominant direct marketer
Fisher’s Assets Under that blare, “I HATE Annuities. And you should, too.” He’s even
Management more emphatic in a promotional video, saying, “I would die
$120b and go to hell before I would sell an annuity.” He’s picked a fat,
largely deserving target. Annuities, which are a kind of invest-
ment product issued by insurance companies, are notorious for
90 their punishing fees and confusing rules. And they’re aimed at
many of the same people Fisher is selling to—people who may
have a half-million or more squirreled away in a 401(k) or an
60 IRA rollover.
Fisher’s ads invite readers to call or click to get a free report.
That gets you on the sales-lead list. Some 125 people have filed
30 complaints against Fisher Investments with the Federal Trade
Commission since 2016, alleging excessive calls, emails, and
mailings, according to records released under the Freedom
0 of Information Act. “CALLS REPEAT EVERY DAY. I SUBMIT A
2009 2019 COMPLAINT EVERY DAY. NO CORRECTIVE ACTION TAKEN.
WHAT CAN I DO???????????????????,” a resident from Waterford,
Pa., wrote in a July 2016 email to the FTC. The company dis-
separate account high-net-worth asset management.” putes the FTC complaints and says its sales force acts “respect-
In his promotions, Fisher has long stressed his status as a fully and professionally.”
bestselling author, like his father. The younger Fisher had help Fisher says the important thing about his approach is
from his company, which bought copies of his books. Some that sales and financial advice are kept distinct. Traditional
employees could expense books, which would pile up in ware- commission-based brokers are expected to sell hard—to engage
houses and staffers’ garages, according to people familiar with in what Fisher calls “hornswoggling”—at the same time that
the arrangement. The company says that it sent books to cus- they’re providing service to customers. “I didn’t like that,” he
tomers for educational purposes and that they were “a perfectly says. “So I wanted to separate the sales from post-sales service.” 43
legitimate business expense.” Once individual customers sign on with Fisher, his company
Despite being so much in the public eye, Fisher describes generally charges 1% to 1.5% of assets per year to run their port-
himself as an introvert. He can be nerdy, rattling off economic folios. Although that far exceeds the cost of investing in most
and financial jargon such as “mean variance optimization.” He mutual funds, Fisher says the price includes broader financial
can also be condescending when challenged. “That’s one of advice, as well as extras such as hundreds of private luncheons
the most basic questions that anyone could possibly ever ask, for clients around the country. “We do things for clients that no
so let me take you through the basic thinking to see it cor- one else does,” says Fisher, who calls it “a total offering.”
rectly,” he responds to a question in an interview about his
investment approach. loomberg Businessweek spoke with more than two
Still he doesn’t come off as a polished finance guy. He drives dozen current and former employees of Fisher
a 15-year-old Volvo and likes to duct-tape together old shoes. He Investments. Some describe an always-be-calling
went to Humboldt State University in rural Arcata, Calif., where operation reminiscent of a David Mamet play. In
for a time he wanted to study forestry. He switched to econom- addition to the Woodside location, Fisher has main offices in
ics, and after graduation went to work for his dad. While setting the city of San Mateo and Plano, Texas. Several years ago he
up his own business, he used to play slide guitar in dive bars. As moved the company’s headquarters to woodsy Camas, Wash.,
it grew, he positioned himself as a market expert and an advo- outside of Portland.
cate for the everyday affluent. Michael Kay, who worked as an account executive from 2017
Among his books are How to Smell a Rat: The Five Signs of until June, says he would make at least 250 outbound sales calls
PREVIOUS SPREAD: GILLIANNE TEDDER/BLOOMBERG. DATA: SEC
Financial Fraud and Debunkery: Learn It, Do It, and Profit From a day. “Fisher recruits people out of college,” he says in an inter-
It—Seeing Through Wall Street’s Money-Killing Myths. He’s very view. “We are poor, smart, and hungry for money, so we can
good at showing the many ways brokers, as the joke goes, can be molded into an efficient closing sales machine.” Kay testi-
make their customers broker. Fisher is best known for his ads fied in a 2018 lawsuit in California claiming that Fisher stiffed
“That’s one of the most basic questions

anyone could possibly ever ask, so let me
take you through the basic thinking”
employees out of overtime—allegations the company denies. fairly treated in what they consider a meritocracy. The company
A lawyer for the company says Fisher never required so many notes that three of five senior executive vice presidents report-
calls in a day. ing to Chief Executive Officer Damian Ornani are women. One of
When the company loses a client, managers will interro- those leaders, Jill Hitchcock, who oversees the company’s larg-
gate investment counselors and rummage through their notes, est business unit and was the former head of human resources,
according to some former employees. Fisher prizes loyalty: He says Fisher’s comments have never offended her because she
likes to praise those who “bleed Fisher green” and have the ini- always considered him to be using analogies to explain complex
tials of Fisher Investments “stamped on their butt,” according topics. “If I didn’t believe in what we were doing and the firm
to an internal company memo. The company, however, bristles and the culture, I wouldn’t have stayed here,” says Hitchcock,
at the cult comparison, saying it prizes independent thought. a widowed mother of two boys, who’s worked at the company
Male entry-level account executives sometimes displayed a for 20 years. “I’ve also seen how our employees and how our cli-
frat house attitude. “Who do you think is hung like a horse?” ents react to seeing Ken, which is they love to see Ken speak.”
one person wrote in a 2013 email. Another named a female The company points to an internal survey showing 79% of
co-worker and, in an apparent reference to her genitalia, employees think it’s a great place to work. Jacob Gamble, who
wrote, “That’s her Laybes though bro.” Fisher provided these worked there from 2002 through 2015, says the company does
emails when Bloomberg asked about the behavior of one of the well by its clients. “It can be hard, and you are held account-
employees, who’s still with the company. After the email epi- able to learn from every single little flaw that comes across in
sode he was demoted, was docked three days’ pay, and had your work,” he says. “But that’s how they’re successful and
his compensation cut to $14 an hour from $24 an hour. Fisher how they move forward.”
says such episodes inevitably occur in a company with 3,800
employees. “When we find out about things, we deal with them f Fisher’s sales force is aggressive, so is his investment
pretty completely,” he says. approach. When prospects turn over their nest egg to
Still, some employees complain of repeated comments about Fisher, his company often puts the bulk of it in stocks,
women’s clothing and appearance. “I got to hear and witness a even for older clients. That’s an outlier in an industry that
lot of things that didn’t sit well with me,” says Joey Hays, who typically recommends a more conservative approach: All things
44 worked in the marketing department from 2013 to 2015 and sat being equal, younger people should go heavier on stocks, retir-
near the sales bullpen. “No sooner would a woman leave the ees should go in a more fixed-income direction, and so forth.
area, and these men would start initiating highly sexualized con- In retirement funds designed for 65-year-olds, Vanguard and
versations about these women.” Hays, who is gay, says he also Fidelity place just over half of investments in stocks; Charles
heard employees make homophobic remarks and vulgar, sexual Schwab and BlackRock, 40%. Fisher has little time for the idea
comments about clients. (The company says a female employee that it’s safer to keep a lot of money in bonds—not when you
once complained to its human resources department about need to grow enough savings to fund retirement. On a pod-
Hays, saying he made an inappropriate comment; Hays says he cast, Fisher once referred to husbands who put their spouse’s
and others joked about the co-worker, and he later apologized.) money in a mix of stocks and bonds as no better than “wife
Fisher’s own words were part of the macho atmosphere. “I beaters.” Fisher says, for example, a 65-year-old man may marry
have a hard-on looking at all of you,” some people remember a woman 10 years younger who can expect to live many more
him saying at a London gathering. Back in 2008, as financial decades. That means the couple has to plan for a longer future.
markets were reeling, a woman at a staff meeting asked Fisher “If you have a 30-year time horizon, you ought to be starting off
if he’d considered shifting into defensive holdings. “Why would with a 100% equity benchmark,” he says.
I want half a dick?” he replied. Fisher doesn’t dispute that he Besides stocks, another investment he likes is an obscure
made comments such as these, though he says he may have instrument called an exchange-traded note, or ETN. They’re
been misunderstood. essentially contracts, issued by a bank, that entitle the owner
In a recording from a 2018 investing conference, Fisher can to a certain payout. The notes’ returns can be linked to the per-
be heard saying: “If I was 30 years old and I had to do it over formance of other securities, such as an index of stocks. And
again, I would have more sex. … Once you get older, you’re like they can be designed so they return even more when those
a Christmas tree. You’re firm once a year, and the balls are just stocks rise—and fall even harder when the stocks fall. The risk
for decoration.” Some in the audience laughed. and costs of ETNs have drawn scrutiny from federal regulators,
A number of women at Fisher Investments say they’ve been and most investors shun them. (Although ETNs are backed by
“I committed myself to never saying

words like that again or any things like
that again ever”
major banks, one risk is the possibility that an issuer might not n response to the negative publicity about Fisher, the
be able to pay.) Fisher Investments is one of the biggest ETN company introduced a counteroffensive. On Oct. 29,
players in the world, with $6 billion of clients’ money invested Hitchcock, the 20-year veteran and senior executive,
in them last year, making up a quarter of the market. The com- asked hundreds of women employees to gather for a
pany says its ETNs are less volatile than most individual stocks last-minute meeting at Camas and three other main offices. She
and work in its portfolios to reduce risk relative to return. asked them to sign releases permitting them to appear in photos
The main investment strategy he uses for wealthy cli- for an ad campaign. More than 1,000 employees, or more than
ents’ accounts has trailed the benchmark the firm uses over a quarter of Fisher’s workforce, are women, and 350 appeared
the past decade by about one percentage point annualized. in the ad, the company says. Full-page spreads would ultimately
Over the past three and five years, however, it has beaten run in the Wall Street Journal, the Dallas Morning News, and
the same index by a percentage point annually, according to newspapers across the country under the headline “You Heard
the company. The portfolios he runs Their Story. Now Hear Ours.” Along
for institutions tend to have lower with the group photo, it featured seven
fees, and some have performed bet- senior women offering testimonials
ter. For Florida’s pension fund, the about the company’s integrity, ethics,
firm returned, on average, 2 percent- and empowerment of women.
age points per year above its bench- Privately some of the women in
mark over the past 10 years. the ad say they felt pressure to partic-
No doubt, leaning into a bull mar- ipate. In interviews others say they
ket has been good for Fisher. After all, were delighted to vouch for the com-
this one’s been going for more than a pany. “People are treated equally here
decade. Cardona, the Fisher client, says regardless of race, gender, and culture,”
she has confidence in her 100% stock says Jessica Smith, a Fisher Investments
portfolio and also likes the customer vice president. “This is a place that
service she gets. As for the remarks really strives to do what’s best for our
that got Fisher in trouble, she says peo- clients, and that’s much different from 45
ple are too politically correct these an industry that’s just trying to make
days. “What he says doesn’t bother me money.” The woman-focused campaign
as it doesn’t impact the 401(k),” says Fisher built his business on savvy media referred readers to a website that asked
Cardona, who is 74. for phone numbers, addresses, and
In a bear market the company’s aggressive stance can emails—making it a source of fresh sales leads.
backfire. Fisher faced at least a dozen legal claims from cus- Back in his Woodside mountain redoubt, Fisher says he’s
tomers who lost money in the 2008 financial crisis. Clients proud of the culture he’s built, both for men and women.
alleged that the company advertised a tailored approach (The company has launched a diversity and inclusion task
while putting everyone in the same stocks, misled them force.) “Businessweek Best Places to Launch a Career,” reads
about risks, or failed to build suitable portfolios. Most were an award in the office. As he did when evoking the days of
resolved in arbitration, where the outcome wasn’t always the family farm, he can sound like a kind of patriarch as he
public. One arbitrator ordered Fisher to pay out $376,000 mourns what he calls “a world that doesn’t exist anymore but
in damages to a retiree in New Orleans who signed up in existed when I was very young.” Fisher wants young people
September 2007 and lost 57% of her $876,000 nest egg in a to join his company out of college and stay until they retire,
little more than a year. But in some other cases, arbitrators as they did in the age of the IBM lifer. He revels in noting man-
sided with Fisher, saying that clients had sought out “growth” agers who have been with him for decades. Ever since the
portfolios of stocks, understood the risks they were taking, backlash against his comments began, Fisher has expressed
and would have prospered if they had ridden out the down- bewilderment that outsiders would react so strongly. “I real-
turn as the company advised. ized that there’s no place for that in the work world in any way
Several former employees say Fisher would identify clients at all, and I committed myself to never saying words like that
who know prominent people—such as lawyers, politicians, and again or any things like that again ever,” he says.
journalists—flagging them in case they became unhappy with During the interview he speaks slowly, as if measuring his
their investments. A 2015 corporate script tells investment coun- words, and pauses frequently. Fisher says his own employees,
selors to determine whether customers have such high-profile with whom he’s long worked side by side, never said anything
people in their “sphere of influence.” Fisher denies the effort to him when he made an off-color analogy—not once, not ever.
was designed to protect the company. Instead, he says, the “Those people know that I’m not perfect,” he says. “But they
script was part of a since-abandoned effort to create a panel also don’t get offended by anything that I do because they
of experts the company could harness for research. “This was know how hard I try for them and have tried for them for a
effectively an innovative attempt that failed,” he says. really long time.” <BW> �With Janet Lorin
46
The time I sabotaged

my editor with
ransomware I bought for
CREDITS CREDITS CREDITS
$150 on the dark web

By Drake Bennett
s you may be aware, there’s money to be made how to use it, they can subscribe to services, complete with
on the internet. The question, of course, is how. customer support, that will help coordinate attacks for them.
Not everyone has the reality-distortion skills to Software as a service (SaaS in tech vernacular) is a mammoth
start their own tech unicorn, or the Stanford global industry comprising everything from Salesforce.com
connections to become an early employee customer-relationship management software to the Slack
there, or the indifference to sunlight necessary workplace messaging platform to Dropbox cloud storage.
to become a world-class Fortnite gamer. Not Search for “ransomware as a service” or “RaaS” in the dark-
everyone lives in the relatively few places where software web chatrooms that function as both forums and bazaars,
engineering jobs are well-paying and plentiful. and you’ll get pages and pages of hits. In the public imagi-
If you’re willing to break the law—or at least the laws of the nation, hackers are Mephistophelian savants. But they don’t
U.S., a country you may not yourself call home—your options have to be, not with ransomware. “You could be Joe Schmo,
expand. You can steal credit card numbers, or just buy them in just buying this stuff up,” says Christopher Elisan, director of
bulk. You can hijack bank accounts and wire yourself money, intelligence at the cybersecurity firm Flashpoint, “and you
or you can hijack email accounts and fool someone else into could start a ransomware business out of it.”
wiring you money. You can scam the lonely on dating sites. You could even be a liberal-arts-educated writer with a prim-
All of these ventures, though, require resources of one kind itive, cargo-cult understanding of how an iPhone or the inter-
or another: a way to sell the stuff you buy with other people’s net work, who regularly finds himself at the elbow of his office’s
plastic, a “mule” willing to cash out your purloined funds, or a tech-support whiz, asking, again, how to find the shared drive.
talent for persuasion and patience for the long con. And, usu- In other words, you could be me. But could you really? I didn’t
ally, some programming skill. But if you have none of these, start out on this article planning to try my hand at ransomware.
there’s always ransomware. A few weeks in, though, it occurred to me that if someone like
Malicious software that encrypts data on a computer or a me could pull off a digital heist, it would function as a sort of
server, ransomware allows an attacker to extort a payment in hacking Turing test, proof that cybercrime had advanced to
exchange for the decryption key. Over the past year in the U.S., the point where software-aided ignorance would be indistin-
hackers hit the governments of Baltimore, New Orleans, and a guishable from true skill. As a journalist, I’ve spent years writ-
raft of smaller municipalities, taking down city email servers ing about people who do things that I, if called upon, couldn’t
and databases, police incident-report systems, in some cases do myself. Here was my chance to be the man in the arena. 47
even 911 dispatch centers. Hospitals, dependent on the flow of
vital, time-sensitive data, have proved particularly tempting n late 1989 medical researchers and computer
targets. So have companies that specialize in remotely man- hobbyists around the world opened their
aging the IT infrastructure of smaller businesses and towns— mailboxes—their actual physical ones—to find a 5.25-
hacking them means effectively hacking all their clients. inch floppy disk containing an interactive program
As the number of attacks has grown, so has the scale of the that evaluated someone’s risk of contracting AIDS,
victims and ransoms. “Ransomware really started as some- at the time an unchecked, fatal pandemic. In all,
thing that targeted individuals,” says Herb Stapleton, a sec- 20,000 disks, from the “PC Cyborg Corporation,”
tion chief in the FBI’s cyber division. “Then it started targeting were mailed from London to addresses throughout Europe
smaller companies without strong internet security protec- and Africa. But the disks had their own viral payload, an addi-
tions, and now it’s evolved to larger companies and municipal- tional program that, once loaded onto a workstation, would
ities.” In 2019 the Weather Channel, the French media group hide files and encrypt their names, then fill the screen with
M6, and the shipping services firm Pitney Bowes Inc. were a red box demanding a $189 “software lease.” A banker’s
all hit. Last summer two small Florida towns paid $1.1 million draft, cashier’s check, or international money order was to
between them to unlock their data. According to the BBC, the be mailed to a post office box in Panama. The AIDS Trojan, as
European forensics firm Eurofins Scientific also paid off attack- it came to be known, was the world’s first ransomware.
ers, though it hasn’t confirmed this. Travelex Ltd. also won’t Within weeks, an American named Joseph Popp was
say whether it paid its multimillion-dollar ransom, though as stopped on his way back to the U.S. from an AIDS confer-
I write this the global currency exchanger’s website remains ence in Kenya. An evolutionary biologist who specialized in
down, a month after it was attacked. baboons, Popp had caught the attention of security officers
In a way, the rise of ransomware was foreordained. Simple, at Amsterdam’s Schiphol airport because of his erratic behav-
scalable, and low-risk, it makes for a particularly tidy cyber- ior. According to a story later published in the Cleveland Plain
crime. Some of the most successful variants are thought to have Dealer, Popp, convinced he was being drugged by Interpol
emerged from the states of the former Soviet Union, where tech- agents, had written “Dr. Popp Has Been Poisoned” on some-
savvy young people can get a high-quality education but not a one’s duffel bag then held it over his head. When his own
commensurate-quality job. That combination has helped birth luggage was searched, authorities discovered a PC Cyborg
an industry that, in big ways and small, is tech’s outlaw twin. Corporation seal. Popp was extradited from his native Ohio
These days, prospective attackers don’t have to create their to London but eventually ruled unfit to stand trial: Among
own ransomware; they can buy it. If they don’t really know other things, he’d started wearing curlers in his beard to
protect against radiation. He returned home, self-published with the mechanics of buying and sending cryptocurrency—it’s
a manifesto urging people to reproduce more, and was starting not uncommon for ransomware attackers to encourage their
a butterfly sanctuary in Oneonta, N.Y., when he died in 2006. victims to reach out if they want help with the process.
While Popp’s motivations and mental fitness remain the sub- CryptoLocker was hugely successful. Three Italian com-
ject of debate, the effectiveness of his ransomware does not. puter science researchers traced 771 payments flowing into
Most of the recipients of the disk didn’t even load the perni- Bitcoin wallets connected to the ransomware variant, total-
cious file onto their computers. Among those who did, only ing 1226 Bitcoin ($1.1 million at the time), likely a very conser-
a tiny number paid the ransom. For one thing, it was a pain, vative figure. And the CryptoLocker recipe—phishing, strong
requiring a trip to both the bank and the post office. And it was encryption, Bitcoin—remains the dominant template for ran-
unnecessary. One victim, a Belgian named Eddy Willems, was a somware today. But there are others: Some attacks pretend
computer systems analyst for a multinational insurer. “I’m not to be from a law enforcement agency that’s locked down your
a cryptologist, but I was able to easily see what it did,” he says. machine because of illicit material found there. (Some ensure
“And I was able to put everything back in something like 10 to the material is there by first downloading actual child por-
15 minutes.” Willems and other security researchers quickly cir- nography.) Some attackers start by luring victims to a com-
culated free AIDS Trojan decryption programs, also by floppy. promised website where a software “exploit kit” can slip the
It’s a testament to Popp’s imagination (and possible mania) malware through their browser’s vulnerabilities. And some
that he attempted the scheme at all with the tools at his dis- attacks turn out not to be ransomware at all: NotPetya, which
posal. The idea of selling stolen data to the highest bidder caused billions of dollars in damages worldwide in 2017, lacked
wasn’t new, but Popp’s innovation, as Mikko Hypponen, chief any means to reverse its encryption. It’s widely suspected to
research officer at the Finnish cybersecurity firm F-Secure, puts have been a Russian cyberweapon built neither to steal infor-
it, was “the realization that in many cases the highest bidder is mation nor hold it for ransom, but simply to destroy it.
the original owner of the information.” “With some of the more sophisticated cybercriminal orga-
A decade and a half later, technology caught up with Popp’s nizations that we’ve found,” says the FBI’s Stapleton, “ransom-
insight, first in the form of the internet. In 2005 security ware is just another tool to use for the monetization of their
researchers starting seeing ransomware they dubbed Gpcode. cyber activities.” Ryan Olson, a vice president at cybersecurity
(In cybersecurity taxonomy, it’s customary to bestow the same firm Palo Alto Networks Inc., remembers monitoring a com-
48 name on a strain of malware and the anonymous gang behind puter for a client after hackers found a way in. First they looked
it.) Gpcode smuggled itself onto computers as attachments to for credit card numbers. Then they searched for passwords or
seemingly legitimate emails, a technique known as phishing, if login credentials they could use to take over the network. “And
it’s done at scale, or spear phishing, if a bespoke email is aimed then the last thing they did,” he says, “just on the way out the
at a single target. Gpcode’s later versions also used much stron- door, was to install some ransomware and encrypt all the files.”
ger encryption to scramble the contents of files. The only real
weakness was the payment step: Ransoms were settled up by hen I started shopping around for my
prepaid credit or gift cards, and therefore flowed through the ransomware service in October, the commu-
highly regulated pipes of the global financial system. Over time, nity was still grieving GandCrab. Rolled out at
with the help and prodding of law enforcement, payment pro- the beginning of 2018, GandCrab wasn’t the
cessors grew better at spotting ransom payments and recover- first RaaS, but its overwhelming success—the
ing at least some of the money.
That problem was solved—from the ran-
somer’s point of view—by Bitcoin. By 2013
the cryptocurrency had become main-
stream enough that a ransomware gang
decided to give it a try, in a variant that
would come to be known as CryptoLocker.
Bitcoin isn’t technically untraceable,
especially when people convert it into
dollars or euros or another fiat currency.
Still, the forensics are difficult and time-
consuming, complicated by “tumblers”
and other anonymizing measures that
obscure a transaction’s path through the
public blockchain. And there’s no pay-
ment processor for law enforcement to
PHOTO: ARTHUR WOO
ask to shut it down. All of which makes

it ideal for ransomware. The only wrin-
kle is that most people are still unfamiliar
cybersecurity firm Bitdefender estimates that at one point it I, of course, was a noob’s noob, protected only by an
comprised half of the world’s attempted ransomware attacks— awareness of how little I knew and the narrow scope of my
had demonstrated the model’s commercial potential. The ambitions. The plan, worked out with my editor, Max Chafkin,
GandCrab gang had licensed their software to “affiliates,” fellow was that I would ransom a single target: him. Max, reasonably
hackers with access to compromised computers or lists of email enough, wasn’t eager to put his own actual personal informa-
addresses to phish, in exchange for a percentage of the total tion at risk, or that of our employer, which handles sensitive
take. And they had diligently stayed ahead of the efforts of anti- data for the world’s wealthiest financial institutions. So the two
virus programmers, shipping out five major software updates, of us bought cheap laptops and took care not to connect them
according to computer security researcher Brian Krebs. at any point to our work internet. Max loaded his with a grab
Then, on May 31, 2019, a post on the Russian-language forum bag of files: some WikiLeaks documents; a pdf of the Mueller
Exploit[.]in, announced GandCrab’s “well-deserved retire- Report; some random pictures of cats, boats and monkeys; and
ment.” Over 15 months, the writer claimed, its affiliates had what he described to me as “a bunch of Romanian academic
pulled in $2 billion, $150 million of which had flowed back to papers.” He then steeled himself for my attack, which I planned
the creators. Potential affiliates were left asking each other, in to announce to him in advance. What the plan lacked in realism,
thread after thread, what the “next GandCrab” might be. it made up for in safety, and, hopefully, our not getting fired. 49
I’m not going to name the forum where I ended up finding Or arrested. Several states explicitly outlaw ransomware
my RaaS; I don’t imagine many readers of this article are aspir- attacks, and legislators in Maryland recently introduced a
ing ransomware entrepreneurs, but I don’t want to make things bill that would criminalize the mere possession of ransom-
easier for anyone who is. Like most similar sites, it’s on the dark ware. There are also broader federal computer fraud statutes,
web, a region of the internet that’s been configured to be inac- which were used in the 2018 indictment of two Iranian hackers
cessible by normal web browsers. allegedly behind attacks against Atlanta, Newark, and several
The forum’s logo is a DOS-green skull. The posts are in large hospital systems. Ransomware prosecutions remain rare,
English, though that’s evidently not the first language of many of but I, unlike most attackers, was actually in the U.S.
the authors, and the mores would be familiar to anyone who’s Still, the laws on the books so far seem to require the intent
spent time in an overwhelmingly young, male setting. Start a to attack an unaware, unconspiring victim. “A person shall not
post with “Possibly a stupid question, but …” and someone will knowingly possess ransomware with the intent to use or employ
respond, “That is a really stupid question.” Yet I was also struck that ransomware,” says the Michigan law, “without authoriza-
by the willingness of participants to answer questions in detail, tion of the other person.” My victim would be fully informed,
or just offer encouragement to an anonymous stranger on a indeed complicit—we were just two consenting adults taking
range of criminal-mischief topics. “Below is an amazing list of risks on the internet. (If Max tried to pretend otherwise, I had
resources,” one October post begins. “It has the best books to emails.) The Bloomberg lawyer we talked to basically agreed. He
check out, some websites that have practice hacking targets, a did, however, suggest that, if I got the impression I was about to
list of free virtual networks to practice on etc.” do business with the North Korean government or some other
I wasn’t the only clueless person on the site. “Easy to Use sanctioned entity, I should get back in touch with him.
Ransomware Wanted,” was the headline of an Aug. 31 post.
Another read, “I’m browsing resources to acquire ransomware one of this would have been possible
and the like. What specifically do I need to learn to use this without Joe Stewart. Stewart lives in Myrtle
stuff?” Some forum members see “noobs” and “script kiddies” Beach, S.C., and runs his own blockchain
like these as targets for scorn, others see them as opportunities. development and security research com-
In the hacker ecosystem, the script kiddie’s natural predator is pany. Since last year he’s been working
the “ripper,” a person who sells bogus goods or just takes the with the cybersecurity company Armor,
noob’s Bitcoin payment and disappears. A lot of the back-and- who put me in touch with him. He was
forth on the forum focuses on whether whoever is peddling one of the first analysts to describe the
this or that software or service can be trusted. criminal uses for the hijacked computer
networks known as botnets. He also coded an early reverse- Nov. 11, Stewart had run it on a special quarantined computer
engineered decryptor to allow victims of carelessly written he used to defuse and dissect malware. High-quality variants
ransomware to unscramble their files for free. Several years are often coded so they won’t deploy if they sense they’re
ago, he helped a couple of my colleagues identify a hacker in a “sandbox” such as Stewart’s, or they have dormancy
working for the Chinese People’s Liberation Army. periods longer than the attention span of the average secu-
Stewart is quiet and in conversation wears a stony expres- rity researcher. My malware wasn’t so equipped, one of sev-
sion that I eventually learned to read as attentiveness rather eral traits that suggested I hadn’t procured top-shelf product.
than dismay. I’d been talking to him over the phone for a few The ransomware service itself had been built not on some
months before I told him I wanted to try ransomware myself. cryptocurrency-accepting, law-enforcement-unfriendly over-
He told me that once I got my hands on some, I could come seas web hoster—which would, as Stewart put it, have been
down to Myrtle Beach and deploy it from his computer lab. “best practices in the criminal underground”—but on Amazon
The ransomware service I ended up using was the first Web Services’ cloud. A subpoena could produce the name
one I found, a few minutes after logging in to the first hacker attached to the Amazon account, potentially leading law
chatroom I tried. Even at the time, there were warning signs. enforcement directly to my provider.
The consensus on the forum was decidedly skeptical. “[T]his The biggest snag, though, was the decryptor I got from the
guy has been spamming this shit for days now and acts like site. After receiving my ransom payment, I was supposed to
no one has ever done this before,” one poster complained, send the file to my victim along with an alphabetical key. But
50 “can’t explain a simple sales pitch about it.” The coder him- when Stewart and I tested it out, it didn’t work—the files in
self had weighed in, telling that critic to “stfu” before mock- Stewart’s sandbox stayed encrypted. In the short term, that
ing him with an obscure reference to the coding language C# wouldn’t be my problem: I’d already be paid by the time Max
and signing off with another “stfu.” Still, the inquiries I’d sent discovered this flaw. But just as with traditional kidnapping,
to other sellers had gone unanswered, and a couple others the information-ransoming business model works only if vic-
were clearly fake. And while the popular Ranion RaaS costs tims are at least moderately hopeful they’ll get their data
$900 a year, according to the possibly defunct ad I’d tried upon payment. As a result, ransomers often go out of their
responding to, this one was only $150. I decided it was worth way to show their good faith and dependability. It’s com-
a try. The morning of Oct. 23, I paid my 0.020135666 Bitcoin mon practice to decrypt a few files for free as proof of con-
and sent a note through Protonmail, an encrypted email ser- cept. Some RaaS dashboards dispense with the term “victim”
vice, to the address on the payment page. A half-hour later, entirely: Screenshots of the Ranion variant taken by Armor
I got a response: “Hello sir, your account is activated now!!! analysts show a table headed “clients” instead. Elisan at
sorry for the delay!” Flashpoint forwarded me a note one ransomware gang sent
The web page I could now access was white, with a black their victims that laid out security measures they could take
Mercator projection of the world beneath a row of tabs. to avoid future attacks.
Clicking on “Dashboard” called up an empty table with the For Stewart it had been easy enough to throw together a
heading “Victims.” Its columns would presumably popu- decryption workaround. “I’m guessing he’s never actually
late once I had multiple campaigns going, with the names of tested the code in a real environment,” he wrote me in an
each and their corresponding decryption keys. A second tab, email. Rather than send Max a key to type or paste in him-
“Builder,” took me to a page that created my malware for me. I self, I’d need to send him a few lines of code and instructions
typed in a Protonmail address for my victims to use and speci- for where to put them. It was inelegant, but it was the sort of
fied the kind of operating system on my target computer. (The thing that I figured I could walk him through.
vast majority of malware is written for Microsoft Windows; on
Stewart’s suggestion, I was using the Linux operating system, ut as Mike Tyson famously said, everyone has a
decreasing the chances of getting hacked myself.) I clicked on plan until they get punched in the mouth. On the
a button labeled “Build,” and a box popped up asking me if I appointed morning, sitting in Stewart’s window-
wanted to download a file. After a few moments’ hesitation, less computer lab, I logged in to my specially pur-
I clicked yes. I now had a piece of malware on my computer. I chased laptop, opened up the anonymizing Tor
attached it to an email and sent it, clearly marked, to Stewart. browser, and clicked on the bookmarked link for the dark-web
By the time I showed up in Myrtle Beach on the morning of address of my RaaS control panel. But instead of the Mercator
projection and the row of helpful tabs, I saw only a cryptic their payloads in obfuscatory layers of code; mine announced
note. “WE ARE TAKING DOWN THE WEBSITE,” it read, “IN itself like a man going through customs with cocaine trickling
ORDER TO LAKE OF THE USERS.” My first thought was to won- out of his pants leg.) Gamely, Max opened the file.
der if “lake of the users” was a coding term I was unaware of, At first, nothing happened. A few minutes passed, and we
something related to torrents or streams. My second, more started texting back and forth about trying again. “Then, I
practical thought was that I had better email tech support. looked away from my screen for a second,” Max recounts,
“Hi, I see you took the website down,” I wrote to an “and suddenly there was that crazy message.” While ransom-
encrypted email address containing the name of the comic- ware designers often opt for a blandly informational aesthetic,
book antihero Johnny Blaze. “How do I keep access?” The ours had aimed for something more demented. Max’s screen
answer came back an hour later: “You have to buy pro ver- filled with the image of a cloud of smoke, a pale, grasping hand
sion if you want to keep using this.” The pro version, I learned, reaching out from its center, and the scrawled words “Your
would cost an additional $500 on top of my $150. When I’d Files are Encrypted.” Max’s WikiLeaks downloads, his cat pho-
signed up two and a half weeks earlier, the pro version had cost tos, his Romanian monographs, all of them were gibberish.
$300, though my provider was at pains to point out that it now (The Mueller Report, mysteriously, was unaffected.)
featured Android-compatible malware. What became clear in a Max wrote me a note full of theatrical betrayal and out-
back-and-forth that went on for much of the morning was that rage, to which I responded in a tone of bloodless profession-
my RaaS had ceased to be a service at all. The server, along with alism, telling him the ransom ($100) and my Bitcoin wallet
the website, had been taken down, though, this, too, was pre- address. If I thought he was dragging his feet, I could have
sented as an opportunity: I could host it myself. At Stewart’s given him a deadline, after which the ransom would increase
prompting, I asked how I’d be able to get my decryption keys or I would destroy the decryption key. Once I got an alert
now that the site was taken down. Johnny Blaze informed me from my cryptocurrency app that his payment was pro-
apologetically that they’d forgotten to back up their database. cessing, I sent him the decryptor with Stewart’s jury-rigged
Had the whole thing been a scam? Was I dealing with a rip- key. Max ran it as instructed and watched as his files returned,
per? If so, why had they gone to the trouble to stand up an one by one, to normal. He got his data back, I got my money.
actual service and create actual, if cruddy, malware? In retro- (As agreed, I did eventually return it.) But the grasping hand
spect, it seems more likely that my not particularly adept sup- image didn’t ever go away.
pliers, their product having flopped, had decided to close up In the end, it’s hard to claim that my ransomware and I 51
shop for “lake” of enough paying users—it’s conceivable I was really passed our test. The cybercrime singularity appears a
their only one—and were seeing if I might want to buy them out. ways off. When I returned from Myrtle Beach, I contacted a
The problem wasn’t just the decryption keys. Without a particularly knowledgeable and helpful-seeming poster on
server, ransomware like mine was all but inert. As Stewart one of the dark-web forums. After insisting on some ground
patiently explained, before encrypting any files, the program rules and taking various steps to verify who I was, he (or
first generated the decryption key and sent it back to the she) agreed to talk. “In regards to types of malware, I have
RaaS server to pop up in my dashboard. If the server didn’t coded and used almost anything you can think of: backdoors,
answer, the program wouldn’t proceed. Deflated, I wrote rats, cryptors, droppers, data destroyers, CSRF and phish-
Johnny Blaze asking if I was entitled to a refund. I was told, ing pages, ransomware, etc.,” he wrote. He was dismissive
curtly, that I was not. of much of what you could buy—in his description the recent
“I think,” Stewart said, “there’s a way around this.” Sitting surge in ransomware attacks sounded almost like a bubble:
at one end of the room on a black leather couch, he hunched “Many of those ransomware projects are just complete junk,”
forward over his laptop. Minutes later, he sent me a line of he wrote, amateur coders finding something on the software
code and instructions to forward to Max, at that moment sit- development platform GitHub, making a couple cosmetic
ting in New York in front of his burner Dell sending me prod- changes, and then trying to pass it off as their own. “In the
ding text messages. Stewart’s fix replaced some code in Max’s end, RaaS does allow for higher numbers of less experienced
computer’s operating system so that when the malware told it people to have access to ransomware, but the most successful
to reach out to the now defunct Amazon web server, it would attacks I know of are still carried out by fewer people using
reach out to one of Stewart’s servers instead, which would more private code.”
then acknowledge receipt of the key and give the green light Of course, an inexperienced horde launching incompe-
to encrypt. My ransomware service provider, in other words, tent ransomware attacks can still cause plenty of damage.
was now Stewart. And every master was once a script kiddie. When I emailed
And so, the groundwork laid, I launched my reverse- my RaaS suppliers asking to interview them for this story,
engineered puppet ransomware. An instant later, Max received they were more than happy to talk, though they were in the
an email from a trusted colleague: “Hey, Max, sorry it’s so late end typically gnomic. “We are team we are 18 to 26 year old
and that it’s such a giant file, but here’s the draft (attached). teens,” Johnny Blaze wrote back. One thing they did empha-
Let me know what you think!” He clicked on the “draft,” only size was that the RaaS I had tried was old news. The team was
for his antivirus software to flag it and warn him not to open it. already coming to market with a newer product, something
(Well-designed computer viruses, like actual viruses, envelop they promised would be “much better.” <BW>
NO CITY HATES ITS

LANDLORDS QUITE LIKE
BERLIN
ACTIVISTS SAY THE NEW FIVE-YEAR RENT FREEZE IS MERELY A GOOD START. WHO’S UP FOR
EXPROPRIATING SOME PRIVATE PROPERTY? BY CAROLINE WINTER AND ANDREW BLACKMAN
O
n the ground floor of a tan stucco building in the That’s how, after about two weeks of fact-finding, Schulte’s
Schillerkiez neighborhood of Berlin sits an anarchist team identified the actual owners of Firman Properties:
bar called Syndikat. Its windows are plastered with anti- Mark, David, and Trevor Pears, three reclusive brothers from
Nazi and anti-gentrification stickers. Motörhead and London who own a majority of the privately held William
German punk bands play on rotation, and a small draft beer Pears Group property company and, according to the Sunday
costs less than €2. Times Rich List, are worth about $4 billion. “They’re very 53
Since 1985, Syndikat has served as a kind of cigarette- secretive,” Schulte says. “One of them, you can’t even find
smoke-saturated living room for misfits, students, immi- photographs.” (Schulte isn’t his real name; he uses a pseud-
grants, and hard-up neighbors. In September 2018, however, onym when talking to the press about real estate because he’s
an eviction notice from the bar’s landlord, Firman Properties looking for a new apartment.)
S.a.r.l., appeared in the mail. That’s when Syndikat’s Soon, journalists caught wind of the story. In May the Berlin
co-managers took on a surprisingly difficult challenge: find- newspaper Der Tagesspiegel, together with the German investi-
ing out who owned their building. gative group Correctiv, confirmed Syndikat’s reporting. Using
“We’ve had a few owners, but the most recent had an information from the Panama Papers, they also revealed that
address in Luxembourg,” says Christian Schulte, a 42-year-old the Pears brothers collected at least $53 million in Berlin rents
sociologist with a septum piercing who’s helped run Syndikat and sales in 2017, while using standard real estate loopholes
for 13 years. “When we finally found the company’s number, and shell companies in the British Virgin Islands, Cyprus, and
no one ever picked up.” Luxembourg and reported paying $197,000 in taxes on that
Wondering exactly who he was dealing with, Schulte income. Syndikat also found that the Pearses’ various Berlin
enlisted friends near the Luxembourg border to drive to the companies had forced out a kindergarten and a pottery studio
company’s headquarters. At the address listed on the bar’s and had tried to remove a flower shop and a decades-old hard-
lease they found an unremarkable commercial building hous- ware store, presumably to charge higher rents. The Pearses
ing a shoe store and a tanning salon—and an intriguing mailbox. didn’t respond to requests for comment for this story.
On a sheet of paper posted nearby was a list of 76 companies In Berlin, revelations about the Pearses’ real estate ven-
associated with that mailbox, most of them apparently prop- tures stoked a growing rage against big landlords and property
erty management firms. Among them was Syndikat’s landlord. speculators. Since 2009 rents in the city have more than dou-
Schulte and his colleagues scoured the internet and bled. For people looking to buy rather than rent, it’s at least as
Berlin housing logs and discovered that the companies all bad—in 2017 alone, property values jumped 20.5%, the high-
shared the same three or four managers. They also found est increase for any major city in the world, according to the
that roughly two dozen of the companies had been used to real estate consulting firm Knight Frank. And while many fac-
purchase more than 3,000 apartments throughout Berlin. tors are at play—most notably, a giant influx of new residents
Luckily for Syndikat, some of the companies were also active and a shortage of housing—Berliners tend to see greedy land-
in Denmark, where, unlike in Germany and Luxembourg, lords as the problem.
owners must reveal their true identities. (In 2020, this became Accordingly, Germany’s capital is taking extreme measures
true for all European Union countries.) to stay (relatively) affordable and not go the way of San
Francisco or London. Beginning in early 2020, Berlin’s left- industry, few jobs, and a glut of derelict apartments. That all
leaning government will freeze rents for five years. Landlords began to change as Berlin became the premier startup hub in
will be required to show new tenants the most recent rental continental Europe. Then big companies moved in, including
contracts to prove they aren’t jacking up prices. They’ll also Amazon, Daimler, Sanofi, and Sony, as did foreign investors.
have to follow new rent-cap rules, which for many land- Today, Berlin is still affordable by international standards.
lords could mean lowering rents by as much as 40%. Those A decent apartment in a good part of town costs about half
who don’t comply will be hit with fines as high as €500,000 as much as a comparable place in New York and far less for
($553,000) for each violation. those lucky enough to possess an old lease. More than 80% of
Even more radically, tenant groups and thousands of activ- Berliners rent, in part because renting was, until recently, so
ists are demanding that large corporate landlords be expelled cheap. Tenant regulations also distinctly favor renters, while
from the city altogether, their property expropriated. The federal tax laws offer no incentives to homeowners. Because
goal is to get the government to buy back roughly 250,000 commercial rents are also relatively inexpensive, the city has
properties—almost one-eighth of Berlin’s housing stock—and preserved a thriving landscape of independent bookstores,
turn them into public housing. And while the move may sound one-off coffee shops, storefront artist and design studios, and
far-fetched, it’s won support thousands of other small businesses.
from anywhere from 29% to In this city of tenants,
54% of Berliners, according a certain number of them
to various polls. Two of the socialists and ex-commu-
city’s three ruling political nists, animosity toward
parties have even endorsed landlords finds frequent
a nonbinding public refer- expression. In April 40,000
endum on whether to force people filled the streets
big landlords to sell their to protest what they call
real estate to the govern- Mietenwahnsinn, or “rent
ment. (The biggest party, the insanity.” (It’s a play on the
54 Social Democratic Party, or German term for mad cow
SPD, is against the move, as disease, Rinderwahnsinn.) A
is German Chancellor Angela few months later, the win-
Merkel’s Christian Democratic dows of one branch of high-
Union. They’ve signaled their end real estate broker Engel
intentions to challenge the & Völkers AG were smashed.
new regulations in court.) Graffiti a few blocks away
Berlin’s landlords, big re a d , “C A P I TA L I S M I S
and small, are reeling. The THEFT” and “Gentrifick
THE ANARCHIST BAR WHOSE EVICTION NOTICE INSPIRED
city’s publicly traded real dich,” which basic ally
A MOVEMENT TO UNMASK ABSENTEE LANDLORDS
estate companies, whose means, “F--- yourselves, gen-
share prices fell for most of trifiers.” Two vans belong-
the summer after the governing to Germany’s biggest real
ment announced the planned freeze in June, complain that estate company, Vonovia SE, were also bashed in, spray-
Berlin’s new regulations will scare off needed capital. Fewer painted, and set ablaze. “We took care to insure that no
companies will invest in modernizations to make buildings other cars caught fire,” wrote the anonymous perpetrators
more appealing or energy-efficient, they say, and construc- on an anarchist website.
tion of new units may suffer, which would exacerbate Berlin’s Protest culture, squatter movements, and progressive
shortages. “Almost 30 years after the fall of the Berlin Wall, it tenant-rights groups are perhaps more entrenched in Berlin
seems that some people want the former conditions back,” than elsewhere, but the city’s plight isn’t unique. In much of
Michael Zahn, chief executive officer of Berlin’s largest pub- the U.S., home prices are rising at twice the rate of wages, and
licly traded landlord, Deutsche Wohnen SE, said in an earn- almost half of renters spend more than 30% of their income
ings call in November, referring to the former East Germany’s on rent, compared with 24% of renters in 1960. A renter work-
all-controlling government. “Tenants and landlords will face ing 40 hours a week and earning minimum wage can’t afford
great uncertainty. That’s a poison pill for investment.” a two-bedroom apartment in any county across the U.S.,
U
according to the National Low Income Housing Coalition.
ntil about 15 years ago, Berlin was unimaginably cheap. Partly as a result, homelessness is soaring. In Oakland, the
Although vibrant and beloved by artists and students homeless population climbed 47% in the past two years. In
for its do-it-yourself culture, throbbing techno scene, New York City the number of homeless schoolchildren grew
and world-class cultural institutions, the city had little 70%, to 114,000, in the past decade.
Elsewhere, afforda- contained several

bility numbers inaccuracies and that
look similarly dire. Blackstone was in fact
Throughout Spain, “helping to address
average rents jumped the undersupply of
49% over the past five housing by bringing
years, while aver- capital, expertise and
age salaries rose only professional manage-
4.3%. In Toronto, a ment to the residential
2019 report found that housing sector.”
housing costs over the In Berlin the govern-
past decade grew ment is partially respon-
four times faster sible for the dominance
than income. of big real estate firms.
A main cause Before the reunifica-
of the problem is a tion of Germany in
shortage of housing INSIDE SYNDIKAT 1990, East Berlin was
as a growing num- communist and West
ber of people move Berlin—a tiny capital-
to cities. According to ist island within the
the United Nations, 68% of the world’s population will live in Soviet bloc—lived off subsidies from the West German gov-
urban areas by 2050, up from 55% today. (In Berlin, more than ernment. After the wall fell, the subsidies ran dry and Berlin
40,000 newcomers arrive every year. In November more than racked up billions of dollars in debt, which the local govern-
1,700 people reportedly showed up to view a single moderately ment attempted to pay down by selling what it could to pri-
PREVIOUS SPREAD: PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (1); REDUX (7). THIS SPREAD: PHOTOGRAPHS BY JOHANNA-MARIA FRITZ FOR BLOOMBERG BUSINESSWEEK
priced apartment in a desirable neighborhood; some waited vate companies. That included, from 1997 to 2004, the city’s
in line for 12 hours.) The expansion of Airbnb Inc. and other water utility, half its electricity producers, and more than 55
short-term rental platforms has only aggravated the shortage. one-third of its public housing, or about 200,000 apartments.
Berliners aren’t entirely wrong to focus their ire on big (Berlin has since remunicipalized its water and electricity.)
investors and landlords. For decades private equity firms and Global companies swooped in almost immediately. In a
hedge funds have bought up swaths of affordable housing sale contested by the public at the time, U.S. private equity
around the world. The trend accelerated after the 2008 finan- firm Cerberus Capital Management, backed by Goldman
cial crisis, when interest rates fell drastically. Investor money Sachs, bought Berlin’s public housing association, paying
rarely goes into construction. With few exceptions, the strat- $448 million for 66,700 housing units—about $6,700 per
egy is to buy existing housing, renovate it, and raise rents. At unit. In 2013 Cerberus’s holdings became part of what is now
the same time, many governments are investing far less in Berlin’s biggest and perhaps most reviled publicly traded
affordable housing, while developers tend to prefer building landlord, Deutsche Wohnen.
T
expensive apartments.
Last March, Leilani Farha, UN Special Rapporteur on oday, Deutsche Wohnen is headquartered in a giant,
Adequate Housing, singled out Blackstone Group, the pri- meticulously renovated former Nazi office building in
vate equity firm, for a practice she says has become com- Berlin’s peripheral Wilmersdorf district. “From above,
mon throughout the industry. “In many countries around the it’s shaped like an H,” says Philip Grosse, the company’s
world,” she and a co-author wrote in a public letter to the firm, boyish 49-year-old chief financial officer, ruefully recounting
“Blackstone and its subsidiaries have been targeting and pur- the building’s origins. “But don’t let that give you the wrong
chasing multi-family residences in neighbourhoods deemed to impression about us.”
be ‘undervalued.’ In each case the pattern is similar. A build- Deutsche Wohnen now owns more than 110,000 apart-
ing or several buildings are determined to be located in an ments in Berlin and counts the global investment manage-
undervalued area, which often means they house poor and ment company BlackRock Inc. (not Blackstone) as its biggest
low-income tenants. Blackstone purchases the building, under- investor. For years, newspapers have excoriated the com-
takes repairs or refurbishment, and then increases the rents— pany for increasing rents while repeatedly leaving hun-
often exorbitantly—driving existing tenants out, and replacing dreds of tenants without heat or hot water during Berlin’s
them with higher income tenants.” icy winters. In 2017 the CEO, Michael Zahn, hired three
There’s nothing new about this strategy, but Farha says bodyguards after receiving death threats. More recently,
Blackstone and other big investors and real estate firms are Deutsche Wohnen inspired the creation of the city’s biggest
executing it on an unprecedented scale. Blackstone responded expropriation advocacy group, which calls itself Expropriate
to the letter in a public statement, saying the UN complaint Deutsche Wohnen & Co.
Grosse buries his face in his hands when confronted with economist with Germany’s IW Economic Institute. In a recent
complaints about the company. “I’m not suggesting that every- report the institute describes Berlin’s coming rent freeze as
thing runs 100% perfect in our organization. We could do bet- a catastrophe that “threatens to cause considerable damage
ter,” he says, adding that Deutsche Wohnen supplies space to both the housing market and Berlin as a whole.”
heaters when the heat goes out, automatically applies rent International examples also give reason for pause. A 2019
reductions until things are fixed, and consistently invests in the Columbia Business School study found that expansion of rent
upkeep and improvement of properties. “I understand that the controls and housing policies in New York City reduced hous-
shortfalls in Berlin’s housing market are causing a lot of people ing inequality and led to increased well-being. But a 2017 study
headaches, but, if I look at the kind of product we are offering, found that rent control in San Francisco had the unintended
it’s affordable to many people,” he says. effect of advancing gentrification, as landlords took rental
From 2012 to 2018, Deutsche Wohnen shareholders saw apartments off the market and sold them. In Portugal, decades
annual returns of 24.5%; and in 2018, the company’s net of rent freezes and rent-control laws left the country with a
income was about $2 billion. Anticipation of the rent freeze, plague of crumbling buildings that landlords couldn’t afford
however, wiped roughly $5.3 billion, or 31%, off the company’s to maintain. After the regulations were lifted in 2012, the mar-
market value last summer. (It’s since recovered by more than ket began booming. In Sweden, which has perhaps the most
half.) Deutsche Wohnen says it stands to lose $363 million in
income over the next five years because of the freeze and pos-
sible rent reductions. In July the city also stopped Deutsche
DEUTSCHE WOHNEN’S GROSSE
Wohnen from purchasing more than 670 apartments along
Berlin’s Karl-Marx-Allee, the neoclassical, Stalin-style boulevard
once used for communist marches in East Germany. Instead,
Berlin spent about $1 billion to buy the residences. “It is my
firm intention to buy apartments wherever possible so that
Berlin regains more control over the housing market,” Berlin’s
mayor, Michael Müller, said at the time.
56 “I’m a very rational guy, and what’s happening here is not
rational,” says Grosse of the coming regulations and Berlin’s
flourishing antipathy toward landlords. As soon as this month,
rents will be capped at as little as $4.30 per square meter for
older apartments with few amenities, and as much as $10.90
for newer apartments with better amenities. (The current
average price in central Berlin is about $12 per square meter,
according to a report by the newspaper Die Zeit; in Munich
it’s $19.30.) Later in the year, tenants paying more than 120%
of the government-determined prices will be allowed to take
their landlords to court to seek a reduction. Apartments built
after 2014 will be exempt, as will government-controlled hous- strictly controlled market in the world, the waiting list for a
ing (where rents are controlled anyway). Beginning in 2022, all regulated apartment in Stockholm is almost 675,000 deep. To
landlords will be permitted to raise rents 1.3% annually, or in bypass the wait, which can take as long as 20 years, people sub-
line with inflation. “But the law doesn’t take into account loca- let apartments, likely paying more and forgoing the security of
tion or quality of building,” Grosse says. “You might have some- a government contract. Grosse, of Deutsche Wohnen, warns
one in a beautiful old building in a central location paying less that black and gray markets will likely result from Berlin’s rent
than someone in a less-nice prefabricated building from the freeze, as they did in West Berlin, which also had strict rent
’70s out in the suburbs.” regulations before the fall of the wall.
Signaling frustration, Deutsche Wohnen says it’s reviewing a Berlin’s senator for urban development and housing,
planned $1.1 billion in new construction spending. Other land- Katrin Lompscher, is credited as the “Mother of the Rent
lords, including large companies and private investors, have Freeze.” A member of Germany’s left-wing party Die Linke,
also threatened to pull back. Berlin’s construction industry is Lompscher grew up in East Germany and, as a construction
worried. In December more than 240 construction vehicles, worker, laid heating pipes for buildings before studying
everything from small vans to crane trucks, converged on the architecture at Germany’s Bauhaus University. She dismisses
Brandenburg Gate to protest the rent cap. Organizers of the international comparisons and the concerns of big land-
demonstration, which also included landlords and landlord lords. “The politics of housing and urban planning are city-
associations, warned that Berlin’s rent freeze will destroy jobs. specific. It’s good to look around, to the right and the left,
“Who will want to make long-term investments in a city that but then we have to decide what’s right for Berlin,” she says.
deals with investors in this way?” asks Michael Voigtländer, an “The idea behind the rent freeze is to create breathing room
so that Berlin can build more apartments,” Lompscher says. of all properties belonging to landlords who currently own
She is counting on a combination of municipal and private more than 3,000 apartments. “If a landlord has 7,000, we
businesses to construct 20,000 apartments each year during won’t take just 4,000,” Hoffmann says. Those with fewer than
the five-year rent freeze. That may be achievable, considering 3,000 would be safe. After remunicipalization, the proper-
that 17,000 homes were built in Berlin in 2018. ties would be run as a public nonprofit, similar to Germany’s
“Some companies have threatened to withdraw from public radio and TV.
Berlin,” acknowledges Lompscher. “These threats shouldn’t Whether or not expropriation is realistic, a recent study,
be taken seriously. As a business you want to be at the heart funded by Berlin’s Rosa Luxemburg Foundation, examines dif-
of things, and Berlin is still an attractive city, despite the fact ferences between the city’s public landlord, Gewobag, and its
that we’re implanting a different strategy to improve the lives of 12 biggest for-profit landlords. It shows that, on average, for-
those who live here.” At any rate, she adds, Deutsche Wohnen profit companies put less into upkeep than Gewobag (4% vs.
has never built a single apartment in the German capital. 17%) and more into modernization (18% vs. 12%), a cost that
“Recently I got to see New York through the eyes of my can be passed along to tenants. They also buy more properties
son, who’s a big music fan, and he was shocked to find out it’s (60% vs. 44%) and build far fewer new apartments (1% vs. 27%).
hard to go out and hear heavy metal because the clubs have “As a result, rents for private companies climb about 5% per
all been priced out,” says Lompscher. “Here in Berlin, you can year, much faster than with Gewobag, where they grow with
go out and hear metal at five clubs every night. And we want slightly more than 2%,” writes Christoph Trautvetter, co-author
to keep it that way.” of the study and one of the journalists who helped Syndikat
S
research the Pears brothers. In a follow-up study, Trautvetter
caring off investors like Deutsche Wohnen, that’s suggests that publicly traded companies aren’t necessarily the
exactly what we want,” says one activist tenant who worst problem for cities. The larger one is anonymous inves-
uses the alias Ingrid Hoffmann when speaking with the tors that use loopholes to extract wealth while paying very
press. “We have no use for them; they only want to few taxes.
make a profit with our rent money.” Despite torrential rain, In late October roughly 100 Syndikat patrons and neighbors
Hoffmann, 69, has just arrived by bike at a Berlin restaurant showed up for the bar’s eviction hearing. Syndikat’s regulars
wearing head-to-toe rain gear. Feisty, with short hair and spar- were dressed mostly in black, with plenty of facial piercings. 57
kling turquoise eyes, she looks excited to take on Berlin’s cor- There were also a few elderly neighbors, as well as colorful
porate landlords. characters, including a middle-aged man with flowing auburn
A former translator, Hoffmann joined Expropriate hair, painted-on fluorescent-orange eyebrows, and a dirty
Deutsche Wohnen about two years ago after Deutsche stuffed animal poking out of his jacket pocket.
Wohnen increased her rent by 10 percent, which she says Schulte looked nervous. “You know, the Pearses, they have
forced her to come out of retirement and get a part-time job a philanthropic foundation and, according to their website,
doing typist work for banks. She’s also dissatisfied with the they want to help people and promote community,” he said.
company’s services. “Every year when it’s cold out, the heat “That’s exactly what Syndikat has always tried to do. When
stops working, and if you complain, nothing happens,” she someone in the neighborhood needs to borrow a drill or a lad-
says. “Elevators are also a problem. I’m on the 11th story, but der, they come to us. When a grandmother from across the
the elevator often doesn’t work. Then I walk up.” street can’t pay for her medicine, she comes and asks if we
At first, Hoffmann didn’t like the term expropriation. “It can help, and of course we do.” Syndikat’s bartenders, he said,
gives people the chills, makes them think of a Communist pool their tips and communally decide what to spend them on.
sneaking up with a knife between his teeth,” she says. But But the neighborhood has changed. “It’s absolutely
she concluded it would stir up necessary publicity and get mind-bending,” said Schulte. “In 10 years it’s gone from one
people talking. of the poorest corners of Berlin to a famous global hot spot.”
PHOTOGRAPH BY JOHANNA-MARIA FRITZ FOR BLOOMBERG BUSINESSWEEK
According to city estimates, the government would have Already, Firman Properties had converted some of the build-
to pay from €29 billion to €36 billion for about 250,000 apart- ing’s other units into furnished short-term housing. “It’s mostly
ments. Expropriate Deutsche Wohnen, in a pitch that’s rad- Americans who come,” Schulte said. “They call in noise com-
ical even by Berlin standards, counters that the government plaints starting at 7 p.m.”
should reimburse the companies only for what they originally To everyone’s disappointment and no one’s surprise, the
paid, plus a bit more to account for renovations, moderniza- Pearses didn’t show up in person for the hearing. Instead,
tions, and inflation. That price would be as little as €8 billion, Firman Properties sent two lawyers. “My clients didn’t want
and Hoffmann says the city could pay the landlords just 20% to have to sit through all this,” one told the judge, gesturing
now and the rest over time, as rent money comes in. Asked if with her head toward Syndikat’s motley supporters packed
the money wouldn’t be better spent on building more hous- behind her in the courtroom and the halls beyond.
ing, Hoffmann says, “Yes, they should do that, too—but they One month later, the verdict was in. Syndikat, the
should have started building a long time ago.” neighborhood bar, would soon lose its home in Berlin. <BW>
To be clear, Hoffmann’s group proposes the socialization �With Todd White and Benjamin Stupples
Connecting
the dots
for decision
makers.
See it all.
Get the ultimate source
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bloomberg.com/subscriptions
A
In an ever-
P
62
Buy your way into
nobility
shrinking bonus
64
season, here’s
Bonus U
Brooches, for bros
66
how to make
Why watch collectors
your windfall
That Will
love leap year
go further
R
67
Downsize your wallet
February 10, 2020
S
Edited by
Chris Rovzar
Businessweek.com
U
I
59
T he era of big bonuses, you might
say, is over. Earlier this year, Morgan
Stanley, Goldman Sachs Group,
Citigroup, and many others announced they’d
be cutting back on investment banker bonuses
in some shape or form. It doesn’t matter how
well the company is doing: JPMorgan Chase
& Co. is keeping annual bonuses at its corpo-
KNIFE: COURTESY MIDDLETON MADE KNIVES. BRANDY: COURTESY BRANDY CLASSICS. COURTESY WORLD CENTRAL KITCHEN. HUDSON VALLEY: PHOTOGRAPH BY TERRY HOLLAND/LANDVEST. SNEAKERS: COURTESY NIKE. BRACELET: COURTESY FD GALLERY. DUBUFFETT: COURTESY SOTHEBY’S.
rate and investment bank unchanged this year
despite notching a record $36.4 billion profit
in 2019. On the other side of the spectrum, D PLAY THE PROPERTY GAME
Deutsche Bank AG executives have agreed An historic spread, listed by Looking for a bigger ticket?
to forfeit the component of their bonus that Christie’s International Real Estate, A $28.8 million listing via Sotheby’s
is set on more than 200 rolling International Realty has 15,000 square
reflects personal performance as the lender feet of interior space overlooking Lake
prepares to unveil its biggest annual loss acres in New York’s Hudson Valley. Lugano in Switzerland. There’s a spa
It has 12 bedrooms, a tennis court, and a pool on the first floor, entertaining
since 2015. areas on the main floors, and bedrooms
greenhouses, and a sheep barn.
The pattern reflects a general reckon- Price: $3.95 million
on the upper levels of the 19th century
art nouveau villa. Stock markets may
ing across banking as electronic systems Future value: With a working farm go up and down, but Swiss real
de-emphasize rewarding individual successes and the possibility of rental income estate has been a rock-solid monetary
refuge for more than a century.
in favor of more broad group performance. as a corporate retreat, the property is
“It’s a team sport now,” Chris Purves, head of largely self-sustaining.
UBS Group AG’s Strategic Development Lab,
told Bloomberg in January. World Central Kitchen workers
With this in mind, it may wise o look
at the dwindling reward a a chance to ake
another good investm Think of a bonu ini
both senses of the d “ preciation”—a rec
60 ognition of yo worth, as well as somethi
that will ri in value. It doesn’t mean you
must s it only on the boring and pract
cal re are plenty of ways to have fun, or
some good, that have future upsides. Here
e some of our favorite
NVEST IN A BETTER WORLD

Elevate Destinations’ 12-day volunteering
adventure in Sri Lanka lets travelers explore
ancient monuments and cave dwellings.
they help the country’s Wildlife Conservation
D SHARPEN BUY A PIECE ety study elephant behavior to lessen the local conflict
YOUR KITCHEN TOOLS OF HISTORY etween people and pachyderms.
A good knife is an invaluable Les Diners de Gala (1973) Price: From $3,500 a person
piece of kitchen equipment, is a first-edition selection
and it’s what great chefs of avant-garde menus and Future value: Each Elevate custom eco-luxury booking
credit as their secret recipes that artist Salvador pays for a group of local children to visit cultural sites in
weapon. Bladesmith Quintin Dalí completed at age 68
Middleton in Saint Stephen, in honor of his wife, Gala. their own country.
DOG: JOHN EWING/PORTLAND PRESS/GETTY IMAGES
S.C., custom-makes his Available at Bauman Rare

high-carbon steel knives Books in New York, it has
to the exact specifications color plates and in-text
requested by each customer. photographs and illustrations Or donate to World Central Kitchen: José Andrés’s charity has fed disaster-hit
Price: From $480 for a 9-inch on almost every page. areas around the world since 2010. A $10,000 donation will enable a farmer to buy a
knife (above) Price: $13,500 greenhouse or allow a small-scale food producer to get a walk-in cooler. WCK also
Future value: Besides Future value: This offers food-job training to underserved communities, so you’re investing in people as
enhancing your kitchen skills, extravagant book is made well as the world. And if your bonus is in the form of stocks, you can donate to WCK
a well-made knife crafted by exceptional thanks to a bold with shares or via a donor-advised fund.
a master from high-carbon inscription by Dalí himself
steel also negates the need with a hand-drawn sketch of a
to constantly replace it. shooting star above his name.
BONUS GUIDE Bloomberg Pursuits GET SMART ABOUT ART
A 2006 landscape of walnut trees,
for sale at an auction at Christie’s
in London on Feb. 12, is trademark
David Hockney—colorful,
v ACHIEVE E HIGHER SPIRITS ebullient, and dreamily figurative.
Price: Estimated from $3.3 million
We all think we know whiskey. Cognac If you prefer putting
your wallet behind Future value: Hockney, who
epresents the chance to become wine: Bordeaux is still turns 83 this year, has been
on the way up. A bottle famous since the 1960s, but in the
an expeert in a different, growing of 2016 Château Les past couple of years his art has
ategory. This bottle of Carmes Haut-Brion commanded some of the highest
is a stunning option prices in his career.
ermitage Cognac Marie for $169; fine wine
ouise, aged for 60 years exchange Liv-ex put
it in its Power 100 for
and the 2018 Cognac the first time in 2019.
Price performance,
Masters winner, has the meanwhile, is up 18%
bonus of a limited-run over the past year—
much better than the
crystal decanter. first growths.
Price: $2,000
Futu
ure value: Cognac is
steadily appreciating, especially
egendary bottles such as Rémy
artin Louis Xlll.
FIND A BEST FRIEND G

z BRING IN SOME BLING Second Chance Animal
Designed around 1990, the Cartier
Panthère gold bangle bracelet,
Rescue of Puerto Rico is a If you think the Hockney
available at FD Gallery in New York, 501(c)(3) nonprofit establisshed market has peaked: There’s
includes three different colors of gold. a 1974 painting by the French
The open spiral ends in two sculpted
in 2000 in Villalba. The organization rescues, modernist Jean Dubuffet
gold panther heads. rehabilitates, and secures permanent homes for (above) at an auction at
Sotheby’s London on Feb. 11
Price: $8,800 the island’s abandoned dogs. that carries a low estimate 61
Future value: Cartier is tthe most of £900,000 ($1.17 million).
valuable and appreciatedd Price: $$400 (adoption fee includes vaccinations It’s a prime example of his
brand of jewel nd spaying or neutering) late style; his works from this
available—e en mor so period have sold well since
when it’s nta Future value: Your heart will grow bigger their paint was still wet.
than you even thought possible.
HION YOURSELF
A BETTER FUTURE For more skills-based personal
side handbag investment improvement: Consider VISIT AN AT-RISK LOCALE,
st es such as the Birkin CourseHorse, which offers lessons SUSTAINABLY
Kelly is a relative newcomer— on cooking, pottery, computer AdventureSmith Explorations
programming, and foreign languages,
th Chanel Boy Bag. among many other classes. Options offers a land tour through
e: From $3,900 can range from about $80 (how to Ecuador from Napo Wildlife
ure value: The Boy’s average resale make handmade pasta) to $12,000 Center, an ecotourism project
(high-impact leadership training).
e is 73% of MSRP, 1.6 times stronger than that’s conserved more than
dbags overall, according to the RealReal. 82 square miles of the most
pristine rainforest in Yasunì
National Park.
If you’re more of a sneakerhead: Unknwn released a limited- UPGRADE YOUR CULTURE Price: From $1,332 per person
edition $120 pink Nike Air Max Verona during the Super Bowl. A membership to the Metropolitan
Museum of Art’s Friends of European for five nights
Paintings Circle is not your typical Future value: You’ll be doing
TER YOUR BODY museum benefit. Along with advance your part to support a local
Men, it seems, are coming around to the minimally previews and private access, members economy in a considerate way.
at this level get tours with department
invasive liposculpting procedure at Ryan Neinstein’s curators and take trips to see like-
plastic surgery center. By using Renuvion’s ionized minded collectors’ private collections.
Price: $10,000 Then store all those pictures:
helium (aka plasma technology), skin tightening Future value: It’s taking The $299 Time Capsule from
complements the removal of stubborn fat. art appreciation to the next Apple Inc. is a wireless hard drive
level. Knowledge, after that works as a master backup
Price: $7,500 (downtime is three days off work all, is power; what you hub. It’ll allow you to secure all
the Mac products in your home
and three weeks out of the gym) choose to do with it
in one place—and it’s also a full-
(collect, impress friends
Future value: You can’t add 10 years to your life, at cocktail parties)
featured Wi-Fi base station.
but you can knock them off your body. is up to you.
BONUS GUIDE Bloomberg Pursuits February 10, 2020
A Coat of Arms for

Former Commoners
If you stump up
enough cash, you
can be adopted
and complete a
metamorphosis
into nobility
62
Buy Your Way Into the Aristocracy

For €80,000 and up, you too can be a lord or lady
By Benedikt Kammel
Born into the rubble and deprivation of postwar Germany, The legal privileges of nobility were abolished in Germany
Horst Koch wanted out of his small-town cocoon, and at age 21 a century ago, when Kaiser Wilhelm II’s monarchy collapsed
found his way to a poker table, where he learned to empty the after World War I. But former members of the upper class were
pockets of less experienced players. For decades, Koch says, permitted to carry a noble title as part of their name. Even
he earned a handsome living playing cards in Baden-Baden, today, the aristocracy benefits from the aura of its separate
Aruba, and Las Vegas. Yet he always lusted after the kind of social strata—at least in the pages of glossy magazines and the
esteem that’s hard for even a champion five-card-stud player imagination of many commoners.
to earn at the table. The value of a title lies in part in its scarcity. About 0.1% of
So when Koch in 2013 heard he might be able to buy an Germans are of noble descent, roughly 80,000 out of a popu-
aristocratic title, he considered it a path to newfound respect lation of almost 84 million. In the U.K. the number is closer to
and admiration. These days, humble Horst Koch is known— 0.01%. There are clear rules about who’s in the club: Typically
legally and in every other way—as Horst Walter Count von you were born or married into gentility, and only men can
ILLUSTRATION BY JACI KESSLER LUBLINER
Hessen-Homburg. He has his own coat of arms and a gilded legitimately pass their title on to spouses and offspring.
family history stretching back centuries. But there’s a loophole: adoption. Usually by a noble who
And if you can stump up enough cash, he’d be happy to can’t afford the upkeep on his or her crumbling country
do the same for you. “Doors that were shut suddenly swing estate or the staff to polish the family silver. Acquiring a title
open, you meet different people, everything becomes easier,” this way is a simple transaction between a noble seller and a
says von Hessen-Homburg. “You get put through, and a no social-climbing buyer, often involving a go-between such as
becomes a yes.” von Hessen-Homburg.
He says each year he brokers about a dozen deals, for U.K., where the tradition of selling a title goes back centuries.
prices ranging from around €80,000 ($88,000) to more than King James I of England created the rank of baronet in 1611,
€1 million, depending on the dynastic relevance of the name bestowing the dignity on hundreds of men in return for pay-
and auxiliaries such as an elaborate coat of arms or storied ments to the deeply indebted crown.
family tree. The new name is legally binding and appears on There’s growing interest overseas, particularly in the U.S.,
all formal German documents: driver’s license, credit cards, where a tongue-twisting noble name carries an old-world flair
passport, even a new birth certificate if you want. (think Claus von Bülow) that can turn the bearer into a dinner-
Although simple in theory, the process of persuading party sensation. Although the U.S. government doesn’t allow
an aristocrat to offload a cherished name can be fraught. noble titles on official documents such as passports, you’re free
There’s no limit to how many buyers a freshly minted count to adorn your credit cards with the extra flourishes.
or baron can then bring on board, and blue- German aristocrats may have lost heredi-
blooded families are usually interested in keep- COUNTING UP tary privileges, yet many continue to live slightly
ing their lineage exclusive. The national nobility Among German nobility, apart. Tweed-clothed men on shooting weekends
archive, maintained by an independent founda- it’s not always clear who and couples twirling in candle-lit ballrooms evoke
outranks whom. Here are
tion in the city of Marburg, says it receives fre- a bygone era—a mythological lifestyle that can
the most commonly traded
quent requests from families seeking to expose titles. appeal to commoners looking to nibble on some
potential impostors. crumbs from the upper crust. “There’s something
Freiherr/Baron
But when a cousin or uncle adopts a status- self-assuring if for generations you considered your
Among the lowest noble
seeking member of the hoi polloi, there’s not ranks, which a ruler might family a cut above,” says Joseph von Westphalen,
much the family can do other than ostracize the bestow on a person of high a Munich author and frequent critic of his social
social standing or wealth.
buyer and seller. “People might find this sort of class. “But just like soccer stars or rappers, the
Price: €80,000 to €120,000
deal unappetizing, but there’s no real way they can fascination is in the eye of the beholder. Most
intervene if two adults decide they want to enter Graf/Count noble families just want to be left in peace.”
The most popularly traded
an adoption,” says Hans-Heinrich Thormeyer, an As von Westphalen tells it, the trappings of a
titles, these range from
attorney specializing in family law. €180,000 to €600,000, title can be a mixed blessing. Kissing the hands
Take Frédéric Prince von Anhalt, the ninth depending on the name, of elderly relatives as a child was annoying, but 63
the age of the seller
husband of the late film diva Zsa Zsa Gabor. He the name did get him ahead, whether being pro-
and the family tree. The
was born Hans Lichtenberg in Bad Kreuznach, a more storied, the more claimed class president in high school or network-
sleepy spa town an hour west of Frankfurt, and expensive. ing with the right people between jobs.
grew up to become a baker who later opened a Among von Hessen-Homburg’s clients is a child-
Fürst/Prince
chain of massage parlors. Lichtenberg gained his Rulers of smaller states or less countess in Munich, now in her 80s, whose
princedom in 1980 via adoption by Marie Auguste lords of the Holy Roman husband died in 1994. A few years ago, a shop
Empire who elected the
Princess von Anhalt, an impoverished descendant assistant half-jokingly asked whether the countess
emperor. These titles
of the kaiser, in exchange for a monthly pension of are rarely sold, because would consider adopting her. That sparked the
2,000 deutsche marks (about $3,600 today). few families have them idea: As a wartime refugee from eastern Germany
these days.
It was a lucrative investment. Von Anhalt paid who married into nobility, she’d never had much
the pension for two years until the princess’s Prinz/Prince appetite for the lifestyle. People occasionally bow
death, then sold his princely title to a second Descendants of royal spontaneously or salute when they hear her name,
families—kings, queens,
generation of customers: There’s Michael, who behavior she calls “absurd.” Although her husband
or emperors. Sales are
owns a pair of fitness clubs near Frankfurt called infrequent, but they can invoked his title at opportune moments—applying
Killer Sports and parades around in tasseled mili- happen when a family for a loan, say—he used it sparingly. The count-
falls on hard times. Prices
tary uniforms. Another von Anhalt, Marcus, who ess, who asked to remain anonymous given the
range from €800,000 to
worked his way up from butcher to brothel owner, several times that. sensitivity surrounding adoption, says they also
cruises the streets of Dubai in his pink Bentley or kept the “von” prefix, which betrays aristocratic
white Rolls. Buying the title—he paid less than $10,000 for it, in descent, off their doorbell.
2005—was “the best decision of my life,” he says. “When you Now living in a humble flat in a quiet neighborhood, she
come from the red-light district, you don’t get invited to fancy says milking the name for a healthy sum to sweeten her retire-
balls or the Oscars. But when you’re a prince you do.” ment seems like a worthwhile transaction. “I have no actual
Germany’s fragmentation before 1871—it was formerly made blue blood running through my veins, so sharing the title isn’t
up of hundreds of tiny states—left it with an unusually large really a big deal for me,” she says. “My noble relatives always
aristocracy, expanded further by Prussian military traditions, made clear that I was an outsider. I can pay my rent, but if I
which spawned yet more noble families, particularly in the can earn a little extra from the title, why not?”
final years of World War I. This relative abundance makes the But whoever ends up taking her name, title, and coat of
country the preferred destination for title seekers, though arms, the countess says, one thing is certain: “We won’t be
smaller markets exist in parts of Eastern Europe and in the holding hands under the Christmas tree.” <BW>
64
BONUS GUIDE February 10, 2020
Meet the Bro-och

Lapel jewelry for men is back in a big way. By Harriet Mays Powell
Photograph by Hannah Whitaker
TIFFANY
Bird brooch in 18k gold
SONIA PETROFF with sapphires and
Silver swan costume diamonds. Price upon
brooch. $285; request; tiffany.com
soniapetroff.com
HEMMERLE
Gecko fancy-green
diamond brooch with
cat’s-eye chrysoberyl, set in
18k white gold. Price upon
request; fd-gallery.com
DOYLE & DOYLE

Antique diamond
dragon pin, circa 1900,
with an old mine cut
diamond set in 18k
WEMPE
yellow gold. $2,500;
Spider brooch in 18k white
doyledoyle.com
gold, onyx, and sea pearl with
brilliant diamonds. $27,600;
wempe.com
CHOPARD
Flower brooch with white DOLCE & GABBANA
diamonds, yellow diamond Feather brooch in Swarovski
briolettes, and black crystal. $1,295; Dolce &
diamonds, set in 18k white Gabbana boutiques
gold and titanium. Price
upon request; chopard.com
FRED LEIGHTON
On the red carpet at the Golden Globes Antique ruby and who gave brooches contemporary
in January, it was impossible to ignore diamond horseshoe credibility when he wore a diamond
Aquaman star Jason Momoa. The 6-foot-4- brooch. Price camellia at the 2017 Academy Awards.
inch titan was wearing a plush green blazer upon request; Jeff Goldblum donned a dramatic star
by Tom Ford over a tank top, of all things, fredleighton.com brooch for the recent launch of Tiffany
which he revealed with gusto later in the eve- & Co.’s men’s jewelry collection, and the
ning as he draped his jacket around wife Lisa brand included several in its 2019 Blue Book of high jew-
Bonet’s shoulders. But the most eye-catching elry. And recently brooches have appeared on tastemak-
item on his outfit was the cluster of diamonds, ing actors and musicians such as Chadwick Boseman,
onyx, and emeralds on his left lapel—a dazzling art Common, Jared Leto, Alexander Skarsgard, and country
deco brooch by Cartier, one of many pieces of jacket music duo Dan + Shay.
jewelry storming Hollywood of late. “Brooches are not just for black tie,”
The old-timey brooch is back, and this Doyle says. “They can work equally
FRED LEIGHTON
time around, it’s not only dowager count- Rose cut diamond well for a casual look and are great on a
esses embracing the trend. “Men are add- crescent brooch, denim jacket, either alone or worn in a
ing lapel pins as the finishing accessory to circa 1865. Price cluster.” Styled as such, or in a hatband,
their evening attire,” says Elizabeth Doyle upon request; they’re a great way to infuse personal-
of the New York vintage jewelry store Doyle fredleighton.com ity into a simple wardrobe staple.
& Doyle. “Recently we have seen a resur- “I am being asked more frequently
gence in the popularity of brooches for men in more to design brooches for male clients,”
whimsical styles.” says jewelry designer Shaun Leane. “They
Call them bro-oches. add a layer to their personas and make for
Lapel pins have a long tradition, worn for great conversation pieces.”
centuries to confer status or membership in a group. Fiona VAN CLEEF & His personal favorite is a 22-karat
Druckenmiller, the owner of Manhattan’s FD Gallery, which ARPELS gold beetle brooch, which he says adds
specializes in one-of-a-kind 20th century pieces, explains that Petales de Chance character to his suits. “It’s exciting to see
clip with emeralds,
historically “many important men used jewelry, and specifically men becoming more experimental in the
tsavorite garnets,
brooches, to share with others their personal narratives: their wealth, and diamonds, set in jewelry they wear,” he says. “It comes
their station in society, their military rank.” 18k white gold and after a long period of them being afraid
The late designer Karl Lagerfeld pioneered the renaissance of the platinum. $408,000; to express their personality through
brooch, wearing them on his famous black ties. But it was Pharrell Williams vancleefarpels.com jewelry.” <BW>
Exquisite
Timing
It’s the perfect moment
to invest in a perpetual
calendar watch
By Roberta Naas
It’s a leap year, and the leap day falls on a Saturday. That
means for collectors who own perpetual calendar wrist-
watches, there’s free time to luxuriate in a phenomenon that JAEGER-LECOULTRE AUDEMARS PIGUET ROYAL
happens only once every four years: the “February 29” month MASTER GRANDE TRADITION OAK PERPETUAL CALENDAR
and date clicking into place. GYROTOURBILLON OPENWORKED
Miniature mechanical marvels, perpetual calendar WESTMINSTER PERPETUAL A black ceramic case and
watches accurately track the hours, minutes, and seconds,
This white gold watch also transparent sapphire dial
combines a three-dimensional showcase the complex caliber
as well as the day of the week and date, always taking into
multiple-axis tourbillon with a here, some of which is crafted in
66 account months with different numbers of days and leap minute repeater that sounds the 18-karat pink gold. It also shows
years. Most such watches will precisely track time without time using Westminster chimes. the week of the year and a moon
needing an adjustment until March 1, 2100, when the leap $895,000 display. $91,000
year that should take place won’t occur so our Gregorian cal-
endars are realigned with solar time. Considered high com-
plications in the world of horology, perpetual calendars are
among the most challenging watchmaking feats.
“It’s fascinating that in such a tiny space, a series of gears
and levers act as a microcomputer to calculate the exact date
every day, as long as the watch is wound. It’s a single system
that performs incredibly,” says Paul Boutros, head of watches,
Americas, for auction house Phillips. “It is the perfect com-
plication for gearheads and for those fascinated by how to
make complex things look simple.”
Not all perpetual calendars are created equally. Some use
small subsidiary dials on the main dial to indicate the neces-
sary information. Others display only some information on
the dial side and secrete the rest on the case back. Further
variations even incorporate moon phase indications or other
watchmaking complications. Time-consuming to build, per-
petual calendars are typically made in small numbers, and
some are so highly sought-after that there are waiting lists IWC SCHAFFHAUSEN BIG PARMIGIANI FLEURIER TORIC
for them. The finest renditions often command upwards of PILOT’S WATCH PERPETUAL QUANTIEME PERPETUEL
$50,000 at retail, with those featuring added complications CALENDAR SPITFIRE RETROGRADE
PHOTOGRAPHS COURTESY BRANDS
selling for hundreds of thousands of dollars. The IWC Big Pilot’s collection Aventurine disks at 6 o’clock
has a cult following, and this show the phases of the moon
At auction, vintage pieces can fetch a lot more. Last year,
new version with military green in both hemispheres, and the
Phillips sold a Patek Philippe perpetual calendar with chro- dial and sandblasted bronze date is indicated by a red-tipped
nograph for $2.3 million. Here are some that can be had for case is an eye-catcher. The retrograde hand that, at the end
less, so next time leap year comes around you won’t be left movement shows moon phases of each month, jumps back to
adjusting your watch. for both hemispheres. $28,200 the first. $64,100
THE ONE Bloomberg Pursuits February 10, 2020
The bulging
Rolodex, once
a talisman of
power, was long
ago pushed into
the tar pit of
Tight Wad
history by your
phone’s contact
list. Somehow the
equally bloated
wallet continues to
Downsizing doesn’t require roam the landscape,
dinosaurlike, stuffed
a downgrade, especially with receipts and
if it’s a supple leather membership-card
plastic. Leave it to
cardholder from Loewe Loewe, a 174-year-
Photograph by Victor Prado old Spanish design
house under
the umbrella of
LVMH, to make the
most compelling,
attractive argument
for you to ditch
your pocket full of
paper: the $265
Puzzle Plain
cardholder.
Modeled on
67
the already
iconic Puzzle
handbag, it has
four slots for credit
cards and IDs and
a central slit for a
few bills.
THE COMPETITION THE CASE

• Milanese leather • The two-slot When Jonathan blue and yellow;
goods maker Buckler from Anderson unveiled the lagoon/black
Valextra SpA has Guarded Goods his first collection for conjures underwater
always been a is handmade to Loewe (pronounced depths. Made from
favorite of those order in Minnesota • Protect your cards low-EH-vay) in supersoft calfskin,
who seek quality, from $65, with your from snooping 2014, the star was all are finished with
not flash. Its $310 choice of leather RFID scanners with his Puzzle Bag, hand-painted black
card case, which and thread color. the Ridge’s $105 with its geometric edges. The thin
can hold six cards, From there, you Titanium metal jigsaw pieces. The middle compartment
comes in lobster red can build your own, wallet. It’s able cardholder renders has just enough
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◼ LAST THING With Bloomberg Opinion
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BP Is Still Paying for the
Deepwater Horizon Spill
By Joe Nocera
① THE ORIGIN: On April 20, 2010, the Deepwater Horizon oil well, operated
68 by BP Plc in the Gulf of Mexico, suffered an enormous explosion, killing
11 workers and spewing 130 million gallons of oil. Knowing it would soon be
inundated with lawsuits, the company quickly set up a settlement fund and
hired Ken Feinberg to administer it. Over the next two years, Feinberg paid out
$6.1 billion to 220,000 claimants, thus avoiding thousands of suits. But he also
turned down many claims on the grounds that the claimants hadn’t shown they
had been damaged by the accident. This didn’t make the plaintiffs’ bar happy.
② THE SWITCH: Some of the heavyweight plaintiffs’ lawyers eschewed the

claims process and pressed on with lawsuits. In March 2012, BP settled with
them for $7.8 billion. As part of the settlement, it agreed to replace Feinberg
with Patrick Juneau, a lawyer from Lafayette, La. The settlement made it much
easier for companies and people to get compensation without any serious doc-
BP Exploration et al. v. umentation. Suddenly all kinds of companies were filing claims. One of them
Claimant ID 100354107 was Claimant ID 100354107: Walmart Inc.
Cases #18-31115 and ③ THE CLAIMS: Walmart said that it was owed $15 million for damage done to
31275 five stores. BP said that Walmart was using an accounting change to inflate the
claim. Walmart made an additional claim for a store in Mississippi that it said
● Has the 5th Circuit ● How much has qualified as a “startup” (thus eligible for more money) because it had recently
rejected any claims? the spill cost BP?
Yes. Tampa Bay’s In addition to the reopened after being damaged during Hurricane Katrina. Juneau approved
football team, the money it’s paid to Gulf both claims. So BP sued.
Buccaneers, tried Coast residents and
to get $19.5 million, businesses, it has
claiming economic paid $20 billion to ④ THE FINALE: Federal Judge Carl Barbier, who’s overseeing the BP litigation,
ILLUSTRATION BY GEORGE WYLESOL
damage, despite being settle suits brought

300 miles from the by states and the is a former plaintiffs’ lawyer. He’s been largely unsympathetic to BP’s objec-
accident site. In its federal government; a tions. After all, BP did agree to the 2012 settlement that opened the door for
ruling, the court noted $4 billion fine levied by
the team went 10-6 the U.S. Department of more questionable claims. Sure enough, he ruled for Walmart in both cases.
that season. “The Justice; and $32 billion And in two separate decisions last month, the U.S. Court of Appeals for the
Bucs have not had a toward the cleanup.
10-win season since,” That comes to about 5th Circuit agreed with him. A decade after the Deepwater Horizon explosion,
the ruling said. $70 billion—so far. BP is still paying up. <BW> �Nocera is a columnist for Bloomberg Opinion
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What are some of the main stories covered in the issue?

What are some of the main stories covered in the issue?

What technology company is plotting a satellite-launching spree?

What technology company is plotting a satellite-launching spree?

○ Industrials down, consumers up 14 ○ A new way to launch satellites 20 ○ The ransomware economy 46

February 10, 2020

THE CORONAVIRUS IS JUST THE BEGINNING.

FEATURES 40 Ken Fisher’s Still Got Assets

46 My Brief Life in the Ransomware Racket

52 In Berlin, the Rent Is Too Verdammt High

partnership ● The outbreak’s effect on the economy ①

“Wow! Nailed it!”

“See ya next week! I’m

[12 hours to deadline]

“I have another idea!”

“Getting tight, but

FINANCE 24 Warren Buffett cancels his newspaper subscription

◼ LAST THING 68 A decade after the Deepwater spill, BP is still paying

How to Contact Bloomberg Businessweek

Start Trading Today! ibkr.com/interestpaid

Interactive Brokers Rated #1

○ With the new ○ Argentina is renegotiating ○ The U.S. is divided—

Fernández, who took office political and election coverage*

in December, must dig his CNN

The country’s $7.5 trillion stock market

with the plans. A sale, which 5

○ “A man without character Rush Limbaugh Show (radio)

or ethical comp The Guardian

find his way. You Univision

are decent. He is Breitbart

not who you are The Washington Examiner

○ India’s government ○ Tony Fernandes stepped

Alibaba releases NATO Defense The New Hampshire

Boeing 787-9 Dreamliner

◀ Less contagious More contagious ▶

make little difference to the organism’s structure or function,

KEITH TSUJI/ABACA/SIPA USA/AP PHOTO

real-world conditions. Its lack of lethality will hold down the

director of the division of pediatric infectious diseases at

the still-roaring consumer Consumer

Change in fourth-quarter earnings from

+80% 60% 40% 20%

S heavy machinery would slump for a second straight

Ikea Solves Soviet ○ The retailer launches a

SAMENESS web service for customers

PHOTO: SERGEI BOBYLEV/GETTY IMAGES. ILLUSTRATION: COURTESY IKEA

Retirement plans for employers that understand

BW Talks Hans Vestberg

18 standard 12-square-meter bedroom last fall, she

ing with a baby carriage.” —Ilya Khrennikov, with

We adopted sustainability practices such as zero routine flaring decades

THIS IS REAL ENERGY.

○ Astra, Darpa’s rocket startup

The 40-foot-long, 4-foot-wide rocket loomed over

ponents for a crucial test.

◀ Astra is betting it can

3D-printed parts as Rocket Lab does, Astra has stuck

Berkshire’s 31 daily newspapers and some other pub-

Russia’s Shrinking Welcome Mat