The $174 million question
As expected, Goldman Sachs yesterday admitted criminal wrongdoing by its Malaysian subsidiary in the 1MDB scandal. The settlement has brought the fines the bank will pay in the foreign bribery case to more than $5 billion, an amount that the bank had largely anticipated and covered with reserves.
The nature of Goldman’s role in the scheme was already known, but the detailed accounts compiled by regulators around the world — the U.S. Justice Department, New York’s financial regulator, the Federal Reserve, the S.E.C., British watchdogs, and securities regulators in Hong Kong and Singapore — still made for uncomfortable reading. They formed the basis of a case in which the bank admitted it was guilty of a crime before a U.S. judge for the first time in its 151-year history.
Goldman will claw back $174 million in pay to past and present executives, a dramatic move that generated the most headlines related to the settlement. In recognition of the “magnitude” of the scandal, Goldman’s board said in a statement, it will forfeit some compensation awarded the top executives at the time, including C.E.O. Lloyd Blankfein, C.O.O. Gary Cohn and C.F.O. David Viniar. It will also cut pay this year for the current chief executive, David Solomon, and his top lieutenants.
It is “an important reminder that we are all responsible for each other’s actions, including our collective failures,” Mr. Solomon said.
“It goes with the responsibility of leadership to accept some consequences for things that go wrong on your watch,” said Mr. Blankfein, who retired in 2018.
Will this deter executives from future wrongdoing? “The important point is that taking money out of a human’s pocket is more effective than taking money out of a corporation’s bank,” said Joseph Grundfest, a Stanford law professor and a former S.E.C. commissioner. “Dollar for dollar,” he told DealBook, personal punishment is bound to have an impact. It also helps soften the blow for shareholders, who will pay the bulk of the fines.
Since the 2008 financial crisis, most large companies have introduced clawback policies. JPMorgan’s “London Whale” trading mishap and Wells Fargo’s fake-account scandal set off such actions for the executives in charge at the time. But has corporate malfeasance fallen meaningfully as a result of these policies? Critics say it hasn’t, in part because many clawback policies are narrowly written and don’t cover all aspects of pay.
“Companies are trying to show they’re doing the right thing,” said Jonathan Ocker, a partner and executive pay expert at the law firm Pillsbury Winthrop. Voluntary adoption of expansive clawbacks are part of Corporate America’s movement to become responsible citizens, he told DealBook. In his view, they are “appropriate and useful” when it comes to deterrence.
But Mr. Ocker admits the cynic in him sees how it might be hard to believe that very wealthy executives truly feel the sting (the C.E.O. of Goldman Sachs has routinely earned more than $20 million a year). Even if it’s all about appearances, it’s still a good look for corporate governance purposes.
Goldman’s action “will put wind in the sails of the emerging trend,” Mr. Ocker predicted. Policies that recoup pay and bonuses for reputational harm, “particularly related to a failure to supervise,” could become more common, he said. It’s not required by law, but shareholders may demand it. And if top executives aren’t deterred by a dent in their wallets, the social stigma of a penalty for management failings may be more powerful motivation for those driven by pride and prestige.
HERE’S WHAT’S HAPPENING
The verdict on last night’s presidential debate: A lot calmer, though with plenty of sharp contrasts between the candidates, particularly on how to handle the coronavirus pandemic. President Trump insisted that a vaccine was imminent and that the virus was beginning to fade despite rising case counts. Joe Biden said Mr. Trump had done “virtually nothing” to stem the pandemic and said Obamacare would become “Bidencare.” Here’s our fact-check of all the statements they made.
The F.T.C. nears a decision on antitrust action against Facebook. The agency’s members met to discuss the investigation into whether the tech giant acquired smaller rivals to maintain a monopoly; they must vote before pursuing a lawsuit.
Walmart preemptively sues the feds over opioid sales. The lawsuit seeks to get ahead of what the retail giant says is an imminent case by the Justice Department, accusing it of filling questionable painkiller prescriptions. Walmart wants a judge to declare that there is no basis for seeking civil damages.
Remdesivir is cleared as a Covid-19 treatment. The F.D.A. formally approved the drug, making it the first official treatment for the disease; shares in Gilead, which manufactures it, rose on the news. Separately, experts pushed the agency to gather more data on Covid-19 vaccine candidates before approving any of them.
Gap will shut nearly a third of its stores. The retailer ubiquitous in malls is rushing to get out of them, planning to close 350 stores by 2024. It expects 80 percent of its revenue to come from e-commerce sales or off-mall locations. “We’ve been overly reliant on low-productivity, high-rent stores,” an executive said.
How to spend it
As several big companies reported their latest earnings this week, it revealed spending patterns that suggest consumers are hunkering down for the pandemic long haul:
Sick of grocery shopping and the taste of their own cooking, they are turning to takeout: Chipotle’s sales rose 14 percent in the third quarter, after falling the quarter before. When they do need provisions, they are staying away from the crowds: Albertsons reported that digital sales were up 243 percent in its latest quarter.
Spending more time at home, they are upgrading their appliances: Whirlpool and Electrolux both reported third-quarter bumps in sales. “There’s actually a shortage of things like refrigerators, as we’re seeing a big increase in demand,” said Ted Rossman, an industry analyst for CreditCards.com
And they are still santizing everything in sight, helping Mr. Clean maker Procter & Gamble and Lysol parent Reckitt Benckiser generate bumper sales and upgrade their outlooks for the rest of the year.
McAfee returns to the stock market
Nine years after going private, the cybersecurity company resumed life as a publicly traded concern yesterday. Its performance may have disappointed I.P.O. investors — its share price closed below its offer price — but McAfee’s owners have plenty to be happy about.
McAfee priced its I.P.O. at $20 per share, near the middle of its expected range. It closed down 6.5 percent in its first day of trading, but that still values the company at about $8 billion.
Peter Leav, McAfee’s chief executive, spoke with DealBook about the thinking behind the I.P.O. and the latest at the company.
Why go public?
“We’re going to run the company as we always have,” Mr. Leav said, but “it helps with recognition.”
Healthy enough, Mr. Leav asserted, with the company generating $435 million in free cash flow and $2.6 billion in revenue last year. (It recorded a loss of $236 million.) “We found that investors looked at the unlevered free cash flow of the company and weren’t concerned,” Mr. Leav said, noting that the company plans to offer a quarterly dividend.
Why do a traditional I.P.O. and not a transaction with a SPAC?
Mr. Leav demurred. “We consider our options at all times,” he said. “This route, for us, makes sense.” (An I.P.O. was always the preferred option, according to a person familiar with its plans.)
Do the legal troubles of John McAfee, the company’s namesake founder, have any impact?
“No,” Mr. Leav stressed. “John McAfee hasn’t been associated with this company for 25 years.”
In the papers
Some of the academic research that caught our eye this week, summarized in one sentence:
Zoom is a boon for men’s grooming
The men’s grooming and skin care market in the U.S. generates about $9 billion in annual sales, and it’s gaining momentum during the pandemic. Men’s makeup was already a thing, but with all the Zooming making people more aware of their natural imperfections, beauty tutorials aimed at male executives have sprung up, along with new business opportunities.
Men aren’t primed from childhood to become beauty consumers, notes Chris Salgardo, the author of “Man Made: The Essential Skin Care and Grooming Reference for Men.” Although there is a vast, untapped market for men’s cosmetics, cracking it means teaching about “the importance of moisturizer,” he told DealBook. Mr. Salgardo started as a makeup artist at Chanel and later served as president of L’Oréal’s Kiehl’s line. “Everyone says men’s is the next holy grail, but we haven’t seen that masterful brand,” he said.
CVS will soon sell men’s makeup near the razors and shaving cream. The retailer announced a 2,000-store rollout of the products, citing the “incredible growth during this stay-at-home period.” Chanel started selling men’s makeup products in 2018 and said this summer that it would be expanding the line.
Direct-to-consumer grooming brands like Manscaped, which is exploring a possible sale, are benefiting from pandemic-era trends, too. DealBook hears chatter about potential sales for other men’s brands, riding the self-care boom.
“The pandemic made our faces more front and center,” said Pergrin Pervez, who launched TRIBE Cosmetics in April with his business partner Matt Rodrigues. “We realized that there is a big opportunity here for men to have a product that will help us feel more confident and look our best on camera,” he told DealBook. But women’s beauty routines can seem like “rocket science,” Mr. Rodrigues added, with “fifteen different jars and palettes and brushes.” They are pitching a simpler process, betting that “every guy wants to feel confident and established when speaking with someone else trying to close a deal.”
THE SPEED READ
Adidas reportedly plans to sell its Reebok brand, whose sales have plunged in recent years. (Reuters)
Eat Just, the maker of egg-free mayonnaise, is said to plan a fund-raising round at a valuation of at least $2 billion. (Bloomberg)
The credit rating agency Fitch downgraded WeWork’s debt and warned that the company might need to raise cash to avoid default. (Bloomberg)
Politics and policy
Senator Bernie Sanders is reportedly seeking to become Labor secretary if Joe Biden wins. (Politico)
Republicans on the Senate Judiciary Committee voted to subpoena Mark Zuckerberg of Facebook and Jack Dorsey of Twitter to testify about censorship on their platforms. Here’s what we know about the allegations against Hunter Biden that set off the controversy. (CNBC, NYT)
A California appeals court ruled that Uber and Lyft must treat drivers as employees, making a coming ballot initiative that would exempt these companies from the law a make-or-break proposition for their businesses in the state. (NYT)
Amazon warehouse workers threatened to walk off the job if the company didn’t give them a paid day off to vote. (NYT)
The subscriptions payments business Patreon is the latest tech company to ban QAnon. (Business Insider)
Best of the rest
“Iowa Never Locked Down. Its Economy Is Struggling Anyway.” (NYT)
A handy guide to digital hygiene in the Zoom era. (NYT)
Did Covid-19 kill rush hour? (Business Insider)
We’d like your feedback! Please email thoughts and suggestions to email@example.com.
The Trump campaign celebrated a growth record that Democrats downplayed.
The White House celebrated economic growth numbers for the third quarter released on Thursday, even as Joseph R. Biden Jr.’s presidential campaign sought to throw cold water on the report — the last major data release leading up to the Nov. 3 election — and warned that the economic recovery was losing steam.
The economy grew at a record pace last quarter, but the upswing was a partial bounce-back after an enormous decline and left the economy smaller than it was before the pandemic. The White House took no notice of those glum caveats.
“This record economic growth is absolute validation of President Trump’s policies, which create jobs and opportunities for Americans in every corner of the country,” Mr. Trump’s re-election campaign said in a statement, highlighting a rebound of 33.1 percent at an annualized rate. Mr. Trump heralded the data on Twitter, posting that he was “so glad” that the number had come out before Election Day.
GDP number just announced. Biggest and Best in the History of our Country, and not even close. Next year will be FANTASTIC!!! However, Sleepy Joe Biden and his proposed record setting tax increase, would kill it all. So glad this great GDP number came out before November 3rd.
— Donald J. Trump (@realDonaldTrump) October 29, 2020
The annualized rate that the White House emphasized extrapolates growth numbers as if the current pace held up for a year, and risks overstating big swings. Because the economy’s growth has been so volatile amid the pandemic, economists have urged focusing on quarterly numbers.
Those showed a 7.4 percent gain in the third quarter. That rebound, by far the biggest since reliable statistics began after World War II, still leaves the economy short of its pre-pandemic levels. The pace of recovery has also slowed, and now coronavirus cases are rising again across much of the United States, raising the prospect of further pullback.
“The recovery is stalling out, thanks to Trump’s refusal to have a serious plan to deal with Covid or to pass a new economic relief plan for workers, small businesses and communities,” Mr. Biden’s campaign said in a release ahead of Thursday’s report. The rebound was widely expected, and the campaign characterized it as “a partial return from a catastrophic hit.”
Economists have warned that the recovery could face serious roadblocks ahead. Temporary measures meant to shore up households and businesses — including unemployment insurance supplements and forgivable loans — have run dry. Swaths of the service sector remain shut down as the virus continues to spread, and job losses that were temporary are increasingly turning permanent.
“With coronavirus infections hitting a record high in recent days and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be much slower,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note following the report.
Black and Hispanic workers, especially women, lag in the U.S. economic recovery.
The surge in economic output in the third quarter set a record, but the recovery isn’t reaching everyone.
Economists have long warned that aggregate statistics like gross domestic product can obscure important differences beneath the surface. In the aftermath of the last recession, for example, G.D.P. returned to its previous level in early 2011, even as poverty rates remained high and the unemployment rate for Black Americans was above 15 percent.
Aggregate statistics could be even more misleading during the current crisis. The job losses in the initial months of the pandemic disproportionately struck low-wage service workers, many of them Black and Hispanic women. Service-sector jobs have been slow to return, while school closings are keeping many parents, especially mothers, from returning to work. Nearly half a million Hispanic women have left the labor force over the last three months.
“If we’re thinking that the economy is recovering completely and uniformly, that is simply not the case,” said Michelle Holder, an economist at John Jay College in New York. “This rebound is unevenly distributed along racial and gender lines.”
The G.D.P. report released Thursday doesn’t break down the data by race, sex or income. But other sources make the disparities clear. A pair of studies by researchers at the Urban Institute released this week found that Black and Hispanic adults were more likely to have lost jobs or income since March, and were twice as likely as white adults to experience food insecurity in September.
The financial impact of the pandemic hit many of the families that were least able to afford it, even as white-collar workers were largely spared, said Michael Karpman, an Urban Institute researcher and one of the studies’ authors.
“A lot of people who were already in a precarious position before the pandemic are now in worse shape, whereas people who were better off have generally been faring better financially,” he said.
Federal relief programs, such as expanded unemployment benefits, helped offset the damage for many families in the first months of the pandemic. But those programs have mostly ended, and talks to revive them have stalled in Washington. With virus cases surging in much of the country, Mr. Karpman warned, the economic toll could increase.
“There could be a lot more hardship coming up this winter if there’s not more relief from Congress, with the impact falling disproportionately on Black and Hispanic workers and their families,” he said.
Ant Challenged Beijing and Prospered. Now It Toes the Line.
As Jack Ma of Alibaba helped turn China into the world’s biggest e-commerce market over the past two decades, he was also vowing to pull off a more audacious transformation.
“If the banks don’t change, we’ll change the banks,” he said in 2008, decrying how hard it was for small businesses in China to borrow from government-run lenders.
“The financial industry needs disrupters,” he told People’s Daily, the official Communist Party newspaper, a few years later. His goal, he said, was to make banks and other state-owned enterprises “feel unwell.”
The scope of Mr. Ma’s success is becoming clearer. The vehicle for his financial-technology ambitions, an Alibaba spinoff called Ant Group, is preparing for the largest initial public offering on record. Ant is set to raise $34 billion by selling its shares to the public in Hong Kong and Shanghai, according to stock exchange documents released on Monday. After the listing, Ant would be worth around $310 billion, much more than many global banks.
The company is going public not as a scrappy upstart, but as a leviathan deeply dependent on the good will of the government Mr. Ma once relished prodding.
More than 730 million people use Ant’s Alipay app every month to pay for lunch, invest their savings and shop on credit. Yet Alipay’s size and importance have made it an inevitable target for China’s regulators, which have already brought its business to heel in certain areas.
These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.
The question now is how much higher Ant can fly without provoking the Chinese authorities into clipping its wings further.
Excitable investors see Ant as a buzzy internet innovator. The risk is that it becomes more like a heavily regulated “financial digital utility,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”
“Utility stocks, as far as I remember, were not the ones to be seen as the most exciting,” Mr. Howie said.
Ant declined to comment, citing the quiet period demanded by regulators before its share sale.
The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.
After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.
China’s Supreme Court this summer capped interest rates for consumer loans, though it was unclear how the ceiling would apply to Ant. The central bank is preparing a new virtual currency that could compete against Alipay and another digital wallet, the messaging app WeChat, as an everyday payment tool.
Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably.
“That’s how the state gets its payoff,” Mr. Howie said. With Ant, he said, “the line between state-owned enterprise and private enterprise is highly, highly blurred.”
China, in less than two generations, went from having a state-planned financial system to being at the global vanguard of internet finance, with trillions of dollars in transactions being made on mobile devices each year. Alipay had a lot to do with it.
Alibaba created the service in the early 2000s to hold payments for online purchases in escrow. Its broader usefulness quickly became clear in a country that mostly missed out on the credit card era. Features were added and users piled in. It became impossible for regulators and banks not to see the app as a threat.
A big test came when Ant began making an offer to Alipay users: Park your money in a section of the app called Yu’ebao, which means “leftover treasure,” and we will pay you more than the low rates fixed by the government at banks.
People could invest as much or as little as they wanted, making them feel like they were putting their pocket change to use. Yu’ebao was a hit, becoming one of the world’s largest money market funds.
The banks were terrified. One commentator for a state broadcaster called the fund a “vampire” and a “parasite.”
Still, “all the main regulators remained unanimous in saying that this was a positive thing for the Chinese financial system,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.
“If you can’t actually reform the banks,” Mr. Chorzempa said, “you can inject more competition.”
But then came worries about shadowy, unregulated corners of finance and the dangers they posed to the wider economy. Today, Chinese regulators are tightening supervision of financial holding companies, Ant included. Beijing has kept close watch on the financial instruments that small lenders create out of their consumer loans and sell to investors. Such securities help Ant fund some of its lending. But they also amplify the blowup if too many of those loans aren’t repaid.
“Those kinds of derivative products are something the government is really concerned about,” said Tian X. Hou, founder of the research firm TH Data Capital. Given Ant’s size, she said, “the government should be concerned.”
The broader worry for China is about growing levels of household debt. Beijing wants to cultivate a consumer economy, but excessive borrowing could eventually weigh on people’s spending power. The names of two of Alipay’s popular credit functions, Huabei and Jiebei, are jaunty invitations to spend and borrow.
Huang Ling, 22, started using Huabei when she was in high school. At the time, she didn’t qualify for a credit card. With Huabei’s help, she bought a drone, a scooter, a laptop and more.
The credit line made her feel rich. It also made her realize that if she actually wanted to be rich, she had to get busy.
“Living beyond my means forced me to work harder,” Ms. Huang said.
First, she opened a clothing shop in her hometown, Nanchang, in southeastern China. Then she started an advertising company in the inland metropolis of Chongqing. When the business needed cash, she borrowed from Jiebei.
Online shopping became a way to soothe daily anxieties, and Ms. Huang sometimes racked up thousands of dollars in Huabei bills, which only made her even more anxious. When the pandemic slammed her business, she started falling behind on her payments. That cast her into a deep depression.
Finally, early this month, with her parents’ help, she paid off her debts and closed her Huabei and Jiebei accounts. She felt “elated,” she said.
China’s recent troubles with freewheeling online loan platforms have put the government under pressure to protect ordinary borrowers.
Ant is helped by the fact that its business lines up with many of the Chinese leadership’s priorities: encouraging entrepreneurship and financial inclusion, and expanding the middle class. This year, the company helped the eastern city of Hangzhou, where it is based, set up an early version of the government’s app-based system for dictating coronavirus quarantines.
Such coziness is bound to raise hackles overseas. In Washington, Chinese tech companies that are seen as close to the government are radioactive.
In January 2017, Eric Jing, then Ant’s chief executive, said the company aimed to be serving two billion users worldwide within a decade. Shortly after, Ant announced that it was acquiring the money transfer company MoneyGram to increase its U.S. footprint. By the following January, the deal was dead, thwarted by data security concerns.
More recently, top officials in the Trump administration have discussed whether to place Ant Group on the so-called entity list, which prohibits foreign companies from purchasing American products. Officials from the State Department have suggested that an interagency committee, which also includes officials from the departments of defense, commerce and energy, review Ant for the potential entity listing, according to three people familiar with the matter.
Ant does not talk much anymore about expanding in the United States.
Ana Swanson contributed reporting.
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