Our Dysfunctional Financial System - TIME

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• Rana Foroohar @RanaForoohar
 

6:15 AM ET

    

Tapes of what really happens between bankers and regulators show how far we have to go

In some ways, the most shocking thing about the 46 hours of secret audiotapes made by former Federal Reserve bank examiner Carmen Segarra in 2012 is that they are no shock at all. Did anyone ever doubt that the New York Fed was in hock to Wall Street? Or that Fed bank examiners–the regulators tasked with monitoring the risks banks take–might fear alienating the powerful financiers on whom they depend for information or future jobs?

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It’s one thing to know and another to hear in painful, crackling detail how the Fed’s financial cops slip on their velvet gloves to deal with Goldman Sachs. Or how Segarra, one of a group of examiners brought in after the financial crisis to keep a closer watch on the till, was fired, perhaps for doing her job a little too well. One can only hope that this latest example of regulatory capture by Wall Street will focus minds on the fact that six years on from the crisis, we still have a dysfunctional financial system.

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Consider one of the shady deals highlighted on the secret tapes of New York Fed meetings, which Segarra made with a spy recorder before she was let go and which were made public on Sept. 26 in a joint report by ProPublica and This American Life. The 2012 transaction with Banco Santander, initiated in the midst of the European debt crisis, ensured that the Spanish bank would look better on paper than it really was at the time. Santander paid Goldman a $40 million fee to hold shares in a Brazilian subsidiary so that it could meet European Banking Authority rules. The Fed employees, who work inside the banks they examine (yes, it’s literally an inside job), knew the deal was dodgy. One even compared it to Goldman’s “getting paid to watch a briefcase.” But it was technically legal, and nobody wanted to make a fuss, so the transaction went through.

It’s hard to know where to begin with what’s problematic here. I’ll focus on the least sexy but perhaps most important point: existing capital requirements–the cash that banks are obligated to hold to offset risk–are pathetic. Despite all the postcrisis backslapping in Washington about how banks have become safer, our system as a whole has not. No too-big-to-fail institution currently is required to keep more than 3% of its holdings in cash (a figure that will rise to 5% and 6% in 2018), which means banks can fund 97% of their own investments with debt. No company outside the financial sector would dream of conducting daily business with that much risk. As Stanford professor Anat Admati, whose book The Bankers’ New Clothes makes a powerful case for reining in such leverage levels, told me, “We’ve got to get rid of this idea that banking is special and that it should be treated differently than every other industry.”

Of course, if you start telling financiers they should use more than a few percentage points of their own money when they gamble, they’ll throw a fit. They will tell you that would make it impossible for them to lend to real businesses. They will also uncork lots of complex financial terms–“Tier 1 capital,” “liquidity ratios,” “risk-weighted off-balance-sheet exposures”–that tend to suffocate useful (a.k.a. comprehensible) debate. Financiers use insider jargon to intimidate and obfuscate. This is something we need to fight. In banking, as in so many things, complexity is the enemy. The right questions are the simplest ones: Are financial institutions doing things that provide a clear, measurable benefit to the real economy? Sadly, the answer is often no.

One thing we’ve learned since the crisis is that bailing out Wall Street didn’t help Main Street. Credit to individuals and many businesses plummeted during and after the bailouts and remains below precrisis levels today. Numerous experts believe that the size of the financial sector is slowing growth in the real economy by sucking the monetary oxygen out of the room. Banks don’t want to lend; they want to trade, often via esoteric deals that do almost nothing for anyone outside Wall Street.

This disconnect between the real economy and finance is now being closely studied by policymakers and academics. Adair Turner, a former British banking regulator, thinks that only about 15% of U.K. financial flows go to the real economy; the rest stay within the financial system, propping up existing corporate assets, supporting trading and enabling $40 million briefcase-watching fees. If the New York Fed really wants to redeem itself, it might consider commissioning a similar study to look at Wall Street’s contribution to the U.S. economy. After all, if finance can’t justify itself by showing it’s actually doing what it was set up to do–take in deposits and lend them back to all of us–what can justify it?

Business Magnate Richard Branson Gives His Staff Unlimited Vacation - TIME

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• Sam Frizell @Sam_Frizell
 

Sept. 25, 2014

    

Virgin founder Richard BransonMichael Buckner—Getty Images

Is Virgin's Richard Branson the best boss ever, or an eccentric?

Richard Branson, the chairman and founder of Virgin Group, said on his website Tuesday that he’s giving his whole personal staff unlimited vacation days.

Branson’s staff of almost 200 can “take off whenever they want for as long as they want,” the executive said on his website, adding that employees don’t need to ask for approval, nor are their managers requested to keep track of their days away from work.

Employees can take however much time off from work they choose, “the assumption being that they are only going to do it when they feel a hundred per cent comfortable that they and their team are up to date on every project and that their absence will not in any way damage the business,” Branson said.

The flexible hours employees were working both in the office and at home already make it hard to track how many hours they’re working anyway, Branson said.

The Financial Times reported that the new rules apply to around 170 staff at the Virgin head offices in the U.K. and U.S., whereas the 50,000 employees of the larger Virgin Group won’t enjoy the same policy — though Branson said in his note if it’s successful, he’ll encourage Virgin’s subsidiaries to adopt the policy as well.

Branson said he was inspired by Netflix, the video-streaming service, which has a similar policy.

PayPal to Separate From eBay in 2015 - Associated Press

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• Associated Press
 

7:23 AM ET

    

(SAN JOSE, Calif.) — PayPal is splitting from EBay Inc. and will become a separate and publicly traded company next year.

The separation is expected to occur in the second half of 2015.

EBay said Tuesday that its board decided that the separation was the best path for growth and shareholder value creation for each business.

Dan Schulman, the president of the enterprise growth group at American Express, will be the new president at PayPal, effective immediately. The 56-year-old will become PayPal’s CEO once the separation takes place.

Facebook Takes Its Ad Game to the Rest of the Web - TIME

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• Maya Rhodan @m_rhodan
 

7:59 AM ET

    

The Facebook logo is reflected in the eyeglasses of a user in San Francisco on Dec. 7, 2011.Bloomberg/Getty Images

In a challenge to online advertising leader Google

Facebook is set to share dataon its millions of users with companies looking to sell targeted ads outside the company’s social network,taking its ad business to the rest of the Internet in a major challenge to Google.

The company on Monday willlaunch a new ad platform dubbed Atlas, through which it promises to deliver “people-based marketing,” especially mobile devices. The idea is to leverage Facebook’s vast troves of data on its users to deliver targeted demographics to advertisers and provide metrics on results. Facebook is already the second-largest advertising platform on the web.

“People spend more time on more devices than ever before, Erik Johnson, who is heading Atlas, wrote in a blog post Monday. “This shift in consumer behavior has had a profound impact on a consumer’s path to purchase, both online and in stores. And today’s technology for ad serving and measurement—cookies—are flawed when used alone. Cookies don’t work on mobile, are becoming less accurate in demographic targeting and can’t easily or accurately measure the customer purchase funnel across browsers and devices or into the offline world.

“People-based marketing solves these problems,” Johnson added.

Atlas has already signed up with the advertising giant Omnicom Group to test automated, targeted ads, starting with campaigns for Pepsi and Intel.

PayPal Co-Founder Takes Aim at Credit Card Industry With New Lending App - TIME

http://time.com/3430817/paypal-levchin-affirm-lending/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+timeblogs%2Fcurious_capitalist+%28TIME%3A+Business%29

• Dan Kedmey
 

Sept. 27, 2014

    

Max Levchin speaks during a Bloomberg West television interview in San Francisco on Thursday, March 28, 2013.David Paul Morris—Bloomberg / Getty Images

“You have to have a credit card. You have to use it. You are going to get screwed and you know it."

The most miserable year of Max Levchin’s life began in 2002, shortly after he sold off his ownership stake in PayPal to eBay for an estimated $34 million. “At the time, I had a fascination with the color yellow,” Levchin told TIME. He would arrive to work in a yellow car, wearing a yellow jumpsuit and hole up in his executive suite, blending in with the all-yellow office paraphernalia. His former direct reports, who numbered in the hundreds, shuffled past the door, “staring at me every morning,” he recalls, “as I would sort of mope around going, ‘My baby’s now been sold to a giant company’ while wearing a yellow clown suit.”

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He was 27 years old, flush with cash and adrift in an ocean of downtime. If that sounds like your idea of heaven, then you’re no Levchin. “I literally — I think I started hearing voices,” he says. His girlfriend left him. He wrote 10,000 lines of code, a “minuscule amount,” he insists. His friend persuaded him to take a scenic drive along the Oregon coast. “We saw a lot of very beautiful places,” he says, “and I don’t remember any of it other than the fact that Oregon is a really messed up state, economically.”

Nothing could lift his spirits, short of launching another company, which he did in 2004. It was called Slide, and it was a fun ride down the chute toward another sale in 2010 to Google for $182 million, Levchin says.

Today, he knows better than to slip back into the interminable boredom of easy living. He’s in the thick of a third venture, Affirm, and to sop up the last waning moments of his spare time, he also oversees an investment fund called HVF, short for “Hard, Valuable and Fun.” “Fun” has a very peculiar definition in this case — referring to any massive, globe-spanning problem that Levchin might get to noodle over in his scrappy new office in downtown San Francisco.

Affirm’s 32 employees have set up shop on a quiet street lined by venerable brick buildings, some of which withstood the great fire and earthquake of 1906 and have the commemorative plaques to prove it. Here, Levchin is thriving in his element. His girlfriend came back. They got married and had two kids. He still favors the style of clothing that might diplomatically be called “start-up chic,” a puffy sleeveless winter vest, unzipped and revealing a weathered t-shirt that practically whispers, “I’ve got bigger things to worry about than shopping.”

In fact, though, he does worry about shopping. Obsessively. Levchin has been visiting retailers across the country, asking about the state of consumer lending. He sums it up grimly: “You have to have a credit card. You have to use it. You are going to get screwed and you know it.”

Millennials are ditching the plastic in droves. More than 6 in 10 of them say they have never signed up for a credit card, a group that has doubled in size since the financial collapse of 2007. Evidently they’d rather scrimp on their purchases than get snagged on finely printed fees or mired in debt. “Which is wrong,” Levchin says. “If you are living hand to mouth every month you’re not going to improve your standard of living and you’re not going to scale up.”

Enter Affirm, a startup that that offers consumers the option to split payments over time, which a growing number of online retailers have added to their checkout pages. Users can get instantly approved for a loan by downloading the app to their smartphones and tapping their personal phone numbers into the welcome screen. From that phone number the app launches into the murky world of online data. “It anchors you to a whole host of information that is entirely public, or pretty close to public,” says Levchin. It can scan for social information across social media or dip into proprietary marketing databases or combine that with credit histories. In total, the Affirm team has identified more than 70,000 personal qualities that it thinks could predict a user’s likelihood of paying back a loan. If old fashioned credit scores provide a fixed, black and white portrait of the borrower, Affirm claims to capture that borrower in full, moving technicolor.

The company is so confident in its claims that it puts its own money on the line, extending loans to people who are normally considered a risky gamble. Active duty soldiers, for instance, return home with scant credit histories. A raft of regulations require lenders to extend credit to the soldiers, even if the decision goes against their better judgement. As a result, lenders have historically eyed returning soldiers with suspicion.

“I couldn’t care less about the narrative of why that might be true,” Levchin says, “except that I know it’s actually not. From all the loans that we’ve issued I think we’ve had literally 100% repayment rate from active duty servicemen.” Of course, military service is just one of at least 70,000 variables that can tip Affirm in the user’s favor. The formula is complex by design, so that no user can game the system by, say, posting “brain surgeon” as a new job on LinkedIn and then asking for a fat line of credit.

Whether Affirm will truly upend the rules of lending or foolishly rushed in where lenders fear to tread will depend on its ability to collect interest on loans without resorting to hidden fees. After all, credit card companies do that for a reason: It’s lucrative. Affirm, on the other hand, actually alerts users to approaching payment deadlines and clearly states fee rates before they arrive.

In short, Affirm has to lend at the right rates to the right people. Fortunately for the company, it has $45 million of venture capital to test run its unified theory of lending. It also has no shortage of potential competitors circling in on the hotly contested field of smartphone payments, from Apple Pay, to Google, to Levchin’s old “baby,” PayPal, all competing for the same “under-serviced” customers, as he put it.

But perhaps Affirm’s greatest asset is Levchin himself, who was practically bred for this kind of work. His mother was a radiologist at a Soviet-era research institute, where she was tasked with extracting reliable measurements from Geiger counters. The old Soviet era instruments spewed out a tremendous amount of error data. Her manager dropped a computer on her desk and asked her to program her way to a more reliable reading. Stumped, she turned to her 11-year-old son and asked, ”Do you know anything about this stuff?” The question kicked off Levchin’s life-long love affair with programming, and it made him acutely aware of what data a machine can capture, and what essential points might elude its sensors. He points out that a heartbeat counter may measure 64 beats per minute, but it almost certainly misses a number of half-beats along the way. Affirm, in a sense, listens for those missed beats.

“The fact that we can look at data, pull it, and underwrite a loan for you in real-time is very valuable, because we can literally decide, ‘Hey, in the last 48 hours you got a new job, that changes things a little bit. Now you’re able to afford more,'” Levchin says.

Maybe that’s a hasty gamble, or maybe it’s sound financing. In either case, it’s Levchin’s idea of fun.

CEO of Trillion-Dollar Company Resigned After His Daughter Told Him How Much He Has Missed - TIME

http://time.com/3432717/ceo-of-trillion-dollar-company-resigned-after-his-daughter-told-him-how-much-he-has-missed/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+timeblogs%2Fcurious_capitalist+%28TIME%3A+Business%29

• Laura Stampler @LauraStampler
 

Sept. 26, 2014

    

Mohamed El-Erian, chief economic advisor at Allianz SE, speaks during the 31st Annual Meeting of the Bretton Woods Committee at the World BankBloomberg—Bloomberg via Getty Images

Former PIMCO CEO Mohamed El-Erian's daughter made him a list of all the milestones he had missed

A 22-point list written by his 10-year-old daughter was all it took to change the trajectory of Mohamed El-Erian’s life.

In January, El-Erian made headlines for announcing his resignation as CEO of trillion-dollar investment fund PIMCO in January. In anarticle for Worth this summer, which has recently gone viral, El-Erian explains that he decided to step down after his daughter listed out the many milestones he had missed in her life.

When El-Erian asked his child why she wasn’t listening to him when he asked her to brush his teeth, she gave him a list of 22 things he had missed (from first soccer matches to Halloween parades) because of work.

“Talk about a wake-up call,” El-Erian writes. “I felt awful and got defensive: I had a good excuse for each missed event! Travel, important meetings, an urgent phone call, sudden to-dos… But it dawned on me that I was missing an infinitely more important point.”

While discussion of work-life balance is often discussed with women in the C-Suite, men are rarely asked whether or not they “have it all.”

But the conversation is now opening up. And this is largely because men are speaking out. For example, former CEO of MongoDB Mike Schireson wrote a popular blog post about his decisions to step down from his position after he realized how much he was missing in his children’s lives.

A recent TIME article asked 7 C-Suite dads, many of whom were CEOs, to reflect on their struggles to maintain a strong work and family life. Intuit CEO Brad Smith recalled leaving his wife and newborn daughters the day after both of them were born for work trips. Since then he has learned that there are “crystal” and “rubber” moments — while you can bounce back from missing a few occasions, the crystal moments (graduations, weddings, births) should never be dropped.

Since resigning, El-Erian now manages “a portfolio of part time jobs” that provides more flexibility. (Meanwhile his former firm, PIMCOhas run into some troubled waters.)

“I now alternate with my wife in waking up our daughter every morning, preparing her breakfast and driving her to school,” he said. “I’m also around much more often to pick her up after school and take her to activities. She and I are doing a lot of wonderful talking and sharing. We’ve even planned a holiday together, just the two of us.”

Here’s How Long It Would Take Most Americans To Earn As Much As The Highest-Paid CEO - TIME

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• FindTheBest/Kiran Dhillon
 

Sept. 25, 2014

    

Rupert Murdoch, chairman of News Corp., arrives to a morning session at the Sun Valley Lodge during the Allen & Co. Media and Technology Conference in Sun Valley, Idaho, U.S., on Wednesday, July 9, 2014.Bloomberg—Bloomberg via Getty Images

Most workers in America would have to work 354 years in order to make what the average CEO makes in one year

Most Americans know that the CEOs of America’s biggest companies rake in piles of wealth, but according to a recent study by Harvard Business School, they have no idea just how much.

“People dramatically underestimate actual pay inequality,” the study said. Americans, for example, estimate that the pay ratio between CEOs and unskilled workers is about 30:1, but the actual ratio is a whopping 354:1.

That means that most workers in America would have to work 354 years in order to make what the average CEO makes in one year.

And that’s just compared to the average CEO. According to calculations by research engine FindTheBest, it would take most Americans thousands of years to catch up to the highest-paid CEO—Charif Souki of Cheniere Energy—who made $141,949,280 in 2013.

How many thousands of years, exactly?

We calculated how long it would take people in seven professions, with median salaries from $18,000 to $187,200—which represents the low and high end of U.S. occupational salaries based on data from the Bureau of Labor Statistics—to make as much as Souki does in one year.

For jobs that are most often paid on an hourly basis, workers would need about seven to eight thousand years to make what Souki did in 2013.

Fast food workers: 7,774 years

Cashiers: 7,483 years

The results are still grim for Americans who earn near the median U.S. household income of $51,058 per year.

Telecommunications line installers and repairers: 2,761 years

Elementary school teachers: 2,658 years

And as for those who’ve managed to break into the six-figures?

Computer hardware engineers: 1,407 years

Lawyers: 1,250 years

It would even take professionals with the highest-paid jobs by median salary over half a millennium to amass the kind of wealth Souki did in 2013.

Physicians and Surgeons: 568 years

But keep in mind that $142 million was Souki’s 2013 total compensation, which is different from salary because it includes earnings like bonus, restricted stock awards, and non-equity incentive plans — indeed, some CEOs take a $1 salary, making up the difference with these other earnings. So how long would it take the above professionals to make as much as the highest-paid CEO, just when measuring salary?

The CEO with the highest salary was Rupert Murdoch of Twenty-First Century Fox, who made $8.1 million in 2013.

Although it’s a ways below $142 million, $8.1 million is still more than a lifetime’s work away for Americans making the median salary within their professions. It would take cashiers 427 years, teachers 152 years, and lawyers 71 years to make what Murdoch did in one. Our highest-paid professionals, physicians and surgeons come closer, but it would still take them almost half a century (43 years) to catch up.

Meet Alibaba’s Jack Ma - TIME

http://time.com/3429657/meet-alibabas-jack-ma/

• Michael Schuman @MichaelSchuman
 

6:41 AM ET

    

The man leading China’s online shopping giant to America

Ma’s Alibaba, China’s online-shopping giant, completed the largest initial public offering in history–$25 billion–on the New York Stock Exchange. The shares started trading on Sept. 19, and the value of the company exceeded that of Facebook, Coca-Cola or IBM.

• CLAIMS TO FAME

Fifteen years ago, Ma, a former English teacher, started Alibaba in an apartment in the Chinese city of Hangzhou. Today Alibaba is the undisputed champion of online retailing, handling twice as much merchandise as Amazon. An indifferent student, Ma built his empire without the top diploma or political connections usually needed to succeed in China.

• BIGGEST CHALLENGES

Ma will be under pressure from his new investors to deliver ever larger profits. He must expand outside his home market while also fighting off opponents at home. Chinese Internet giants Baidu and Tencent and property group Wanda recently joined forces to start a rival e-commerce firm.

• BIGGEST THREAT

China’s authoritarian rulers still wield tremendous control over business. A big wild card in Alibaba’s future will be Ma’s ability to stay in the good graces of the Communist Party while building trust with consumers in the West.

• BIGGEST CRITIC

The investor Peter Thiel passed on Alibaba’s IPO, arguing that a bet on the company was ultimately a bet on Beijing–with the political uncertainty that implied.

• CAN HE DO IT?

Ma has a proven track record of competing with global e-commerce titans–and winning. He’s shoved aside eBay and Amazon in China. And with his post-IPO war chest, Ma has the financial muscle to invest heavily and acquire other firms. The question is, Will he shop wisely?

Warren Buffett's $750 million grocery bill - CNN

http://money.cnn.com/2014/09/23/investing/warren-buffett-tesco/index.html

• 
  

LONDON (CNNMoney)

Warren Buffett may be feeling rotten after investing in a British grocery chain that's gone bad.

His famed investment company, Berkshire Hathaway (BRKA), is the third biggest Tesco(TESO) shareholder, with a stake of almost 4%.

Tesco is the U.K.'s leading supermarket operator.

Berkshire is now nursing losses of about $750 million on the investment after the shares plunged by as much as 43% this year. It paid $1.7 billion for the stake.

Tesco issued a series of profit warnings this year as its sales shrank in the face of intense competition from lower cost rivals.

Its top management, including the CEO and finance chief, have been replaced.

The biggest shock came earlier this week when Tesco was forced to admit it had overstated profit forecasts for the first half by £250 million ($409 million).

It suspended four executives and called in auditors from Deloitte to conduct an investigation.

"Considering all the problems that Tesco is tackling at the moment ... poor internal accounting issues was the last thing it needed," said Alastair McCaig, a market analyst at IG in London. "A downgrade of 23% for its profit forecast is more than a minor issue."

Related: Wal-Mart holiday hiring lags rivals

Since the company reported the accounting bungle Monday, its shares have dropped by about 17% to an 11-year low, wiping roughly $5 billion off the firm's market value.

Buffett is unlikely to be panicking yet. His guiding principle has always been to find solid companies that will do well over the long-term -- for years, not just a few quarters. This "buy and hold" mentality has helped Berkshire prosper for more than four decades.

Berkshire Hathaway also owns a significant stake in Tesco competitor, Wal-Mart (WMT), as well as American Express (AXP), Coca-Cola (KO) and IBM (IBM, Tech30), among others.

Berkshire did not respond to a request for comment.

Tesco's top two shareholders are Norges Bank and BlackRock (BLK). 

Obama Administration Unveils New Rules to Fight Tax Inversions - TIME

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• Fortune / Tom Huddleston, Jr.
 

Sept. 22, 2014

    

The U.S. Treasury Departmentsaid Monday it will take steps to curb the practice of companies moving their headquarters overseas by trimming the tax benefits of those transactions — known as corporate tax inversions — and, in some cases, stopping them entirely.

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“Inversion transactions erode our corporate tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hard-working Americans,” Treasury Secretary Jacob Lew said. “It’s critical that this unfair loophole be closed.”

Lew told reporters on a conference call that he believes the best way to curb a practice that is increasingly popular with corporations, which can generate millions of dollars in tax savings, is through comprehensive tax reform with anti-inversion provisions and he also urged Congress to pass new legislation to tackle the issue.

“Now that it’s clear that Congress won’t act before the lame-duck session, we’re taking initial steps that we believe will make companies think twice before undertaking an inversion to try to avoid U.S. taxes,” Lew said.

Lew announced a new set of measures meant to make inversions less appealing to U.S. companies, including by eliminating some of the ways those companies gain access to deferred earnings of foreign subsidiaries without incurring associated taxes. The Treasury will also require that owners of U.S. companies own less than 80% of a newly combined entity, thus making it more difficult for them to invert in the first place.

“These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether,” Lew said in a statement before adding that the “Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share.”

The Treasury’s new regulations will go into effect immediately, but will not be retroactive, meaning that they will affect any transactions that are completed after Monday, according to a senior Treasury official. “For some companies considering deals, today’s actions may mean that those transactions no longer make economic sense,” Lew said.

President Obama issued a statement applauding the actions taken Monday by Lew and the Treasury Department “to help reverse this trend.” Obama said that he has personally asked Congress “to lower our corporate tax rate, close wasteful loopholes, and simplify the tax code for everyone.”

Fortune magazine ran a cover story this summer detailing the practice of corporate inversions and the possibility of pending legislation to combat the transactions. A potential high-profile dealbetween Burger King and Canadian doughnuts and coffee chain Tim Horton’s, which would see the U.S. fast food company move its headquarters to the tax haven north of the border, is part of the wave of similar transactions invigorating the debate over the best way to keep U.S. companies’ tax dollars from going overseas.

This article originally appeared on Fortune.com

The Easy Way to Beat the High Cost of Health Care in Retirement - TIME

• Dan Kadlec @dankadlec
 

Sept. 12, 2014

    

Ariel Skelley—Getty Images

Out-of-pocket healthcare costs may total $318,000 in your retirement, new research shows. This expense is most peoples' biggest worry. But it needn't be.

Americans’ top financial concern in retirement is paying for healthcare, which has been rising at twice the rate of inflation and will reach more than $318,000 in out-of-pocket expenses per retiree over a 30-year stretch, new research shows. And those out-pocket costs do not include potential further expenses associated with long-term care.

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Strikingly, the fear factor is most acute among the affluent. Perhaps because they have more to lose (or fewer things to worry about), 60% of folks with investable assets greater than $5 million name healthcare costs as their top retirement concern, compared with 35% of those with less than $250,000 in investable assets.

The findings come from a health and retirement report out today from Bank of America Merrill Lynch and aging consultants Age Wave. Overall, 41% of those age 50-plus name healthcare costs as their top financial concern; 29% say it’s outliving their money; and just 11% cite Social Security cuts.

Three major health-related forces are conspiring to change the face of retirement planning, according to the report:

• Boomers, now all 50-plus, have high expectations for wellness and will demand care that may be costly but keeps them vital and feeling young.
• Longer life spans will give rise to greater numbers of retirees suffering from chronic diseases including hypertension, heart disease, diabetes, cancer, Alzheimer’s and arthritis.
• Long-term care costs are unpredictable and can run into many tens of thousands of dollars in a short time, potentially putting a lifetime of saving and planning at risk.

These forces present a huge challenge to government, which must try to keep costs from rising too fast, and to the scientific community, which could make longer lives a joy by discovering treatments for chronic diseases. The report notes:

“If we could find an effective treatment or cure for Alzheimer’s the future health and financial landscape for almost every family would be dramatically improved. The goal is to match our health spans (how long we can expect to be healthy) with our increasing life spans.”

A more readily solved problem may be the dearth of medical professionals focused on healthy aging. Today, there is only one certified geriatrician for every 13 pediatricians, even though the 65-plus population is growing four times faster than any other cohort and is most likely to suffer from some kind of ailment, according to the report. Put another way: We have one pediatrician for every 1,200 children, but just one geriatrician for every 9,400 older adults.

Institutional change will not come fast. So it is important that, as part of taking charge of your financial future, you also take charge of your health. This includes:

• Exercise People who begin exercising in their 60s or 70s are three times more likely than those who don’t exercise to age in good health.
• Diet A healthy diet improves heart health, fortifies bones, and reduces the risk of stroke, type 2 diabetes and cancer.
• Weight People 45 to 64 who eat well, maintain a healthy weight, and exercise a few hours a week can reduce risk of cardiovascular disease by 35%.
• Connections A low level of social interaction is just as unhealthy as smoking and can be unhealthier than lack of exercise or obesity.
• Lifestyle It’s never too late to quit smoking, and the benefits are almost immediate. People who consume more than two drinks a day have a 62% greater risk of stroke.

Your money and your health are all part of the same equation in retirement. The good news is that anyone can choose to live healthier—and doing so can make a big difference as to how well you live your last 20 or 30 years.

Are Alibaba’s Best Days Ahead, or Behind It? - TIME

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• Rana Foroohar @RanaForoohar
 

Sept. 20, 2014

    

A question of whether Alibaba will prove the exception or the rule

This week’s record-setting IPO of the Chinese Internet firm Alibaba makes it feel like it’s 1999 all over again (a year I remember with some regret—I joined a “b to c” dot-com company which folded 18 months later).

But I have been feeling for some time that America’s IPO market it’s booming, but broken. I’ve been reading a lot of research recently, including this fascinating NBER paper looking at how much more robust innovation and investment is in private firms, rather than public ones. Particularly for tech companies, their best days as innovators and creators tend to be before they go public, rather than after. Once they are in the public markets, they become beholden to the quarter, and it’s more difficult to justify long-term investment and strategies that won’t yield fruit quickly (this is all the more true with the rise of “activist” investors).

It will be interesting to see whether Alibaba proves to be the exception or the rule to this.

Why the World’s Most Powerful Leaders Really Love India - TIME

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• Michael Schuman @MichaelSchuman
 

Sept. 18, 2014

    

Indian Prime Minister Narendra Modi and visiting Chinese President Xi Jinping walk for a meeting in New Delhi, India, Thursday, Sept. 18, 2014.Manish Swarup—AP

Chinese President Xi Jinping’s visit to India highlights the geopolitical contest reshaping Asia

Some of the world’s most important people are wooing India’s new Prime Minister Narendra Modi like teenage boys drooling over the homecoming queen. Less than a month ago, Modi was feted in Japan on his five-day official visit, during which he even received an unexpected hug from usually stiff Japanese Prime Minister Shinzo Abe. This week, Modi is hosting China’s President Xi Jinping, who upon his arrival in the country on Wednesday, proclaimed that Beijing wishes “to forge a closer development partnership and jointly realize our great dreams of building strong and prosperous nations.”

Why has Modi become so popular? The reason can be found in how Asia is changing, politically and economically. Ever since China’s paramount leader Deng Xiaoping launched his country’s remarkable economic miracle in the early 1980s, the old Cold War divisions in the region melted away amid increasing economic integration. According to the Asian Development Bank, trade between Asian countries accounted for 50% of their total trade in 2013, up from 30% in 1985. But with China flexing the political and military muscles it has acquired from growing wealth, Asia is becoming split into two camps once again – one centered on China, the other on the U.S. and its allies, including Japan, South Korea and the Philippines. Each side is looking to bolster its support in the region in order to gain leverage on the other. Tokyo, embroiled in a tense stand-off with Beijing over disputed islands in the East China Sea, is looking to build a network of allies to “contain” a rising China. Meanwhile, Beijing is aiming to create a power bloc of its own in the region to counteract U.S. influence.

India has become a key wild card in this new geopolitical power game. As a rising power in its own right, and a huge potential source of new business in everything from espressos to expressways, whichever side manages to lure New Delhi into its orbit will tilt the scales in its favor.

Both camps are making their best pitch. Japan’s Abe took the unusual step of traveling from Tokyo to the historic city of Kyoto to personally welcome Modi to the country. Xi ventured all the way to Modi’s home state of Gujarat on this visit, even donning an Indian-style vest. Abe sent off Modi with a promise of $33 billion of new investment. Xi is reportedly planning to top that during his India visit, dangling an even bigger package of $100 billion.

On purely economic grounds, you’d think Xi has an advantage in his quest for Modi’s favor. Trade between the two has exploded, to nearly $66 billion in 2013 from a mere $1.2 billion in 1996. Their economic links will likely continue to strengthen as Chinese companies become more and more important global investors and Chinese consumers more and more important customers. The world’s two most-populous nations would appear to have many economic interests in common as well. Their companies, accustomed to operating in an emerging economy and selling to emerging consumers, are attracted to the potential of each other’s markets. China’s Xiaomi, for instance, has successfully lured Indian customers to its cut-rate smartphones as it has in China. Wouldn’t Modi be wise to hitch his country to the world’s rising power, rather than Japan, a declining one? That would bring to life the economic power of what’s been termed “Chindia.”

But China-India relations are more complicated than that. After India’s independence in 1947, Prime Minister Jawaharlal Nehru thought his new nation would find a friend in newly communist China. The spirit of the times was captured in the phrase Hindi Chini bhai-bhai, or “Indians and Chinese are brothers.” That hope was dashed, however. India has incensed China by allowing Tibet’s Dalai Lama, who Beijing considers a dangerous separatist, to reside in exile in India. Modi, in fact, invited Tibet’s prime minister-in-exile to his inauguration in May. Relations are also continually roiled by border disputes. In 1962, the two fought a nasty border war, and the causes of that conflict linger to this day. The two countries contest land along their border in India’s far north in Ladakh, while China claims India’s eastern province of Arunachal Pradesh. China perennially irritates India over these unresolved issues. Just last week, only days before Xi’s much-heralded visit, India charged that Chinese troops are building a road in the contested territory in Ladakh. In talks with Xi on Thursday, Modi urged the Chinese President to finally resolve their border disagreements.

Such tensions are clearly weighing on Modi’s mind. He has apparently embarked on a mission to upgrade India’s military capabilities and relationships. Abe and Modi during their recent summit agreed to strengthen military ties, and in August, New Delhi and Washington pledged to do the same during U.S. Defense Secretary Chuck Hagel’s visit to India. One of the first economic reforms Modi announced after becoming Prime Minister was easing restrictions on foreign investment into India’s defense sector, a move aimed at bolstering its technology and production capacities. It is an open secret who is the target of all these military moves. While in Japan, Modi took a swipe at an assertive China when he told business leaders in Tokyo that “everywhere around us, we see an 18th century expansionist mind-set: encroaching on another country, intruding in others’ waters, invading other countries and capturing territory.”

Modi, then, is attempting to have his halwa and eat it, too — playing off both sides to win as many goodies as he can. In his quest to restart India’s economic miracle by building much-needed infrastructure and boosting manufacturing, Modi will need all the money he can get — from China, the U.S., Japan and anyone else who is offering. India has always been wary of trying itself too tightly into any one political camp — during the Cold War Nehru was the leading figure behind what was known as the “nonaligned movement.” The question is how long Modi can play one side off the other. We may find out soon enough. Later this month, Modi will travel to Washington to meet with President Barack Obama. Let’s see what goodies he picks up there.

Everything You Need to Know About Alibaba and its Mega-IPO - TIME

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• Victor Luckerson @VLuck
 

Sept. 18, 2014

    

Employee works at the Alibaba Group headquarters on March 29, 2014 in Hangzhou, China.Hong Wu—Getty Images

What you need to know about the Chinese Internet firm's massive U.S. IPO

The Wall Street hype machine is in full swing as the world anticipates Chinese online retail giant Alibaba’s initial public offering. The company, which operates a vast online marketplace in China, is expected to raise as much as$21.8 billion before it begins trading shares on the New York Stock Exchange Friday morning, giving it a valuation as high as $168 billion. Alibaba has already been called so many things–the Amazon of China, potentially the biggest IPO of all time, the harbinger of a new Internet era—that it can be hard to pin down exactly what Alibaba does and how it makes money.

Alibaba Group is a Chinese Internet corporation involved in a variety of Web businesses. Its most important elements are its online retail sites: Taobao Marketplace, a large eBay-like commerce site; Tmall, an online marketplace for name-brand retailers like Apple; and Juhuasuan, a daily deals site similar to Groupon.

The company is also affiliated with a PayPal-like mobile payments service called AliPay, and it has investments in online video, mobile messaging and cloud computing, among other businesses.

So is Alibaba the “Amazon of China” or not?

Not exactly. Unlike Amazon, Alibaba itself does not sell and ship items to customers. Instead, it acts as a kind of online bazaar where merchants as small as local vendors and as large as Nike can hawk their wares. Alibaba makes money mainly by convincing these sellers to place search ads on its website to reach more potential customers through keywords (like Google) or by charging a commission on some transactions (like eBay).

The company also makes money by selling premium memberships, cloud computing services and access to analytics data — so there are some comparisons to be made to Amazon.

Why is Wall Street so obsessed with Alibaba?

Two big reasons.

First, Alibaba processes a lot of sales and makes a ton of money doing it. Alibaba generated $248 billion in transactions on its three biggest marketplaces last year. By comparison, eBay generated $83 billion.

More staggering is the profit the Chinese giant reaps from these sales: Alibaba made about $2 billion in profit in the most recent quarter, tripling its earnings from a year ago. EBay, on the other hand, made $676 million and Amazon lost $126 million. Alibaba keeps costs low by hiring fewer employees than its closest American competitors and, unlike Amazon, avoiding the costly expense of operating fulfillment centers to ship products to customers.

Investors are also excited because Alibaba offers the most direct way to own a piece of China’s booming tech scene. The Internet population in the country is expected to reach 800 million by next year, according to government estimates, making it the largest market of online users by far. Tencent, another Chinese tech giant, offers many services that compete with Alibaba’s, but it’s traded on Hong Kong’s stock exchange. With Alibaba on the New York Stock Exchange, it will be easier for U.S. residents to invest in the company.

Who’s the mastermind behind Alibaba?

That would be Jack Ma, a former English teacher who founded Alibaba out of his Hangzhou apartment in 1999. Ma is not your average tech executive. He didn’t start using the Internet until 1995and still doesn’t know how to code. He’s an eccentric character who once donned a blonde wig and black lipstick to sing “Can You Feel the Love Tonight?” at a 10th anniversary celebration for his company.

But he’s also a ruthless businessman who effectively ran eBay out of China in the early 2000s and maintains significant influence over Alibaba’s activities even though he’s no longer the CEO.

Who are the other key players at the company?

Yahoo, which owns about one-fifth of Alibaba, stands to make a windfall when it sells more than 120 million of its shares during the IPO, reaping as much as $8.3 billion before taxes. Yahoo will still have a 16.3% stake in Alibaba after the IPO and its stock price will likely continue to be buoyed by Alibaba’s rapid growth. However, Softbank, the Japanese tech firm that owns Sprint, is Alibaba’s biggest shareholder. Softbank will have a 32.4% stake following the IPO.

Despite their large stakes, these companies have relatively little say in the operational activities of Alibaba. They have ceded much of their shareholder influence to a group of executives called the Alibaba Partnership.

What is the Alibaba Partnership?

It’s a group of longtime of Alibaba employees, including Ma and his right-hand man Joe Tsai, who exert incredible control over the company’s activities. Alibaba also has a board of directors, but the Alibaba partnership reserves the right to nominate the majority of the board members, meaning the Partnership essentially controls the activities of the company by proxy without the need for input from other shareholders.

Should investors be concerned about this structure?

Well, it is highly unusual. The Partnership structure was rejected by the Hong Kong Stock Exchange, which is how Alibaba ended up on Wall Street in the first place. Though members of the Partnership must have a “meaningful” equity stake in Alibaba, according to the company prospectus, it’s not spelled out how large the stake must be. As Harvard Law School professor Lucian Bebchuk points out, partners could choose to later pare down their stakes in Alibaba and attempt to influence the company in ways that are not beneficial to other shareholders (remember, Yahoo and Softbank have basically handed their votes to the Partnership).

The ability of Alibaba’s executives to act unilaterally has already caused concerns before. Jack Ma spun off the fast-growing payments platform Alipay to another company he owns in 2011, which angered Yahoo.

Forget the risks! How do I get in on this IPO?

You don’t, unless you’re really rich. The banks underwriting Alibaba’s IPO will sell shares to mutual funds, hedge funds, and large-scale individual investors. The Average Joe’s first chance to get a piece of the company will likely be Friday morning, once the stock is publicly trading. But those shares could come at a significantly higher price than the IPO price range of $66 to $68. Twitter, for instance, started trading above $45 back in November even though its IPO price was just $26, due to extremely high demand for its stock. Unless you’re well-connected, it would be almost impossible to game the IPO to turn a quick buck. You should either plan to buy in as a long-term investor after carefully studying Alibaba’s prospectus or just relax and watch the chaos unfold without worrying about making or losing money.

What’s next for Alibaba?

The company’s breakneck growth in China shows no signs of abating, and Alibaba also has plans to compete on U.S. shores. Over the summer, the company launched 11 Main, an Etsy-like platform that connects shoppers with boutiques and other small vendors. And during Alibaba’s road show pitching the IPO to potential investors, Ma made his most direct statements yet about his already-massive company’s global ambitions.

“After we go public in the U.S., we will expand strongly in Europe and America,” Ma said. “Because after all we’re not a company from China, we are an Internet company that happens to be in China.”