Cornell Business Journal - Fall 2016

BOOK REVIEW Taxation of Entertainers, Athletes and Artists P.06 FINANCE FALL 2016 | VOLUME II | ISSUE II DECEMBER 2016

DEFENSE I N SI LI CON VALLEY P.03

The Controlled Return of the Subprime Mortgage Market P.10 OP - ED The Modern Indictment of Finance Professionals P.23

RICK ROSS

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L ETTER FROM THE E D I T OR

Welcome to the second magazine issue of the Cornell Business Journal, which I hope you will enjoy reading as much as we have enjoyed creating it. Our writers have journeyed far and wide in their analysis and research of topics such as: virtual reality, innovation in India, tax law, the ailing healthcare industry, the subprime mortgage market, product management in the automotive industry and the secret history of Silicon Valley. We have expository pieces, research articles, a scathing op-ed, and even a book report in this issue. But we are also very excited to feature a photo by the Johnson Community on racial equality and diversity. We are very proud of the Johnson community for standing in solidarity with the BLM movement, for encouraging inclusion and for fostering a progressive environment to stand up to the systemic issues that continue to plague the nation.

Finally, we would like to thank the Samuel Curtis Johnson Graduate School of Management for their unwavering support of our mission to provide an unbiased voice to Johnson students and the local business community. In addition, this publication would not have been possible without the hard work of my managing editor, Timothy Higgins, my vice president and digital marketing chief, Steve Vuleta, and our lead designer, Janani Umamaheswaran. We would also like to extend our gratitude to Najeen Riazi for her invaluable services as a consultant for the CBJ and for being a great friend. And last but not least, we would like to thank our talented writers: Brian Balduzzi, Alex Bramlet, Matthew Lyons, Mustafa Donertas, Jordan Young, Shantanu Naidu, Steve Vuleta, and Andrew Davoodian.

Thank you for taking the time to read the Cornell Business Journal. It is my hope that you will enjoy our publication for years to come as we continue our transition into a comprehensive academic publication. This might be my final Letter as the editor-in-chief, but I am excited for the future of this magazine – what it can be and how it can help shape the Cornell community and beyond. Happy reading!

Sincerely, Jonathan L. Hua MBA ‘17 Editor-in-Chief www.cornellbusinessjournal.org

Editor In Chief

Managing Editor

Vice President

CBJ Consultant

Lead Designer

Jonathan L. Hua

Timothy Higgins

Steve Vuleta

Najeen Riazi

MBA’17

MBA’17

MBA’17

MBA’17

Janani Subhashini Umamaheswaran

Cornell Business Journal | Fall 2016

Info Sci’17

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CONTENTS MAGAZINE 1 defense in silicon valley

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The DoD “invasion” of Silicon Valley unwittingly ignores a long and complex history between the two. Rather, the Defense Department’s arrival could be better described as bringing the Valley back to its roots. - by Steve Vuleta

2 Book review: taxation of entertainers, athletes and artists

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Mixes Diverse Performance with Complex Tax for Emerging Professionals. - by Brian Balduzzi

3 product development in the automotive industry

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This dynamism highlights the continued importance of product development within the automotive industry, and Ford remains at the forefront of this initiative. - by Mustafa Donertas

4 the controlled return of THE subprime mortgage market

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Only time will tell whether subprime mortgage origination returns to pre-crisis levels. - by Matthew Lyons

5 THE coming vr economy

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Like the technologies that preceded it, VR and augmented reality (AR) promise to revitalize the global economy by creating a multibillion-dollar entertainment ecosystem. - by Alexander Bramlet

6 OF BUSINESSMEN AND INNOVATORS

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The businessman of the new age has an obligation to help cultivate and encourage innovation that has social impact, regardless of industry and expertise. - by Shantanu Naidu

7 Toyota’s Remedy for Ailing U.S. Hospitals

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While the differences between the automobile and healthcare industries are obvious and vast, the concepts of TPS lean operations have been able to transcend industry lines because they are as much about a managerial philosophy as a mechanism of action as they are a protocol. - by Andrew Davoodian

8 the Modern Indictment of Financial Professionals

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Today, Bankers, traders and financial executives are guilty until proven innocent and are at the mercy of politicians.

- by Jordan Young

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DEFENSE IN SILICON VALLEY

“The narrative of a DoD “invasion” of Silicon Valley unwittingly ignores a long and complex history between the two. Rather, the Defense Department’s arrival could be better described as bringing the Valley back to its roots.”

- Steve Vuleta, MBA ‘17 The Pentagon has arrived in Silicon Valley. This fact elicits a range of reactions from tech industry titans, defense establishment wonks, taxpayers and others, as they wonder: what could the United States Department of Defense (DoD) possibly want to accomplish in the world’s premier hub of high-tech entrepreneurship? What are their motives? Some believe this is a necessary, smart, and long overdue move vital to U.S. national security.

Others are skeptical of potential ulterior motives or perverse incentives. Skepticism is understandable given revelations of alleged collusion between the National Security Administration (NSA) and some of the world’s most recognizable hightech firms, such as Microsoft and Google. However, the narrative of a DoD “invasion” of Silicon Valley unwittingly ignores a long and complex history between the two.

Rather, the Defense Department’s arrival could be better described as bringing the Valley back to its roots.

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To understand the relationship between the DoD and Silicon Valley, we must first look back to the Second World War. In an article for Inc.com, serial entrepreneur and tech legend Steve Blank referred to World War II as “the first electronic war” , with the lessons learned from the Allied strategic bombing campaign over Europe underscoring the importance of electronic and technological innovation in the eventual Allied victory.

As an example, Blank discusses the tactics and techniques developed to exploit the German integrated air defense network called the Kammhuber Line. The risk of aircraft being detected, acquired, engaged and shot down had to be eliminated or mitigated, which called for in-depth knowledge of German radar and communications systems, as well as the development of electronic countermeasures systems to be carried onboard Allied aircraft. Experiences such as this proved that engineering and technology would be the key force multiplier in any future

war. With the onset of the Cold War in the 1950s, the United States invested heavily in further developing electronic and signals intelligence technologies. Several such ventures came out of Stanford University and the surrounding area more popularly known today as Silicon Valley.

In the following decades, the growing military power of the Soviet Union and the specter of nuclear annihilation drove the U.S. Government to pursue all available means to prevent a global catastrophe. From a military and intelligence standpoint, this meant heavy investment in technology solutions such as radio-telescopes, satellites, jet aircraft and other signals intelligence hardware. As the Soviet Union established a lead in conventional ground forces, it was vital for the Western world to maintain its technological advantage.

The precursor to Silicon Valley was “Microwave Valley,” out of which cutting-edge technology platforms

that specialized in electronic intelligence (ELINT) were manufactured to gather intelligence about the Soviet Union’s military and intelligence capabilities. As computers and technology grew in sophistication during the 1970s and 1980s, mass commercialization of high-tech hardware and software became increasingly viable.

The fall of the Iron Curtain would redefine the business landscape of the area we recognize today as Silicon Valley. With the advent of personal computers and the internet, Silicon Valley morphed from a defense technology hub to a selfsustaining ecosystem of innovative technologies targeted towards mass consumers. Venture capital followed in trace.

Blank, a Silicon Valley mainstay for decades, points out that the Valley’s entrepreneurial ecosystem did not magically spring “from orchards in one evolutionary swoop,” but was, in effect, the result of a heavy injection of federal investment for military and intelligence purposes

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starting in those early Cold War years. In some ways, the defense and intelligence industries have never left. Defense and aerospace giant Lockheed Martin remains a major employer in the area and the CIA has been injecting capital into various Silicon Valley firms to spur growth in intelligence technologies and techniques for years . The innovative culture associated with the Valley, combined with a recognition of the importance of maintaining a high-tech advantage in 21st century military and intelligence affairs, has caught the attention of Defense and Intelligence policy officials as they seek out new methods to maintain America’s hitherto stateof-the-art armed forces.

Officially launched in 2015, the Defense Innovation Unit Experimental (DIUx) seeks out top tech talent by contracting with firms that do not typically do business with the Defense Department.

Defense Secretary Ashton Carter has said that DIUx will help tech industry professionals “understand places in the Department of Defense where they secure funding for ideas that they think are relevant to defense”. DoD collaboration with the tech industry will include a Defense Innovation Advisory Board headed by Google co-founder and Alphabet chairman Eric Schmidt. DIUx will function as an innovation hub to augment the traditional contracting process of military hardware and software, expedite the current glacial pace of innovation within the Defense Department, and work with “traditional” defense technology organizations such as the Defense Advanced Research Projects Agency (DARPA).

the Defense Department, is often characterized as hierarchical, bureaucratic and conservative. Moreover, the public sector in general is often thought of as having only a marginal understanding of private enterprise management. These characteristics do not fit the Silicon Valley brand. Modern tech entrepreneurs are thought of as decisively innovative, scrappy, and cost and time sensitive. Their organizations are flat, and employ relatively few people. They are imaginative, “outside-the-box” thinkers. One could be forgiven for thinking that the cultural incongruence between the two would make them poor business partners. Nevertheless, cross-cultural collaboration alone, to say nothing of the funding, could lead to breakthroughs in technological innovations that benefit not just national defense or defense industries, but the public at large. DARPA laid the groundwork for the modern Internet with the invention of “ARPANet.” Research in applied physics and engineering from the Reagan-era Strategic Defense Initiatve (SDI)

The government, and especially Cornell Business Journal | Fall 2016

advanced their respective fields for both academic and commercial purposes. The fruits of the collaboration between private high-tech firms and the Defense Department may be even greater.

In recent decades, the relationship between technology companies in the Valley and the Defense Department was largely forgotten, never completely severed, but pushed to the background.

However, an increasingly volatile and complex world demands innovative solutions. Transnational terrorism, the uncertainty of global populist movements and neo-imperial statecraft, and the renewed specter of international conflict, are grave concerns. Properly addressing these concerns requires investment and further innovation in artificial intelligence, cyber security and increasingly “smart” weapons.

While the future nature of their relationship remains to be seen, for now the United States Department of Defense and Silicon Valley are two old friends tackling new problems.

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B OOK REVIE W: TA XAT I ON OF E NTER TA INERS, AT HLE T E S, AND ARTISTS

“Mixes Diverse Performance with Complex Tax for Emerging Professionals.”

Martha Stewart, Wesley Snipes, Richard Hatch, and Nicholas Cage may have few things in common, but one of them is tax evasion. The United States Tax Code is no entertaining matter when the risks for incorrect and aggressive positions, or untimely filings, may include federal prison time. Professor Lionel S. Sobel, of UCLA Law School, contributes handsomely to the breadth of information on the taxation of entertainers in his newest book, Taxation of Entertainers, Athletes, and Artists, published through the Forum on the Entertainment & Sports Industries of the American Bar Association. While Sobel provides a thorough overview of the tax system in a well-organized reference book and as applied to this subset of independent contractors and employees (and even employers), the book struggles as too superfluous for the practicing tax attorney and advisor, and too dense for the taxpayer-entertainer, leaving us with an audience of one: the emerging tax scholar interested in a new field.

- Brian Balduzzi, esq, MBA ‘18 Taxation of Entertainers, Athletes, and Artists focuses on the system of taxation in two parts: (1) United States domestic tax practice and procedure, and (2) International taxation. This division helps focus the reader’s attention on each of these two parts, especially when many entertainers, athletes, and artists only work within the United States and can ignore the complex treaties and double taxation concerns within the international taxation system.

Sobel provides a clear understanding of the breadth of the definition of income within the Tax Code, notably applying seminal tax cases to illustrate his point; for example, the United States taxes “income of all kinds earned worldwide.” The practiced tax attorney or law student will recognize many of these references from an Introduction to Federal Income Taxation course, but Sobel includes some nuances applicable to the entertainers, athletes, and artists, such as gains from the sale of self-created works, prizes, and unemployment compensation. We are also treated to some

of Sobel’s best explanations, when he explores incidents ripped from the headlines, such as Elizabeth Taylor’s jewelry, Academy Award swag, and Oprah’s impressive gifts to audience members. Readers will connect with these popular stories, rumors, and trivia, and this connection allows the book to move from the dense tax code and its theoretical application to the familiar and fun presentation of the tax code in practice, adding depth to the tabloids with a sound academic and intellectual analysis. The reader gains sexy party trivia to expand upon the collective knowledge of each of these headlines, while Sobel gains strong word-of-mouth readership. One take-away, to paraphrase Sobel, “YOU get a car, YOU get a car, but YOU also get a tax bill.”

These opening chapters are adequate refreshers for a practitioner, but the laundry list of factors for whether a taxpayer is engaged in an activity “for profit,” and similar tests, soon begins to wear on the

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uninformed reader’s attention.

The nuanced examples provide good narratives, but the distinctions create more questions than answers for the reader who is an athlete or artist. Broadly exploring taxation issues applicable to the different businesses of an employed athlete on a designated team and the freelance opera singer seems ambitious, at best, and cumbersome, at worst.

While many chapters could be considered in further detail, the chapter on Loan-Out Corporations was particularly useful for me because of a lack of familiarity with the topic. As an emerging tax scholar, the potential target market for this book, I benefited from spending additional time reading and considering this chapter and its notable depth from multiple points of view, including as a former tax practitioner, former actor, and current tax scholar. By examining this chapter, I was able to more clearly understand Sobel’s processes in developing and explaining this book’s concepts for his various readers.

With these considerations in mind, the chapter on Loan-Out Corporations was quite well-done and satisfied an intellectual understanding of this topic, but, upon further reflection, the designated readership remains unclear. This conclusion was mainly due to Sobel introducing the topic with definitions and diagrams, but exploring the specifics beyond the scope of the entertainer and focusing instead on the entertainment industry and its employers.

The specifics of this tax and business planning seem to favor more of the limited liability aspects of being an entertainer, rather than the tax implications of the salary or income. Such depth is appreciated,

but dilutes the book in its broad focus on the business planning rather than the tax decision-making. Sobel correctly understands and explains that tax planning is intimately tied to the business decisions, but this lengthy section may confuse the neophyte reader with additional distinctions to consider.

Such business planning might be better suited to be explained in earlier chapters, or explored in each chapter as discussion points more interconnected with the tax topics.

Some of the more applicable sections for the general advisor include the contract negotiations and agreements, and contingent payments sections. While these sections present legal questions, worthy of complex analyses and regulatory distinctions, Sobel navigates these intricacies with aplomb and clarity, making them most useful for the business advisor and tax planner. While perhaps a bit dense for some entertainers and athletes, these chapters could serve as supplementary readings for clients before or after initial meetings to provide a framework for further discussion.

The text is richly supplemented by charts and figures, reflecting decision-making and timelines for taxpayers and advisors. If all of the sections started with such a broad exposure, leading to a more academic and intricate discussion, the book would have had a broader reach, becoming a holistic resource for advisors with applicable supplementary information for entertainer-clients.

Taxation of Entertainers, Athletes, and Artists by Professor Lionel S. Sobel is an accessible reference text for the emerging tax practitioner that includes advanced topics

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in business planning and international taxation. However, the book could provide more questions than answers for an unpracticed and uninformed entertainer as an introductory resource, while it can serve only as a mere refresher for a more practiced attorney or tax advisor. Future editions of this 375page reference book could better differentiate sections and chapters based on the intended readership or provide more context for who should read or appreciate each section’s depth and information. These contextual clues will enrich the otherwise unique figures, charts, and functional tests and lists, and improve the text’s application for a broader range of readers encompassing the emerging fields of taxation for entertainers, athletes, and artists. As we explore the frontier of YouTube stardom, Hulu and Netflix markets, and international sports, the work of tax attorneys and business advisors will become more important and nuanced, and this text provides a first edition examination of the applicable issues and questions for these practitioners and clients to consider and appreciate.

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PRO D U C T D E V E L O P M E N T I N T HE A U T OM O TI V E I N D U S TRY

“This dynamism highlights the continued importance of product development within the automotive industry, and Ford remains at the forefront of this initiative.”

- MUSTAFA DONERTAS, MBA ‘18

A Little Bit of History

Product Development

The internal combustion engine has been shaping the way humanity lives, works and prospers for more than a century. What started as a novelty only available to the privileged became affordable and commonplace in 1908 thanks to the revolutionary production efficiency of Ford’s Model T. Technological innovation has remained a hallmark of the industry ever since, apart from the major design features of every automobile’s most critical component – its internal combustion engine. Given that the technology behind this most fundamental aspect of every car has remained relatively constant, the question is: how can a 2016 Ford Mustang perform so much better than a 1908 Ford Model T? Is it simply due to better aerodynamics? More efficient design and manufacturing? Or is it the superiority of materials available that led to a fivefold increase in speed and torque and a decrease of two orders of magnitude in emissions?

The answer is all of the above, and quite a bit more, but I believe it can be summed up in a single term: product development. In the case of the automotive industry, product development activities can be divided into four main areas: powertrain, body, interior and electronics.

The internal combustion engine is the heart of the powertrain and is responsible for creating power from fuel. The engine converts the chemical energy of gasoline or diesel fuel by consuming it in a continuous cycle, which is essentially the same cycle a Ford Model T engine. If this is the case, what makes modern engines so much more powerful, efficient and environmentally-friendly? And why did that change happen? Any successful product is doomed to ultimate failure if a company ignores potential improvement against competition. This is especially true for products such as automobiles, since

these improvements happen in a measurable way that customers can observe. This is where product development comes into play: to create new automobiles and engines with better performance characteristics.

As part of the engine product development team at Ford, I was responsible for a wide variety of activities ranging from concept and detail design, supplier selection and collaboration, prototyping, testing and cost minimization to serialization of production of a new heavy-duty truck engine. From my time on these projects, I discovered that the biggest improvement in auto performance came from the engine design, which combined innovative technologies to optimize fuel efficiency and minimize mechanical losses, as well as high-end materials, to withstand the enormous forces and temperatures that arise during engine operation.

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Business Context The decision to develop a new engine is driven by three factors: market opportunity, emissions requirements, and the company’s strategy to reduce costs.

Market opportunity arises from the ability to differentiate through better operating and acquisition costs for the customer. Statistically, the fuel efficiency obtained in the automotive industry per year is incremental: less than 2% a year.

However, the savings are significant, especially for trucking companies recording millions of miles per year. In a market where operating costs drive a customer’s decision, there is great potential for product differentiation if the product offers a significant reduction of operating costs for customers.

At the same time, there is an ongoing battle to meet increasingly strict emissions standards in Europe. Any player who is left behind will face a slow, but certain, decline as these new regulations are put into place over the next few years. This will require heavy investment in developing emissions-reducing technologies, which come with a cost beyond the balance sheet: reduced engine performance. However, failure to comply can be even more expensive - the VW emissions scandal in 2015 cost the industry giant more than $18 billion.

the form of incremental and consistent improvements in terms of product offerings and cost reduction. A great recent example is the new F-150 with aluminum panels, which dramatically improved the truck’s mileage. In order to mitigate the higher cost that comes with the choice of aluminum over steel, Ford uses a closed-loop scrap recycling process during manufacturing, recovering as much as $600 worth of aluminum per truck.

Traditionally, one of the most prominent strengths of Ford has been its ability to reduce costs, and this is a crucial element of Ford’s overall pricing strategy. Cost reduction has been a hallmark of the company as early as 1908, when assembly line production allowed for a drastic reduction in manufacturing costs. Currently, cost reduction is achieved through optimized supplier selection and the utilization of efficient manufacturing techniques, such as the aluminum recycling process outlined above.

Future Outlook In keeping with the continuity of product development, Ford has been improving existing vehicles

Ford’s business strategy, as outlined in their sustainability report, revolves around “challenging industry norms and taking nothing for granted.” This manifests itself in many forms, and in the case of the development of electric vehicles, can be quite novel. However, most of the innovation comes in Cornell Business Journal | Fall 2016

and creating new ones, especially hybrid and electric cars. The decision to invest in electric car development can be attributed to two main factors. First, Ford does not want to be left behind in the electric vehicle race, especially with the popularization of hybrids in recent years. The explosion of the electric car market brings about opportunities for revenue growth and “green” branding. Second, Ford received very low-cost government loans from Term AssetBacked Securities Loan Facility (TALF), which helped Ford avoid a bailout during the automotive crisis between 2008 and 2010, when GM and Chrysler filed for Chapter 11 bankruptcy. In return for low-cost loans, Ford agreed to accelerate its development of greener cars.

The biggest perceived weakness of electric vehicles is their lack of driving range. In response, Ford has chosen to increase its focus on the development of batteries and other range extension methods through R&D investments. This dynamism highlights the continued importance of product development within the automotive industry, and Ford remains at the forefront of this initiative.

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SAVING THE COUNTRY FROM OURSELVES: THE CONTROLLED RETURN OF THE SUBPRIME MORTGAGE MARKET

“Only time will tell whether subprime mortgage origination returns to pre-crisis levels.”

We’ve heard the story of the Financial Crisis countless times, and felt its crippling shockwaves over the course of the past decade.

In the early 2000s, with a booming housing market promising everincreasing residential home equity, borrowers had access to assets they never before thought possible, and the desire to cash out on their newly appreciated home values rose. Banks, caught up in the rare opportunity to earn higher interest rates with strong collateral, were more than happy to extend credit to these borrowers, regardless of their creditworthiness (and sometimes in spite of it). As a result, lending rates rose, underwriting policies loosened, and investors jumped at the chance to purchase pools of riskier loans.

Unfortunately, as unemployment rose and ARM interest rates began to reset in the late 2000s, borrowers began to default on this overextended credit, and collateral on the associated loans dropped in value. The investors in those loans, and their insurers, experienced massive losses. Banks

- MATTHEW LYONS, MBA ‘18 quickly tightened their credit policies, and as rates began to fall to historic lows post-2010, many sub-prime borrowers (and certain prime borrowers) found that they were no longer qualified to access the cheaper credit available on the market.

As the country slowly recovers from the Great Recession, we see the residential housing market returning to its former strength.

The Federal Housing Finance Agency’s Housing Price Index (HPI) has shown rapid gains over the past 4 years from its post-crisis low in early 2015; homes, in fact, appear to have appreciated back to the all-time highs at the height of the housing bubble (see Figure 1). With a recovering economic backdrop, we begin to see, again, increases in the extension of credit to those borrowers considered to be “sub-prime”. According to Equifax’s Annual “National Consumer Trends” Report, subprime mortgage originations, as a percentage of total US originations, have increased 61% since 2012. Total subprime loan value

has also made substantial gains over this time period, with subprime origination balances accounting for 3.2% of the total market share, compared with 2% in 2012. In addition to an increased market share for subprime mortgages, Standard & Poor’s First Mortgage Default Index shows that roughly 40% fewer mortgages have been delinquent in 2016 than in 2008, and about 90% fewer than at the peak of the crisis in 2009 and 2010 (see Figure 2).

Similarly, the returns on Residential Mortgage-Backed Securities (RMBS) have shown healthy increases in recent years, with Standard & Poor’s RMBS index up 32% since 2008. With lending rates at all-time lows, price increases in these securities are largely due to increased investor confidence.

But how have lenders and investors become more confident with these borrowers? After all, subprime borrowers represent essentially the same risks they did during the Financial Crisis. These borrowers still have FICO credit scores

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below 620, and incomes that are largely unchanged. conservative in their due diligence process, particWhat has improved since 2012 that makes these bor- ularly in the verification of a borrower’s income and rowers more attractive? assets. According to the Wall Street Journal, investors and money managers have begun to place more Regulation has, of course, played a large part in placing pressure on lenders to engage in “alternative docucontrols to prevent a similar crisis from occurring in the mentation” loans, to provide investments with higher future. Dodd-Frank has explicitly placed the respon- yields than the low rates available on the market today. sibility of assessing financial fit on lenders. Banks Banks and lenders, however, have held strong, and are now have more pressure to make responsible loans avoiding these products. Not only do these products on behalf of their customers, investors, and insur- present a greater risk that was responsible, in part, ers. Dodd-Frank also created the Consumer Financial for the Financial Crisis’ high default rate, but they also Protection Bureau (CFPB), which has created chan- now fall outside of Dodd-Frank’s safe harbor window nels for borrowers to communicate complaints and for fiduciary responsibility. Furthermore, according to put a stop to predatory lending. Since taking control FHFA data, Loan-to-Value ratios on mortgages have of Fannie Mae and Freddie Mac, the Federal Housing shown a steady decrease since 2010, indicating that Finance Agency has placed substantial restrictions on lenders do not plan to push the envelope by eating into the loans these two entities have been able to pur- any available equity cushion in the event of default. chase. These restrictions have tamped down on loan amounts, leverage ratios, underwriting standards, and Only time will tell whether subprime mortgage origiservicing procedures. Additionally, foreclosure pre- nation returns to pre-crisis levels. With housing prices vention programs under the Making Home Affordable on the rise, and capital markets craving higher-yield Act have provided borrowers with options to lower investments, the landscape is set for these loans to their monthly payments, while still providing the same make a comeback. However, with a healthy regulapresent value to investors. tory framework, and an industry of lenders that have learned valuable lessons, practices that made these Banks have also done their part to implement safer loans irresponsible are largely behind us. A growing lending policies, and are ensuring subprime borrow- economy and housing market, combined with the ers are better equipped for success. Mortgage prod- appropriate checks and balances, can ensure that ucts with such features as “Interest Only” or “Negative all borrowers have access to safe and much-needed Amortization” periods are no longer used in prac- credit. tice. In addition, banks have become much more

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FIGURE 1

Source: Federal Housing Finance Administration Datasets

FIGURE 2

Source: Standard and Poor; Experian Credit Bureau Cornell Business Journal | Fall 2016

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THE COMING VR ECONOMY

“Like the technologies that preceded it, VR and augmented reality (AR) promise to revitalize the global economy by creating a multibillion-dollar entertainment ecosystem.”

In homes across the US and around the world, millions of consumers have begun taking their first steps into the world of virtual reality (VR). While today’s VR technology is still far off from the futuristic experience popularized by blockbuster movies like “Tron,” “Inception,” and “The Matrix,” it may well be the next global economic driver. According to figures from Deloitte Global, sales of VR hardware and software will top $1 billion this year, and could make 2016 a watershed year for VR akin to the debut of color TVs in 1953, home gaming systems in 1975, personal computers in 1981, and smart phones in 2007.

Like the technologies that preceded it, VR and augmented reality (AR) promise to revitalize the global economy by creating a multibillion-dollar entertainment ecosystem. VR systems from Sony, Samsung, HTC and Oculus have already hit the market, and VR/AR products are in active or

- ALEXANDER BRAMLET, MBA ‘18

rumored development from major players such as Apple, Google, Microsoft and Amazon. Startups like Meta and Magic Leap, which manufacture AR headsets, goggles, and displays, have raised billions in investor funding.

Magic Leap recently showcased a “mixed reality” display designed to give the user a holographicstyle experience, where whimsical creatures, robots, and virtual data screens seemingly appeared out of thin air. These demonstrations not only wowed the industry experts, they provided a preview of things to come. According to DigiCapital, sales of VR/AR hardware, software and peripherals will grow to $120 billion by 2020.

Investors have been lining up to position themselves in the coming VR economy. So far in 2016 investment in VR/AR companies has topped $1 billion, and heavyweight media companies, like Disney, 20th Century Fox, and Legendary, and capital firms like Andreesen

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Horowitz and Highland Capital Partners, have poured in hundreds of millions of dollars. Early stage funds like the Venture Reality Fund have been created to attract individual investors.

VR or AR, what’s the difference?

Virtual Reality is an artificial, computer-generated simulation or real world recreation. Typified via an enclosed VR headset, users can immerse themselves in a virtual world by stimulating the wearer’s vision and hearing. Peripherals like controllers or gloves allow the user to “tactilely” interact with this virtual world.

Augmented Reality is a blending of virtual reality and real life. Typically through tech-enabled glasses, wearable headsets with transparent visors, or display screens, AR overlays virtual imagery on top of the wearer’s field of vision.

This enables the user to engage with virtual information while still

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being fully aware of his or her surroundings.

Industry Changing Technology VR and AR have long been considered the next evolution for the $100 billion video gaming and $1 trillion+ entertainment industries. However, the technology will change a number of other industries in the future: Education. VR/AR will let teachers engage students in entirely new ways. Classes can go on virtual class trips through time and space, or watch lessons come to life.

Healthcare. VR/AR will allow medical students, doctors and healthcare professionals to virtually explore injuries or ailments, simulate surgeries, virtually consult on diagnoses, or even remotely control robotic operations.

Military. VR/AR will change military training and engagement from Pentagon-level strategy down to the individual soldier. Combat deployments will be commanded by generals and admirals overseeing a virtual battlefield, while soldiers and pilots will be fed real-time data via connected smart displays.

Automotive. Cars from companies such as BMW, Audi and Lexus are already rolling off the assembly line with a basic version of augmented reality in the form of headsup displays. Add on systems are also available from companies like Navdy, and Garmin. Soon, AR windshields will feed drivers a plethora of information--from traffic information, road conditions and enhanced views, to connected news and information. This can make driving safer by limiting peripheral distractions.

Manufacturing and Construction.

VR/AR is changing the way things are designed, from products to buildings, by enabling designers a way to preview virtual models.

During the manufacturing process, AR-connected workers will be able to monitor assembly, communicate, and ensure quality control in real time. Donning a VR headset, a designer or worker will be able to virtually explore any product or project.

Travel, Tourism, and Theme Parks. Visitors to cities, landmarks, historic sites, museums, zoos, and other attractions will be able to see and learn more than ever thanks to virtual overlays. Theme parks like Six Flags are already using VR technology to enhance rides, while AR will soon be able to keep visitors engaged and entertained while they’re waiting in line.

Real Estate. Realtors representing high-end homes have already started using VR to let prospective buyers virtually tour properties. In the future, VR walk-throughs will become the norm, while AR will provide information on everything from average heating costs to local schools, to buyers during actual home tours.

Sports. From training and simulations to game day competition, players and spectators will utilize VR/AR technology. VR is already helping world class athletes improve their techniques while fans are able to experience simulations. In the future, players will be able to use AR goggles or helmets to receive information or be connected to their teammates or coaches. Spectators will be able to use AR to tap into statistics, enhanced information, replays,

alternative viewing angles, or even first person views from the perspectives of their favorite players.

Concerts, Plays, and Performances. With VR, music and theater lovers will be able to enjoy simulcast or pre-recorded concerts without having to be there. Live performances will be further enhanced for audience members using AR. Science. VR/AR is changing science at all levels from the microscopic to the telescopic. Physicists, chemist, microbiologists and others are able to virtually explore the cellular, atomic and subatomic worlds. Astronomers are virtually exploring the universe to discover new planets, stars, and galaxies.

Communications. In the last 20 years, the internet, email and mobile phones have changed the way we communicate. VR/AR will take communication to the next level. VR will let friends have a real-time conversation, or a group have a meeting in a virtual space.

AR overlays will let users dictate messages or engage in pop-up conversations while still moving though their daily routines.

Marketing. As with every medium, marketers and advertisers are already working on ways to use VR/AR to compete for attention and drive sales of products and services ranging from fast food to banking. VR is a way to “virtually try before you buy.� In the near future, an AR-glasses-wearing consumer walking down the street will be barraged with virtual ads, sale announcements, and pitches.

Apps. In less than a decade, smartphones led to the development of millions of mobile

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apps—everything from simple calendars to advanced applications for every special interest imaginable. Apps designed for VR and AR headsets will up the ante by bringing the experience into the virtual space.

The Dark Side While most of the attention is on the technological possibilities and economic potential of VR/AR, as with every new technology, there will always be a “dark side”. When the internet was just taking off in the early 1990s few people imagined that viruses, phishing, trolling, catfishing, piracy, cyberbullying, cyber spying, identity theft,

and a host of other cyber demons The Virtual Future is Now would also emerge from this digital Pandora’s box.

After years of promises and false starts it’s undeniable that we are While it may take years for VR/AR’s now entering the virtual reality era. demons to materialize, some initial In the years to come, VR/AR techconcerns have been raised about nology will only continue to improve privacy, security and productivity. with sleeker hardware, better user How will the challenges of iden- interfaces, faster speeds, more softtity protection be different inside ware, higher resolution graphics, and a virtual reality world compared smarter AI. It’s a technology that will to the current internet ecosys- be able to virtually take us anywhere tem? How will companies secure – how far can we go? virtual and augmented systems from infections and other threats?

Some have suffered “addiction” to massive online video games, will more become addicted to the virtual reality world?

Cornell Business Journal | Fall 2016

From the Johnson Office of Diversity & Inclusion: Cornell MBA students invited staff, faculty & Cornell Police to come together in a show of support for our black community #MBAsOpenUp

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Cornell Business Journal | Fall 2016

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OF BUSINESSMEN AND INNOVATORS

“The businessman of the new age has an obligation to help cultivate and encourage innovation that has social impact, regardless of industry and expertise.”

The ways of the world are not easy.

In an age where the ways of life are varied across our race, in terms of suffering and issues that are seen as unsolvable and complex, there is indeed one constant that has continued to come to our aid – scientific and technological discovery. This application of science to create unique solutions, and to get to the roots and dispel issues effectively, is done by none other than innovators.

SHANTANU NAIDU, MBA ‘18 was an invention, rather than an innovation. There is an important distinction here. The Q-drum, an application of the wheel by a simple farmer, was an innovation.

But what do we know about the Q-drum? Do we know of its existence? Did its use become widespread? Did it really help make the lives of those drought stricken people more convenient? If you have to Google it right now, then the answer is no; it was not very effective. The lesson here is that thousands of potentially life changing innovations are born every day and countless more die daily, some as thoughts at inception and some as ideas shared and subsequently shut down by critics and naysayers, and others as failed prototypes. What do so many ideas and projects lack that lead to their failure?

Day in and day out, innovations are born in the minds of young students, everyday housewives, garage workers and unemployed thinkers. They don’t have to possess a certain designation for their innovation to be validated.

The best example of this is the rural Indian “Q-drum”, a water container in the form of a wheel that is able to transport water over long distances without people needing to carry anything on their backs The answer to that: A receiving end in drought prone areas. It is also and just as importantly, a cultivatimportant to note that the “wheel” ing hand.

Cornell Business Journal | Fall 2016

As an automotive design engineer at Tata, I used to come across a large volume of road kill during my drive home every day - specifically stray dogs. And there were many days where I would read newspaper reports about nighttime drivers tragically dying in car accidents after swerving off the road to avoid hitting dogs that ventured onto the roads and highways. As a concerned citizen, I was determined to find the cause. After months of asking around, I found out that the problem was low visibility of small animals and shock as they jumped onto the road without warning. My solution was to design a reflective collar from throwaway denim and automotive retroreflective, which, when put on a dog, made it visible from a distance of 500 meters on the entire width spectrum of the road. We conducted tests on a sample size of strays in the city and were delighted with the results.

The project was then incorporated

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into the local animal welfare community. I sponsored the material and the production myself. And after one month, the project died.

We were completely exhausted of funds, and the meagre donations and sponsors that were still helping were doing nothing more than delaying the imminent death of the project. This was a heartbreaking development. However, through a combination of serendipity and strategic word of mouth, the news of my faltering project had reached the ears of Tata Group chairman and distinguished Cornell alumnus, Mr. Ratan Tata.

In the following months, the prospects of my project changed and I learned some very important lessons about the influence of a single player in the sustainability of a project – the “Businessman”.

In under a month, Mr. Tata helped me:

1) set up a production model using an organization of underprivileged tailors

2) create a self-sustaining cash flow via the sale of collars in select communities

3) talk to the retroreflective manufacturers for wholesale rates around the year and

4) set up donation boxes for free used denim across the country The result: I am proud to say that the project is now 2 years old and is functioning across 17 cities in India with a manufacturing rate of 3000 collars per month.

I was lucky. Not everyone has a businessman like Mr. Tata as a mentor. In the current business culture, unless businessmen and venture capitalists have a monetary incentive, such projects are typically not looked at. In fact,

most projects don’t even make it to VC’s at all, especially small scale projects. While money and venture funding are critical to an under the radar innovator, guidance and mentorship are equally important, but often overlooked.

Businessmen like Mr. Tata are the

key to bridging the gap between innovation and execution. But such mentorship does not need to be a purely serendipitous event that every entrepreneur hopes for. Business school alumni networks can more efficiently cultivate nurturing relationships between

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innovating students and enterprising businessmen. If we can teach all business students to act as mentors and guides to the next crop of entrepreneurs and innovators, we can jump start the entrepreneurial ecosystem and facilitate the success of more ideas and projects. Successful innovation no longer needs to be an uphill battle.

There are resources already in existence that aim to connect entrepreneurs and enterprising businessmen. The best example of active innovation hunting and cultivation is the Foundation for Innovation and Social Entrepreneurship founded by the Tata Trusts. Since 2007, Lockheed Martin has sponsored the India Innovation Growth Program (IIGP) with the aim of accelerating innovative Indian technologies into global markets and has helped produce over 350 successful innovations with nearly USD$1 billion of economic value addition to India in the last decade.

As a first-of-its-kind collaboration, IIGP has successfully brought core competencies from national and international institutions under one umbrella.

The businessman of the new age has an obligation to help cultivate and encourage innovation that has social impact, regardless of industry and expertise. He should always be on the lookout for talented innovators and new innovations, whether the idea is in the thought inception phase or any other, and is prompt in extending mentorship and incubation resources. As for business firms, it is time they recognize, like Lockheed Martin did, the scale of the impact they can have by helping innovators succeed. This can be done as an active initiative that improves a

firm’s moral standing in society and boosts its image as a technology driven firm, or as a new phase of CSR that involves actual quantifiable impact. The ways of the world

Cornell Business Journal | Fall 2016

are not easy. But we have businessmen. And we have innovators.

And they have only just started to work together to make our world a better place.

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TOYOTA’S REMEDY FOR AILING U.S. HOSPITALS

“While the differences between the automobile and healthcare industries are obvious and vast, the concepts of TPS lean operations have been able to transcend industry lines because they are as much about a managerial philosophy as a mechanism of action as they are a protocol.”

The Hospital While there continue to be advances in medicine and healthcare the increasing burden of an aging U.S. population and proliferation of chronic disease states have led to shortages in both healthcare personnel as well as healthcare facilities.

From a business perspective, the goal of high-value medical care is for any medicine or health service to be valued greater than its cost.

To that end, meaningful changes in the status quo can only be implemented if the value of medical care is properly estimated in the first place. It is then up to the health care systems to reduce costs, and this is where the Toyota Production System may be worth emulating in order to reduce waste.

There are 5,627 registered

ANDREW DAVOODIAN, MBA ‘17

hospitals in the U.S. with over 34.8 million admissions and 900,000 staffed beds, totaling expenses of approximately $892.7 billion.

According to a recent American Hospital Association survey, roughly two-thirds of hospitals lose money providing patient care with one-third losing money overall, and hospital margins are down 34% from pre-Balanced Budget Act levels.

Medicare and Medicaid cover more than half of care provided and subsequently drive hospital financial performance, with private pay compromising the rest. The majority of hospitals lose money treating Medicare and Medicaid patients because they pay less than the cost of care provided to those patients. As a consequence, this puts pressure onto the private sector to make up losses.

Efficiency & Timeliness Hospitals are constantly struggling to remain financially stable and provide for capital ventures, while simultaneously attempting to stem losses of revenue associated with their unique operational structures. Two examples of this challenge revolve around efficiency in the Emergency Department (ED) and timeliness in the Operating Room (OR).

According to the Centers for Disease Control and Prevention’s National Center for Health Statistics, of all 136.3 million emergency room visits annually, 16.2 million result in hospital admission and another 2.1 million into critical care unit admission. Roughly one-in-four visits have patients being seen in fewer than 15 minutes, meaning the other three are spending precious time waiting

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in the ED. Since only 12% of ED visits become hospital admissions, it is not difficult to see why EDs are crowded, and their staff overworked.

These figures highlight the importance of having an efficient patientresponse protocol, which should include addressing everything from a common cold to a pulmonary embolism (blood clot in the lungs) requiring immediate advanced imaging, specialized targeted drug administration and possible subsequent transfer of care. For a common cold, a delay ranging even as much as several hours would not change the patient’s overall health outcome, although it would result in lower patient satisfaction. Compare this to a pulmonary embolism in which a delay in the range of seconds could lead to increased morbidity and mortality, and the importance of timeliness becomes clear.

An article in the Journal of Clinical Anesthesia discussing operating room time costs discussed a study of 100 U.S. hospitals which showed that provider charges average $62/ minute in the OR, not including surgeon and anesthesia provider fees. An all too common reason behind delays from time of onset of general anesthesia to time of incision by the surgeon is the lack of availability of proper surgical equipment. A 2015 study published in the Journal of the American College of Surgeons showed a correlation between operation duration and severe complications, with longer operating times carrying higher risks. These risks include increased rates of deep venous thrombosis, incisional infections, wound disruption, and most strikingly sepsis (a response to infection that leads the body to injure

its own tissues and organs) which occurs 16.6 times more often per additional hour of operative time.

Operational efficiency is not just important for a hospital’s bottom line, but for its patients, too.

Toyota Production Systems The Toyota Production System (TPS) is an exemplar of lean manufacturing. It presents a core management philosophy of efficiency and integrates it into a sociotechnical system whose primary purpose is to prevent and eliminate muri (Japanese for “overburden”), mura (“inconsistency”) and muda (“waste”). The seven kinds of muda are waste of: overproduction, waiting, transportation, processing, inventory, movement and defects. Proactively addressing these areas of waste leads to increased efficiency, productivity and profitability.

Recognizing waste is hard enough, let alone addressing it proactively and designing it out of a process since most muda is invisible. One muda that applies directly to long waiting times in the ED is “the waste of time on hand,” or simply waiting. Time not being used effectively is waste which translates directly to the hospital incurring higher wage costs. This occurs both to the patients as they wait to be registered, seen and then discharged, as well as to the physicians, nurses, phlebotomists and techs who wait on patients, labs, imaging, orders and signatures.

While applying a TPS approach to eliminate muda in the ER may be challenging given hospitals’ resource constraints, there are some successful examples to reference. For instance, Kings County Hospital in Brooklyn now has a patient navigator rather than

Cornell Business Journal | Fall 2016

a security officer to direct patients to triage as soon as they enter the front doors of the emergency department. This is one example of an easy efficiency improvement; efficiencies like this have led to reduced redundancies and an estimated $215 million in combined savings and revenue for hospitals in the past decade, according to a report from NYC Health + Hospitals.

Another muda that applies directly to the OR relates to the processing of surgical equipment. In particular, Seattle’s Virginia Mason Medical Center explored ways to improve lean processes regarding their surgical instrument processing. They did this by using daily defect sheets, redefining operator roles and increasing staff training, adjusting certain workspace, mistake-proofing and continuous feedback as they addressed numerous facets of the Seven Wastes.

In doing so, they were able to reduce instrument processing errors by 50% from 3.0% to 1.5% of surgical cases. They also minimized assembly errors of packaging from 0.66 to 0.24 errors per hundred cases and foreign objects from 0.17 to 0.02 errors per hundred cases, as detailed in the Joint Commission Journal on Quality and Patient Safety. Given the significant cost of each minute in the OR, restructuring to a leaner operation has a tangible and direct positive impact, both financially as well as socially.

Obstacles While the differences between the automobile and healthcare industries are obvious and vast, the concepts of TPS lean operations have been able to transcend industry lines because they are as much

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about a managerial philosophy as a mechanism of action as they are a protocol in operations. In this age of globalization and information sharing, it should not come at too great a surprise that perhaps the remedy for ailing U.S. hospitals may in fact be found within the corporate walls of a Japanese

automotive manufacturer.

As such, one way in which to address struggling U.S. hospitals is to apply business management concepts to the intricacies of the daily hospital work flow, and not just the financial and macro-level aspects of hospitals and healthcare

systems. The steadily growing population of physicians with business degrees should help this push for leaner processes. Hopefully, this will ultimately translate into dollars saved and more importantly, highvalue medical care.

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T H E WE LLS FA RG O S CA NDA L A ND T H E MOD ERN IND I CT M E NT OF F I N ANC IA L PROF E S S I ONA LS

“Today, bankers, traders and financial executives are guilty until proven innocent and are at the mercy of politicians.”

JORDAN YOUNG, MBA ‘18 Vilifying financiers is nothing new; as long as there have been lenders, there has been an angry public bemoaning the dreaded debt collector. What is new is the stripping away of the rights of financial professionals in the post-2008 financial crisis US. Today, bankers, traders and financial executives are guilty until proven innocent and are at the mercy of politicians.

Viewers should have half-expected to hear the evil empire music from Star Wars playing in the background as John Stumpf appeared before Congress. The hearing was eerily reminiscent of Joseph Stalin’s staged “show trials,” which were used as a means of legitimizing the horrible purges rampant in the Soviet Union during the 1930s.

The world helplessly observed as high ranking generals, notable politicians and influential intellectuals were paraded in front of a kangaroo court and subjected to aggressive and manipulative cross-examination tactics in trials that were scripted and designed to

perpetuate a false narrative.

problems and real villains.

Elizabeth Warren’s cross examination of John Stumpf had a similarly theatrical tone and demeanor.

Stumpf, frequently limited to oneword answers, was perpetually interrupted as Warren employed numerous manipulative tactics. To the untrained eye, this public condemnation looked like the trial of an obviously guilty and evil man.

In reality, the hearing was a craftily tailored show, fitting a narrative promoted by numerous politicians for political fodder, having little to do with public good.

John Stumpf was called before Congress to answer for thousands of fraudulent accounts, opened by Wells Fargo employees. In some instances, these accounts were attached to non-existent social security numbers under names of people who did not exist. In others, these accounts were assigned to real people, putting their financial well-being at risk. Wells Fargo employees, coerced into applying aggressive sales tactics, became additional collateral damage during the hearing. Yes, these actions were unethical. My defense of Wells Fargo is not a defense of these behaviors, but rather an objection to what has become a clear witch hunt.

Early in our country’s history, John Adams and the Federalists expressed concern over the potential rise of “mob rule” in a government where the common people impacted policy. Today’s world of sound-bite news and social media has made this fear a real cause for concern. Politicians, keenly aware of our public’s ever shortening attention span, have mostly taken to avoiding real issues, real

Cornell Business Journal | Fall 2016

To understand Wells Fargo’s strategy and what ensued, it is essential to understand changes that have occurred in retail banking as a whole. Industry consolidation over the past thirty years sharply reduced the number of

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retail banks in the US as countless community and regional institutions were gobbled up through a series of mergers and acquisitions. As “mega banks” emerged, the responsibilities left to branch staff shrank, becoming extensions of much larger organizations.

Bookkeeping and underwriting processes shifted to a central location and many remaining tasks were made more efficient as sophisticated software systems took over for archaic P&L management.

Simultaneously, banks began engaging in easy-lending practices. In need of a way to quickly deliver credit to retail consumers and spurred on by generous commission structures, branch personnel became the method of choice.

In the end, sales and relationship management became the biggest pieces of the remaining pie left to branch office employees.

The changing role of branch staff significantly impacted both bank strategy and the ways in which customers interacted with bank platforms. Similar to other industries operating branded retail operations, decision making was increasingly centralized in an effort to create a consistent customer experience while implementing best practices to maximize revenue. This put decision making further away from actual execution. In some instances, retail bank operators, including J.P. Morgan Chase, Bank of America and Wells Fargo, began scripting the interactions of bank staff with customers. Practices put in place by upper management mapped out the ways in which retail bankers were to converse with customers, at times going as far as to dictate the specific language to be used.

“Secret shoppers,” bank customers employed to audit the staff,

were often used as a means of enforcing these policies.

The evolution of the “local banker” to salesperson led public perception, which largely viewed these individuals as bank officers. This, in combination with assumptive sales tactics put in place from the top down, resulted in many dissatisfied customers, “preyed” on by commission hungry salespeople.

Sadly, what sounded like a good idea in a board room, did not play out exactly as anticipated. When senior management finally realized the negative impact these practices had on relationship building, most were quickly overhauled, both at Wells Fargo and elsewhere. John Stumpf and Wells Fargo are not to blame. The Wells Fargo Scandal was not limited to a single bank but rather was the result of industry change. The choreographed and aggressive sales tactics noted above were practices deeply embedded in the industry, and employed by every major bank.

As far as regulatory controls go, where were ChexSystems, Tr a n s U n i o n , E q u i f a x a n d Experian? Surely ChexSystems, the consumer reporting agency responsible for tracking consumer checking and savings account history, deserves much of the blame for the incidents in question. Branch bankers were selling checking accounts, not complex derivatives. Some level of discretion, some absence of red-tape, is expected with low price-point products. Can you imagine if opening a bank account was a fraction as difficult as applying for a mortgage?

To this last point, branch employees knew what they were doing.

Senior management did not desire to have employees engage in

fraud. Those gaming the system wanted to earn increased commission dollars and broke rules to do so. This is no different than a realtor or car-dealer pressuring a potential customer to sign the dotted line. Here too, salesmen have the potential to negatively impact a person’s finances and credit. Yes, all these behaviors are bad, but why are retail bank staff looked at differently?

The answer lies in the broad nature of banking coupled with the public’s general misunderstanding of the various roles of finance professionals. Banks deliver services to diverse clients, from merger and acquisition advice to C-suite executives to retail checking accounts, with many degrees of separation along the way. The vast majority of the public does not understand this. Leave the Cornell campus and ask someone on the street what an investment banker does.

My dollar says the answer sounds either more akin to trading or simply results in a bewildered look.

A retail banker typically only provides bank accounts and simple credit products, not sophisticated investment vehicles, and, as such, should be viewed no differently than any other such salesman.

Perhaps Elizabeth Warren would be interested in apprehending an even greater financial menace in society. There are a number of institutions openly selling products to young adults, for tens of thousands of dollars. These products are incredibly over leveraged, sold utilizing very loose credit standards and lose the majority of their value within just a few years, leaving the victims saddled with debt. I’m looking at you, car dealers. Unfortunately for consumers, auto retailers just don’t

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generate the same publicity and headlines as do banks.

During the Wells Fargo senate hearing, John Stumpf and Wells Fargo’s management were subject to unyielding vilification. Elizabeth Warren was trumpeted as a hero for delivering a blunt verbal tongue lashing to the “evil” Stumpf. This wasn’t a trial and there was no way for Stumpf to defend himself.

Warren was in control; she set the stage and made the rules, framing Stumpf as guilty from the start.

Warren’s questioning was not intended to reveal facts, but to bully and abuse: “Have you resigned as President and CEO?”; “Have you returned one nickel of the millions of dollars you were paid while the scam was going on?” Stumpf actually tried to answer this last one, beginning to note that fewer than 1% of Wells Fargo employees were actually involved in this incident, but almost immediately, Warren cut him off, allowing only “yes” or “no” responses. This was bullying, plain and simple. To the viewer, Warren made the scandal sound widespread and intentional when the reality was something quite different. A trial attorney might have objected to such questioning but alas, here, the judge was also the prosecutor.

Word swapping, false correlations and masked, wild accusations were just some of the tools employed by Warren. The senator frequently referenced numbers as hard evidence without any context for what they meant. Speaking about Wells Fargo’s cross-selling efforts, Warren noted, in horror, that Stumpf set eight accounts as the target number for each customer.

In retail banking land, accounts are just products: checking account, savings account, debit card, credit

card, online banking, online bill pay, direct deposit and overdraft protection. Voilà, eight accounts. In fact, according to a 2016 RFI Group study, the average American had 8.5 retail banking products. In this context, the number eight is far less jaw-dropping.

About half way through her interrogation, Warren began using the word “scamming” to replace the word “cross-selling.” When Stumpf interjected, noting cross-selling was a way of deepening relationships, Warren cut him off, responding “we’ve been through this.” This forced shift in verbiage reinforced, in the audience’s mind, Stumpf’s guilt as another fact of the proceeding, a calculated manipulation on Warren’s part.

Warren made a number of enormous leaps in logic as she accused Stumpf of perpetrating a massive conspiracy. According to Senator Warren, cross-selling, the sale of direct deposit, online banking etc., was the key driver for the appreciation in Wells Fargo’s stock over past few years. She should be reminded that “correlation does not equal causation”. Even more incredulous was Warren’s implication that Stumpf knew that crossselling, scamming, was driving the stock higher and allowed it to continue so that his own personal holdings in Wells Fargo stock would appreciate. In plain English, Senator Warren attributed direct deposit and checking accounts as the main drivers of Wells Fargo’s stock price appreciation. She argued that CEO John Stumpf, intentionally encouraged $12 an hour branch employees, at thousands of banks, to sign customers up for credit cards and checking accounts that they did not want to increase the value of

Cornell Business Journal | Fall 2016

his own personal holdings of Wells Fargo stock. I find this very difficult to believe. Sadly, Warren’s accusations, absent this smoke and mirrors, were not what the audience heard.

There is a major oversight, a failure for which Stumpf is to blame. He is guilty of failing to represent the financial services industry appropriately in front of the Senate, he is guilty of not standing up for himself and he is guilty for allowing himself to fall victim to overt, manipulative tactics. The time has come for financial institutions to stop tucking their tails between their legs. As part of a complex ecosystem, it is their responsibility to explain to the general public, in plain English, what it is that they do and why they do it. At a minimum, Stumpf should have made it clear to the audience that he was not allowed to get a word in edge wise. At least then, this complex issue would not have looked so black and white.

As for Senator Warren, she should be ashamed of herself. There are some real policy issues that need to be addressed here in the US. Sadly, many are tabled, as only stories that can be easily digested through a Twitter feed seem to make headway while more nuanced and less shocking issues are set aside. Perhaps this is why we have not had a national discussion on healthcare, despite clear failures in our system. But that is another topic for another day.

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W RITERS

Brian Balduzzi, ESQ

Alexander Bramlet

Andrew Davoodian

Mustafa Donertas

MBA’18

MBA’18

MBA’17

MBA’18

Matthew Lyons

Shantanu Naidu

Jordan Young

MBA’18

MBA’18

MBA’18

http://www.cornellbusinessjournal.org/ Cornell Business Journal | Fall 2016

About RED Tal ks ? What will you share? What will you contribute? What will you learn? Who will you meet?

RED Talks offers the chance to transfer your knowledge, build your confidence, and share your personal or professional stories with peers, contributing to the collaborative spirit of Johnson.

If you are interested in giving a RED Talk, email redtalks@cornell.edu with a one-paragraph description of your idea, and a list of 1-3 points you expect participants will learn through participation.

RICK ROSS

*RED Talks are held on Wednesdays at 3-3:45 pm in Sage Hall 301

THE BRIGHT BILLIONAIRE GURU P.78