thewallstreetjournal. monday,june20,2016| r1...

© 2016 Dow Jones & Company. All Rights Reserved. THEWALL STREET JOURNAL. Monday, June 20, 2016 | R1

JOURNAL REPORT

Preet Bharara talks terrorism, corruption, and how business leaders should view cyberthreats, R4 | Philip Tetlock on how to make forecasts more accurate, R5

Michael Froman discusses where the TPP stands and why the politics surrounding it have been so tough, R6 | Blythe Masters explains blockchain and its potential, R6

Thomas Curry talks about balancing safety and innovation in regulating fintech, R7 | Lt. Gen. James McLaughlin worries about adversaries taking control of the U.S. cyber networks, R8

John Collison and David Gurle on how new technology is changing the landscape for CFOs, R8 | Bill McInturff and Frederick Yang offer insights into a very unusual election, R9

Alan Blinder and Diana Furchtgott-Roth discuss what’s ailing the U.S. economy, R10

PLUS The CFO task forces’ management and policy priorities, R2

INSIDE

sertive than his predecessors,but I think a lot of that is forpolitical consumption at home.

MR. BAKER: Should the U.S. gettougher with China?MR. HUNTSMAN: Absolutely.There are some tools that youcan use. For example, there’ssection 337 of the Trade Act,which allows you to block atthe border things that are arisk to our national security. Ithadn’t been used with respectto IP theft before, but give it atry. Second, treat companiesthat engage in cybertheft as ifthey were laundering moneyout of North Korea. Whatabout companies associatedwith IP theft who want to gopublic on the New York StockExchange? Just say no. There

are a half dozen things thatyou could do that would behuge attention getters. Today,it’s wide open. And so why dothey do it? Because there’s nopenalty.

The next presidentMR. BAKER: The domestic op-position here to trade, the do-mestic concerns about losingjobs to countries around theworld, how is that going towork for the next president ofthe United States in terms ofdealing with the most impor-tant economic relationship inthe world?MR. HUNTSMAN: When I was inChina just in recent weeks,they said for the first timethat I’ve heard that they wantto be in Trans-Pacific Partner-

ship, which is an unbelievableadmission. Joining the UnitedStates with trade agreementsis an aspirational thing. Who-ever’s elected president, ifthey don’t already know this,will recognize that TPP servesan extremely important role asour strategic backbone in theregion.

And that will have to berecognized and dealt with. Youjust can’t wish it away, youcan’t renegotiate it. You can’topen up trade agreements thathave already been done. No-body would ever negotiatewith you again. Nobody wouldever have confidence in theUnited States again to do an-other trade agreement. Itsounds good rhetorically onthe stump.

Foreign business continuesto bet big on China. Should thenation’s economic slowdowncurb that enthusiasm?

For insight, The Wall StreetJournal’s editor in chief, Ge-rard Baker, spoke with Jon M.Huntsman Jr., former gover-nor of Utah and ambassadorto China and current chairmanof the Atlantic Council. Hereare edited excerpts of theirconversation.

What lies aheadMR. BAKER: It’s been a prettydramatic few years for theglobal economy, but for Chinain particular—making a tran-sition from the export-ledeconomy that has grown sorapidly in the last 25 years, to-ward a more consumptioneconomy. That entails a lowerrate of growth. It’s not been asmooth transition. Give usyour sense of how it’s going.MR. HUNTSMAN: [Chineseleader] Xi Jinping is an inter-esting character. Has Xi Jin-ping seen the most tumultu-ous periods in recent Chinesehistory? Indeed, he has. Doeshe want to return to thoseyears? Guaranteed not.

So he’s leading the chargeof what you would call thefifth generation of leaders.Low in ideology, high in tech-nical capacity. English-speak-

ing degrees from the best in-stitutions in the world. And avery sophisticated read of theUnited States.

Where Xi goes is going be afunction of the months ahead.What lies ahead is the run-upto the 19th Party Congress.There’s probably going to be a70% turnover in the CentralCommittee. These are prizedseats. And he’ll have to pickfolks to come in. Who hebrings in will be very telling interms of where he wants totake reform.

MR. BAKER: But how do theymanage the [economic] transi-tion?MR. HUNTSMAN: Expand indus-try, commerce, innovation, en-trepreneurship. You have moreindigenous forms of commercethat begin to build up. They’rein the middle of that journey,and it’s a rickety, unpredict-able ride. And there’s no guar-antee they get to the promisedland. But Xi Jinping and theeconomic planners knew thatthey had no choice.

The key challenge for XiJinping is one of communica-tion. He has to convince theaverage citizen that the timeis right to take your renminbiout from under the mattressand invest it in the future ofthe country.

Every citizen says, going allthe way back to the OpiumWar, it seems that every 20years or so there’s a disrup-tion that causes people to runfor cover and to seek safety.So the people of China legiti-mately are saying, “Is the timeright? Is the message of confi-dence that there’s going to bea better, more predictable to-morrow actually upon us? Andif so, we can take our renminbiout and begin to invest it inour future.” But that hasn’thappened yet.

Assertiveness abroad?MR. BAKER: Let me ask youabout foreign policy, becausethat’s been another areawhere Xi Jinping seems tohave taken a somewhat differ-ent tack from his predecessor.Much more assertive, muchmore aggressive. What’s hetrying to do?MR. HUNTSMAN: Xi Jinpingwakes up every morning andhis No. 1 priority is domesticstability. If he can’t keep 1.4billion people calm, employedand at peace, the whole sys-tem falls apart.

So he wakes up everymorning and he prays for abenign external environment.He doesn’t want to go to warwith anybody. He might flexhis muscles and act more as-

A Delicate Balancing ActFor China’s LeadersJon M. Huntsman on what they have to do

brought in a range of activities.Aside from that, because of theway the stress test works,you’ve had to have a conserva-tive nature to everything, be-cause at the end of the day, ifyou think about any businessdecision you’re going to make,you have to assume that thebusiness decision is going to gowrong at the worst possiblemoment, and hold capital as ifit went wrong. That’s what thestress test says. It will makeyou very safe. The question iswhether it restricts lending.

MR. BERMAN: Does it?MR. MOYNIHAN: We could lendmore money if the capital levelswere different. But if the pointis that we’ll have so much capi-tal we can never fail, this iswhere we are now. Over time, Ithink there will be people wholook at this and say, “Is the in-surance policy too large or toosmall?” The policy right now isvery strong in favor of safetyand soundness, and it shouldbe. Over time, I think peoplewill think it through and we’llsee where we get.

MR. BERMAN: You think it willdawn on people that the econ-omy is perhaps being retarded

by lack of lending?MR. MOYNIHAN: Well, if youlook at especially small banksright now, if a small bank fails,the FDIC liquidates it. Thebanking industry has to main-tain the FDIC fund. The checkgoes out, 13% of it from Bankof America, pays for the costof cleanup. So, the question is,do you need all that regulationfor these smaller enterprises,and the answer is no. The bigbanks, our view is take it awayfrom those banks because youstart to see what it can cause.

Over the next 10 or 15years, people will look backand say, “Did we get it right?”That will require an honest de-bate about what we want toachieve out of this industry.The issue for us is we have toget far enough away from itthat people don’t remembereverything that went wrong.Not that they’re going to for-get what went wrong; they’regoing to think about it in thecontext of a broader scope.

MR. BERMAN: So you grin andbear it in the meantime?MR. MOYNIHAN: We made $16billion last year after tax.That’s worth grinning andbearing.

credit cards and home-equityloans that were supposed to besecured and weren’t. You haveto have balance in your portfo-lios, in your risk, in everything.

MR. BERMAN: Last few years,revenues at Bank of Americahave been declining.MR. MOYNIHAN: That’s becausewe got rid of a lot of stuff thatdidn’t make sense, and thenthe interest-rate environment.That will reverse itself, but it’sgoing to take higher rates.

MR. BERMAN: When you seenegative rates, can you evencompute that?MR. MOYNIHAN: Well, we do ittoday in Europe. It is veryhard to imagine saying to oneof our 50 million consumershere, “Give us $100 and we’llgive you $99 back.” I don’tthink the U.S., based on anyeconomic estimates we haveor forecast, is facing it.

MR. BERMAN: How do you getBank of America moving?MR. MOYNIHAN: More loans,more deposits, working for allthese types of clients on fees,and taking costs down. Wehad costs at $82 billion in2010 and we brought thatdown to $57 billion last year.

Stress testsMR. BERMAN: Tell us about theregulatory environment.MR. MOYNIHAN: If you sat backand said, “What was the needout of the financial crisis,” toput stability back in, you had tofix capital, liquidity, range ofactivities. You had to have acontract with society that said,“If the world ever went in away that no one expected, andall the stuff you did didn’twork, could you liquidate oneof us through bankruptcy or anFDIC proceeding or a proceed-ing outside bankruptcy”; thosewere all things we’re putting in.We have worked hard to get allthat done.

So, you have a companythat’s gone from $100 billion li-quidity to $400 billion; from$60 billion to $160 billion intangible common equity overthe last 10 years. You built thiscapital, this liquidity. You

AnOptimistic ViewFrom theBigBanks

Big banks have been busytrying to repair themselves, andmake money, in this post-finan-cial-crisis era of more regula-tion and less economic growth.To better understand the chal-lenges banks face, Dennis Ber-man, financial editor of TheWall Street Journal, spoke withBrian Moynihan, chairman andchief executive of Bank ofAmerica. Edited excerpts oftheir conversation follow.

Clouded view?MR. BERMAN: It felt like bankswere more resilient at the be-ginning of this year. Why isn’tthe investing community com-ing around to that view?MR. MOYNIHAN: All of thesegreat companies out there,

they create things, new things,and our job is to lend themthe money, help them raise thecapital to help that go on. Sowhen the world believes theeconomy is not going togrow—and you’ve seen thisthing ebb and flow and ebband flow—and if you thinkabout the estimates of mosteconomists from last fall towhat they are now, as thathappens, as rates come down,and the prospects for our in-dustry and capital marketscome down, the reality is thatthe trading volumes and stuffhave actually been fine.

MR. BERMAN: That doesn’tsound like the dynamic days ofyore. It sounds like Daniel Tar-

ullo, the Federal Reserve’smain regulator, would say youshould be doing simple bank-ing. Do you agree with him?MR. MOYNIHAN: There’s nothingsimple about taking a majorM&A transaction through themarket or raising tens of bil-lions of dollars of financing.

The other part of this: allthings in moderation. You haveto have balance in your com-pany to weather the storms. Ifyou go back and look at whatwe got wrong, it was when weoverreached. Two-thirds of ourloans were consumer loans, in aconsumer-led economy. Sowhen it went wrong, it took us.Everybody thinks about mort-gages getting in trouble. Whatreally got us in trouble was the

Brian Moynihan of Bank of America on how thecompany is doing—and the regulatory balance

‘The question is, doyou need all thatregulation for thesesmaller enterprises,and the answer is no.’

‘Who he brings inwill be very tellingin terms of where hewants to take reform.’

RALP

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When two top economists briefed a gathering of chief finan-cial officers at The Wall Street Journal’s CFO Network conferencelast week in Washington, D.C., they cautioned that tepid business

investment is clouding theirforecasts.

The economy is firing on justtwo cylinders, in part, becausebusiness isn’t spending to ex-pand. The CFOs were quick toexplain. Yes, business invest-ment is sluggish. But that’s the

downstream symptom, not the upstream cause.Upstream is a world of problems for CFOs. And that’s

prompting many to reduce risk and keep powder dry. At the topof the list: A wild U.S. presidential election campaign that’s ham-mered big business and trade—from the left and right; the possi-bility of Britain leaving the European Union; uneven global de-mand for their products; and technology that’s rapidly changingthe workplace and the size of the workforce (read: customers).

The CFOs wrestled with these and other issues during theconference, from cybersecurity, to China’s struggles, to trade andregulation. Here’s a look at those conversations.

—John Bussey

Why CFOs Are So Wary

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R2 | Monday, June 20, 2016 THEWALL STREET JOURNAL.

The Task Forces’ PrioritiesCFO Network executives split up into five groups to debate their management and

policy agendas in the following areas. Here are their top recommendations.

JOURNAL REPORT | CFO NETWORK

BEING CFO

1 EmbraceConstructive Debate

Engage in an annual con-structive debate resulting ina budget that’s dynamic withregard to the current envi-ronment and consistent withthe multiyear strategic plan.

2 Make Budgeting aDynamic Process

Use dynamic modeling, in-cluding a range of outcomesin a rolling process, to takeinto account volatility andenvironmental changes asthe year progresses. Budgetsubmitted to the board is asnapshot.

3 CommunicateMarket Realities

Use the budget as the toolto drive messaging to em-ployees, the board and inves-tors. Use benchmarks to helpframe the budget, then ex-pand the use of leading indi-cators to move the discus-sion beyond the financialsand into operations. Educateinvestors about the businessenvironment in which youoperate, clearly identifyingcompetitive threats, the im-pact of technology and otherinnovations.

4 CFO as anOperating Partner

CFO shouldn’t just keep divi-sions/teams accountable formeeting the budget, but alsohelp them meet their goals.The budget becomes thestarting point for the CFO toplay a big role in operationalexecution.

CO-CHAIRSKatherine C. Harper, CFO,TronoxVanessa Wittman, CFO,Dropbox

SUBJECT EXPERTJohn Engler, President,Business Roundtable

THE FINTECH REVOLUTION

1 Deploy Tech forBusiness Intelligence

CFOs should use fintech totap proprietary data and pro-vide critical company analysisand insights.

2 Use Cloud Services toStreamline Workflow

Use cloud-based platformsas secure, time-saving waysto better run the business.Technology can save costsand allow companies to scaleup quickly.

3 Every CFO Should Havea Fintech Strategy

The growing fintech marketcalls for CFOs to have a planfor how to best leveragethese evolving technologiesfor their business. Because ifyou’re not, your competitoris. Implementing fintech canboost productivity, cut costsand differentiate.

4 Improve B2BPayments and Pricing

Use fintech to replace anti-

quated business-paymentsprocesses with more stream-lined tech solutions, whilealso bringing down costs.

CO-CHAIRSWilliam Maw, CFO,Liquidnet HoldingsKimberly J. McGarry, CFO,Options Clearing Corp.John Rainey, CFO, PayPal

SUBJECT EXPERTPatricia Kemp, GeneralPartner, Oak HC/FT

THE CYBER WAR

1 Engage the EntireOrganization

Engage the whole organiza-tion in cyberdefense, fromsenior leadership to the rank-and-file. Executives need tobe engaged in and account-able for cybersecurity plan-ning. It is no longer just theIT department’s job to pro-tect the company.

2 Conduct RoutineAssessments

Hack yourself. The C-suiteshould set up regular cyber-security checks. Build atracking mechanism thatisn’t static. Find the vulnera-bilities in your system before

others do. Hire professional“hackers” to detect anyweaknesses in your system.

3 Invest inTalent and Tech

Hire and work with experts.Investing in technology secu-rity will only go so far if youhaven’t also invested in theright talent. Budget for regu-lar upgrades given rapid ad-vances in technology. Under-stand and use theinvestments you’ve alreadymade.

4 Practice theResponse Plan

Have response plans, includ-

ing business continuity, andpractice them. Make sure ex-ecutives are participating intabletop response exercises.

CO-CHAIRSFrank Calderoni, CFO,Red HatKelly A. Kramer, CFO,Cisco SystemsLori A. Varlas, CFO,Hitachi Data Systems

SUBJECT EXPERTJohn Banghart, Senior Di-rector, Technology Risk Man-agement, Venable LLP; for-mer Director for FederalCybersecurity, National Secu-rity Council, White House

BUSINESS REPUTATION

1 Do What’s RightFocus on doing the right

thing in the long run for em-ployees, customers, share-holders and communities.When companies lose focuson doing what’s right, overallbusiness reputation suffers.

2 Create BusinessAmbassadors

Improve internal communica-tions so employees becomebetter-informed ambassa-dors. Help employees (retiredand active) and suppliers un-

derstand the nature of yourbusiness to become yourvoice in the community andadvocate for you with policymakers. Arm them with moredata to allow them to speakup publicly.

3 ArticulateBusiness Purpose

Engage more interactivelywith employees, shareholdersand communities to heartheir concerns and explainthe value of business to theeconomy.

4 Value Social MediaRecognize the power of

social media and harness theability of companies and theiremployees to inform publicopinion about business.

CO-CHAIRSDavid W. Meline, CFO,Amgen Inc.R. Neil Williams, CFO, Intuit

SUBJECT EXPERTLeslie Gaines-Ross, ChiefReputation Strategist,Weber Shandwick

INVESTING FOR THE FUTURE

1 Create anInnovation Culture

Instill long-term vision incompany culture. Createquantitative and qualitativegoals across all levels. Createa culture that empowers risk-taking and innovation.

2 Speak to Main Street,not Just Wall Street

Focus your corporate strat-egy to appeal to all stake-holders, including customers,employees and shareholders.

3 Set and Defend YourFinancial Strategy

Be clear and consistent inestablishing and defendinglong-term financial goals andcapital allocation. Identifyand manage your investorbase accordingly.

4 Properly AlignCompensation and

IncentivesCompensation should be insynch with and reinforce thecreation of long-term value.

Think creatively beyond re-muneration.

CO-CHAIRSJohn M. Jureller, CFO,Frontier CommunicationsKathleen Philips, CFO,Zillow GroupWilliam Zerella, CFO, Fitbit

SUBJECT EXPERTLinda A. Livingstone, Pro-fessor, Dean, ManagementSchool of Business, GeorgeWashington University

(Chief financial officersexcept as noted)

Kedrick D. Adkins,Mayo Clinic

Raj Agrawal, Western UnionChristopher J. Appleton,

Embraer Aircraft HoldingRajiv Bansal,

ANI Technologies Pvt. Ltd.Richard Beckert,

CA TechnologiesBeth Bombara, Hartford

Financial Services GroupJudy L. Brown, Perrigo Co.Stuart Burgdoerfer, L BrandsFrank Calderoni, Red Hat Inc.Paul Carbone,

Dunkin’ Brands Inc.Anil Chanana,

HCL Technologies Ltd.Andrew C. Clarke,

C.H. RobinsonGary Crowe, Ricoh AmericasJatin Dalal, Wipro Ltd.Marcia A. Dall,

Churchill Downs Inc.George S. Davis, QualcommBrian D. Doubles, Synchrony

FinancialKevin Entricken, Wolters

Kluwer NVDaniel Fairfax, Brocade

Communications SystemsEdward J. Fitzpatrick,

Genpact Ltd.Mark J. Flaherty, Sally

Beauty Holdings Inc.Clint Freeland, Dynegy Inc.Frank Friedman, Deloitte LLPRahul Ghai, Harris Corp.Robert L. Glenning,

Hackensack UniversityHealth Network

Kellie Goldstein, TravelChannel

Dipak Golechha, NBTY Inc.Mark J. Guinan, Quest

Diagnostics Inc.Bob Gunderman,

Windstream Holdings Inc.Gregory Gutting,

Erie Indemnity Co.Brad Halverson, CaterpillarKatherine C. Harper, TronoxMark Hawkins, SalesforceScott Hill, Intercontinental

ExchangePaul W. Hoelscher, Horizon

Pharma PLCRobert F. Hull Jr., Lowe’sJamere Jackson, NielsenLuc Jobin, Canadian

National Railway Co.Hugh F. Johnston, PepsiCoJohn M. Jureller, Frontier

Communications Corp.Kelly A. Kramer, Cisco

SystemsPaul Lalljie, Neustar Inc.Kevin Lenahan, Atlantic

Health System

Anne H. Lloyd, MartinMarietta Materials Inc.

William Maw, LiquidnetHoldings

Thomas A. McCarthy, CignaKimberly J. McGarry,

Options Clearing Corp.Jeffrey McGroarty,

SafeguardKaren McLoughlin,

Cognizant TechnologyDavid W. Meline, AmgenCheryl Miller, AutoNationKen Miller, Juniper NetworksMichael Monahan, Pitney

Bowes Inc.James E. Moylan Jr., CienaAldo J. Pagliari, Snap-onSusan Panuccio, News Corp

AustraliaDon Parker, SAS InstituteMark Peek, WorkdayJames Perry, Trinity

Industries Inc.Kathleen Philips, ZillowJohn W. Pietrowicz, CME

GroupBiggs C. Porter, Fluor Corp.Karan Rai, ADS Inc.John Rainey, PayPalJoseph W. Ritzel, Day &

ZimmermannPat Romano, Executive

Business FinanceManager, Dow Jones

David P. Rowland, AccentureSandra Rowland, Harman

International IndustriesPaul Saleh, Computer

Sciences Corp.Stephen Scherger, Graphic

Packaging Holding Co.Anna Sedgley, Dow JonesFrancis J. Shammo, Verizon

Communications Inc.Bob Shanks, Ford Motor Co.Michael Sheridan, DocuSignJeff Shotts, Evernote Corp.John Shrewsberry, Wells

Fargo & Co.Bedi A. Singh, News CorpHarmit Singh, Levi StraussAmit Singhi, FLIR SystemsRobynne Sisco, WorkdayCathy Smith, Target Corp.Marshall D. Smith,

California Resources Corp.Ewout Steenbergen, Voya

FinancialTim Stonesifer, Hewlett

Packard EnterpriseDominique Thormann,

Renault GroupKenneth R. Trammell,

Tenneco Inc.Scott B. Ullem, Edwards

LifesciencesSuketu Upadhyay, Endo

PharmaceuticalsLori A. Varlas, Hitachi Data

SystemsRichard H. Veldran, Dun &

BradstreetGunnar Wiedenfels,

ProSiebenSat1.Media SER. Neil Williams, Intuit Inc.Vanessa Wittman, DropboxWong Wai Ming, LenovoWilliam Zerella, FitbitAndrea Zoeckler, Epson

America Inc.

PARTICIPATING GUESTSJohn Banghart, Senior

Director, Technology RiskManagement, VenableLLP; former Director forFederal Cybersecurity,National Security Council,White House (2013-15)

Preet Bharara, U.S. Attorney,Southern District ofNew York

Alan S. Blinder, Professor ofEconomics and PublicAffairs, Princeton Univer-sity; Vice Chairman,Promontory InterfinancialNetwork; former ViceChairman of the Board ofGovernors, FederalReserve System (1994-96)

John Collison, President andCo-Founder, Stripe

Thomas J. Curry,Comptroller of theCurrency, U.S. Treasury

John Engler, President,Business Roundtable

Michael Froman, U.S. TradeRepresentative

Diana Furchtgott-Roth,Senior Fellow andDirector, Economics21,Manhattan Institutefor Policy Research;former Chief Economist,U.S. Labor Department(2003–05)

Leslie Gaines-Ross, ChiefReputation Strategist,Weber Shandwick

David Gurle, Founder andChief Executive Officer,Symphony

Peter D. Hart, Founder, HartResearch Associates

Jon M. Huntsman Jr.,Chairman, AtlanticCouncil; former Governorof Utah (2005-09); formerU.S. Ambassador to China(2009-11)

Patricia Kemp, GeneralPartner, Oak HC/FT

Linda A. Livingstone,Professor and Dean ofManagement School ofBusiness, GeorgeWashington University

Blythe Masters, ChiefExecutive Officer, DigitalAsset Holdings

Bill McInturff, Co-Founder,Public Opinion Strategies

Lt. Gen. James K. “Kevin”McLaughlin, U.S. AirForce, DeputyCommander, U.S. CyberCommand

Brian Moynihan, Chairmanand Chief ExecutiveOfficer, Bank of America

Jean Rogers, Chief ExecutiveOfficer and Founder,Sustainability AccountingStandards Board

Philip E. Tetlock, Professor,School of Arts andSciences and WhartonSchool, University ofPennsylvania

Frederick S. Yang, Partner,Hart Research Associates

CFO NETWORK MEMBERS

CFO NETWORK VIDEOS

Watch interviewsfrom the CFOconference atwsj.com/LeadershipReport

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Where theTPPStandsU.S. Trade Representative Michael Froman on whythe politics of the deal have been so tough

Blockchain is the financialtechnology underpinning thebitcoin digital currency. But italso has the potential tochange the way companiesmake and verify transactions.

Kimberly Johnson, the edi-tor of CFO Journal at The WallStreet Journal, sat down withBlythe Masters, chief executiveof Digital Asset Holdings, todiscuss this technology andwhat it can do.

Here are edited excerpts.

Great opportunityMS. JOHNSON: Could you startus off by explaining whatblockchain is?MS. MASTERS: To start, sus-pend everything that you’veheard or read on the subject ofcryptocurrencies and bitcoins.By this stage, everyone hashad enough exposure to thosetopics to have been at leastpartially confused, and a lothas gotten lost in translation.The simplest way to thinkabout what this technology isall about is actually very unex-citing. And that is, a new,

clever form of database archi-tecture.

You all know what data-bases are, you use them inyour different businesses ex-tensively. The thing about da-tabases is they’re siloed andthey’re generally centralized,and they’re owned and man-aged by someone who has uni-lateral editorial rights.

So when multiple parties toa common transaction inter-act, they are inclined to keeptheir own separate records oftheir respective piece of ajoint transaction, and thatleads to tremendous ineffi-ciencies. An enormous amountof time, particularly but notlimited to financial services, isspent reconciling the differ-ences between records kept indistinct databases that ulti-mately refer to the sametransaction between two par-ties.

Blockchain technology, ordistributed ledger technology,is just a way of using the mod-ern sciences of encryption toenable entities to share a com-

mon infrastructure for data-base retention.

MS. JOHNSON: So how is yourcompany working in this bur-geoning field?MS. MASTERS: Our area of fo-cus is wholesale financial-ser-vices technology, so our cus-tomers are the big financialfirms: banks, exchanges, mar-ket-infrastructure providers,those types of entities. Andwe’re very focused on helpingthose entities essentially de-velop distributed, encrypted,straight-through processingtools that allow them essen-tially to share common data-base infrastructure. Thatmeans that they are able tocut a significant amount ofcost out of the process ofpost-trade financial manufac-turing and actually reduce riskbecause it reduces the time ittakes to complete a financialtransaction once it has beenagreed in the marketplace.

MS. JOHNSON: You’ve said pre-viously that this is one of the

So, What Is Blockchain?BlytheMasters describes what it is, what it can do

biggest financial technologychallenges of our time.MS. MASTERS: Well, it’s one ofthe great opportunities for thefinancial-services sector. But Idon’t want to leave folks withthe impression that there’s noapplication of this technologyin the nonfinancial world. Ifyou think about any multi-party process where shared in-formation is necessary to thecompletion of transactions,and the coordination of activ-ity and the exchange of value,that’s where blockchain tech-nology can be put to good use.In terms of the audience inthis room, probably somethingthat many if not all of youhave in common is the chal-lenge of supply-chain manage-ment or dispute resolution invarious business contexts.

Those are the types of con-texts in which blockchain tech-nology has the greatest poten-tial upside. It’s a cost-savingdevice, it’s an error-reducingdevice. In financial servicesthe reason why there is suchtremendous opportunity isthat the post-trade processingof financial services reallyhasn’t been revolutionized inany meaningful sense in de-cades. The major market-infra-structure providers, the ex-changes and the like, they’reoperating on infrastructures

that were designed and built20 to 30 years ago.

But the incentive to changethem is very significant. We’retalking about billions of dol-lars in annual savings for thebanking industry, and percent-age points on capital ratios tobe freed up.

Encryption is vitalMS. JOHNSON: Say I’m the CFOof Wal-Mart and you comealong and tell me that I shouldconsider using blockchain or adistributed ledger technologywithin my supply-chain sys-tem. Why would I want toshare internal informationwith distributors who mightactually be doing businesswith my competitors?MS. MASTERS: There’s a dis-tinction between sharing in-frastructure and sharing theinformation that you keep onthat infrastructure. That’s acommon area of misunder-standing in this space.

In supply-chain coordina-tion what you’re doing is man-aging movement of money inreturn for the provision ofgoods and services in a highlycoordinated fashion acrossmultiple different entities. Andthe most efficient process thatyou can devise to do that isthe one where there’s no dis-agreement between those par-

ties around the timing of whencash should flow, moneyshould be exchanged and/orgoods are needed and need tobe supplied or manufacturedas you work your way back inthe manufacturing process.And the ability to coordinatethat information in a central-ized place, but in a fashionwhere only the entities withthe need and right to knowtheir respective piece of theinformation can access it, iswhere this benefit comesfrom. So the tools of encryp-tion are very vital parts of thisinfrastructure.

MS. JOHNSON: What about thecost of implementing the tech-nology and the return on in-vestment?MS. MASTERS: What the tech-nology allows you to do is toessentially share and replicateinformation in a secure or en-crypted environment betweendifferent nodes or differentpoints on a network. So inher-ently this is software designand development rather than amajor capital-intensive tech-nology rollout.

In the financial-servicessector, the benefits signifi-cantly outweigh the costs.Take settlement and clearingin securities processing. Thefact that it takes trade dateplus two or three days ormore essentially is two orthree days’ worth of carry andtwo or three days’ worth ofconsumption of a balancesheet, which is increasingly anexpensive and rare commodityin the post-regulatory-reformworld.

That delay between thestart and completion of atransaction has a cost both interms of capital and risk allo-cation. So the way to analyzereturn on investment is totake into account the elimina-tion of those delays, the free-ing-up of capital, the elimina-tion of the need for very low-value-added processes beingdone largely manually by op-erations and back-office sup-port staff that are essentiallyticking and tying two differentrecords or more of the sameinformation.

‘It’s a cost-savingdevice, it’s an error-reducing device.’

Going MainstreamThe World Economic Forum asked more than 800 executives andtechnology experts when they thought various tipping points wouldoccur—when various technologies would hit mainstream society.Here are the respondents’ expectations for two tipping points forblockchain technology.

TIPPING POINT10% of global gross

domestic product storedon blockchain technology

AVERAGE EXPECTED DATE2027

BY 202558% of respondents

expect this tipping pointto have occurred

TIPPING POINTTax collected for the first time

by a government viaa blockchain

AVERAGE EXPECTED DATE2023

BY 202573% of respondents

expect this tipping pointto have occurred

Source: World Economic Forum survey of 816 executives and experts from the informationand communications technology sector, conducted in March 2015

THEWALL STREET JOURNAL.

ECONOMIC ROLE TAX ROLL

Trade has been battered inthis presidential campaign, bythe left and the right. To betterunderstand what’s happening,Jeanne Cummings, politicaleditor of The Wall Street Jour-nal, sat down with U.S. TradeRepresentative Michael Fro-man, the White House’s chiefnegotiator on trade issues. Ed-ited excerpts follow.

MS. CUMMINGS: Bring us up-to-date on the Trans-Pacific Part-nership.MR. FROMAN: This deal in-cludes 12 countries, represent-ing about 40% of the globaleconomy. We completed it inOctober, published it in No-vember, signed it in February.And now we’re working withcongressional leadership andthe leadership of our commit-tees to prepare for it to betaken up by Congress.

Hung upMS. CUMMINGS: It’s gotten hungup. What do you have to targetto move enough votes to try toget it passed?MR. FROMAN: A handful of is-sues have been flagged as ofconcern, and we’re working ourway through all of them. Someof the agricultural issues, forexample, involving dairy orpork. I think dairy and pork arenow in favor of the agreement.

There was an issue around thefree flow of data and data-lo-calization requirements for fi-nancial-services companies.We’re working our way throughthat right now. I think that’strending in a positive direction.

The main outstanding issuehas to do with intellectual-property rights, with biologics,pharmaceuticals. We’re work-ing closely with Congress andindustry to try and find a path-way forward.

MS. CUMMINGS: Some memberson the Hill say that’s the piecethat has to be fixed to really un-lock the door.MR. FROMAN: The agreementitself is very good on intellec-tual-property rights, on copy-right, on trademark and, onpharmaceuticals, very impor-tantly, on enforcement. Itstrengthens intellectual-prop-erty-rights enforcement acrossthe board. This is an areawhere there has been divisionwithin the industry, between in-novative companies and genericcompanies. We’ve come outwith an outcome that raises thestandards across the region. Itall comes down to data protec-tion and the period of years fordata protection. The U.S. has 12years. Other countries eitherhad zero, five or eight years.We ended up at eight years. But

we’ve gotten a lot of feedbackfrom Congress that they wantto make sure that eight years isreal and that there’s nothingthat’s going to undermine thestandard in U.S. law.

MS. CUMMINGS: Has it sur-prised you, given that Con-gress is now controlled by Re-publicans, how the trade issuehas become more challenging?MR. FROMAN: Trade votes havealways been difficult. We’vehad robust trade politics heresince the North American FreeTrade Agreement, since 1992,1993.

What we’ve seen more re-cently is a real sense of angerout there after 15 years ofwage stagnation, which is onlybeginning to turn up now, af-ter widening income inequal-ity, of feeling like the systemwasn’t working for everybody.

Now, you talk to econo-mists. They’ll tell you that theimpact on wages and on jobsin the U.S. is more a productof automation than globaliza-tion, but both play a role.

The fact is you don’t get avote on automation, onwhether there’s going to be anew generation of computersor robots that might replaceyour job. You don’t really getto vote on globalization. It’s afactor of the containerization

of shipping, the spread ofbroadband, the integration ofeconomies like China andEastern Europe that used tobe closed and are now part ofthe global economy.

You do get a vote on tradeagreements. So trade agree-ments become the vessel intowhich people pour their verylegitimate concerns about jobsecurity, wage stagnation andincome inequality.

Trade agreements give usan opportunity to open othermarkets to our exports andraise standards in those mar-kets. It gives us a chance toshape globalization in a waythat reflects our interests andour values. And that’s why it’sso important to get TPP done.

China’s partMS. CUMMINGS: How muchdoes China inspire people’s un-ease with the global economy?MR. FROMAN: It is a significantfactor, both because of the im-pact we’ve seen here as manu-facturing has moved offshore,but also because of the per-ception that not all countries,including China, are perceivedas playing by the same rulesas we are. So the sense of un-fairness people have about theglobal trading system, I think,becomes embodied, in part, intheir perception of China.

MS. CUMMINGS: Is that fair?MR. FROMAN: We have a lot ofissues with China and are pur-suing them through direct dia-logue, from the president ondown. We’ve just come backfrom China. Secretary Lew andSecretary Kerry led the strate-gic and economic dialogue thatdealt with a lot of these issues.

We pursue it by bringingcases against China in theWorld Trade Organization.And we’ve won all the casesthat have gone to conclusion.We need to continue to pressthem to live by their obliga-tions and to support a rules-based trading system.

And that is why TPP is soimportant. Because China’s notpart of the TPP. TPP allows us

to help set rules for the roadfor this region at a time whenalternative approaches are be-ing put forward. China’s nego-tiating its own trade agree-ment in the region with 16countries. And unlike TPP, itdoesn’t strengthen intellec-tual-property rights. It doesn’timpose disciplines on state-owned enterprises to makesure that, if they compete withour private firms, they do soon a fair and level playingfield. It doesn’t preserve a freeand open internet and the freeflow of data across borders.And it doesn’t deal with laborand environmental challengesand obligations and rights.

So we think it’s very impor-tant for this region, which is socritical to our economic well-being, and strategically, thatthe rules of the road reflect ourvalues and interests.

MS. CUMMINGS: Donald Trumpis proposing much more puni-tive actions against China.What would a trade war withChina look like?MR. FROMAN: Without com-menting on any particular can-didate’s proposals, if we wereto impose tariffs on anothercountry, they would have theright to retaliate and to im-pose tariffs on us. And therehave been some estimates thatsomething like that couldcause a loss of seven million

jobs, could put the U.S. in re-cession. Others have estimatedthat it would impose a cost of$6,000 for every Americanfamily. Because if you thinkabout it, so much of what weconsume comes from abroad.

And if you start putting tar-iffs on other countries, it’s go-ing to immediately raise theprice of consumer goods. Butit’s also going to raise theprice of inputs that go intomanufacturing in the U.S. Andwe depend on these inputs tomaintain our competitivenessas manufacturers.

MS. CUMMINGS: But could thisadministration be tougher?MR. FROMAN: I think we’vebeen pretty tough. But we arealways looking to do more.

We’re continuing to look attheir practices and practices ofother countries. Wherever wefind violations of WTO obliga-tions, we bring a case. Webrought more cases, I think,than any other country. Webrought, I think, 22 cases nowover the course of the adminis-tration. We’ve won every casethat’s been brought to conclu-sion. More than half thosecases have been against China.So we need to be vigilant. It’salso why it’s important that wefocus on making sure that stan-dards and rules of the road ofthe region are defined in theappropriate way.

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‘A handful of issueshave been flaggedas of concern,and we’re workingour way through allof them.’

Mixed FeelingsOnly about half of Americans see a broad benefit from free trade, and fewer than half think it has helped them

Source: Pew Research Center political survey of 2,254 adults in the U.S., conducted by telephone March 17-27, 2016THEWALL STREET JOURNAL.

Have free-trade agreements between the U.S. andother countries been good or bad for the U.S.?

How have free-trade agreements affected youand your family financially?

Good51%

Bad39%

Don't know/Didn't answer

10%

Definitelyhelped

6%

Probablyhelped39%

Probablyhurt26%

Definitelyhurt

11%

Hasn't helpedor hurt

10%

Don't know/Didn't answer

8%

P2JW172000-0-R00600-1--------XA


tect their data and their sys-tems. And in the event thatthey are breached, that there’san appropriate process inplace that can be deployedrapidly.

MR. SCHLESINGER: You men-tioned anti-money-laundering.I would assume that some ofthe appeal of taking thesetransactions outside of thetraditional banking sector is totake them outside the scrutinyof traditional bank regulators.

How do you deal with thatissue?MR. CURRY: The technologycould actually help a more ef-fective regulatory regime andthe ability of our financial in-stitutions to detect patternsthat may indicate illegalmoney-laundering activity.

Our banks spend an enor-mous amount of money onmaintaining expensive BankSecrecy Act and [anti-money-laundering] programs. If therewas an ability to share thatwhile protecting legitimateprivacy concerns, that wouldbe a plus.

It would be a plus in termsof having better reach intowhat’s going on from an illicitstandpoint and also reduce theoverall cost for the banks sothat those savings can be re-deployed into the economythrough lending and other ac-tivities by banks.

MR. SCHLESINGER: Since

they’re not regulated, they’renot insured, why should abanking regulator care whathappens in [the fintech lendingmarket]?MR. CURRY: Longer term, theremight be concerns about fi-nancial stability. The largerthe presence [of fintech busi-nesses] down the road, theymay have an impact on theeconomy.

From a banking standpoint,we think that there’s somevalue in [traditional banksforming] strategic partner-ships [with fintech firms oracquiring technology to add totheir] suite of services orproducts.

That’s something that wewould like to encourage, or atleast provide a road map froma regulatory standpoint ofwhat considerations that abank and a fintech firm shouldbe aware of.

Changing rulesMR. SCHLESINGER: Let’s talkabout the Office of the Comp-troller of the Currency itself.You’ve talked a bit about howthis isn’t just an evolution ofthe banking industry, it’s anevolution of the regulators,too.

Give us an honest assess-ment of where you see barriersinternally, and what is it thatyou’re trying to do to changethose?MR. CURRY: That’s really beenpart of the focus in how we’ve

been approaching technologyand the strategic changes itposes to the banks that weregulate. I think that there’s areflexive action among theregulatory community, “Whenin doubt, say no.”

I’ve charged our people tobecome educated; to under-stand what’s going on from atechnological standpoint; to beopen to what its potential ben-efits are, not jumping immedi-ately to some negative conclu-sions.

The other area is really arecognition that banks reallyare engaged in technology andhave been. So this is central towhat we do as a bank regula-tory agency.

There’s an opportunity forus. That’s what I’ve been ask-ing internally—to rethink howwe do things and to thinkabout how we can act as abridge [between traditionalbanks and fintech firms] or aclearinghouse for informationto both banks that are inter-ested in expanding their reachthrough technology or poten-tially entering into partner-ships with technology firms. Itwould help both sectors un-derstand each other and whatthe requirements are.

I’ve charged people to lookat how we should set up thisfunction. How should it bestaffed, what type of resourcesshould be provided to it, andhow it can break internal log-jams within the OCC.

‘The challengesposed by fintechfirms and theirfreedom fromthe constraintsthat banksoperate undercan be healthy.’

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Financial-technology—orfintech—firms hold the prom-ise of disrupting the world oftraditional lending by, amongother things, slashing costsand using big data to assessrisks. Now regulators arewrangling with a difficultquestion: How to create rulesfor this new sector to keep thepublic safe—without squash-ing innovation?

For insights, The WallStreet Journal’s JacobSchlesinger spoke withThomas J. Curry, comptrollerof the currency. Here are ed-ited excerpts of the discussion.

Acting responsiblyMR. SCHLESINGER: You’ve ad-opted the phrase “responsibleinnovation.” Tell us what youmean.MR. CURRY: How do you en-gage in innovation but do it ina way that doesn’t result inendorsing a fad, or an inher-ently bad idea, or one that isagainst existing law and regu-lation.

The clearest example ofwhere you could have respon-sible innovation is to reducecost structures for banks, andallow them to be more profit-able and to reach greater num-bers of people and meet theirexpectations as customers.

MR. SCHLESINGER: What wouldyou say are the benefits andthe things you fear most whenyou look at fintech?MR. CURRY: I think fintech hasa lot of potential. I think com-petition’s good. For regulatedfinancial institutions to bechallenged, I think that’s im-portant. The challenges posedby fintech firms and theirfreedom from the constraintsthat banks operate under canbe healthy.

That’s really the major ad-vantage.

The downsidesMR. SCHLESINGER: What scaresyou most when you look athow fintech changes the land-scape?

MR. CURRY: I don’t think wehave a negative view towardfinancial technology. It’s avaluable challenge to the tra-ditional banking industry. Ithink that the concerns are,from a regulatory standpoint:Is the [lenders’] informationgoing to be accurate? Is it ca-pable of being corrupted? Andthere is a strong public-policygoal for combating moneylaundering.

Whether you’re a bank ornonbank, ultimately if you’reoffering a transactional prod-uct you need to maintain thetrust of your customer. Youneed to provide basic assur-ances that the transaction issafe, that there is not a realpotential to have it be hackedor the underlying data to becorrupted.

The possible advantage ofregulation is that this is some-thing that we pay close atten-tion to from a regulatorystandpoint—banks’ ability tomake sure that reasonablesteps have been taken to pro-

TheTricky TaskOfRegulating FintechComptroller of the Currency Thomas Curry talksabout balancing safety and innovation

Challenges for fintech companies in dealingwith traditional financial companies

Challenges for traditional financial companiesin dealing with fintech companies

Source: PwC Global FinTech Survey 2016, a global survey of 544 senior executives conducted between mid-November 2015 and mid-January 2016.


What Are the Rules?Regulatory uncertainty was cited as one of the top concerns of both fintech companies and traditionalfinancial-services companies in forming partnerships or otherwise doing business with each other.

IT security

Regulatory uncertainty

Differences in business models

Differences in management and culture

Differences in operational processes

53%

49%

40%

39%

36%

Differences in management and culture

Differences in operational processes

Regulatory uncertainty

Differences in business models

Differences in knowledge/skills

54%

47%

43%

31%

30%

P2JW172000-0-R00700-1--------XA


Over the past few years, cy-berattacks on businesses haveled to huge losses and dimin-ished consumer confidence.But cyberattacks are also hap-pening on the national scale asthe internet becomes anotherarena for global conflict.

To get a picture of thisemerging battlefield, The WallStreet Journal’s Rebecca Blu-menstein spoke with Lt. Gen.James K. “Kevin” McLaughlin,deputy commander of the U.S.Cyber Command.

Here are edited excerpts ofthe conversation.

Cyberwar on terrorMS. BLUMENSTEIN: If we’refighting ISIS on the ground inSyria, how surprised are younow at their capabilities, theircybercapabilities? Are youneeding to invest a lot ofmoney to keep up with them?Can you give us a sense of

how important this is on theground right now?LT. GEN. MCLAUGHLIN: ISIL’s avery dangerous foe. All youhave to do is read the paperover the last six or eightmonths. You can see the threatthey pose to the United Statesas well as our allies.

On the cyber side, theyhave lots of aspirations to be acyberactor. And this is an areayou can buy and create capa-bilities. So we do pay atten-tion to it.

But I would say, on the cy-berthreat today, the most dan-gerous thing we see is themtrying to steal the personal in-formation of our militarymembers and then publishingthat and trying to generatesome potential threat againstmilitary people who mightpost things on social media orother places.

I never discount any adver-

sary and their ability to dosomething dangerous to us.But today, on the cyber side,they’re a lower threat thanother actors.

MS. BLUMENSTEIN: How aboutthe Russians and the Chinese?LT. GEN. MCLAUGHLIN: Thereare several large countries,like Russia and China, that arevery, very capable cyber ac-tors. We look at them seri-ously. You talked a little bitearlier about theft of intellec-tual property, which has beengoing on for a long time. Thethreat of them stealing thedata on our employees is alsosomething that’s important.

But the types of threatsthat we worry most about to-day that are new are adversar-ies taking full control of ournetworks, losing control of ournetworks, having a hacker ap-pear to be a trusted user.

What CyberthreatsTo Fear theMostLt. Gen. James K. McLaughlin worries aboutadversaries taking control of U.S. networks

’We are doing better,on the government side,of being able to takethreat data and share it.’

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On the military side, youcan imagine the difficulty thatwould cause a commander, ifhe didn’t trust his own net-work or his data.

But then the Sony incidentsof last year show you [thethreat of] destructive cyberat-tacks. A keystroke, and thou-sands of computers, they’rebroken. They no longer func-tion. So we watch those adver-saries very closely to makesure we know what they’re do-ing in cyberspace.

Public and privateMS. BLUMENSTEIN: One stickingpoint between government andbusiness has been how muchgovernment and businessshould work together. Therehas been a certain level ofmistrust. And companies ha-ven’t been quite sure howmuch information they shouldshare with one another. Whatwould your advice be to com-panies?LT. GEN. MCLAUGHLIN: I thinkwe are doing better, on thegovernment side, of being ableto take threat data and shareit. I think that’s happeningmore and more, even classi-fied data being declassifiedand then being put in a waythat we can share it with criti-cal industry segments.

But there’s really not a two-way flow of information today,for some of the reasons thatyou mentioned. So the realquestion is, from a U.S. per-spective, what’s the beneficialrelationship [we can form withbusiness] so that we can de-fend ourselves and that youcan take advantage of what webring to bear from the govern-ment side?

We can take advantage ofyour expertise. Often, you maybe the first place where somethreat is seen that we haven’tseen from our sensors or fromour infrastructure. The earlierwe know about that, and theearlier other parts of thebroader private industry teamknows it, the faster everybodycan defend against it. But if itwas easy to do, we’d alreadyhave all that in place.

MS. BLUMENSTEIN: You men-tioned Sony and the North Ko-reans. What can you tell us

about what went right in thatexample and what wentwrong?LT. GEN. MCLAUGHLIN: You no-tice that the president attri-buted that to the North Kore-ans. It’s pretty rare that thatkind of strong attribution isable to be done.

I think the sharing of infor-mation for what was known inthe government with the par-ties involved, worked reallywell.

I think the fact that all ofus on the government sidewere sharing information, itallowed the leadership of thenation to make some rapid de-cisions on how they wanted torespond to it.

But to me, it was just an ex-ample, even though [U.S. Cy-ber Command wasn’t] playinga direct role, it was an exam-ple of watching the broaderteam function.

As things like this happenin the future, where we mighthave a role, we learned a lotfrom how the military and cy-ber community participaterapidly with our interagencypartners.

The cost of attacksMS. BLUMENSTEIN: Extraordi-nary investments are requirednow for cybersecurity. Butlooked at another way, there’s

an extraordinary cost to get-ting it wrong.

I was talking to one of theCFOs out there who said, “Canyou ask, what is the estimatedloss?” Is there a total number?Or do you just know specificincidences?LT. GEN. MCLAUGHLIN: I don’tknow a dollar figure. Withinsome industry segments, theymight be able to put a dollarfigure on that.

What I think about is thebroader national-security loss.For example, if large amountsof our intellectual propertythat make up the core technol-ogies of our military forces, ifwe spent decades and billionsof dollars or trillions of dollarsover a long period to developthat, and an adversary can juststeal it and immediately be atthat same level that we areand not have to invest theirtime. From a security perspec-tive, that’s a strategic loss forthe nation.

So if they can steal that in-formation and, perhaps, holdus at risk, because we mightbe attacked in cyber usingsome vulnerability that wasdiscovered because of [the in-tellectual-property theft], Iquantify it in terms of broaderrisk to the country.

I can’t put a dollar cost onit. But the risks are significant.

Budget constraints

Lack of skilled resources

Lack of executive awareness or support

Lack of quality tools for managing information security

Management and governance issues

Fragmentation of compliance/regulation

What Does It Cost?Information-security executives and other company leaderssurveyed by Ernst & Young cited cost concerns more often thanany other obstacle to stronger information security

62%

57%

32%

28%

28%

23%

What are the main obstacles that challenge your information-security operation's contribution to the organization?

Source: Ernst & Young's Global Information Security Survey 2015, a survey of 1,755 CEOs,CFOs and information-security executives world-wide, conducted online and in personJune-September 2015



New financial technology isdisrupting everything frompayment systems to messagingto how we manage our data.Dennis Berman, financial edi-tor of The Wall Street Journal,explored the implications withJohn Collison, president andco-founder of Stripe, an onlinepayments company, and DavidGurle, founder and chief execu-tive of Symphony, a cloud-based secure-messaging sys-tem. Edited excerpts follow.

MR. BERMAN: What do CFOsneed to know?MR. COLLISON: Part of what’shappened due to the decreaseddistribution costs of the internetis that capital constraints disap-pear. We’re used to thinking in acapital-allocation frame of mind,and sometimes, when it comesto technology development,that’s not the right framework.Because you have these tinytech teams who end up develop-ing a platform, or a product thatgrows to tens or hundreds ofmillions of users.

Two things. I still think theworld is in a head-count stateof mind. You notice this whenmanagers discuss the size oftheir organizations, that that’sthe unit of relevance. Whenyou’re dealing with new tech-nology that could have a verylarge impact on a company, it’svery dangerous to think aboutit in terms of head count. Thesecond thing maybe is the met-rics you choose for early-stagetechnology. Revenue will sel-dom be the right metric. Weuse market share. Obviously,we later want to optimize thatnet revenue into earnings andthings like that.MR. GURLE: Technologies havea cycle, and it’s going to keepchanging and challenging yourassumptions all the time.

Most of the time it is theearly adopters that make thestrategic bet and eventuallymake the big benefit. The lateadopters, or the ones whocome in midterm, they missthe train. Because adoption ofnew technology is just notmoney you’re going to spend.

It’s also a change in your cor-porate culture, in processes.

MR. BERMAN: What should busi-nesses think about in terms ofthe pace and ease of payment?MR. COLLISON: The importantthing to realize about onlineand mobile commerce is thatit’s still relatively tiny. Between2% to 5% of global commercehappens online. In the U.S., on aconsumer basis, it’s around 5%.That’s online and mobile, so it’s

still just a very small total. Andyou can kind of see why—inthat it’s such a pain to do any-thing online or on mobile. Thisis why we spend so much timeon the developer experience.

We think Apple Pay In-Apphas been a huge deal. [In-AppPurchase allows purchaseswithin apps simply and se-curely.] You go from this multi-page, lots of data entry experi-ence to just pressing yourthumb on the fingerprint sen-sor. Apple announced it’s bring-ing that to the web and to Sa-fari. That’s going to be a hugedeal. When you get a platformand a technology that enables anew kind of commerce or pay-ment experience, you get theseentire industrial shifts. I thinkthere will be something similarwith Apple Pay, where there area new breed of companies andbusinesses possible that werenot possible before.

MR. BERMAN: Can you think ofa cool example?MR. COLLISON: Sure. You can’tbuy an individual newspaper is-sue online right now; they onlysell subscriptions across all themajor papers. I think that is be-cause it’s been so cumbersometo go through the paymentflow, that once you pull some-one through it you might aswell sell them a subscription.So we might see differentforms of content, it being possi-ble to sell them as a result.

The View From FintechJohn Collison and David Gurle discuss howtechnology is changing the landscape for CFOs

Buying Into FintechAmount of venture-capital*investment in U.S. venture-backed fintech companies

*Venture capital includes all investmentsmade by venture capitalists or venture-capital-type investors, i.e. those makingequity investments in early-stage companiesfrom a fund with multiple limited partnersSource: Dow Jones VentureSource


$24 billion

0

4

8

12

16

20

2006 ’08 ’10 ’12 ’14

John Collison (left) and David Gurle

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tions were that there was toomuch compromise with theObama administration. Theysaw Donald Trump as some-body who would be aggres-sively at the barricades for apoint of view; you could counton him to be an unrelentingfighter for that point of view.MR. YANG: For Trump, it wasn’tideological, it was style. Itdidn’t matter what he was say-ing, just that he was loud andstrong and emphatic. That iswhat a chunk of the electorate,certainly Republicans, are look-ing for even if it seems to goagainst the party orthodoxy.

MR. SEIB: In your party [theDemocrats], Fred, people whowould have said, “Let’s have a$9 minimum wage,” decided,well, maybe because theycouldn’t get that, they wouldgo for the guy who wants $15,and who wants to break upthe banks. Where did thatcome from?MR. YANG: In the Decemberpoll, we asked what’s the big-gest concern in the economy.And by about 57% to 37%, itwas lack of economic opportu-nity for working families, ver-sus inequality on Wall Street.That stems from a very realdebate we’re having on theeconomy and economic secu-rity. We asked in May, aboutthe Great Recession, “Are youand your family still feelingthe effects?” Two years ago,the percentage of Americansfeeling the effect was around64%, 65%. This May it was64%, 65%. And Trump voterswere more likely to feel theimpact than Democrats.MR. MCINTURFF: White menwho have less than a collegedegree are voting for Trumpby almost 40 points. Whitemen with a college degree areTrump by about seven. Whitewomen that don’t have a col-lege degree, Trump by 11. Butwhite women with a collegedegree are voting againstTrump by double digits. It’s agroup that Romney carriednarrowly, and he’s losing bydouble digits.

MR. SEIB: Is that the Achilles'heel for Mr. Trump? Suburbanwhite women? College-edu-cated white women?MR. YANG: The Achilles' heel is

the political arithmetic. One ofmy favorite pollster stats isMitt Romney defeated BarackObama by the same proportionamong whites that George Bushdefeated Michael Dukakis by in1988. Bush won the popularvote by eight points. Romneylost the popular vote by fourpoints. The college-educatedwhite woman is a symptom ofthe broader point.

It’s really hard for a Republi-can to win white voters bymore than what Romney andBush won white voters by, 20points: 59%/39%. The voting-age population in 2016 will be31% minority. It’s hard for meto see how the math works forTrump if he doesn’t win whitesby 30 points, which would bereally hard, or make inroadsinto that minority population.MR. MCINTURFF: African-Amer-icans are roughly, let’s say,10% of the population. Obamacarried them by 90 points. Thequote “traditional” Republicanusually loses them by 80.That’s a one-point difference[in the general vote]. So, youget a point back just by beinga traditional Republican. Ithink Donald Trump will do alittle better with African-Americans, because he’s notreally a traditional Republican.

So I think there’s a pointthere he could get back. Andwe don’t know if SecretaryClinton’s campaign is going tohave the same impact thatObama did with African-Amer-ican turnout and Latino andyoung, 18- to 29-year-old.

Trump outperforms Romneywith white voters. You canmake that argument; he will ac-tually outperform Romneyamong white men with lessthan college education. Changethe turnout with those peo-ple—very hard—then figure outhow you would get back somechunk of college-educatedwomen to break even.

He could conceivably picksomebody for vice presidentthat the country perceives tobe fill-in for what his lack ofexperience has been, in a waythey find reassuring. There aredownscale white voters who’venot been voting. And he is pow-erfully speaking to a set ofemotions and issues that mayin fact have some capacity tomobilize those voters.


mid-30s. But the Republicanshave a winner-take-all systemin enough states wheremid-30s, high 30s, you becomethe nominee. So, this happenedbecause of long-term powerfultrends that are, if anything, es-calating. But the rules contrib-uted to a pretty unusual result.

MR. SEIB: Why does the coun-try’s conservative-liberal po-larization work for Mr. Trump,who’s more a populist than aconservative?MR. MCINTURFF: In December,we asked a poll question,“What are you looking for in apresident?” Republican pri-mary voters said, “What Iwant is somebody who willkind of blow up the system inWashington, who will be astrong leader.” His style is sopotent that it blew past whatwe think about as being typi-cal ideology.

Exit-poll numbers tell you alot. We had a majority of Re-publican primary voters say-ing they’ve been betrayed bytheir national party. Republi-can primary voters’ percep-

AVeryUnusual ElectionTwo pollsters offer their insights into how Donald Trump beathis primary opponents, and what his chances are in November

other somebody will win, so I’llleave Trump alone and try tobe the somebody else by de-molishing the next guy in line.”Donald Trump sort of floatedthrough the Republican pri-mary, and still only has 41% ofthe votes cast. When it wascompetitive, he was in the

For insight into one of themost unusual presidentialcampaigns in recent history,Gerald Seib, Washington bu-reau chief of The Wall StreetJournal, spoke with Bill McIn-turff, co-founder of PublicOpinion Strategies, and Fred-erick Yang, senior vice presi-dent of Hart Research Associ-ates. The two are pollsters for,respectively, the Republicanand Democratic parties, andconduct The Wall Street Jour-nal/NBC News polls. Edited ex-cerpts of the interview follow.

MR. SEIB: This is not a climateor a race like any we’ve everseen. How is it different, andwhy is it different?MR. YANG: We’ve seen for aquarter of a century, there’sthis hunger for change, for adifferent way. Anti-Washing-ton. That segment of the pub-lic has found the voice for thatdissatisfaction.MR. MCINTURFF: We have hadpolling since the 1930s, andwe’ve never had two candi-dates who’ve had negativesthis high. We have a majority

of people saying, “I’m votingbecause I want to vote againstthe other person.” That hasnever happened.

We had $25 million spent inFebruary attacking Rubio, andnone on Trump. Each Republi-can candidate said, “OK, it’ll beTrump and somebody. The

RALP

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(2)

After the VoteCFOs were asked if the U.S. economy’s performance beyond 2016 willdepend substantially on the outcome of the presidential election

Source: Deloitte CFO Signals 4Q15, a survey of 112 CFOsconducted over two weeks ended Nov. 20, 2015

MANUFACTURERS ONLYALL RESPONDENTS


Disagree19%

Neutral27%

Agree37%

Strongly Agree

Stronglydisagree

Strongly Agree

Stronglydisagree

Disagree23%

Neutral23%

Agree31%

9% 15%

7%8%

Bill McInturff (left) and Frederick Yang

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MS. FURCHTGOTT-ROTH: I’m infavor of something called theTaylor rule, which is a stablerate tied to the rate of GDP,and I don’t think that the Fedshould have gone down whereit is for such a long time. Onthe other hand, we cannotplace all the blame for theeconomy on the Fed.

If we’re regulating compa-nies out of business, if wehave the highest corporate taxrate in the world and we taxcompanies on their world-wide income and not just theirterritorial income, then weneed to accept the conse-quences.

MR. KING: How concerned arethe two of you about the pos-sibility of a recession in thenext year?MR. BLINDER: I have very littleconcern about a sharp down-turn in the next year. A down-turn, though, is always possi-ble, so I am somewhatconcerned about that. JanetYellen is always somewhatconcerned, as she should be.

The good news is there re-ally aren’t any signs of a re-cession to speak of right now.MS. FURCHTGOTT-ROTH: I amvery concerned that GDP issteadily going down, job cre-ation is steadily going down.Even at the very best growthrate, we only had around 2%average growth rate comingout of a recession, which isabnormal.

The labor-force participa-tion rate is continuing to trendsteadily down, whereas in theU.K. it trended up after the re-cession. These are all objectsof very great concern, even ifwe don’t go into a sharp eco-nomic downturn or recession.

MR. KING: If either of you areto point to one indicator, onesign, one risk that would moveus in this direction or is flash-ing red to you in a worrisomeway, what would it be?MR. BLINDER: Well, I think weboth already mentioned thebusiness investment.MS. FURCHTGOTT-ROTH: It’svery troubling because it wasthe biggest downturn sincethe first quarter of 2009. Andif we keep going in that envi-ronment, GDP just isn’t goingto recover.


The U.S. economy is in themidst of one of the longest ex-pansions on record, yet every-thing clearly isn’t rosy. Slow-ing growth, low productivityand a dismal May jobs reporthave left many businesses un-sure of where things areheaded.

Neil King, the global eco-nomics editor of The WallStreet Journal, sat down witheconomist Alan Blinder, a pro-fessor at Princeton Universityand former vice chairman ofthe Federal Reserve, and DianaFurchtgott-Roth, a senior fel-low and director at the Man-hattan Institute for Policy Re-search and former chiefeconomist of the U.S. LaborDepartment, to try to sortthings out.

Here are edited excerpts.

Business investmentMR. KING: We have an econ-omy at the moment that is en-tering year eight or so of ex-pansion. But in many otherareas this economy is offtrend. Diana, just what do youmake of the economy now?MS. FURCHTGOTT-ROTH: All ofyou know that the economyisn’t really good. We had aGDP growth rate at 2% in the

third quarter last year, then itwent down to 1.4%. Last quar-ter it was 0.8%. And we havedeclining job creation mirror-ing that.

Last month, only 25,000private-sector jobs were cre-ated. We have a 4.7% unem-ployment rate, but that’s be-cause labor-force participationrates are at 1977 levels. Andwe have very low capital in-vestment. That’s the big prob-lem. Companies don’t seem towant to invest.

We have the highest corpo-rate tax rate in the industrial-ized world—39%. Other coun-tries over the past 20 yearshave been steadily loweringtheir corporate tax rates. Ourshas stayed the same. We alsohave very unpredictable regu-lations. And as all of youknow, there’s nothing worsethan having the IRS or theEPA or the Labor Departmentjust come down on you forsomething that you didn’tknow was wrong.

MR. KING: Alan, what is yourtake on where we are at themoment?MR. BLINDER: I think we’re in apretty good position, thoughit’s taken a very long time to

get here. The recovery wasslow, but it has been quitesteady.

As Diana said, the unem-ployment rate is down to 4.7%.Many of the other indicatorsof the labor market aren’tflashing quite as green as thatone, but we must be tolerablyclose to the full employmentzone, as evidenced by the factthat wages are perking up andbusinesses are actually start-ing to report difficulties infinding people to come to

put per hour.

Fed’s roleMR. KING: What is your sense,Alan, on the role of the Fed inwhat we’re seeing now, to theextent that it’s a rather blahperiod?MR. BLINDER: The Fed threweverything including thekitchen sink at the recession.Once you’ve uprooted thekitchen sink and thrown it in,there isn’t much left, andthat’s where the Fed is. Now, ithas inched the interest rate offzero.

But if you imagine that theFed should feel a need to cutinterest rates, which itdoesn’t, but if the circum-stances should change so thatit did, it really can’t.

It’s got a balance sheet nowof $4.5 trillion, roughly. I don’tknow how many of you knowthis. On the eve of the LehmanBrothers calamity, it was $0.9trillion. So the Fed’s balancesheet is up by a factor of fivein that period, which is proba-bly more than most corpora-tions, but that isn’t a goodsign.

In this case it’s a sign thatthey’ve pushed quantitativeeasing almost as far as youcan. They could do more.There’s no ceiling on that. Butit isn’t going to have the kindof effect that, say, QE1 had.

MR. KING: Diana, is there wis-dom in raising rates this yearif only for having the ammuni-tion to lower them later,should the economy worsen?

work.There are two dark clouds.

First, Diana mentioned thisright off the bat, business in-vestment has been terrible.There is no gloss to put on it.It is just on the floor.

That is one reason, thoughnot the only reason, for theother dark cloud, which is pro-ductivity growth. Productivitygrowth has been limping alongat a nearly unprecedented rateof one-half percent a year.This is labor productivity, out-

What’sAiling the EconomyAlan Blinder and Diana Furchtgott-Roth on the forces that keepgrowth from taking off, and the risks that things will get worse

Estimate Forecast

The OutlookRecent and forecast growth rates of real gross domestic product

Source: World Bank THEWALL STREET JOURNAL.* Fiscal years

A slog for the leaders China and India diverge

2014 2015 2016 2017 20180

1

2

3

4

5%

World

Advancedeconomies

Emerging anddevelopingeconomies

2014 2015 2016 2017 2018–2

0

2

4

6

8%

U.S.EurozoneJapan

China

India*

Estimate Forecast

Alan Blinder and Diana Furchtgott-Roth

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