Is this the end of the people’s car?

Bernhard Rieger writes:  The US  Environmental Protection Agency’s announcement on September 18 that Volkswagen had manipulated diesel engines during emissions tests sent shockwaves around the Western world. Facing hefty fines in the United States and elsewhere, the corporation soon revealed that no fewer than 11 million of its vehicles were powered by an engine that it had previously praised as ecologically friendly and now revealed as a generator of hazardous exhaust. The company’s stock took a dive, CEO Martin Winterkorn had to resign, and drivers on both sides of the Atlantic filed class action lawsuits. German engineering, once a catchword for excellence, has now gained a set of decidedly undesirable connotations.

Beyond anger, the international response to Volkwagen’s fraud has been tinged with disbelief. Politicians, experts, and ordinary citizens alike have struggled to comprehend why Volkswagen, of all companies, engaged in systematic cheating. Observers were not only flabbergasted that a high-profile car manufacturer had risked sizeable fines from regulators as well as claims for damages by consumers, stockholders, and dealers. They were also stunned at the reputational risk. For Volkswagen, as a U.S.-marketing expert pointed out, being caught cheating was “significantly damaging” because “this is such an iconic brand.” In Germany, the business-friendly Frankfurter Allgemeine Zeitung simply declared that Volkswagen had lost its “honor”—a concept rarely evoked in the context of global corporate giants.

Volkswagen thus finds itself at the center not just of an economic disaster, but a moral scandal of international reach.

Now, by manipulating emissions data for years, Volkswagen did more than cheat regulators and customers. Given its extraordinarily rich and long-standing reputation for quality and dependability, Volkswagen committed a cardinal sin against its own identity. It blemished its “corporate soul,” as historian Roland Marchand called the intangible aura surrounding those enterprises that manage to project themselves in the public sphere as socially and economically responsible agents. To regain customers’ trust, public penance will not be enough. Rather, it will need to undertake demonstrable reforms to assure the public that there are robust internal procedures to prevent fraud. Only then will Volkswagen be in a position to build anew.  The End of the Beetle

The daily fantasy sports (DFS) industry, which is projected to bring in over $14 billion in revenue by 2020, is currently embroiled in a scandal that raises a number of important questions about how the game is run.

The industry blog DFS Report reported that DraftKings employee Ethan Haskell published competitively sensitive data early on the day of DraftKing’s “Millionaire Maker,” the site’s largest tournament. DraftKings, along with its competitor FanDuel, are two of the biggest DFS carriers in the industry.

“[T]his was published in error originally by myself,” Haskell wrote in a forum post featured on DFS Report. “I’ve fixed the error and we’ll be putting checks in place to make sure it doesn’t happen again.”

Haskell reportedly won $350,000 on the rival site FanDuel that same week.

According to DFS Report,  the data that Haskell allegedly posted concerned how popular players were on the DraftKings platform before rosters locked for the day’s games. This is competitively sensitive because in order to win big in DFS you need to select players that other people overlook.

In a recent statement given to Tech Insider, however, DraftKings said that “the employee in question” had “inadvertently” posted the data, and that after a “thorough investigation” over several days, they found “no evidence that any information was used to create an unfair advantage.”

According to industry experts, the concern isn’t in Haskell’s inadvertent publishing of data. If he didn’t have access to the data until the FanDuel rosters were locked, then he couldn’t act on it.

According Chris Grove, editor of the trade publication Legal Sports Report, the real problem is that Haskell had such easy access to data at all. The apparently lax attitude surrounding access to such sensitive data in a multi-billion dollar industry raises a number of important questions, according to Grove:

• How could a mid-level manager have access to that competitively sensitive data so readily?

• How could that data be posted in such a significant manner?

• Given the amount of employees from each site that play on other sites, shouldn’t there be some sort of restriction?  

A joint statement given to Tech Insider from DraftKings, FanDuel, and the Fantasy Sports Trade Association, says that in the Fantasy Sports Trade Association charter has a requirement that employees don’t use competitive data from to play on other sites, and they haven’t found evidence that Haskell violated those rules.

Still, the statement says, “the inadvertent release of non-public data by a fantasy operator employee has sparked a conversation among fantasy sports players about the extent to which industry employees should be able participate in fantasy sports contests on competitor sites.”

The industry is working “to develop a more detailed policy,” the statement says.

In the meantime, the statement says DraftKings and Fanduel are prohibiting employees from playing fantasy sports for money.

Leonid Bershidsky wites:  Marc Rich commodity trader extraordinaire, once gave this advice to an employee: “As a trader you often walk on the blade. Be careful and don’t step off.” Glencore, the world’s biggest commodity trading company, which Rich founded, now seems to be falling off the edge, its business model in question. 

A Glencore director said “we are under hedge fund attack but don’t know why.”

 The immediate explanation was probably a report from the financial company Investec, which said that if commodity prices remained at the current lows, almost all of Glencore’s equity value “could evaporate.” And something similar could happen to Anglo American, another mining giant, the report said.

It’s easy to see how these findings set in motion a sell-off. Yet Glencore already was on a downward trajectory — it has lost more than three quarters of its value since April. I

Relatively few commodity trading houses are publicly traded. They were usually set up by crafty individuals such as the late Marc Rich to look for arbitrage opportunities in commodity markets. These opportunities arise when it makes more sense for the end user to buy from a trader a bundle of services — transportation, warehousing, sometimes processing — in addition to the commodity itself rather than buying the commodity from the producer and dealing with the logistics separately. 

Many commodity deals are just bets on price moves, without any involvement with physical commodities. Yet industries obtain energy and raw materials through physical trades, and this is what companies such as Glencore do best, keeping logistical costs as low as possible, buying when and where it makes more sense, moving vast quantities of oil, iron ore or wheat efficiently around the world. These companies have expertise dealing with unsavory regimes that produce raw materials — they were among the first big investors in the former Soviet Union — and they also master the most sophisticated aspects of marine transport management or hedging. They can even serve as banks.

This versatility usually offers protection against problems in specific markets, and traders usually hedge against commodity price fluctuations. 

The profitability of traditional commodity merchandising depends primarily on margins between purchase and sale prices, and the volume of transactions. 

In other words, when trade volumes rise, so do trading houses’ margins, and vice versa. Margins swelled during the recent commodities super-cycle, with China driving growth.  The trading companies reaped $250 billion in profit in the preceding decade, more than Goldman Sachs, JPMorgan Chase and Morgan Stanley combined. 

Now, China is slowing and so is global trade. That means a drop in profitability for the traders. Bunge’s net income per share fell to 50 cents in the second quarter of this year, from $1.71 in the year-earlier quarter. 

Glencore’s merger with Xstrata, completed in 2013, made the company one of the world’s biggest mining operations, and that probably compounded its problems. 

Big traders, most of which made similar upstream investments during the boom, are being squeezed from all sides. 

Trading houses cannot shed only the risky parts of their business because these days, all parts are vulnerable as demand plummets in commodity markets. It’s too soon to say whether some of them will be wiped out by a crisis like the one that killed off a number of U.S. energy traders, including Enron, in 2002, but the conditions are challenging. Not even Rich, with his limitless capacity to walk the edge of the blade, could escape unscathed.

Marc Rich knew how to court politicians

Will what worked in Georgia work in Ukraine? It will if it is up to Davit Sakvarelidze, deputy prosecutor general of Ukraine and the chief prosecutor of the Black Sea city of Odessa.

L. Todd Wood writes:   Ukrainian President Petro Poroshenko has brought in veterans of the country of Georgia’s reform process to help Ukraine remove the legacy of decades of Soviet and oligarchic corruption. Sakvarelidze, appointed to the national post in February 2015, and to the Odessa post several weeks ago, is attempting to bring change to the one state organization that has most resisted the political reforms sweeping the country, the General Prosecutor’s Office, which enjoys very low trust among the Ukrainian people – indeed, for good reason. I sat with Sakvarelidze last week, during a visit to the Academy of Prosecutors in Kyiv, to discuss the challenges ahead of him. The place was teeming with young, energetic applicants making their way through the new selection process. There seemed to be a pervasive, youthful motivation, albeit possibly naive, with the people I met while engaged at the facility.

Along with former Georgian Prime Minister Mikhail Saakashvili and others, Sakvarelidze is working to bring trust in government to the Ukrainian people.

Sakvarelidze is attempting to overhaul the General Prosecutor’s Office and remold it into a professional force that can deal with the sickness destroying Ukrainian society. The number of prosecutorial positions have been reduced significantly and all candidates, even current hires, must undergo rigorous testing and training to be accepted into the new reality. More than 700 positions must be filled.

The entire effort is behind schedule. In fact, the newly created National Anti-Corruption Bureau cannot begin its work until the prosecutor’s office is up and running. Yet Sakvarelidze is optimistic and seems determined.

“Political changes have reshaped the political structure, but the Prosecutor General’s Office has not changed; the system has remained the same. Now we are trying to correct it,” he recently said at the 12th Yalta European Strategy Annual Meeting in Kyiv.

Regulatory reform should also be a big part of the anti-corruption effort, according to Sakvarelidze; the ability for bureaucrats to siphon cash from the public needs to be reduced. In Georgia, the time needed to get a new passport was reduced to 60 minutes.

The stakes for Ukraine are huge. There have been many half-baked anti-corruption campaigns in the past that lacked the political will for real reform. This time Sakvarelidze hopes it’s different. “It is not just Ukraine who will feel the pain if we fail. Ukraine is the gateway to Europe, a wall against the tide of Soviet-style corruption. I’d hate to think of the consequences to Europe and the world if we fail.”