Dublin University’s financial newspaper

06 DECEMBER 2012 ISSUE 3 VOL 2

Budget 2013 Unveiled

Tesco to leave US Market › Michael Noonan announces budget plans for 2013

» Property Tax Comes Into e!ect » Tax Hikes for High-Income Earners » Registration Fee Increases

Tesco’s Chief Executive Philip Clark announced on Wednesday that Tesco were ending its foray into the US market, stating that they would now most likely be sell-ing Fresh & Easy, their US subsidi-ary, in an attempt to recoup some of the losses from the US business. Fresh & Easy is a chain of grocery stores which Tesco operates across much of the western United States.

Clarke stated that a review “might lead to a sale of Fresh & Easy, or partnering the business. But it is

likely that our presence in America will come to an end”. But Clarke is optimistic, stating that they had been approached by a number of potential buyers in the last year.

Tesco began its venture into the US market 5 years ago, and has in-vested in the region of £1 Billion into Fresh & Easy since then. It is expected that by early 2013 total losses incurred by Tesco’s US sub-sidiary will be around £850 Million.

The decision to withdraw from the US market has been treated as

a positive one by many of Tesco’s investors, who are happy to see the loss-making venture come to an end. Shares in Tesco rose in early trading in London on Wednesday morning, up 3%.

The news was announced at the same time that Tesco reported that its sales across the UK have shrunk by 0.6% compared with the same period a year earlier. This is as a re-sult of like-for-like sales across the UK declining in the last quarter of the year.

BY CATHAL O’DOMHALLAINEditor

HIGH-INCOME EARNERS and pensioners were the primary tar-gets of Budget 2013 with an estimat-ed !500 million extracted from this group. The controversial property tax is also set to come into e"ect in July at a rate of 0.18% on properties valued under !1 million. Unoccu-pied properties and first-time buy-ers are temporarily exempt from the tax.

Excise duties have increased by !1 on wine and by !.10 on other forms of alcohol and cigarettes. Excise duty on petrol and diesel re-mains unchanged.

One of the measures that was formally announced by Minister Noonan was a three-point increase in the Universal Social Charge, for those over the age of 70 with in-comes in excess of !60,000 per an-num. A new cap of !60,000 on the amount of tax relief available for pension contributors was also es-tablished, which the government expects to engender !200 million in savings.

In total, the budget will involve

approximately !2.25 billion in spending cuts and !1.25 billion in tax increases.

Eamon Gilmore, leader of the Labour Party, called the budget “tough but fair.” Gilmore and other Labour TDs were willing to coun-tenance cuts to certain programs in exchange for an estimated !500 million in increased taxation on high-income earners.

Additional sources from the Labour Party expressed their dis-content at the !10 cut to child ben-efit allowances, but indicated their relief at education spending being maintained at their 2011 levels, hopefully protecting front line ser-vices to the greatest extent possible.

One of the most controversial aspects of the budget, however, was the increase in student con-tribution charges. Brendan How-lin announced that this fee was to increase !2,250 to !250 in 2013. This cost is set to increase to !3,000 in 2015. There is some concern for those receiving the student grant, as there is to be a reduction in the income threshold entitlement. However there will be no cut to the maintenance grant rates.

A new swathe of divisions over how to implement the recommen-dations of the Likkanen report are threatening to derail one of the most ambitious reforms of the Eu-rozone in recent years.

While Eurozone finance minis-ters seem to agree with the idea in principle, they cannot agree on how far the powers of the banking super-visor should go, how the regulations should be implemented and how to prevent discrimination between Eurozone and non-Eurozone coun-tries.

Fissures have erupted over whether the regulations should ex-tend only as far as the larger Euro-pean banks, as Germany prefers, or if should be applicable to all banks operating within the EU.

Spain’s Economy Minister Luis De Guindos said that the future of the Euro depended on the imple-mentation of a deal.

“Banking union is crucial to re-move all doubts about the future of monetary union,” he said yesterday evening.

Concerns persist, however, over the fate of Swedish and British banks. Britain currently seeks the ring-fencing of its banks from any regulations which could do harm to the City of London, while Sweden, also a non-Eurozone state seeks representation on the ECB’s execu-tive if it’s to have oversight of the as-sets that Sweden owns.

Sweden’s finance minister An-ders Borg a#rmed his stance on Tuesday, telling reporters “there can be no unfair treatment of non-Eurozone countries. There must be safeguards and we must be able to have our own.”

Diplomats must also address the concerns non-Eurozone states that intend to join the currency in the near future to ensure that these countries are not disadvantaged by the regulations.

If a deal is agreed to, however, it will allow them to finalize the framework through which the deal is implemented by the EU summit on December 13-13.

Likkanen Under Strain

TEF RELAUNCHES P3

Trinity Economic Forum

BUDGET 2013:SPECIAL REPORTP8

TEXAN TRAINSP6

NEWS & CURRENT AFFAIRSTHE BULL 06.12.20122

EDITORCathal O’Domnallain

DEPUTY EDITORSean Tong

LAYOUT AND DESIGNBishoy Abdou

NEWS EDITORDave Kelleher

FEATURES EDITORReuben Murray Whelan

OPINIONS EDITORGabriel Corcoran

EDITOR-AT-LARGETed Nyhan

Special thanks to Tony O Connor for all his help during production.

This publication is partly funded by a grant from DU Publications Committee and by Trinity Inves-tors Society.

This publication claims no special rights or privileges.

For advertising, please contact thebull.tcd@gmail.com.

Serious complaints should be ad-dressed to: The Editor, The Bull, Box 31, Regent House, Trinity College, Dublin 2.

CONTRIBUTORS

VITAL INDICATORS

Chelsea Owner Abramovich Inter-venes In Dispute

1.2%CONSUMER PRICEINDEX

14.6%UNEMPLOYMENT RATE

0.4%GDP PERCENTAGE CHANGE

106%NATIONAL DEBT AS A PERCENTAGE OF GDP

!1.05 bnB OF P CURRENT ACCOUNT DEFICIT

Chinese Companies Facing Di!culty in US Markets

BY DAVE KELLEHERNews Editor

WITH THE fiscal cli" in the United States looming ever closer Repub-licans in the House of Representa-tives have delivered a counter-o"er to President Obama. The o"er gives a renewed hope of movement in the negotiations, though it is clear that both sides are still far from achiev-ing a deal.

The fiscal cli" refers to the ef-fect of a number of laws which, if left unchanged, could result in tax increases, spending cuts, and a cor-responding reduction in the budget deficit beginning in 2013. The Con-gressional Budget O#ce (CBO) es-timates the sudden reduction will likely lead to a recession in 2013.

The Republican’s o"er calls for a $2.2 Trillion deficit reduction over 10 years, which is significantly lower than the $1.6 Trillion target proposed by Mr. Obama last week. Republicans hope to achieve this saving through a broad tax reform, rather than an increase in taxes on the wealthy, which is what Mr. Oba-ma and the White House has been

actively pursuing.In a letter to the President, US

Speaker of the House John Boehner stated that “If you are agreeable to this framework, we are ready and eager to begin discussions about how to structure these reforms so that the American people can be confident that these targets will be reached.”

However White House Commu-nications Director Dan Pfei"er was quick to reject both Mr. Boehner’s letter and the Republicans’ plan. “Their plan includes nothing new and provides no details on which deductions they would eliminate, which loopholes they will close or which Medicare savings they would achieve.”

Treasury Secretary Tim Geith-ner presented the White House’s of-fer last week, but it too was rejected out of hand by the Republicans.

While both o"ers were met with immediate dismissal, their release has suggested to some that a com-mon ground may yet be achievable. However at present both sides re-main in a stalemate.

Republicans and Democrats make Budget O"ers

THE US Securities and Exchange Commission this week accused the Chinese a#liates of Deloitte, Ernst & Young, KPMG, PwC and BDO, of breaking securities laws after their refusal to provide the Commission with paperwork relevant to investi-gations of fraud at a number of Chi-nese companies.

Such firms are put in a di#cult position by the fact that US law requires them to provide the SEC with all documentation of their au-dits in overseas companies, while at the same time they are barred by Chinese law from sharing that same paperwork with foreign investiga-tors.

Some lawyers and accountants have stated that the SEC has poten-tially begun a process that could re-sult in all Chinese companies being removed from the US stock market.

The result could either see Chi-nese companies going down the private route, or could see them shift their listings to the Hong Kong stock exchange.

The problem arises from a fail-ure to put in place a China-US au-diting framework before the com-panies were originally listed. The result has seen a less strenuous auditing process of Chinese compa-nies that seem to have been taken advantage of.

THE RUSSIAN billionaire Roman Abramovich, best known as the sometimes erratic and always con-troversial owner of Chelsea Foot-ball Club, has this Tuesday agreed to purchase a 7.3% stake in Norilsk Nickel, which will help to end a long-running battle for control be-tween the companies two largest investors.

Norilsk Nickel is based in Mos-cow and is the world’s leading pro-ducer of nickel and palladium, as well as being in the top ten for pro-duction of copper.

Issues have existed since 2008 when Hong-Kong listed Rusal pur-chased 25.1% of Norilsk in a failed takeover attempt, leaving rival com-pany Interros with 28%.

Mr. Abramovich’s investment company Millhouse Capital will ac-quire the stake for an undisclosed amount. The move is believed to have been facilitated by the Krem-lin, who were forced to step in after a four-year dispute had held back the company’s development.

Representatives from both com-panies met with Russian Prime Minister Dimitry Medvedev ear-lier this year, and met with Russian President Vladimir Putin just last

week.The aim of the plan is that Mr

Abramovich will be able to act as a neutral third party, and the agree-ment is expected to provide meas-ures that will ensure greater stabil-ity into the future.

A statement from Rusal released Tuesday states “The reasons for and benefits of entering into the agreement are to improve the ex-isting corporate governance and transparency of the Norilsk Nickel group, to maximise profitability and shareholders’ value and to settle the disagreements of the company and Interros.”

BY DAVE KELLEHERNews Editor

THE GREEK government has com-menced a program to purchase back some of its debt, a condition of it re-ceiving the next tranche of bailout funds.

The government is set to o"er to buy back !10 billion of their bonds from private investors at an esti-mated 40% of their face value.

These bonds will be paid over a six-month period with money from the European Financial Stability Facility rescue fund.

Private investors have until Fri-day to accept the deal.

The current Greek hope is that the first to apply for this program will get the best deal.

This comes after private credi-tors agreed in March to write o" ap-proximately !107 billion of Greek government debt in one of the most aggressive restructuring programs in recent years.

If this operation succeeds, it will pave the way for Greece to receive the next tranche of its bailout funds, worth approximately !44 billion on 13 December.

Greece has been waiting since June for these loans to keep the country running.

The payment of these loans agreed to last week at a meeting of Eurozone finance ministers and the International Monetary Fund.

Doubts persist, however, over whether Greece can continue pay-ing at its current rate or if a program of debt-forgiveness is required.

Greek Bond-Buy-Back

› Is there any hope for a deal betweeen the two parties?

BY BISHOY ABDOULayout and Design Editor

3NEWS & CURRENT AFFAIRS THE BULL 06.12.2012

TEF OFFICIALLY RELAUNCHESLAST MONDAY the 2013 Trin-ity Economic Forum was o#cially launched. TEF 2013 follows on from the highly successful inaugu-ral forum that took place last Febru-ary, in which students from around the country converged on Trinity for a series of workshops and guest lectures from notable figures in the field of economics.

Speaking at the launch of TEF 2013, program coordinators Seán Gill and Gary Finnerty said they hoped to “encourage student par-ticipation in the policy making pro-cess, open discourse on a national level and share with students the knowledge, insight and expertise of professionals.”

The 2013 forum will follow a similar format to last year’s event, with student focused workshops on the issues currently dominat-

ing economic discourse in an Irish context. The workshops, facilitated by PricewaterhouseCoopers, will focus on issues such as the viability of property taxes, the provision of health insurance and the allocation of spending within the education sector.

Speaking to this reporter, Gill said that while the coordinators were still working on confirming the full set of speakers for the fo-rum, he was “very confident that we can build on the fantastic speakers we secured last year and really ap-peal to all those with an interest in rethinking economics.”

He went on to say that Presi-dent Michael D. Higgins’ keynote address to the forum last year, in which he urged students to ques-tion the failed assumptions and have the courage to consider bold

new strategies, would be the defin-ing characteristic of TEF 2013.

“We’ve been working really hard over the past few weeks to secure the guests who can help us take TEF 2013 to the next level. We have some interesting speakers from across the economic field and hopefully we can provide speakers and work-shops that cater for every prefer-ence”.

The coordinators were quick to stress the networking opportunities for students present by TEF, with Finnerty commenting that many of last year’s student delegates had gone on to secure places on intern-ship programs with the chief spon-sor of the event Pricewaterhouse-Coopers.

Ticket prices for TEF 2013 start from !10 and are available from trinityeconomicforum.ie.

ANTI-CORRUPTION WATCH-DOG Transparency International (TI) published their corruption in-dex on Wednesday, which showed that Greece was perceived as being the most corrupt country in the EU, and was ranked 94th overall out of the 176 countries surveyed world-wide.

Corruption has long been an is-sue of concern in Greece, but ever-increasing austerity measures tak-en in recent years have brought the issue to greater attention, with tax evasion by the wealthy being one of the problems that most concerned Greeks.

Ireland was ranked 25th out of those surveyed.

Jane Mittermaier, who is TI’s EU analyst, said that “The results of the

survey should be a warning signal for the EU to require more infor-mation and accountability from its member states”.

Perceptions of corruption are created primarily by weak and in-e"ective judicial systems and per-ceived over-familiar ties between government, big businesses and the wealthy, according to Mittermaier.

Other standout countries in-clude China ranked 80th, the US who were 19th, the UK in 17th, a po-sition they shared with France, and Germany who were 13th.

New Zealand, Denmark and Fin-land shared the top spot while Af-ghanistan, North Korea and Soma-lia were perceived as being the most corrupt.

Greece ranked bottom of EU Countries on Corruption Index

Trinity Economic Forum

Aid approved for Spanish Banks

The Eurozone’s finance min-isters have last Monday approved !39.5 Billion in aid to Spanish banks. The decision has formally ended months of uncertainty that could potentially have pushed the country into a full-blown bail-out. The announcement has seen Spain’s 10-year bond yields drop to 5.25%, - the lowest since April.

The decision was approved just hours after the Spanish government o#cially requested funds, which has been a positive sign for many. Yet

despite this there concerns persist among private-sector analysts, who believe the !39.5 Billion will not be enough as Spain’s banks continue to su"er in the midst of a deepening recession.

However European o#cials are confident that the injection of capi-tal, as well as an easing of many EU-mandated budget targets, will take much of the pressure o" Spain and its banks, meaning it will not need any further aid in the future.

FINANCETHE BULL 06.12.20124

AS THE hand-wringing and head-shaking reaches its peak in Europe, swift resolutions and future pre-ventative measures for the banking crisis are still a long way from frui-tion. What are we waiting for?

The e"ects of our crippled bank-

ing sector are clear: lack of liquidity has strangled the credit supply to labour-intensive small and medium enterprises, driving up unemploy-ment figures.

One mooted solution to this problem is the establishment of a

banking union. A September proposal by the

European Commission mandated the establishment of a single super-visor for the Eurozone. Questions remain over the extent of its remit, however. National Banks are to re-tain their everyday functions, but will cede authority to the European Central Bank to set capital bu"ers, order inspections of financial insti-tutions, and carry out stress tests of the 6,000+ banks in Europe.

There are also calls for a ceiling on bankers’ pay and bonuses, either through a bonus ratio limit or sim-ply prohibiting any bonuses that exceed salary.

Many objections come from countries outside the single cur-rency club, who are understandably reluctant to cede sovereignty to the single supervisor for little return and say in its regulations, as non-eu-ro countries will not be granted full voting rights. The Commission has made some concessions in terms of voting procedure but they have so far been deemed an unworthy o"er-ing. The UK is striving to protect the city of London from overwhelming regulation while maintaining ac-cess to the single market. Still fear-ful of a voting block of EU countries in the new authority leaving the UK ignored, David Cameron is under-standably cautious given the grow-

ing protestations of Euro-sceptic MP’s.

However, a very public dispute between France and Germany over the remit of the supervisor stems from their respective domestic banking systems. Germany’s po-litically powerful network of small public bank, popularly known as ‘Sparkassen’, consider themselves

sacrosanct and it remains in their interests to stay within domestic regulation only, mainly because any deposit-pooling guarantee scheme would likely see foreign banks benefiting from German de-posit strength. The ‘Sparkassen’ have launched a campaign against the plans, claiming that they did not cause the euro crises, and will not be forced into such a scheme.

“The lovely word ‘banking union’ masks a redistribution mechanism,

where sound [banks] are tapped so that the unsound don’t have to substantially change their business model,” said Georg Fahrenschon, president of the Sparkassen Federa-tion (DSGV).

Regulation of the union’s top 25 ‘systemic’ banks is preferred by the German government, who cite the quality of supervision to be priori-tised over the quantity. This howev-er, has caused an uproar in France, where it is believed that will result in the creation of a two-tier system, meaning French banks will be un-der the supervision of the European Regulator while German ones will remain under domestic supervi-sion.

All this is disappointing as the original aim was merely to maintain adequate levels of liquidity and sta-bility standards for the future. In-deed, any plans for the implementa-tion of any of the above firstly rely on the agreement of the !1 trillion European budget, which is creeping its way through the usual summits and meetings of European finance ministers. It is hoped that the be-ginning of any legislation draft will be available in the first six months of 2013.

LAST TUESDAY, the 20th of No-vember, Bank of Ireland raised !1billion ($1.27billion U.S.) in its most significant bond issuance in three years. Although the bank had recently issued £300million worth of private bonds to a small group of investors, this is the first public is-suance by Bank of Ireland since Oc-tober 2010 and also the first public covered bond / ACS issue since Sep-tember 2009. Originally planned for September of this year, the plan had to be put on hold due to the return of market turmoil.

Reports by the bank itself say it had an oversubscribed order book approaching !2.5 billion for the is-sue, with a “well diversified” group of nearly 200 investors: 37% were German and Austrian investors, 35% Irish/UK and the rest from continental Europe. Banking re-ports are claiming the majority of these were so-called “real money” (institutional fund managers) rath-er than hedge funds and other spec-ulative players.

Financial reports are referring to it as a potential signal of renewed market willingness to look at in-vestments within Ireland, a very positive sign for the struggling fi-nancial sector as a whole. It has been a struggle for the Irish finan-cial institutions to regain share in public markets heavy with concern over the government’s inability to

support a bruised banking sector, which is still recovering from heavy losses in the property lending mar-ket.

“Today’s trade is a significant vote of confidence by international bond investors in Bank of Ireland and reflects the material progress made by Group” the Bank said in a statement.

The Bank has confirmed it will use the !1 billion raised to reduce its reliance on monetary authority/Central Bank funds, which are esti-mated to stand at !21 billion.

Finance Minister Michael Noo-nan also released a statement say-ing that the “issuance is further evidence of the strengthening and normalization of our banking sys-

tem.” “Today is an important mile-stone on the path to full independ-ence for our banks”.

Vinod Vasan, head of European financial institutions’ debt capital

markets at Deutsche Bank and one of the bookrunners on the deal, has also backed the move: “This deal demonstrates Bank of Ireland can access the market and that’s been one of the critical concerns about the sector”.

Bank of Ireland’s bonds will pay an interest coupon of 5.875 per cent. An indication of wide interest came as a total of 68 accounts bought the bonds and investors orders for the transaction totaled !1 billion.

Speculation is now mounting that Ireland and the National Treas-ury Management Agency are poised to follow in the Bank’s footsteps and make a return to the long-term bond market for the first time since September 2010. Although rumours

claim this move may potentially be made before Christmas, financial analysts believe the country may wait until January. There is, how-ever, a certain pressure in place: if bad news emerges from any of the other at-risk Eurozone countries, it could hinder Ireland’s chances of a successful return

EBS has also successfully tapped international bond investors re-cently. AIB CEO David Du"y told the Irish Independent earlier this week that the bank has updated its “covered bond” program, which has fueled talk that state-owned AIB is now potentially in position to soon follow in order to reduce the bank’s reliance on the ECB for ongoing li-quidity. This later move comes just

as the Government’s bank guaran-tee in due to be withdrawn at the end of December, which costs the banks hundreds of millions each year. Earlier this year, Bank of Ire-land said it was ready to exit the scheme as the pace of growth in mortgage arrears is falling.

Clearly Bank of Ireland is leading the rest of the Irish banking system towards a more normal operation. It remains to be seen if the ECG can be withdrawn from the banking system later in the year or in early 2013. This would be a significant sign of further progress and would serve to improve the reputation of Ireland’s banks in the worldwide fi-nancial market.

by Eibhlin Crowley

Normality Close for Irish Banking System?

Tiarnan O’Caithin explores the political pitfalls of the European banking regulation

Banking Turmoil

› Bank of Ireland is leading the rest of the Irish banking system back to normality

“CLEARLY, BANK OF IRELAND IS LEADING THE REST OF THE

IRISH BANKING SYSTEM”

“REGULATION OF THE UNION’S TOP 25 BANKS IS PREFERRED

BY THE GERMAN GOVERNMENT”

5FINANCE THE BULL 06.12.2012

THE FIXED income market is comprised of a broad range of se-curities that promise a fixed stream of income, or a stream of income determined in accordance with a specified formula. Activities in this market have historically accounted for a significant proportion of rev-enue in the investment banking in-dustry, with the ten largest banks sharing $22 billion in FICC (fixed income, currencies and commodi-ties) revenue in the second quarter of this year. Changing regulatory requirements and muted markets have, however, forced a number of

banks to question the viability of continued participation.

More so than in most markets, fixed income trading is heavily scale-dependent. This is due in part to the high fixed costs of operation, but also to the requirement that firms regularly turn over their in-

ventory in order to earn spread in-come on client transactions. Banks operating on a smaller scale are struggling to manage the strain brought about by cautious investors and stricter regulators, who now re-quire that banks hold significantly more capital in order to back their fixed income transactions.

Particularly decisive action has been taken by UBS, which an-nounced at the end of October that it will be largely withdrawing from the market in order to focus on more secure revenue streams. About 10,000 jobs are set to go across the group as the firm acknowledges that it is unable to compete as a sub-scale participant in the sector. The regulatory requirements imposed in Switzerland are particularly stringent, squeezing margins to the extent that the activity is no longer economical for the bank.

The response of investors was one of approval: the company’s share price rose 6% on the day of the announcement, as the market welcomed a move that many saw as being belated. Given that the in-vestment banking division had just announced a pre-tax loss of 2.87 billion Swiss francs, investors were reassured by the bank’s decision to place greater emphasis on its wealth management and advisory services.

Credit Suisse, another Swiss

bank, took a very di"erent approach to its own fixed income travails. Whereas UBS took quite radical action, Credit Suisse rea#rmed its commitment to the market while rearranging its operations so that more risky divisions will be kept separate from those that are per-ceived as being safer. The bank will thus be split into an Investment Banking Division and a Private Banking and Wealth Management Division. The hope is that this sepa-ration would make it easier to cut o" loss-making divisions in times of di#culty, while preserving the ac-tivities in other sectors.

In contrast to the experience of UBS, Credit Suisse’s decision seemed to be rejected by the mar-

kets. Shares ended the day down 2%, as the firm was seen to be cling-ing to a pre-crisis model of universal banking that UBS had recognised as no longer being economical. It must be said that the fixed income divi-sion in Credit Suisse is significantly larger than that of UBS: represent-ing more than 25% of group earn-ings, a full withdrawal may not have been feasible. The feeling remains, however, that the ability of small-scale banks to compete in this mar-ket has been significantly impaired, and banks should be more realistic about their participation.

The consensus amongst analysts certainly seems to be that more cut-backs are inevitable as smaller firms are squeezed. There is pressure

on other sub-scale players, such as Morgan Stanley, to take similar ac-tion. Quite apart from the di#cul-ties posed by regulation and high costs, there is a real danger that re-newed market volatility in the com-ing months will see a flight of client capital from these smaller banks to larger, more secure ones. None of those operating on the periphery seem prepared to admit to planned restructurings or withdrawals, though time will tell.

It should be said, of course, that there are risks to withdrawing en-tirely from the market. The cost of re-entering the business after exit-ing is very high, and e"ectively pre-cludes the firm from participation in the foreseeable future. Bernstein Research also points out that the in-terrelated nature of banking means that a weakened fixed income de-partment may a"ect revenue in pre-cisely those sectors that the banks are withdrawing to, such as mergers and acquisitions.

While smaller firms may be ap-prehensive about their future pros-pects, the larger banks within the industry will undoubtedly benefit from further withdrawals. Deutsche Bank in particular reported a surge in business on the back of the UBS decision, as market transactions were split amongst fewer firms. Other market leaders, such as J.P. Morgan and Barclays Capital, also stand to gain from the unrest.

Volatility in the Fixed Income MarketSean Tong examines the problems faced by the fixed income market

THE INFAMOUS Bush era tax cuts are set to expire at the end of this year. Among the taxes due to increase is the tax rate on capital gains, which is forecasted to rise from 15% to 20%. For high-income taxpayers the new rate will be 23.8%. Most importantly for the private equity industry, the Obama administration plans to end the treatment of ‘carried interest’ as a capital gain in its 2013 Budget.

‘Carried interest’ refers to the share of a private equity firm’s prof-its that is paid to the investment managers. The compensation of managers at private equity is often called the ‘2 and 20’ rule. Managers are usually entitled to around 20% of total profits, even though ‘general managers’ typically contribute only 1%-5% of the firm’s capital. They get also get a fee of around 2% of total capital, which is taxed at the normal rate of income tax. ‘Carried interest’ does result from a capital gain but most of the risk is borne by the firm’s investors or ‘limited partners’, who contribute the vast majority of the firm’s capital. Those in favour of closing the loophole say that ‘carried interest’ is more akin to a fee, and should be taxed as an income, like a performance bonus is.

It is doubtful whether the private equity industry will be adversely af-fected by the proposed changes. The

loophole doesn’t apply to money managers at mutual funds or to cor-porate executives who get stock op-tions as a bonus. They are taxed at the same rate as ordinary income. Closing the loophole will not a"ect the investors who provide the lion’s share of the capital; just as much investment will be forthcoming as before. Undoubtedly, some private equity managers will try and claw back some of their losses through higher fees, while other ‘general partners’ want to introduce clauses that would allow them to take a big-ger share of the profit if the tax rate is changed.

Moreover the preferential treat-ment of ‘carried interest’ goes against two of the canons of a good tax system: e#ciency and equity. An e#cient tax is one that does not encourage people to do more or less of an activity than they otherwise would. An equitable tax makes the rich pay more than the poor. Alas, the ‘carried interest’ loophole fails both these tests. Someone who would be more suited to working in

an investment bank may decide to work in private-equity solely for tax avoidance. The tax is also extremely inequitable. Most private equity managers are very wealthy indi-viduals. The loophole is the main reason why Mitt Romney only paid 14.1% of his income in tax in 2010. Half of all capital gains go to the top 0.1% of income earners in the US.

This issue raises the fundamen-tal issue of whether capital gains

should be treated di"erently at all. An enormous amount of rent seek-ing activity is involved manipulat-ing income so that it is classified as a capital gain. This would be avoided if the rates were equal, like they were when Reagan was president. Whatever the merits of the prefer-ential taxation of capital gains, the carried interest loophole is a sub-sidy to the super rich that should be ended.

Increase in capital gains is in our interest

THE CONSENSENSUS AMONG SEEMS

TO BE THAT MORE CUTBACKS ARE INEVITABLE

› Mitt Romney: A beneficiary of the ‘carried interest’ loophole

› One of the firms involved affected by this trend

“CARRIED INTEREST GOES AGAINST TWO

OF THE CANONS OF A GOOD TAX

SYSTEM; EQUITY AND FAIRNESS”

FEATURESTHE BULL 06.12.20126

› Crazy for bargains

Consumers run amok on Black FridayOn the 23rd of Novem-

ber a wave of con-sumer hysteria hit the streets as the an-nual buying-bonanza

of Black Friday, began. Retailers across the country dangled deep discounts to lure customers this year as an estimated 147 million people went shopping between Friday and Sunday. Consequently, Black Friday upheld its title as the busiest shopping day of the year. The coining of the phrase is widely disputed, but the popular theory is that the name is a reference to prof-its in retailers accounts, as it was an accounting tradition to use red ink to show negative figures and black

ink to show positive. Since retailers historically “moved into the black,” or became profitable on the Friday, the name followed suit. Black Fri-day has gained both national and international notoriety for its an-

nual reports of assaults, shootings, and throngs of people trampling on other shoppers as they rush to get the best deal on a product before supplies run out. This year alone various incidents were reported, in-cluding a man reportedly pulling a gun out on a shopper while waiting in line in at a Sears store and a cou-ple that were hit by an SVU driving into Wal-mart.

For stores, the Friday after Thanksgiving can be the most prof-itable day of the year and serves as a useful barometer for what they can expect for the rest of the season. With a strong Black Friday, they can generally keep their prices up and assume that their holiday inven-tory will sell; a weak Black Friday means they have to start marking down holiday merchandise to get enough of it out the door by Christ-mas. With the US economy in such a fragile state, many shops this year began their sales on Thursday night - the earliest yet. Retailers noted that their midnight openings drew a younger crowd who wanted to party — and shop — late rather than get up early. Discount retailer Target opened its doors at 9pm local time, three hours earlier than last year and Sears opened at 8pm. Although these Thursday night opening hours were followed by Union calls for people to boycott the shops and for the employees to go on strike, they were largely ignored. At Macy’s Herald Square store in Manhattan,

for example, about 11,000 people were in line as it opened at mid-night, compared with 7,000 for an early Friday opening in 2010.

Black Friday relies on a few sim-ple retail strategies. One method is to sell everything as cheaply as possible and magnify a tiny profit through volume. Other stores mark down only a few high-profile items — even selling them at a loss — in the hope that customers will also add

some full-priced items into their carts. Yet the data still suggests a general decline in the number of in-store buyers, as the 147 million people forecast for this year is down from 152 million on the Thanksgiv-ing weekend last year.

Where the market is seeing an increase though is online shopping. A survey by Forrester Research suggested online shopping is set to jump 15% to $68.4bn. According to

IBM, online sales for Thanksgiving were up 18% from the previous year.

When analyzing the continuing increase of consumer spending, two possible explanations must come to mind; either the economy is start-ing to grow again and as a result people have more money to spend or people having to purchase during the discount period due to financial duress as it is the only time such items can be a"orded.

Several economic and sci-entific studies over the past number of years have recommended the mod-ernization of the U.S. rail

network as a means of bolstering economic growth, limiting urban sprawl, creating thousands of jobs and providing much-needed relief to the beleaguered construction industry. The main recommenda-tion coming out of these studies has been to upgrade the American rail system to incorporate high-speed trains like those used in Europe and Japan. The main criticism of the current rail operators is that their fastest vehicles can only average 110 km/h; this is in stark contrast to the TGV of France which runs at an average of 200 km/h. Clearly there is a significant divide in both the operational speed and the qual-ity of service. It has been suggested that an improved rail network in the U.S. would provide the rail com-panies with a vastly augmented op-erational capacity, allowing them to provide a better and more com-petitive service to their clients. It is hoped that such an improvement will benefit small to medium sized

businesses by allowing them to switch from the more conventional road haulage, thus enabling them to open up their operations to in-creased commuter travel.

Transport planners in Texas have recognized the benefits and opportunities which could be af-forded by an upgrade of their rail network and have put in motion a project to create a high-speed link between Houston, Dallas and San Antonio. The desired impact of the

plan is to establish the possibility of traveling between the three cities in 90 minutes. The main demographic reason for the upgrade of rail infra-structure is that Texas’ three main cities - Dallas, San Antonio and Houston - form a triangle, with two thirds of the population densely packed into the sprawling suburbs surrounding them. With popula-tion figures expected to jump sig-nificantly in the next ten years, a solution must be found. Such an

ambitious project won’t be cheap. Planners estimate the cost to be ap-proximately $18 billion. This is ob-viously a substantial sum of money, explicating the main barrier to em-barking upon this project. Though there have been no concrete moves as yet, there has been an indication that Governor Rick Perry is sympa-thetic to the idea: “Currently it isn’t possible without very large govern-ment subsidies. However as the population of these cities becomes

denser and more concentrated around the DFW-Houston-San An-tonio triangle it will become a more viable option.” This came from a spokeswoman for Rick Perry, and while it certainly leaves Perry’s po-sition firmly sat on the fence, it does provide a glimmer of hope to those who hope to see high-speed trains running in Texas by 2020.

Texas Turns to TrainsEd Teggin expounds the benefits of turning to high-speed trains

“WITH THE US ECONOMY IN

SUCH A FRAGILE STATE MANY

STORES OPENED THEIR DOORS ON

THURSDAY”

› TGV - A model for the future?

7FEATURES - SPECIAL REPORTTHE BULL 06.12.2012

Dublin University’s financial newspaper

Budget Special

The build-up to Budget Day in recent years, like a festival of sorts, bring with it numerous weird and wonderful

sideshows, from the colourful street carnivals of austerity marches, to the feature long radio shows dedi-cated to speculating and anticipat-ing what will happen come the big day. Amongst the most fascinating of these annual rituals are the Budg-et Proposals released by the opposi-tion parties of the day.

But is there anything of sub-stance behind their inexorably emotive, yet inherently ambiguous taglines such as “A Fairer way to Recovery”? Or do they simply de-tract from the reality of impending austerity, o"ering false and unreal-istic alternatives from parties who will ultimately have no say, nor bear the brunt of responsibility, for the measures that will inevitably be put in place? Below is an unconvention-al look at some of the more bizarre, and arguably more self-serving

proposals, the rhetoric, the impli-cations and their consistency with previous policies while in power.

Fianna Fail, our most recently ousted incumbents, o"er “A Fairer

Way to Recovery” as the mantra of their proposal. Upon initially con-sidering this statement, you may as-sume their use of the term “fairer”

is used in comparison to Fine Gael, but on examination of the outlined proposals, it becomes clear that they may in fact be stressing a su-perior alternative to their own pre-vious track record. Some of their more populist proposals such as their view that “now would not be the right time to introduce a prop-erty tax” and their “solidarity meas-ure” to reduce retired public serv-ant pensions, are a complete U-turn on the stances they held when they actually had the power to change these things, with the former hav-ing in fact, been promised in writing to the Troika by FF. Much of the rest of their proposal to raise funds in-clude the usual rather lofty, yet limp suggestions to increase e#ciencies, cut evasion rates, increase enforce-ment, as well as a plan to raise the cost of our pints and tayto with al-cohol and junk food taxes.

Sinn Fein, the second string op-position party, take a more direct approach in using their budget proposal to attack the incumbents

using terms like “cruel” and “gruel-ling” in reference to recent budgets. At the press conference, Mary Lou McDonald boldly declared that the purpose of their proposal was “To Protect Children”, virtually imply-ing, in a way only Mary Lou can, that FG may in fact be setting out to harm children, just stopping short of a Helen Lovejoy-esque outburst of the emotive “Won’t somebody please think of the children?!”. As for the actual substance of the proposal, Sinn Fein come out guns blazing (metaphorically of course) and tax happy. They propose a 48% rate of tax on income over !100,000 which they estimate would yield !365m, and a 1% wealth tax on net wealth over !1m which would raise !800m. Other expected proposals included stabs at private schools and “super pensions” as well as a gambling tax of 5%, perhaps to com-pete with FF aforementioned fun-curbing taxes. Like FF, the Shinners haven’t shied away from comical hypocrisy either, also including

measures to cut down on “black market activities”.

While opposition budget pro-posals will always have their im-

portance in a democratic society, in o"ering the incumbent govern-ment constructive suggestions and alternatives on behalf of the under-represented, it is when they lose sight of this responsibility, using budget season as an opportunity to gain petty opinion poll points with empty irresponsible political rheto-ric, that the exercise becomes an ir-relevant side show, detracting more than it contributes.

Every year opposition parties release their budget alternatives. But are they constructive, or merely irrelevant sideshows? Gabriel Corcoran investigates these proposals; their relevance; or lack thereof

Opposition Party Budget Proposals

“AMONGST THE MOST

FASCINATING RITUALS ARE THE BUDGET PROPOSALS

RELEASED BY THE OPPOSITION

PARTIES”

HELEN LOVEJOY-ESQUE “WON’T

SOMEBODY PLEASE THINK OF THE CHILDREN?”

SPECIAL REORT- FEATURESTHE BULL 06.12.20128

Ireland has been praised, most prop-erly, for its Herculean e"orts in adapting to the fallout from an eco-nomic collapse and for sustaining the monumental burden of bank debts.

Public expenditure has been restrained and revenue has been generated through tax rises and the divestiture of assets (The weight of adjustment is distributed be-tween spending and taxes at a ratio of 2:1). The country and its finances appear to be well on the way to recovery.

Conversely, our fellow PIGS have re-fused to confront the structural prob-lems that plague their economies, and have been less successful in restoring fiscal rectitude. Their populace has been intransigent in their opposition to necessary, and belated, reforms and has been equally hostile to an unavoid-able contraction in government spend-ing.

In Ireland there have been fringe protests, but in general there is recog-nition of what must be endured. Unfor-tunately, Irish people seemed resigned to these measures as a punishment, rather than as a chance to improve the ability of our nation to produce wealth and prosperity. This period of aus-terity should be bright with hope for the future. There is an opportunity to resolve the last vestiges of our fiscal and economic crisis, whilst laying the groundwork for a vibrant economy go-ing forward. Focusing on budgetary de-cisions as some sort of zero-sum game in a static world is a mistake. Everyone

can benefit if the appropriate approach is adopted.

Of all the issues in recent budgets, un-employment, education, health, and water and property taxes have dominated the dis-course and they are addressed briefly below.

Firstly, the path forward should involve reducing the marginal tax rate on lower income earners. The loss of benefits and income that accompanies securing em-ployment can often mean that, for the low-skilled unemployed, the marginal tax rate can exceed 100%, which, the inherent ful-fillment from work notwithstanding, pre-sents a powerful disincentive to accept un-desirable jobs. This perverse arrangement deters the unemployed from pursuing em-ployment, which leads to social ills as well

as exacerbating the fiscal situation by de-priving the exchequer of taxes and demand-ing more in the way of job-seeker allowance. Lower marginal tax rates can be achieved by shortening the duration of benefits, allow-ing them to b e c o m e l e s s g e n -e r -

ous as time passes, which progressively adds greater pressure to take a job. This has the virtue of easing the social welfare burden, ame-liorating the fiscal situation. Un-fortunately, in this budget, it is likely the government will continue child benefit cash payments to lower income families, which they presumably lose if they climb in to a higher income category. This is anath-ema to promoting social mobility and also worsens the country’s finances.

Insofar as the state funds health services and the education system these areas should be spared the full brunt of cuts. Clearly, the concept of “free-fees” should be consigned

Ted Nyhan analyses Ireland’s current fiscal situation; whether Ireland is going in the right direction or is it consigned to more years of austerity?

“THE CONCEPT OF ‘FREE-FEES’

SHOULD BE CONSIGNED TO THE DUSTBIN

OF FAILED EXPERIMENTS”

BUDG#

9FEATURES - SPECIAL REPORTTHE BULL 06.12.2012

to the dustbin of failed experiments. There is mounting evidence it has done little more than act as a subsidy to the comfort-able middle class. The government should instead construct a state-backed student-loan system, creating a model that exists in many of the world’s most admired econo-mies, from the US to Australia to Norway. This loan system can include “sweeteners”,

such as writing o" a portion of principal if the borrower suc-cessfully obtains a degree. Establish-

ing this may cost money, but the overall objec-tive is to allay market (and Troika) con-cerns as regards our capacity to repay our debt. Settling the is-

sue of third-lev-el funding would certainly not hin-der our attempts to convince our financiers of our

creditworthi-ness.

In the realm of public health,

the government has indicated it may decrease “the price and volume of goods

and services procured by the health ser-vices”, which is ominous. They also intend to lower sta" lev-els. This may be

suitable (admin-istrators may be the subjects of cuts), but

it is discomfit-ing that a gov-

ernment bureaucracy is determin-ing the amount spent on something

as vital as healthcare, and, indeed, how these services are dispensed. An incre-

mental privatisation of the system could re-lieve the government of some obligations, as well as potentially raising money from the sale of assets. Even in the context of a universal, mandatory insurance scheme, there is no need for the government to ac-tually be involved in supplying medical ser-vices.

The water charge and property tax are ideal taxes for generating revenue, given their lump-sum nature. They have a com-paratively mild distortionary e"ect on eco-nomic behaviour and are di#cult to avoid or evade, which maximises receipts. Most developed countries have a property tax, which is a very e#cient method of funding state expenditure. Given that yawning defi-cits must be closed somehow, these taxes represent one of the optimal ways of doing so. The recent protests in Dublin ignore the fact that this charge is required to preserve the services that they themselves would undoubtedly demand. The property tax is negligible. Fears persist, however, that it will grow in the future. This is most likely correct, but hopefully rises will be matched

with falls in tax collected by other means, especially the income tax. As for the water charge, it can be viewed as user fee. Ireland is currently alone amongst OECD coun-tries in not charging for water use. The only drawback to the water charge is that it is much too small and not related to the level of consumption. The once-mooted plan of installing water meters would do much to rationalise the provision of this resource, if implemented. This would ensure the full cost of water is borne by the user, and not society. The government spends !1.2 bil-lion on water services annually, so shifting costs to the users would be fiscally mean-ingful.

Finally, the limitations of the budget in and of itself to e"ect the positive changes should be acknowledged. For instance, the delayed insolvency bill should be ex-pedited through the Dail, and the period of bankruptcy reduced to one year, in line with the UK and US. Relatedly, the thicket of regulations that smothers business and calcifies markets should be thinned. These actions would spur private sector growth, enlivening the labour and housing markets. However, much can be achieved by holding down marginal tax rates and the amount of consumption channeled through govern-ment bureaucracy. And, of course, running a manageable deficit helps too.

BUDG#T 2013

“IN IRELAND THERE HAVE BEEN FRINGE

PROTESTS, BUT IN GENERAL THERE IS A

RECOGNITION OF WHAT MUST BE

ENDURED”

“THE PERIOD OF BANKRUPTCY

SHOULD BE REDUCED TO ONE

YEAR, IN LINE WITH THE UK

AND US”

FEATURES-SPECIAL REPORTTHE BULL 06.12.201210

Ireland has been almost unique amongst developed countries in its refusal to implement some form of property tax, in-stead relying on exceptionally high rates of direct (income)

and indirect (consumption) taxa-tion. Given the limited scope for further increases in these, it was inevitable that the Government would be forced to shift its focus to a tax on wealth – and as property rep-resents the vast majority of wealth in Ireland, it was an obvious candi-date.

There are, broadly speak-ing, four types of property tax. The first of these is a flat-rate charge, and is considered singularly un-desirable due to its regressive and indiscriminate nature. The House-hold Charge introduced at the be-ginning of 2012 is an example of this, and served as a temporary measure before the introduction of a full property tax in this year’s Budget. The second type of tax is based on the market value of the whole property, and is in common use across the world.

The third form of property tax is essentially a reduced form of the second one, relying on value ‘bands’ to determine the tax appli-cable to any given property. This is the form the Government has cho-sen to adopt, mimicking the council taxes used in the UK. Households will be asked to self-assess the val-ue of their whole property, and pay taxes in accordance with the band within which this value falls.

While this is certainly an im-provement over the somewhat dis-

astrous Household Charge, there is a strong feeling of opportunity lost in this decision. Having found itself in the enviable position of be-ing able to create a bold new tax that drew from the experiences of other countries, Ireland has instead de-cided to copy-and-paste a relatively ine"ective model into our own tax system. The fourth type of property

tax, known as a site valuation tax (SVT), would have been preferable along a number of dimensions.

An SVT is calculated in relation to the value of the land upon which a property sits, rather than the total value of the real estate. This model was actually proposed by the Gov-ernment in November 2012, but has since been abandoned in favour of the total property value approach. A tax of this nature can be found in countries such as Singapore, Hong Kong and Russia, as well as certain states within the US (such as Penn-sylvania). There are three signifi-cant benefits to this approach: it is e#cient, creates desirable incen-tives, and falls on the ultimate ben-eficiaries of the revenue.

The e#ciency of the SVT has been noted by economists as far back as Adam Smith, who was an ad-vocate of the measure. The supply of land is, for all intents and purposes, perfectly elastic in so far as there is a fixed quantity of it. This means that, unlike the property tax the Govern-ment would like to implement, an SVT would not be distortionary. It would not influence the market

mechanism or create deadweight loss in the manner that other taxes do, as the supply curve for land is vertical. There is, in fact, both a pre-dicted and an observed correlation

between the use of an SVT and im-proved market e#ciency.

In terms of incentives, the SVT encourages the e#cient use of scarce resources. This is in stark contrast to the full property tax, which actively discourages this. Faced with a tax calculated solely in relation to the value of the site, landowners are incentivised to de-velop vacant and underused plots in order to maximise their value. Spec-ulative holding of land is discour-

aged, and better use of inner city space helps to reduce urban sprawl. In Harrisburg, Pennsylvania, the use of an SVT has been credited with bringing about an eight-fold reduction in vacant structures over the past thirty years.

Contrast this with the property tax that the Government is imple-menting, which encourages owners to distort the value of their homes and discourages them from carry-ing out improvements that would increase the property’s value. This seems like a bizarre set of incen-tives to induce: businesses are dis-couraged from expanding their op-erations, households are punished for improving things like energy e#ciency, and dilapidated build-ings would be left to continue their decline.

Finally, an SVT would be easier to implement and fairer in terms of its incidence than the tax that the Government is proposing. Where-as the value of the whole property depends on innumerable factors, there are just two key variables that influence land value: the size of the site and the extent of the ameni-

ties (social and natural) in the local area. Given constant plot sizes, it is improvements in local amenities that drive di"erences in land value and, consequently, the tax payable under an SVT. As the revenue from this tax is intended to be used to fund local services and improve-ments, the SVT is also fairer than the full property tax in the sense that those who pay the tax are also the ultimate beneficiaries, and ben-efit in proportion to their payment. Under the Government’s model, households pay di"erent rates for the same local amenities.

This is certainly not an exhaus-tive list of the failings of the ‘band’ system of property tax – there is, for example, ample evidence in the UK that the regular updating of these bands can be problematic – but it should be su#cient to appreciate that there were certainly better options open to the Government. While the (belated) introduction of a property tax is to be applauded, it is di#cult to shake the feeling of lost opportunity in this case.

The Property Tax: Right Idea, Wrong ModelThe property tax has generated much controversy since it was initially mooted by the Fianna Fail government in 2008. But is it sustainable? Sean Tong investigates

“GIVEN THE LIMITED SCOPE FOR FURTHER INCREASES IN TAXATION, IT

WAS INEVITABLE THAT THE

GOVERNMENT WOULD BE FORCED TO

SHIFT ITS FOCUS TO A TAX ON

WEALTH”

“IRELAND HAS DECIDED TO

COPY-AND-PASTE A RELATIVELY INEFFICIENT

MODEL”

11POLITICS THE BULL 06.12.2012

Hamas: The Islamic Resistance Movement

THE RECENT outbreak of vio-lence between Israel and Hamas has dominated global political dis-courses in recent weeks. No other world conflict has ever embodied such a mixture of religious fervor, national identity, cultural aspira-tions and economic drawbacks than this tumultuous relationship.

In 2006 Hamas won a major-ity of seats in the Palestinian Par-liament; defeating the governing political party of the time, Fatah,

in Gaza. The following years were dominated by violent clashes with Israel which were characterized by the frequent exchange of missiles between the two belligerents. How-ever, little is made known of Hamas; what it is, whom it represents and what it stands for. Can peace in the Middle East even be considered

while what so many have branded a terrorist group is in a position of political leadership?

The organization was founded in 1988 by Sheik Ahmed Yassin fol-lowing an uprising by Palestinians against the Israeli control of the Palestinian territories since 1967. Hamas was created with the sole purpose of ending the existence of the Israeli state and to restore the land to Palestine. The founding Charter commits the group to rais-ing “the banner of Allah over every inch of Palestine”and the to the de-struction of Israel. Hamas is also committed to overriding the Pal-estinian National Authority as the main governing body of Gaza. The 1988 Hamas covenant is a deeply religious document that empha-sizes a total dedication to Allah, the spread of Islam across the land and the struggle against the Jews. The prospect of a cooperation between Hamas and Israel seems unlikely upon reading the the charter’s ex-tremist statements. Hamas sees Ji-had, which is Arabic for struggle, ei-ther physical or internal, as the only path to Allah. Any man or woman who does not accept Islam as their faith has chosen “annihilation as their only companion.”

Hamas reportedly has a seven hundred million dollar budget funded mostly by private individu-

als, groups and neighboring states such as Saudi Arabia. Last year the group cut all financial a#liations with Shia dominated Iran because of its support for Bashir Al-Assad and the treatment of Sunni Mus-lims. Despite terrorist accusations by foreign nations Hamas denies that it is a terrorist group and has built a wide local support by provid-ing education, hospitals and sports leagues to communities. Hamas views itself as a political party will-ing to use violence to see its ideals

come true, which, in its eyes, ren-ders it a militant group rather than a terrorist organization.

Recent attempts at reconcilia-tion with secular Fatah, the party that still governs the West Bank, fell short of success. However, a coali-tion between the two would o"er more promising path to Arab- Is-raeli peace. With followers united through an absolute and irrevoca-ble hatred for Israel it’s di#cult to envisage a mutual agreement be-tween the two states. A peace deal

between the two would have to in-clude a compromise and accept a state that does not include all of the historic territory of Palestine. Ha-mas’ current leader has been chal-lenged by its more radical members for favoring a political solution over military resistance. To reach a solu-tion Israel and Hamas must engage in direct negotiations and find a compromise in which two states, something which truly looks easier said than done.

Timmy Munier examines the prospect of peace between Israel and Hamas

› Missiles have featured heavily in recent Israeli-Hamas conflicts

Adam Smith is often por-trayed as a free market advocate. His seminal work The Wealth of Nations is frequently

cited by many free marketers as a theoretical underpinning for ben-efits of an unadulterated market system. This depiction is limited and simplistic. If one probes a little deeper into Smith’s work, they will

find some notions more akin Marx than Friedman.

Smith’s underlying Marxism is most clearly seen in the Theory of Moral Sentiments – especially the parts dealing with consumerism. To Smith, consumerism is only benefi-cial if it’s supported by the exercise of three virtues: justice, benefi-cence and prudence. Throughout his works, these three virtues are

consistently regarded as the basis of our morality. Justice is the preven-tion or remedy of acts that cause “real and positive hurt to some par-ticular persons, from motives which are naturally disapproved of.” Be-neficence is the “free gift of items or services of value to another human being.” Prudence is the “care of the health, of the fortune, of the rank and reputation of the individual, the

objects upon which his comfort and happiness in this life are supposed principally to depend.” These three virtues formulate the rationalistic part of men for Smith.

Free marketers frequently ar-gue that consumption can satiate human desires and thus lead to an overall happier life for the consum-er. A free market system based on a production-consumption mutu-ally beneficial relationship can help people live the good life. Believers of such a notion often depict human beings as self-interested, egoistic, utility maximisers. This depiction only accurately captures half of a person’s make-up for Smith – they are also rationalistic. A free market consumerist society like the one we experience today will not lead to the good life according to Smith. To him, unchecked consumption leads to alienation. If people are completely enveloped in consum-ing, they don’t exercise the moral virtues that Smith identifies. Mod-ern day advertising helps create a scenario where people become obsessed with consumption. This leads to a state of a"airs where people become deficient in their rational moral decision making ca-pacity and overly egoistic and self interested, alienating them from their rationalistic side. The best so-ciety for Smith is one which keeps a healthy balance between mans rationalistic and egoistic parts. The current economic system we live

under promotes consumption vi-ciously and pushes us into our ego-istic side far too much. For Smith, the current economic system al-

ienates man from what they truly should be. This is precisely the same conclusion Karl Marx came to in his Economic and Philosophic Manu-scripts of 1844. Smith captures the futility of men trying to live their live by feeding their egoistic parts with consumption when he says the following:

“The poor man’s son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich. He finds the cottage of his father too small for his accom-modation, and fancies he should be lodged more at his ease in a pal-ace. It (isn’t till) in the last dregs of life... that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquility of mind than the tweezer-cases of the lover of toys.”

By James Nugent

Adam Smith’s Underlying Marxism?

“THE FOUNDING CHARTER

COMMITS THE GROUP THE

RAISING THE BANNER OF

ALLAH”

“TO SMITH, UNCHECKED

CONSUMPTION LEADS TO

ALIENATION”

ECONOMICSTHE BULL 06.12.201212

THE GLOBAL economic outlook for the coming months is domi-nated by politics to a greater extent than ever. This is true across the developed world and into emerging markets. In the United States, Re-publicans and Democrats look like they will squabble all the way to the ‘Fiscal Cli" ’ and perhaps go over it. Elections next month in Japan will see power change hands once again but this time the Bank of Japan has been at the centre of the debate as it comes under pressure to revive the economy. Meanwhile, back in Eu-rope the EU has just postponed the di#cult decisions in the EU budget which exposed the fault lines be-tween richer and poorer, and Euro-centrics and Euro-sceptics. It would be an understatement to say that greater challenges lie ahead.

European politicians have put up with their fair share of abuse; now attention has rightly turned on the US elite. The ‘Fiscal Cli" ’, which is the automatic tax raises and spend-ing cuts which will be introduced if no compromise can be reached over the debt level, could be a serious self-inflicted wound. If fully intro-duced it would take 2.9% out of real GDP in the US next year - this would almost certainly mean another re-cession and much higher unem-ployment, making it one of the most costly own goals in recent history.

The reality will most likely be a compromise between the current path of persistent deficits and the ‘cli" ’ itself. With the Bush tax cuts

for lower and middle earners mak-ing up more than half of the ‘cli" ’ expect to see the American con-sumer a"ected: consumer senti-ment, which recently hit new highs, will probably see a drop.

Japanese politics rarely makes it into the headlines, but the upcom-ing election in mid-December has caught the attention of financial markets and commentators. Shinzo Abe, the leader of the opposition Liberal Democratic Party and the likely future PM, has said that he will bring pressure on the Bank of Japan to boost the economy if elect-ed.

The Bank of Japan, like most central banks, fiercely defends its independence from politicians;

however this has not stopped the yen from falling 4% against the dol-lar in the past fortnight. Abe has suggested raising the inflation tar-get and buying foreign government

bonds in a bid to weaken the yen and boost growth in a country that has battled inflation for the best part of 25 years.

This political intervention is seen by some as the potential cata-lyst for a Japanese bust. Kyle Bass, an American hedge fund manager who profited from the European crisis, now has his sights set on Ja-pan. However, many hedge funds who forecasted a fall in the yen and a debt crisis have been slowly bleed-ing money waiting for the ‘Japan Short’ to come o" over the past few years. If they’re proven right this time, Mr Abe will have a lot to ex-plain to the Emperor.

Will 2013 be the make or break year for the euro? This time last year it was going to be 2012. A reso-

lution looks as likely as a break-up. European politicians are struggling to find common ground while the economic realities are hitting hard. Unemployment rose again in the eurozone in October to 11.7%; even Germany has not been unscathed, seeing an eighth straight month of increased unemployment, which is now at 6.9%. Greece has had an-other bandage put over its public finances and a Spanish bailout looks like being a matter of when, not if.

However there is some cause for optimism: Italy was able to sell debt in the bond markets at yields that hit a two-year low last week as Mario Draghi’s proposed bond buying scheme (Outright Monetary Transactions) appears to be having an e"ect without being used.

If the better credit conditions for peripheral sovereigns can be trans-mitted to businesses then the eu-rozone may be able to function as a proper monetary union. Until then, the domestic economies of Ireland, Spain et al. are struggling with a persistent contraction in lending, under which a recovery is unlikely.

Financial markets and political elites are eyeing each other intently from across the room, decisions on both sides being influenced by the other: politicians courting the mar-kets and markets testing the loy-alty of politicians to their promises. This relationship has evolved over the past two years and if the coming months pan out as expected, this fling is about to get serious.

SMF - Global economic outlookThe SMF’s Head of Macro-Research, Edward Flahavan, delivers his outlook on the Global economy

“ITALY WAS ABLE TO SELL DEBT IN TEH

BOND MARKET AT YIELDS THAT HIT A TWO-YEAR

LOW”

› Are thinkg looking up for the global economy?

TENSION HAS been mounting as a failure to compromise on a budget deficit reduction plan between the Democrats and Republicans has

pushed the United States on the brink of the fiscal cli". If both sides hold their respective positions, On

January 1 2013 the US government will be facing $600 billion of higher taxes and reduced public spending in 2013.

The formation of this fiscal cli" is due to many past temporary gov-ernment policies (especially tax related) which are due to expire. These include the Alternative Mini-mum Tax, Bush tax cuts, and elaps-ing of payroll tax cuts. Attempts to maximize growth and to maximize welfare in the past have come to a large bill that the current genera-tion of Americans are forced to pay o".

When the problem arose in 2011, US President Obama passed the Budget Act of Control of 2011. The US government made the decision

to increase the debt ceiling which will be compensated by a reduction in government spending at some point in the future. Clearly, fail-ure to address the high public debt has exacerbated the problem. Now Democrats and Republicans appear

to be making the same mistake by failing to agree on a program to re-duce public expenditure and rais-ing the tax revenue. Republicans believe that tax rate increases for the upper class are not necessary, if not harmful to the economy. Presi-

dent Obama insists on introduc-ing higher tax rates on the upper income class while keeping the tax cuts for the middle class, arguing that suggestions such as ‘closing tax loopholes’ and ‘limiting reductions’ suggested by Republican Senator Mitch McConnell are ine#cient.

An additional delay in making a progress towards a deficit reduction package will bequeath the current generation of US citi-zens with a dimmer outlook, reduc-ing market confidence and poten-tially raising its borrowing costs. If no agreement is sought for a debt reduction plan, the US economy will contract. Not only will the rate of unemployment increase to 9%, unemployment benefits will be cut dramatically. All government de-partments would share the hit of the fiscal contraction. As for the public, an average household will be liable for an increase in tax of $2000. The already weakened glob-al market would take another shock after the European financial crisis and China’s slowing growth.

An agreement on a fiscal plan can minimize the hit; but it all comes down to whether America is united after all.

Heading towards the fiscal cli!Celia Ho looks at the prospect of a ‘grand bargain’ as the US veers towards the fiscal cliff

“IT ALL COMES DOWN TO WHETHER

AMERICA IS UNITED AFTER

ALL”

› Partisan divisions are hampering the prospect of a resolution

13ECONOMICSTHE BULL 06.12.2012

In the past 3 months Europe has seen a shift in the focus of the debt crisis. Recent trends have illuminated how mar-kets have been re-evaluating

EU economies. Greece, as ever, re-mains on the point of default, living on day-to-day financing via four-week T-bills. A Greek default, or at the very least a significant “haircut” to its creditors, is surely not far o". Greece’s debt, simply put, is too sig-nificant to be paid back at present value and this has been reflected in the Troika’s recent agreement to ex-tend the debt deadline by two years to 2022.

Yet the trend of falling bond yields has shown a possible di"er-ing market sentiment. Greece has seen its own 10-year bond yields reduce massively from 24% to av-eraging just above 16%. Spanish 10-year bonds in the last 3 months have fallen over 100 basis points (one basis point is a hundredth of a per cent) from within touching dis-tance of the “unsustainable” 7% to almost 5.5%. Italy has mirrored this

pattern, dropping from a brief stint above 6.5% to significantly below 5% hitting record 2 year lows. Back home, Ireland has been showing up some of its bigger neighbours with a much improved attitude. Credit institutions are being lambasted by any perceived “tightness” in terms of lending and special credit facili-

ties are opening to provide for the SME sector. Continually cited as a “special case” in light of commend-able recovery, Ireland last week saw its credit rating outlook upgraded

from “negative” to “stable” by Fitch rating agency. While The PIIGS re-main delicately poised economical-ly, trends from key indicators seem to be less pessimistic of late.

The pressure on the EU has not subsided, however, but merely shifted to its newest target. France, with stalling growth, a lacklustre SME sector and an indecisive gov-ernment, has emerged within the Eurozone as the latest concern. This could possibly be the begin-ning of the “contagion” economists and advisors have long speculated about. Whether Europe’s trailing periphery economies’ problems or France’s gradual loss of competive-ness have led to the problems right at the heart of the EU is not yet clear.

What is clear, though, is the man-ner in which the socialist French government is failing to deal with it e"ectively. While Hollande has promised reforms, those enforced so far seem to reflect an ideologi-cal background rather than an economic purpose. France’s tax

reforms have targeted the wealthy with a tax of 75% on earnings above !1,000,000 and, before a strong re-volt, attempted to increase capital gains tax up to 60% in certain cases. The latter of these would have im-posed serious penalties on entre-preneurs in a time when incentives are desperately needed. Monsieur Hollande has displayed a remark-able lack of comprehension of the SME sector and its role as the driv-ing force of economies, perhaps to his and France’s detriment. The feeling of a flailing France is one reflected in the markets. France’s bond yields have crept up over 70

basis points on the Eurozone’s one stable economy, Germany. Further-more, a symbolic loss of the top credit rating AAA by Standard & Poor has had drastic implications for the French economy. The surge in bond yields is only the beginning of France’s troubles. Many forget that France’s debt level is by no means under control, sitting at 91% of GDP - an increasing cost of debt just adds to Hollande’s list of wor-ries. If the French premier fails to stimulate SMEs and attract inves-tors to France to boost growth and subsequentially GDP, it won’t be long before speculation ensues.

In a state of flux

IN 1960S a group of prominent Chilean economists held a series of meetings behind closed doors. All classically trained in economics, they debated how a Western style free-market economy could be built out of a ramshackle banana repub-lic. They set about planing the most radical economic experiment since the Meiji Restoration.

At this time Chile’s economy seemed to be in freefall. In 1970, Chile elected the first Communist leader in the Western world, Sal-vador Allende. He immediately sets about nationalizing industries, set-ting price and wage controls and

restructuring the economy along socialist lines. The economy col-lapsed. The country was in sham-bles as hyperinflation of over 340%, a lack of foreign reserves, a rocket-ing trade deficit, massive increases in circulating currency, and falling GDP took hold. Chile, it seemed, was spinning out of control.

In 1973, the people had enough. The country erupted in protests and citizens poured into the streets de-manding change. A crisis took place when the parliament passed a reso-lution accusing the government of violating the Constitution. The Al-lende government was overthrown

in a coup. A military government, led by general Augusto Pinochet, took power. It was change, but not of the sort the people wanted. Pino-chet was an opportunist rather than a liberator and he set about brutally suppressing the people.

At first the Junta continued the centralized economic policy of the predecessors. It was only after the economic malaise deepened that Pinochet and his generals turned in desperation to the ideas of the “Chi-cago Boys”. The economists were at first reluctant to work with the regime with such a violent record of oppression, but in the end they saw it as their duty to use their expertise for the good of Chile. They set about a radical economic transformation of Chile’s economy. Economic lib-eralization replaced collectivism as the government began one of the most dramatic reversal of economic policy in history.

Under the guidance of the Chi-cago economists, the government set about overturning the country’s centralist economy and building a modern market economy. They im-mediately began rolling back Allen-de’s socialist reforms; privatising state industries, eliminated price controls and cutting the money sup-ply. The used the ideas they learned in America to reshape Chile’s fu-ture. The results of the experiment were at first were devastating. Un-employment spiked, the economy contracted and capital flowed out of the country.

Despite this, the Chicago Boys

kept their nerve and eventually the fever broke. Inflation fell and con-tinues to fall for the next decade. They continued the programme of economic reforms. Chile cut out many of the loopholes that favored certain interest groups and encour-aged ine#cient economic choices. Tax evasion dropped significantly and revenues rose. Exports more than doubled as tari"s were dra-matically reduced. Chile main-tained the most stable monetary policy in the region. As a result, the

economy that once seemed hope-lessly outdated was transformed. Economists around the world be-gan to refer to the “Miracle of Chile” as a new model for development.

In 1989 elections were called and the military regime was peacefully removed from power. A center-left coalition took power. The new gov-ernment set about building an open democratic government . Noting the successes of the policies, they refrained from dismantling the eco-nomic reforms. They continued the

tight monetary policy and privatisa-tion policies throughout the 1990s and 2000s. Although debate contin-ues on specific economic policies, a consensus reigns on the success of the market reforms.

Chile’s economic reforms were the first shots in an economic revo-lution that would spread the world over. However quietly, however clouded in euphemism, nation after nation emulated Chile’s reforms. From Thatcherism in the UK to Rogernomics in New Zealand, from the former soviet republics of East-ern Europe, to the emerging Asian nations of Singapore and Malaysia, successive governments spanning continents adopted local variants of the reforms.

Today Chile in the most pros-perous economy in Latin America. Poverty has fallen from a peak of 46% to 14% today. It’s economy re-mains the strongest performing in the region, with growth at a robust 6.5% in 2011, the fastest growing developed country. In 2010, Chile was the first South American coun-try to join the OECD. Many econo-mists contend today that the most important consequence of the Chi-cago Boys reforms were not the eco-nomic prosperity they generated but rather that they set a course for democracy. By freeing the markets they believe, they set the conditions for a free society, a view vindicated by the peaceful transition to demo-cratic government in 1990.

By Niall Casey

The Chicago-engineered Chilean economic revolution

Reuben Murray-Whelan remains sceptical of the viability of the Eurozone’s nascent recovery

› Nonchalance in the face of financial turmoil

› Santiago - The fruits of capitalism

“EXPORTS MORE THAN DOUBLED AS

TARIFFS WERE DRASTICALLY

REDUCED”

“THE PRESSURE ON THE EU

HAS NOT LEFT, HOWEVER, BUT

MERELY SHIFTED TO ITS NEWEST

TARGET”

STUDENT MANAGED FUNDTHE BULL 06.12.201214

Since our last report mar-kets have had a mixed performance across the board. The US equities market in particular has

shown signs of consolidation that has been limited on the downside by improving business sentiment. Considering that this is on the back of a four month market rally it is comforting to see this support, one would envisage that the S&P 500 will reach new highs in the event that a fiscal agreement is reached in Washington before the January 1st deadline. However, we will endeav-our to avoid another discussion on the fiscal cli" as it is a topic that has received more than its fair share of media coverage in recent weeks. While US data for consumers and

housing show increasing signs of re-covery, concerns about weak global growth have been reflected in a be-low average earnings season. Com-pany guidance in each of the sec-tors has been predominantly weak with Caterpillar Inc. typifying this

by lowering its revenue forecasts for the next three years despite improving margins. We retain the view that this is an opportune time to add to the portfolio; with P/E ra-tios in every sector with the excep-tion of healthcare well below their historical averages and encouraging developments in Europe, we have taken the necessary steps to make this happen. Large cap companies have significant amounts of cash on their balance sheets leaving them well placed to exploit market op-portunities in the event that global economic outlook is improved. For the most part, companies with a global focus have been sheltered by the debt crisis in Europe by repo-sitioning to target growth regions. As a result we are inclined to be at-tracted to companies that are not particularly at risk from national domestic developments.

We have been fortunate enough to be provided with some particu-larly good investment presenta-tions that clearly show evidence of considerable research and com-pliance with our investment pro-cess. We have consequently added Apache Corporation to our port-folio and feel that this independ-ent energy company is a good fit with our Schlumberger holding and shows ample signs of upside potential. Likewise the integrated global nutritionals and dairy busi-ness Glanbia plc as well as tech-nology giant Qualcomm have been

chosen for the portfolio. Glanbia (GLB:LON) will be added when the shareholder vote is finalised in the coming days while an order for Qualcomm (QCOM:NASDAQ) has already been placed. Edward Life sciences (EW:NYSE), Empresa Na-cional de Electricidad (EOC:NYSE)

and Barrick Gold (ABX:TSE) have been placed on our watch list, ap-pearing to be promising investment prospects. These additions match the criteria set out in our invest-ment policy and will undoubtedly bring greater balance to a portfolio that was overweight in industrials and healthcare. The portfolio as a whole has performed in line with our benchmark over the last two months and it is hoped that our new additions will enable us to out-perform the MSCI World into next term. We remain bullish about Q1 2013 and intent on making further acquisitions in the run up to poten-tial Christmas volatility.

SMF Monthly Report

“WE RETIN THE VIEW THAT THIS IS AN

OPPORTUNE TIME TO ADD”

“THE PORTFOLIO AS A WHOLE HAS PERFORMED IN LINE WITH OUR BENCHMARK”

› Things are looking up for the energy market

› Italian police try to calm protestors

Performance Graphics

15CAREERS AND EDITORIALTHE BULL 06.12.2012

EDITORIAL:

The growing consensus around Washington is that the United States needs to restore fis-cal sanity to federal balance sheet. As the

adrenaline-fueled and aggressive combatants in this debacle belat-edly begin to relax their seemingly intransigent stances on this issue, special interests and ideologues on both sides of the political divide continue to trample on the shoots of growth, all but hampering the prospect of a swift resolution to this crisis.

Early signs from the Republi-can Party appear encouraging, as a growing number of politicians and party stalwarts have distanced themselves from Grover Norquist’s organization, Americans for Tax Reform. Senators Saxby Chambliss and Linsdsay Graham disavowed the infamous pledge not to raise taxes during their tenures in o#ce, refusing to put partisanship over the nation’s interests in doing so.

People like these imbue hope that the three branches of the US government will address the issue of sequestration before the US igno-miniously veers o" the fiscal cli" on December 31.

This is a highly unfortunate situ-ation. Unlike the Eurozone, which faces another two years of anemic growth and recessions in the pe-riphery, the US economy is back on its own two feet and growing at a moderate pace. This is understand-able, as most economists, including Ben Bernanke, believe that Amer-ica’s sustainable long-term growth rate has fallen drastically since the Great Recession.

If this situation was allowed to transpire, however, the economy would still probably grow, but at a negligible rate of around 2% in 2013. While the economy would slow down, the full-on great depression hyperbole espoused by the general

media appears to be nothing more than a mirage.

Nevertheless, as this long-lasting game of political brinkmanship en-ters its second month it remains as apparent as ever that the bat-tle is far from over. Neither party seems willing eschew their ideo-logical purity to reach a solution to this crisis. While a select group of Republicans are beginning to dis-tance themselves from Norquists’s organization, they remain a small minority. Democrats seem equally unwilling to see cuts to the sacro-sanct programs of Medicaid, Medi-care and Social Security. Both these positions are completely unrealis-tic. The social programs that many Democrats wish to ring-fence are bordering insolvency. The total costs of these unfunded liabilities currently stands at $7.1 trillion, and estimated to be growing at a rate of approximately $100 billion per week. Many economists also hold the Bush tax cuts of 2001 and 2003 responsible for having caused such shortfalls in government revenue.

Often overlooked in the narra-tive of these events is the Demo-crats’ pandering to various interest groups. The AARP and the Commit-tee to Preserve Social Security and Medicare have launched aggres-sive campaigns to block any cuts to these programs. Similarly, the ‘Social Security Protector’s Pledge’ has received the signatures of 110 House Democrats and 11 Senators.

Over 200 Representatives and a large proportion of Republican Senators have also signed the no-tax pledge. While the disavowing of the pledge has proven not to have dealt the fatal blow to the guilty Re-publicans that it would have done two years ago, the fact that so many remain loyal to it illustrates the organization’s stranglehold on the Republican party and proves that it remains a very potent force in dic-tating policymaking.

Alas, there are not guarantees that members of either party will stand up to these special inter-ests, who continue to apply huge amounts of pressure to parties and continue to bare a disproportionate influence on each parties’ fundrais-ing activities as well as their con-ventions and primaries.

The United States can neverthe-less count itself highly fortunate that a group of Senators have put bipartisanship before ideological fervor. The so-called ‘Gang of Eight’, the informal bipartisan group seek-ing the enactment of a Grand Bar-gain, have proven that cross-party cooperation is possible when facing the dark reality of economic tumult that will inevitably come into being if the sequester occurs.

Much of this hinges on Mitt Romney’s running mate Paul Ryan, the economic wunderkind of the anti-tax wing of the Republican Party. If he continues to oppose tax increases, then the chances of House Republicans agreeing to them will remain minuscule. If he countenances them, however, it would diminish his 2016 Presiden-tial prospects.

There is another reason for op-timism, however. The result of Nov. 6 has proven that voters want poli-ticians in Washington to work to-gether, to put their political fervor and partisan zeal aside in the inter-est of the wider public. A recent Gal-lup poll found that 80% of Ameri-cans favor a debt reduction package predicated on compromise rather than having one skewed towards ei-ther party’s bases.

From this evidence, it’s clear that the American people are ready for tough choices. They stare into the dark face of the future with a brood-ing sense of realism as politicians continue to dither over the enact-ment of a Grand Bargain. It’s time for their elected representatives to listen.

RESTORING SANITY TO THE US

University: Trinity College DublinCourse: BESS (Business & Economics from 3rd year)Current role: Analyst

What was the application process for the internship like?The first decision I had to make was choosing the division I wanted to

work in. I did some online research and spoke to people in the year ahead that had done similar internships in the past. After much careful consid-eration, I decided to apply for the Investment Banking and Global Capital Markets Summer Analyst Program (IBD & GCM). I chose to do so because I enjoy longer-term project-based work than the fast based sales and trad-ing environment.

The online application was very straightforward. I uploaded my CV and cover letter onto the Morgan Stanley careers website. After you do this you are sent the link to complete a numerical reasoning test.

There were three rounds to the application process for IBD. The first round consisted of two phone interviews with junior bankers. These were heavily focused on ‘competency’ based questions (i.e. questions about CV / leadership / teamwork etc). In addition they tested my motivation for an internship in finance and for working at Morgan Stanley. Finally, there were some technical questions (e.g. methodologies for valuing companies and basic accounting-style questions to ensure that I understood the rela-tionships between the three main accounting statements).

The following round involved being flown out to London for three face-to-face interviews at the Morgan Stanley o#ces in Canary Wharf. This was the first round of interviews, at which only senior bankers were present. There were also a few ice-breaker questions that required me to think quickly on my feet. I remember not knowing the answers to all the technical questions they asked. Either way, I always gave it a shot and was able to justify my answers / rationale along the way.

The final round took place at an assessment centre (AC), again in Ca-nary Wharf. The AC lasted an entire day and included two more face-to-face interviews with very senior bankers. I also participated in a group exercise, gave an individual presentation and took a numerical test at the end of the day.

Throughout this process there was a very supportive junior banker in contact with me at regular intervals to provide me with performance feed-back and to guide me through the following round.

What did you do on a daily basis?I joined the media and telecommunications team in IBD, which cov-

ered all media and telecommunications clients in Europe, Middle East and Africa (EMEA). As an intern, I was essentially doing the same work as a first year full-time analyst. The team provides financial advice to com-panies that specialize in mergers and acquisitions. This meant that that I was undertaking financial company valuations and modeling in addition to carrying out industry benchmarking analyses.

What was the best aspect of your internship?Unquestionably the opportunity to Work with extremely motivated

and talented individuals from an eclectic mix of backgrounds. One of the main perks, however, was participating in a very high-profile M&A deal which was regularly on the front page of the Financial Times.

What did you learn during your internship?I acquired the very useful skill of time management and I learned how

to assume responsibility for my own work. By the end of the internship I was able to prioritize my work more e"ectively. I also gained an invaluable insight into the more practical aspects of corporate finance than my finan-cial theory classes could not provide me with.

How has your internship a!ected your career prospects? At the end of my internship I was o"ered a full-time position at Morgan

Stanley. It was a great source of relief for my final year and it meant that I didn’t have to worry about applications and interviews when I was focus-ing on important exams and course work. The internship is a great way to get a feel for the industry and the company to ensure that you make the right decision coming out of college.

Any top tips for a student interested in an internship at Morgan Stan-

ley?Apply early as a rolling application process is in place. Read up about

the di"erent divisions before making a choice. Finally, make sure that your CV and cover letter is polished. Thousands of applications are received fora limited umber of places and it is very easy to rule out potentially great candidates if there are typos/wrong company names in the text.

BY CATHAL O’DOMNALLAINEditor

Intern Insights: Morgan Stanley InternshipEver wondered what it feels like to work at a world-leading bank? A former Mortan-Stanley Intern reveals all

ADVERTISEMENTTHE BULL 18.09.201216