october 2015 newsletter final

7/21/2019 October 2015 Newsletter Final

http://slidepdf.com/reader/full/october-2015-newsletter-final 1/14

We’ve finally said goodbye to that sunny summer weather and are starting to pull oour jackets against the chill of the coming fall/winter. The E-Board would like thank everyone for their continued attendance at our events. It’s the support from

you guys that inspires us to continue to help the Stern community improve. It hbeen very exciting to see the substantial turnout at our past events and we looforward to seeing such great turnout at future ones as well.

So far, the semester has been chockful with many fantastic events. We started thinoff with our introduction to different careers in the financial industry with Financ101. Since then, we have had the valuable opportunity to welcome in great firms sucas Credit Suisse, Goldman Sachs, Morgan Stanley, Perella Weinberg, and Evercor All of us have learned a great deal by listening to their presentations and gaining moinsight into some of the service lines and cultures at the respective firms.

Many of you juniors are in the midst of another recruiting season. We wish you a

good luck with the process. For all you underclassmen, who might be a littoverwhelmed by many of the professional presentations, don’t fret. We will havmany more freshmen/sophomore-friendly events later on in the year. For surspring semester is when we really gear up with events focused on you guys. Keecoming through to meetings so you can achieve full membership with the club aneventually be able to get more involved with the Executive Committee.

This week, we welcome in BlackRock with its asset management overview. Maksure to ask any questions that may cross your mind after the presentation. We hopyou enjoy today’s event, and hope to see you out at next week’ s event, in which w

ill welcome in the professionals from Citi.

Aside from today’s event, we hope you also enjoy this latest edition of the Financ

Society Newsletter!

Finance Society Executive Board

FINANCESOCIETY

NEWSLETTEROctober 2015 / Volume XXIV

MESSAGE FROM THE EXECUTIVE BOARD

RECENT NEWS

1: Wal-Mart and DOW

A 10+% decrease in Wal-Mart’s

stock price caused the Dow Jones

to lose almost a percentage point

in 1 day, as the index dipped below

17K after a reasonable rally.

2: Dish Stands Against Merger

Dish Network has filed an FCC

petition to deny the Charter/TWC

merger on the grounds of public

interest. This could put theestimated $79 billion deal in

jeopardy.

3: Fed Rate Hike?

The likelihood that the Fed hikes

this year has lessened considerably

off the back of disappointing retail

sales numbers and low inflation

numbers listed at around 1.4%.

4: UAW And FCA Avert Strike

The United Auto Workers Union

reached an agreement with Fiat-

Chrysler, avoiding a planned strike

by 40,000 auto workers.



The Finance Society 2

Table of Contents

Articles Written by Members of the Finance Society ’ s Executive Committee

China’s Path to Sustainable Growth ................................................................................................................3

By Eric Chao, Class of 2017 ......................................................................................................................................

The Volcker Rule and Market (Il)liquidity .....................................................................................................4

By Aditya Garg, Class of 2018 ..................................................................................................................................

M&A RoundUp .......................................................................................................................................................5

By Ryan Lee Wei, Class of 2017 ...............................................................................................................................

The Volkswagen Scandal .....................................................................................................................................7

By Neil Bhuta, Class of 2018 ....................................................................................................................................

All Eyes on the Fed, ...............................................................................................................................................8

By Miranda Wang, Class of 2018 .............................................................................................................................

President Xi’s State Visit – Striving For Cooperation, Not Just Coexistence ......................................9

By Lia Wei, Class of 2018 .........................................................................................................................................The Trouble With Student Loans ....................................................................................................................10

By Brandon Russo, Class of 2018 ............................................................................................................................

The Oil Market in 2015: A Slippery Slope ......................................................................................................11

By Yutong Zhou, Class of 2018 ................................................................................................................................

Price Gouging in US Pharma ...........................................................................................................................12

By Karan Magu, Class of 2017 ..................................................................................................................................

Tom Hayes and the LIBOR Scandal ...............................................................................................................13

By Kevin Dong, Class of 2018 ..................................................................................................................................




CHINA ’S PATH TO SUSTAINABLE GROWTH

By Eric Chao, Class of 2017

In 1978, China enacted a series of economic reforms that openedChina up to foreign investment and trade. For the past three decadesChina’s GDP has averaged astounding growth at 10% per year, to theawe of economists and investors alike. No other country had been

able to undergo such a sustained period of growth. However, in recentyears, China’s upward trajectory has slowed. This year alone, China isprojected to grow at a more conservative (but still impressive) 7%.

Some economists claim that the numbers reported by Beijing lacksubstance and that actual growth in China is much lower than reported. It seems that no matter how adverse economicconditions may be, China remains on track to grow at what the government projects. Whether or not China is“cooking its books” is a topic up for debate, but one thing is for certain: evidence and data on China’s economicoutlook has not served to help the Chinese government’s case.

Beginning in June, China’s central bank cut interest rates by 25 basis points to boost lending. As the ShanghaiComposite nosedived from June through September, the government took a number of measures to limit the massive

sell-off in equities. In August, China shocked global markets by devaluing the yuan by 2%, which many argue was adesperate move meant to drive up exports. Furthermore, August data from China ’s Manufacturing PurchasingManagers’ Index (PMI) showed that China experienced a contraction in manufacturing activity. With all this datapainting a negative outlook for China, is it really that surprising for economists to question China ’s official numbers?

So what’s led to this recent economic slowdown? Well for one, if we go back to basic macroeconomics, it’s simplyunfeasible for a country to sustain 10% growth into perpetuity. When a country has reached its steady state, growth will be driven primarily by innovation and technological development. This steady state growth number is usuallyaround 2-3%, as is seen through the United States’ GDP growth. But is economic theory the only reason China’sGDP growth has undergone such a speedy pullback? There are a number of factors attributable to China’s flagginggrowth but we explore below three factors that contribute very largely to China’s GDP.

China’s economy depends heavily on exports. As of 2013, exports comprised of approximately 26.4% of China’sGDP. Just to get a glimpse of how dependent China’s economy is on exports, the United States’ GDP was comprisedof 13.5% exports, approximately half that of China. This past year, a number of factors have led to a global slowdownin economic activity. Simply put, as other nations experience economic troubles, their demand for Chinese productsdecline. Less demand leads to a decrease in exports for China and ultimately leads to slower GDP growth.

Another factor in China’s slowing growth is the real estate market. From 2000 to 2012, China’s real estate market grewfrom 5% of GDP to 15%. As the real estate market grew, new residential developments were built at a rapid paceHowever, supply eventually outgrew demand. Many of the completed residential developments in China now sit vacant. A declining housing market impacts other areas as well, such as construction and industrial activity. All of thisof course, also negatively impacts GDP growth.

Finally, we have steel. China is the world’s largest producer and exporter of steel. While China’s steel exports grewthrough the first half of the year, steel prices of steadily declined, approaching all-time lows. As worldwide demandfor steel declines, China will no longer be able to increase its exports enough to offset falling prices. When thishappens, the largest steel producer in the world will be forced to see its exports decline.

Things without a doubt don’t appear too well for China in the near future. However, now that the global economy isso intricately linked, we cannot look past the effects China has on other economies as well. As the largest consumerof commodities such as iron, a slowdown in China means less demand for commodities. This means leadingcommodity suppliers, many of which are emerging market countries, have been hit hard and will continue to go




through a rough economic patch. With emerging markets down and China looking less and less attractive to investorscapital will flow out of these countries, stymieing global economic growth even further. Not only does China’seconomic situation have adverse effects on other nations, so does China ’s response to slowing growth. China’scurrency devaluation has made China’s exports look more attractive relative to other nations, causing smaller nationsto consider devaluing their currencies as well in order to maintain competitiveness with China. Although there hasn’seemed to be too big a threat of a currency war amongst these nations, the risk could drastically increase if Chinachooses to make another move on the yuan.

Going forward, China will continue to see its GDP growth fall as its economy reaches a more mature stage. Thatmuch is inevitable. The question lies in how China will respond to a slowing economy and how other economies willreact in relation to China’s. If China can increase government transparency and allow GDP growth to slowly settle toa sustainable rate, then perhaps economies worldwide will gently settle into an equilibrium with China ’s as wellHowever, if measures to prop up an unsustainable growth rate continue to be taken, then an already shaky globaeconomy could quickly crumble when these measures lose their efficacy.

THE VOLCKER RULE AND MARKET (IL)LIQUIDITY

By Aditya Garg, Class of 2018

When Jamie Dimon, Steve Schwarzman, and Bill Gross all share an opinionit is wise to consider the implications. In recent months, all three men havespoken about the apparent declining liquidity in bond markets.

The likely culprit? The Volcker Rule.

Taking effect July 21st, after three years of delay and negotiations, the Volcker Rule is a response to the financial crisis and a desire to put

restrictions on the activities of banks to prohibit them from engaging in excessively risky activities. It essentiallyprohibits banks from engaging in proprietary trading and from sponsoring or investing in hedge funds, private equityfunds, etc.

There are, of course, a number of exceptions, with perhaps the most important one being market making. Howeverthere is a very fine line between proprietary trading and market making and even though market making is to beexempt from the prohibition of proprietary trading activities, the bank/trader must assume the burden of provingthat any trade made was made with the intent of market making and not proprietary trading.

The likely impact of such a rule will be that market makers will be more loath to step in and absorb large supply-demand imbalances or even participate in less liquid issues at the risk of being accused of engaging in proprietarytrading. Thus, a strict implementation of the rule will likely lead to consequences not only for banks but also customers who will face such issues as reduced liquidity, marked to market losses, distorted security prices, etc.

Former Fed Chief, Paul Volcker, however, has continued to argue that his eponymous rule will help further stabilizeand strengthen the economy. "I don't see anything here that is going to harm the basic investment processes in theeconomy," he said. "In fact, I think it will help the stability of the broader economy. Before the crisis we had lots oftrading, lots of liquidity, and people thought that liquidity was going to last forever. And what happened? We had abig balloon."




Research on liquidity has admittedly been mixed and is among the chief concerns of market participants. In its newGlobal Financial Stability Report released September 29,2015, the IMF emphasized the need to adopt pre-emptivestrategies to guard against liquidity evaporation. They warned that while liquidity may not be clearly lower than beforethe passage of such regulation, the true nature of liquidity may have been somewhat masked by the Federal Reserve’sQuantitative Easing program.

In a blog post written by Bank of England staff members: Yuliya Baranova, Louisa Chen, and Nicholas Vause, they

stated, “ We find that dealer holdings act less as a shock absorber than they did around a decade ago. Instead, bondspreads rise more. We also find that greater declines in issuance now follow these shocks.” However, they alsocommented that several indicators of market liquidity still remain healthy.

While the exact impact of this regulation on Wall Street is yet to be seen, we have already began noticing some effectsCitigroup, Bank of America, Goldman Sachs, etc. have all shed their proprietary trading desks and five of the largestUS investment banks have cut staff on their bond desks by 18% from 2011 to 2014 according to research firmCoalition Ltd.

As these large banks begin to downsize and the market continues to become more familiar with and adjust to thisregulation, it is evident that the next few months will be pivotal in shaping the future course of both the domesticand global economies.

M&A ROUNDUP

By Ryan Lee Wei, Class of 2017

Despite the sell-offs in global markets due to China ’s stalling economyM&A activities have not been adversely affected. In fact, globally, Augustsaw 952 deals worth US$297.8 billion, which was up 12.7% year-on-year Year-to-date, there has been 7863 deals worth US$2.5 trillion, the highest valued first eight months to start a year since 2007.

The top performing sector was Industrials, which saw a 25.7% marketshare in M&A activities with 203 deals worth US$76.6bn. This was primarily due to Berkshire Hathaway ’s US$36.5billion acquisition of Percision Castparts Corp.

The top performing region was North America, with 307 deals worth US$177.3 billion, with a 59.5% market share inglobal M&A. Coming in a distant second was Asia (ex-Japan) with 251 deals worth US$58.6 billion. Despite Europeanstruggles, the region came in a close third with 312 deals worth US$51.3 billion.

In the global macroeconomic backdrop of slowdowns in Europe and China, experts believe that this would not deterM&A for the next few years. We will continue to see a consolidation trend across all sectors moving forward.

Notable News

Energy Transfer Equity (NYSE:ETE) to buy Williams Companies (NYSE:WMB) for US$32.9 Billion

Energy Transfer has agreed to acquire Williams for $43.50 a share. Shareholders can elect to receive either cash orETE stock in exchange. Including other fees, the final acquisition price amounts to US$37.7 billion.

The new company will be the third largest energy business in North America, and the fifth largest globally. The keycatalyst for this deal was the William’s owned Transco pipeline, which stretches over 10,000 miles from South Texasto New York City. With this acquisition, Energy Transfer will operate more than 100,000 miles of oil and natural gas




THE VOLKSWAGEN SCANDAL

By Neil Bhuta, Class of 2018

This past month has been arguably the worst period in Volkswagen history since the end of World War II, whenit employed slave labor as part of the Third Reich. It wasrecently discovered that that Volkswagen had employed

devices in their diesel engines that could detect whenthey were being tested, changing the performanceaccordingly to improve environmental emission results Volkswagen has admitted that about 11 million cars worldwide are fitted with these so-called “defeadevices".

Although details are still scarce, the EPA has stated that the engines had computer software that could sense testscenarios by monitoring speed, engine operation, air pressure and the position of the steering wheel. When the cars were operating under laboratory conditions, the onboard software would put the vehicle into a safety mode in whichthe engine ran below performance, but once on the road, the software switched back to normal performance. This

has resulted in the cars emitting nitrogen oxide pollutants up to 40 times above what is allowed in the US undernormal use.

The case against Volkswagen seems to be iron clad. The CEO of VW America, Michael Horn, admitted "we've totallyscrewed up", meanwhile now resigned global CEO Martin Winterkorn stated that his company had "broken the trustof [their] customers and the public". An internal inquiry has been launched, and Volkswagen is recalling almost500,000 cars in the US alone, setting aside $7.3bn to cover costs, but that's only the tip of the iceberg. The EPA couldpotentially fine the company up to $37,500 for each vehicle that breached standards, meaning a maximum potentialfine of about $18bn. Legal action from consumers and shareholders is likely to follow, along with speculation that theUS Justice Department will launch a criminal probe.

This scandal raises the larger question of why did Volkswagen cheat in the first place? The key fact to understand

here is that there are two main types of combustion engines, diesel and gasoline, and there are trade-offs for each While diesel cars get better mileage and emit fewer carbon dioxide emissions, they emit more nitrogen oxides, whichcan help form smog that causes lung damage. Diesel technology has been gradually improving through a combinationof more advanced engines, lower-sulfur fuel, and better emission controls, and so carmakers have shown a renewedinterest in clean diesel cars that don't suffer from the trade-off between performance and pollution. These vehicleshave proved increasingly popular in the United States, but still only represent less than 1 percent of the market.

In the case of Volkswagen, the nitrous oxide emission controls likely decreased the cars' performance when theemission controls were turned on, with the engines running hotter, becoming worn out more quickly, and gettingpoorer mileage. Volkswagen most likely was unable to profitably produce diesel cars that achieved the ideal mix ofperformance, fuel economy, and lower pollution. Thus, the company attempted to solve this problem by sacrificingemission controls using software designed to deceive regulators, with consumers and the environment paying theultimate price.




ALL EYES ON THE FED

By Miranda Wang, Class of 2018

Wall Street has been watching closely over the possibility of the firstinterest rate hike since 2006. The Fed has kept rates near zero for years asa tactic to boost the stagnant U.S. economy. Earlier in the summer, Janet Yellen, the Chair of Federal Reserve, had given hints to raise rates by the

end of 2015, though she understated the prediction by saying that the well-being of economy remained highly uncertain and unanticipateddevelopments could hinder the decision. Despite the fact that economicactivity in the country is "expanding at a moderate pace, Janet Yellenfinally announced on September 17th that the Fed is still not ready to raise

short-term interest rates, citing persistently low inflation and the turbulent global economy as the main reasons.

The first cause cited by the Fed for its decision to keep interest rates steady has to do with its dual mandate to controunemployment and inflation. The Fed's objective is an unemployment rate of between 5% and 5.2%, with inflationin the range of 2%. Even though the unemployment rate has currently reached 5.1% within the levels, inflation hasmaintained well below 2%.The most recent year-over-year change in consumer prices is only 0.2%, which isinsignificant compared to the Fed’s target. Yet Janet Yellen believes that U.S. inflation will move toward the 2% goal The reason for temporarily low inflation is largely because of falling oil and energy prices which dragged commodityprices down. In order to stabilize price levels back to normal, the Fed has decided to keep the near-zero rate tohopefully continue to stimulate consumer spending and economic growth.

The second reason to keep rates unchanged is “high uncertainties abroad” as Janet Yellen emphasized in her speechFirst of all, while household spending, business investment, the housing sector, and the labor market are all improvingin the U.S., net exports "have been soft." It's reasonable to assume that it has to do with the strength of the U.S. dollar which increases the cost of American exports abroad. The U.S. market has been drastically affected by theperformance of global stock markets including China’s. It's no secret that China's economy is slowing. The questionis how much it will impact the rest of the world and the US. Janet Yellen is afraid that the slowdown in China is much worse than China’s data shows. As the Chinese government is trying to stabilize the economy through excessive

regulation, the risk of a more abrupt future slowdown in China is suspected to be high.

In reaction to Janet Yellen’s concern over the global turbulence, Bill Clinton commented that the Fed was right not toraise rates. "In a world where America looks like a good news story compared to the current problems in China andthe slow growth in Russia and the uncertainty caused by massive move of the refugees into the European Union, Ithink they didn't want to take a chance in not only slowing growth in the United States but having a bad impact onthe rest of the world," Clinton responded.

A low rate is great news for the average American, as it would make many things cheap for consumers, from monthlycredit card bills on carried debt to lower mortgage rates and car payments. However, a hike would have signaled thatthe economy has recovered enough for the Fed to begin “normalizing financial policy “, as Janet Yellen said in JulySince the Fed still does not see very solid improvement in the U.S. economy, the stock market has sold off sharply

The NASDAQ has erased all gains for the year. Instead of stocks going up in a relief rally, the stock market is fallinghard because Investors have been "dazed and confused" by the Fed's plans -- and whether the global economy isgoing to be a drag on America. “Markets seem to have focused on the weaker growth message,” explained by EthanHarris, a global economist at Bank of America.

Despite of the said reservations, the Fed may still choose to raise hikes towards the end of the year. After the no-hikeannouncement, Janet Yellen reiterated in her most recent speech in Wisconsin that she thinks the Fed will likely raiseinterest rates sometime "later this year." She argued that the Fed can't keep rates at zero too much longer becauseextremely low interest rates might encourage investors towards "inappropriate risk-taking that might undermine




financial stability." With that being said, the Fed only has two meetings left -- one in October and the other inDecember. Though Janet Yellen said a rate hike this year is possible, much depends on incoming economic datadomestically and internationally.

PRESIDENT XI’S STATE VISIT – STRIVING FOR

COOPERATION NOT JUST COEXISTENCE

By Lia Wei, Class of 2017

Last week, six world superpowers, the US, China, Germany, RussiaFrance, and the United Kingdom, met with Iran to discuss thepossibility of severely limiting its nuclear program. After almost 12years of discourse between the West and Iran over the developmentand management of its nuclear drive, both parties finally seem to be willing to discuss terms to possibly reach a peaceful agreement.

The terms of this contract basically demand for Iran to curb its

nuclear initiatives for up to 25 years, with strict restrictions in the first decade. Iran is to slash the number ofcentrifuges, devices that can fuel and create cores for nuclear weapons, from 19,000 to roughly 6,000; it has also agreedto halt the enrichment of uranium beyond 3.67% for the next 15 years, which will only allow its nuclear energy to beused for energy purposes. Furthermore, the country will cap its stock pile of low-enrichment uranium from 10,000kilograms to only 3,000 kilograms, and allow international nuclear organizations to verify the purpose of its nuclearfacilities. In exchange for these restrictions, the US and EU have agreed to lift all sanctions within four to twelvemonths of when the agreement will be reached, which is expected to occur at the end of June.

Essentially, these sanctions involved the prevention of conducting any business dealings with Iran, includinginvestments and purchases in its oil, gas, and other petroleum industries, which has severely weakened the Iranianeconomy in the last few years as more than 40% of government revenue relied on oil products. Should Iran reach afinal agreement with the West, economists forecast a sharp increase in its oil export by as much as $ 1.2 million a day

with the potential to grow into $2.5 million overtime. This will strongly entice investments in Iran’s energy relatedindustries by foreign companies that have previously been penalized for doing business there, and rapidly strengthenIran’s economy after it shrank half its size in 2012 due to tougher sanctions.

However, while many applaud the positive outcomes this agreement will yield, multiple parties fear that it will onlyserve to legitimize Iran’s nuclear program, and help in the destabilization in the balance of power in the Middle East Already, officials and royals in Saudi Arabia have announced that they will match any of the nuclear technologies Iran will maintain as per the agreement and have hinted possible cooperation with Pakistan should the need to counterIran’s possible development of nuclear weapon ever arise. Israel Defense Minister, Moshe Ya’alon, express skepticismin the actually effectiveness of the agreement as its result still permits Iran the use of Nuclear technology. Othersraise the questions of if the agreement is reached, how quickly will Iran be able to scale up its nuclear activities afterthe first decade of harsh limitations, and although both the US and EU have decided to nullify their sanctions againstIran, exactly when will all sanctions be removed?

Personally, I feel that this agreement is a necessary first step towards eliminating nuclear weapons and promotingpeace between western powers and Iran. By exchanging its nuclear weapon building capabilities for economicdevelopment, Iran is essentially showing a desire to join the global economic community, which will serve as afoundation for its future development into a global nation. While many may question the utility of the discussedcontract, the reality behind its effectiveness lies in the fact that once Iran is entrenched in the world community, it wilno longer have an incentive to development weapons capable of harming its business partners. Although the endresult of this contract may take years to actual develop, I believe it is the first step for Iran to end its isolation fromthe rest of the world.




THE TROUBLE WITH STUDENT LOANS

By Brandon Russo, Class of 2018

A significant portion of the student loan market is facing potential downgrade riskfrom credit rating agencies, which some say could dampen the supply of student

loans.

The bonds under review are a $36 billion chunk of student loan-backed securities The underlying loans were originated by private lenders, with federal backingthrough the Federal Family Education Lending Program. Created under the

Higher Education Act of 1965, the FFELP was the second largest higher education student loan origination programby volume and is responsible for $371 billion in outstanding student loans. Programs of this kind are designed tolower the barriers of higher education by allowing borrowers more favorable loan repayment options. The specificbenefit of the FFELP was the option to convert to an income-based repayment schedule, promising a cap of 15%of discretionary income for 25 years.

The federal government partnered with private firms, who would use capital to issue federally backed disbursements

These originators collect origination fees before selling the loan agreements to aggregators, which are the preliminarysecondary players in the student debt market. Aggregators bundle the newly minted loans and securitize the loanportfolio for sale to broker-dealers. Aggregators profit from the difference in price paid for the mortgages and theprice of the derivative mortgage-backed security, whereas broker-dealers profit on the spread of the MBS when thesecurity is sold to investors.

With the possible downgrade looming from rating agencies Moody ’s Investor Service Inc. and Fitch Ratings Inc.investors are expecting discounted prices on the tainted bonds. An uptick in conversion to income-based repaymentshas had the effect of thinning the cash flows spun off by the bonds and prolonging the maturity, both of which areheadaches for firms trying to market the loans or MBS that remain on their books.

Navient Corp. is a student loan servicing corporation that was formed from the break up of Sallie Mae and whoselargest principal asset is a $100 billion portfolio of loans originated under FFELP. Its share price down nearly 50%year-to-date, Navient could see up to a third of its largest holding face a downgrade. In theory, Navient would take aloss on sale if it were to purge the FFELP loan portfolio from its books, which speculators have said could create adisruption in the student loan market that would make it harder to originate new student loans. Navient and otherfirms who hold similar bonds would not be able to free up cash to purchase new loan portfolios and help maintainthe flow of the market, eventually hurting the students who need to access financing to afford schooling. This notionof the effect on slowing FFELP repayment affecting new student loans, along with the big losses that investorsforesee, is not supported by the reality of the student debt market.

The inability for students to access new loans would be an issue if the private firms that handled FFELPorigination were still responsible for extending new loans. However, FFELP was disbanded by the federal governmen

in 2010 after President Obama cited inefficiencies in paying billions to private banks to ostensibly act as a bufferbetween the government and borrowers. The Education Department has since stepped in to operate the originationfunction, removing the risk that market disruption could impede the volume of available capital for student loans.

The second concern, that firms holding the FFELP loans on their books will take massive losses in the event

of a downgrade, neglects the guarantee provided by the federal backing of the loans. Yes, the loans were originated

by private banks, but the loans are guaranteed by the US government for a minimum of 97% of defaulted principa

and accrued interest. It’s more of a waiting game than a doomsday scenario for those involved, since the only real risk




is longevity of repayment. Once the market re-prices bonds backed by the income-based loans, there should be no

fear that business will not continue as usual in the student debt market.

THE OIL MARKET IN 2015: A SLIPPERY SLOPE

By Yutong Zhou, Class of 2018

We are in the midst of one of the steepest drops in oil prices since 2008. Major oil producing countries are feeling

the squeeze as oil prices continue to drop in the face of overproduction. US oil production has nearly doubled in the

last six years through hydraulic fracturing and deepwater drilling. In conjunction to this surge in oil supply, demand

has been dropping off sharply. China’s insatiable demand for natural resources had been the driving factor behind the

oil boom for years. Now, the country ’s weak equities and slowing economic growth are hitting the industry hard. In

addition, the anticipation that Iran may soon enter the crude oil market is applying even more downward pressure on

prices.

That being said, why hasn’t OPEC decided to control oi

output? Out of many speculative theories, the most popular

seems to be one stemming from OPEC’s desire to squeeze out

competition from US shale, knowing that the latter cannot

afford to keep pumping oil at prices below $50 a barrel. The

US Department of Energy reports that the US produces

around 43% of its oil through fracking, an expensive

operation costing around $65 per barrel. In comparison

OPEC can supply oil at a much higher operating margin

through traditional wells. So, the organization starts a price war, testing the US’s resolve to continue hydrofracking.

There are certain major repercussions that fall on the Middle

East from this strategic move. The fact of the matter is, OPEC countries need high oil prices more than the US. Saud

Arabia, the largest oil exporter in the world and greatest oil producer in OPEC, receives around 80% of government

revenues and 90% of its export earnings from oil. Having been hit hard by the price drop, Saudi Arabia is considering

cutting spending by a whopping 10% to control their budget deficit. Meanwhile, the country ’s currency is pegged to

devalue past a 3.79:1 riyal to dollar ratio. Yet, Saudi Arabia is set to continue producing at the current level, around

10.2 to 10.3 million barrels a day.

Counter-intuitively, the strongest proponent of keeping current production levels may be Saudi Arabia itself

announcing at the end of 2014 that the country cannot afford to cut back in their production. The last time they had

agreed to a cut in 2008, competitors, including the US, had eaten into their market share. As Saudi Arabia continues

to resist cutting back, the US oil industry will continue to decline, with Chevron and Royal Dutch Shell announcing

cuts in payroll, and smaller companies selling assets and moving towrads bankruptcy. Companies such as Ithaca

Energy Inc., Energy XXI Ltd., and Ocean Rig UDW Inc. are especially vulnerable with debt to EBITDA ratios above

5x.




Ibrahim Al-Muhanna, adviser to the Saudi minister of petroleum, denies political agendas and blames the decision on

non-OPEC members refusing to cooperate, alluding to Russia and Mexico’s refusal to agree to a cut, whose oil

companies are still able to keep pumping despite weak economies and government deficits. Mexico, in particular, is

reported by Bloomberg Business to be engaging in an oil hedging program with several major banks, including Morgan

Stanley, Citibank, and JP Morgan. The rest of the OPEC members are feeling the pressure and have expressed

sentiments supporting cuts in production.

On Tuesday, September 29, oil prices rose briefly as analysts declared that US production may be entering a phase of

slowdown. However, Deutsche Bank still estimates that there will still be an oversupply of 1 million barrels per day

in the first half of 2016, moving into an oversupply of 310,000 barrels per day in the second half. It seems that we

still have a ways to go before reaching the end of this oil slump.

PRICE GOUGING IN US PHARMA

By Karan Magu, Class of 2017

American spending on drugs has more than doubled since 2000, rising

from $121.2 billion then up to $271.1 billion in 2013, the most recent

year for which data is available. Pharmaceutical companies have

especially high profit margins even relative to other industries. Pfizer

one of the country's biggest drug companies, ran a 42% profit margin

in 2013. With some drugs costing upwards of $100,000 for a ful

course, and with the cost of manufacturing just a tiny fraction of this, it's not hard to see why. 72% of Americans say

that drugs are overpriced and the prices are especially high for drugs that are the only effective drug in their medical

field and have limited competition. At this point it easy to see that medicine in the U.S. is heavily influenced by thepharmaceutical industry and this influence can lead to the perpetuation of a poor medicine prescribing culture

motivated by all the wrong incentives. In recent years there have been countless such lawsuits against erring physicians

who were in profitable relationships with pharmaceutical companies with shrewd (and sometime false) marketing

campaigns. In fact, data from the BBC shows that 9 out of 10 of the major drug companies spend more on sales and

direct marketing to physicians than on research and development. However, this bargaining power available to the US

drug makers like Pfizer is not seen in pharmaceutical companies across the Atlantic in Europe and even in Canada or

Australia. In these regions, the government regulates the monopolist profiteering and levels the playing field for

consumers by setting drug prices through a bureaucratic process of negotiation- similar to how the U.S regulates

water or utility pricing. Recently, Hillary Clinton proposed allowing Medicare to negotiate with pharmaceuticacompanies.

This news came in the light of the recent public outrage against Turing Pharmaceutical over the nearly 5500 % price

increase of the generic drug Daraprim.

Daraprim was made in the 1960s and is the only drug in its competitive field capable of treating a rare infection called

toxoplasmosis.




After acquiring the drug from another pharmaceutical company, Turing increased its price from $13.50/tablet to

$750/tablet, leading to an enormous jump in expenditures from patients depending on the drug as the only cure for

toxoplasmosis. The Turing CEO explained the move with the common refrain that the high price is a business move

as the company needs to remain profitable to continue innovation through R&D. When a drug company releases a

new offering, the company should ideally price in the costs of research and development of the various other drugs

in the research pipeline that could not successfully make it to market and are sunk costs. It is also true that with the

price increase, the company will have more money for research and development in this niche drug market. But in my

opinion, since pharmaceutical companies as an industry already have some of the highest profit margins, the price

increase of 5500% was nearly arbitrary. Especially with the small group of highly dependent people now having to

pay exorbitant and often unaffordable amounts of money for treatment, the move deserved the ethical and socia

backlash it ended up receiving.

Turing did end up reducing the price in light of the largely negative response but did not disclose by how much. In

an industry where average profit margins for pharmaceutical companies are above 40%, the price drop might as well

be a few percentage points. The more worrying issue is that Turing is not the first pharmaceutical company to

aggressively price its drug. There have been worrying trends in the pharmaceutical industry for companies to introduceexorbitant price hikes and then resist the ensuing PR and media fallout in order to still make healthy profits.

Technically, under U.S. regulations, pharmaceutical companies are free to set their own prices, which allows them to

enjoy large amounts of bargaining power over their customers. For example, Gilead introduced a rare Hepatitis C

drug at prices that would require patients to spend $84,000 for a three-month course. Despite the backlash for the

greedy move, the company sold 250,000 prescriptions earned $3.5 billion in a single quarter of 2014 from this drug

alone. The overall trend is highly against global standard and presents a worrying picture for the American consumer

So maybe it’s time to usher in a new era of regulation, government led negotiation and pricing in the American

pharmaceutical industry, especially as employer and insurance policies force the working class to foot a larger and

larger part of the medicine bill.

TOM HAYES AND THE LIBOR SCANDAL

By Kevin Dong, Class of 2018

LIBOR, the London Interbank Offer Rate, is a benchmark thatmost of the world’s banks charge each other for short term loansMany of the world’s interest rates use LIBOR as a fundamenta

benchmark, so it’s obvious how important it is. Despite itsimportance, LIBOR has surprising very little regulation and toomuch centralized power. Every morning, executives that represent

the major five currencies (USD, EUR, GBP, JPY, CHF) congregate in a meeting and ask one simple question: “ What would you charge for another bank to borrow your money?” The average of those rates is the LIBOR.

On August 3rd, Tom Hayes, an autistic mathematician who was previously a trader, was convicted of rigging LIBORHe was convicted of 8 counts of fraud and sentenced to 14 years in prison. Hayes had made speculations and tradeson LIBOR being relatively low, so he contacted traders, brokers, and anyone else he felt like he could manipulate. In




one of his calls to a London broker, he said, “I need you to keep it as low as possible, all right? I’ll pay you, you know$50,000, $100,000, whatever. Whatever you want, all right?”

During Tom Hayes’s prosecution, he had spent over 82 hours explaining finance, markets, and the LIBOR scandal tohis investigators. Towards the end of the trial, Hayes had also tested positive for mild autism and was found debatingsuicide numerous times. Proponents of Hayes’s freedom argue that he is mentally instable and would not have beenable to determine whether or not he was committing crimes.

The judge on the case brushed aside allegations that he was mentally instable. Instead, the most convincing argumen was what Hayes’s lawyers said about the environment and culture. Hayes never felt like he did anything wrong. Duringhis testimony he argued that he wasn’t being dishonest because the practice of trying to influence LIBOR was socommon that he had no idea it was wrong. He compared it to negotiating for the purchase of a vehicle. He alsoargued that many individuals were involved in rigging LIBOR, but he was used as the scapegoat for the whole ordealHayes’s last point was that all of his 45,407 LIBOR related trades were with other banks, hedge funds, or other assetmanagement firms. Therefore, he argues that he didn’t ruin anyone’s livelihood. He should simply return the moneyto all the institutional investors, and take a few years in prison as punishment. Unfortunately, or fortunately, this wasn’the case. Despite all of his arguments, the jury unanimously voted that he was guilty for the numerous counts offraud.

When the judge sentenced Tom Hayes to 14 years in prison, the whole industry was shocked. Most of the individualsclose to the case were expecting a few years in prison, but nowhere near 14 years. The judge presiding over the case wanted to send a powerful message to Wall Street and the rest of the financial industry that their unethical decisionsaren’t just going to damage their financial livelihood, but also strip them away from their family and friends. By thetime Tom Hayes is released from prison, his child will be an adult. Personally, I think this serves as a great lesson forall of us since this is the very first time that someone is serving a significant period of time in prison for somethingthat many people did not imagine to be illegal. The judge also stated in the court room that even if Hayes does norealize that his actions are immoral, he will still be held accountable for his involvement in the situation.

I think this court sentence sends an indirect message about the corporate greed that is still persistent in finance todayMost individuals have a poor image of finance in general, stating that finance professionals are greedy and unethical This is just another prime example of how white collar crimes are influencing the overall perception of business

executives. Enron, Bernie Madoff, and Adelphia are all examples of white collar crimes that continues to deterioratethe image of finance. Many people speculate that this situation marks a turning point for the industry. This is thelargest punishment to happen in this industry and I feel like there will be a strong push towards more regulation as well as more education. I feel like business schools are under pressure to teach social and corporate responsibility tofuture business leaders so that events like these do not occur. More and more, business schools are requiringmandatory classes that surround around ethical practices, and I feel like this trend will continue to all elite businessschools. This appears to be the best option to truly affect the future of finance, as monetary punishments are onlytemporary.

Contact Us

The Finance Society40 West Fourth StreetNew York, NY 10012

[email protected]://www.nyufinancesociety.com

october 2015 newsletter final

Documents