Volume 6 The Offi cial Newsletter of the Smeal College Trading Room New Building New Trading Room Inside this Issue...

FEATURED ARTICLES

New Business Building, New Trading Room ...... 4 On September 30, 2005, the Smeal College of Business dedicated its new Business Building, which features a new Trading Room facility.

A Day in the Life: A Collection of Internship and Co-op Experiences ... 11 Four Smeal students recall their on-the-job experiences in four fi nance-related positions.

Airlines: The Forces that Keep Air Carriers from Crashing into Liquidation ...... 14 This student research paper reviews the six distinct forces that ensure the airline industry will stay aloft.

TABLE OF CONTENTS

Message from the Director ...... 3 PSU Alum Donates Bell to Trading Room ...... 3 New Business Building, New Trading Room ...... 4 An Afternoon with Ken Kulju ...... 6

Reuters ...... 6 Student Research: Online Purchases Unlikely to Remain Free ...... 7 Student Research: The Economics of a Football School ...... 8 Student Research: Hurricanes and Insurance ...... 10 A Day in the Life ...... 11 Student Research: Airlines ...... 14 LionTrader Staff ...... 16

On the cover: Trading Room interns meet with Academic Director David Haushalter in the Trading Room.

2 MESSAGE FROM THE DIRECTOR

he fall around the perimeter of the Trading ESPN-enabled until late in the football semester Room providing real time quotes to season, we also hosted a regular stream Twas very passers-by. of visitors in the mornings prior to home eventful for the football games. In addition to fi nance Trading Room The success of the move is largely courses taught in the room, students also with a move to due to people who went above and regularly attended classes taught by the the new Business beyond the call of duty, including Gary student Trading Room interns on how Building. The Field, the manager of the to use the fi nancial technology and data room is situated Trading Room. There are still lingering available in the Trading Room. on the first questions regarding whether Gary floor, flanking ever left the building during the week The spring semester will feature a number the building between the delivery of the furniture of key events. Through our in-house David Haushalter, entrance, making and the dedication of the new building trading competition, we will select a Clinical Assistant on September 30th. Within this week, group of students to attend the Rotman Professor of , it a focal point of and Academic the new building. Gary managed to get all of the furniture Trading Competition at the University Director of the This improved set up and most of the in of Toronto. During the past two years, Trading Room visibility has working . Thanks to Gary, access to the Penn State team has returned from increased the the room’s data resources went virtually this competition with top honors, third fl ow of students uninterrupted during the course of the place in 2005, and fi rst in 2004. Smeal’s into the Trading Room, many of whom move. The success was also largely due Global Trading Competition will be rarely visited the room in its former— to the generous support and assistance held later in the Spring. The inaugural somewhat secluded —location. The provided by Ginger Breon, director of Global Trading Competition was held new room features a layout which is administrative and information services in 2003 and featured 140 student much more conducive to teaching, as for the Smeal College, and former Dean competitors representing 42 universities well as additional resources, particularly Judy Olian and the many donors who and eight countries. We hope to make ReutersStation, that increase the ability made the new building possible. the 2006 version bigger and better. Other to integrate fi nancial data and technology upcoming events include visits from into our classes. As described in the following pages, the Bloomberg product specialists and our new Trading Room has hosted a wide inaugural Friday Finance Film Festival. As with any move, there have been a few range of visitors and events in the few challenges. One of the largest logistical months since its opening, including We always welcome visitors. The challenges was moving the room’s students from high school investment next time that you plan to be in the seventy-one foot ticker. After several classes, prospective Penn State honor area, contact us at tradingroom@email. reconfi gurations and a six foot section students, classes by product smeal.psu.edu to schedule a tour or just making a round trip visit to Kansas City specialists, and lectures by industry stop by. (in a very large box), the ticker now fl ows professionals. Although the room was not PSU Alum Donates Bell to Trading Room hen Howard Trauger (’69 B.S., appropriately. He arranged for Dean Judy ’79 M.B.A.), originally visited Olian and himself to make the inaugural Wthe Trading Room, he noticed ring of the bell at the Philadelphia that there was something glaringly Exchange on May 13, 2004. missing. The computers were there, the trading platforms were commendable, The bell was fi nally installed in the new but it still did not feel right. Finally, he Trading Room on Friday, September 30th, 2005, the day of the new Business Philadelphia Vice Chairman, realized that the Trading Room needed a John Wallace (l), looks on as Penn State Alumnus bell—every trading fl oor has a bell. Building’s dedication. Mr. Trauger feels Howard Trauger (center) and former Smeal that the bell symbolizes “the standards College Dean Judy Olian (r) ring the Phlx He soon found the perfect bell in an of students at Penn State,” paralleling inaugural bell on May 13, 2004. antique shop, a Pennsylvania Railroad its association with the quality and bell that was used in the late-1800’s historical importance of the Pennsylvania the college’s traditions and instilling its through the turn of the century. Railroad in building our great country. values in the lives of Smeal students for Additionally, he feels that it would act as years to come. Before the bell could be situated in its new an emblem of the college, promoting — Ryan K. Miller, LionTrader Editor home, however, it needed to be initiated

3 The Trading Room is visible just to the right of the Building’s entrance. It is a busy place for learning and teaching, even at night. Here, the Trading Room interns meet with Academic Director, David Haushalter. New Business Building New Trading Room

ituated on the corner of Park Avenue and Shortlidge Throughout the week, the building bustles with activity. Road, the new business building dominates the Students attend class in multi-tiered classrooms, tap into Slandscape. It was designed by Robert A.M. Stern, one of global markets in the trading room, study and access the the world’s preeminent architects and dean of the Yale School wireless in the four-story glass atrium, and meet with of Architecture. At 210,000 square feet with twenty-two academic advisors and faculty. They interview with employers classrooms, six research laboratories, and a-150 seat auditorium, from across the nation in the interview rooms or through video the new building is the largest academic facility at Penn State. conferencing facilities. Guests can also use touch kiosk screens It is one of the most modern facilities among America’s top to fi nd classrooms and faculty offi ces and learn about ongoing universities. events.

4 In addition to its state of the art and amenities, the building gives the Smeal College of Business a concentrated community, something that was lacking in the past. This will serve to further the college’s reputation for excellence by providing a more integrated business education.

— Leslie C. Vitale, LionTrader Staff

The Trading Room boasts the latest technology to give students realistic trading experience, including a real-time ticker, cable news feeds, stock boards, and such as Bloomsberg and Reuters.

Penn State President Graham Spanier speaking at the Building Dedication in the Atrium.

Tables, sofas, and chairs throughout the Foyer and Atrium create a comfortable “home away from home” for students.

The Building’s main entrance, facing Shortlidge Road. The openness of the Building Foyer is spanned by overhead walkways that connect the different wings of the Building.

5 An Afternoon with Ken Kulju

en Kulju (’80 B.S.), the & Johnson. Mr. Kulju believes that aging demographics and lead healthcare analyst a steady rise in global healthcare spending present some great Kat First opportunities in this sector. Boston, has spent 21 years in equity research. He has Credit Suisse First Boston has an outperform rating on lived through a stock UnitedHealth Group, and a neutral rating on Johnson & crash and two recessions, Johnson. CSFB is bullish on UnitedHealth Group due and he is still excited to go to to strong second quarter earnings and a large increase in work each day, without ever membership for the health care service provider. CSFB is knowing what to expect. neutral on Johnson & Johnson, due to deteriorating trends in the pharmaceutical drug industry. On September 30, 2005, Mr. In Penn State’s continued effort to put current students in Ken Kulju Kulju visited Penn State to give students and faculty his contact with alumni, Mr. Kulju has proven to perspective on the marketplace and comment on the current be a great resource for members of the Nittany Lion Fund. healthcare holdings in the Nittany Lion Fund, Penn State’s “Ken’s presentation gave me an enhanced perspective on how student-run multi-million dollar investment portfolio. He the healthcare industry operates and what is going to affect it was immediately impressed by the breadth and depth of the going forward. This was an amazing opportunity for me and students’ knowledge and the overall quality of the portfolio. will defi nitely affect my investment decisions,” said Nittany It was a great opportunity for students to get the perspective Lion Fund Healthcare Lead Analyst John Nelson. of an established professional on current themes in the market — Eugene E. Weissberger, LionTrader Staff place.

In his presentation, Mr. Kulju covered historical healthcare trends, current themes, and an evaluation of the Nittany Lion Fund’s two healthcare holdings: United Health and Johnson

Darrin Pisani. This past November Pisani and his colleague Ted King, two Reuters specialists, presented on the varied Reuters functions available in ReutersStation. Topics covered included historical news eutersStation is one of several searches, analytics, and real-time software applications available Reuters-linked financial modeling in Rin the Trading Room. It is the . preeminent information provider around the globe, with over 100,000 terminals “Having these Reuters representatives domestically and more than 600,000 here provides our students with additional globally. It brings together all facets of the insights into regarding how the tools and market from level II quotes to research data available in the trading room are used in equity, fi xed income, and in the real-world,” says David Haushalter, markets. As a direct news source, Reuters fi nance professor and academic director is able to publish news faster than its of the trading room. All Penn State competitors, making it the leading news students are welcome to come in and provider globally. use the software. Student Trading Room interns are available to answer questions Reuters prides itself in having “better and help with Reuters software. quality, timeliness, accuracy and user Pisani (l) and King (r) during their visit to the interface,” says Reuters Product Specialist, — Daniel M. Kokini, LionTrader Editor Trading Room.

6 STUDENT RESEARCH PAPER Online Purchases Unlikely to Remain Tax-Free

December 2004, the U.S. Congress passed a three-year Inextension of the moratorium on multiple and discriminatory Internet taxes, as well as the ban on taxation of Internet access. Online retail was not included in this moratorium, however, and still remains a murky issue for both consumers and state tax agencies. Currently, some retail purchases are taxed and some are not; sites such as Amazon.com and eBay currently do not have a sales tax on most of their online This past summer, Borders.com (now states announced an interstate agreement purchases, but Walmart.com and Target. managed by Amazon.com) lost a pivotal on uniform sales tax regulations. The com are some of the many that do charge case against the state of California in a agreement is set to smooth over the a sales tax. This article will explain the related dispute, where the Court reasoned differences in state tax procedures. current determining factors of whether that, “Borders’ receipts were sometimes Proponents of the agreement hope the or not a sales tax is included in an imprinted with ‘Visit us online at www. streamlined system, even with voluntary online retail purchase, including the Borders.com,’ and Borders’ employees compliance, would attract participation likely eventuality that all e-commerce were encouraged to refer customers from multistate companies that say the will include respective states’ applicable online to fi nd merchandise not available current tax system is too complicated. sales taxes. at Borders stores.” As more states begin to enforce their use Legally, purchasers of online goods are Borders’ headquarters are located in tax, it is only a matter of time before all required to pay their respective state’s Michigan, and at the time, it had no online purchases are taxed. The most sales tax. This concept is referred to as a employees, accounts, or property compelling piece of evidence in favor “use tax,” and state tax agencies have long in California. Yet the close association of this lies in Supreme Court Justice complained about consumers failing to between Borders and Borders Online John Paul Stevens’ opinion in Quill report the tax they owe from both online was enough to push the case in favor of Corp. v North Dakota: “This aspect of and mail-order purchases. In general, the state of California, and Borders was our decision is made easier by the fact online retailers have been covered by ordered to pay California sales tax on all that the underlying issue is not only one the 1992 Supreme Court case of Quill internet purchases shipped to California that Congress may be better qualifi ed to Corp. v. North Dakota. In it the Court during the time frame at issue. resolve, but also one that Congress has barred state and local governments from the ultimate power to resolve. No matter The Borders.com case appears to have collecting taxes on most “remote” sales, how we evaluate the burdens that use emboldened state tax collectors to more ruling that it would be unreasonable to taxes impose on interstate commerce, aggressively pursue tax receipts from force mail-order and catalog sellers to Congress remains free to disagree with major internet retailers, and more states collect sales taxes in the thousands of our conclusions.” Translation: the clock are looking at using the “use tax” as jurisdictions around the country where is ticking. justifi cation for collecting sales tax. This they don’t have a substantial presence. past summer, tax collectors from 18 — Ryan R. Ward, LionTrader Staff

7 STUDENT RESEARCH PAPER The Economics of a Football School

General Overview: Revenue Infl ows: the Penn State Alumni Association and receives fi nancial benefi t from university- “The Penn State Athletic Department Sponsorship and Advertising: wide agreements such as those with Pepsi operates similarly to about half of the Penn State Athletics utilizes multiple and The Penn State Bookstore. schools in the Big Ten conference,” methods to collect revenues in advertising according to Gregory Myford, associate and sponsorship. Most of the sponsorship Conference Media Agreements: athletic director of marketing & capabilities are outsourced to Learfi eld One of the major benefi ts of being in communications. Penn State Athletics Sports, a national sports marketing a major conference like the Big Ten supports all 29 varsity sports by collecting agency (football and basketball only). is the division of the money received and dispersing revenue self-suffi ciently Learfi eld purchases the rights from Penn from broadcast rights agreements and without assistance from the University. State Athletics (PSA) for an annual fee, corporate sponsorships that are given to Additionally, Penn State Athletics has and then they sell sponsorships to make the conference. The Big Ten Conference certain obligations to the venues where a profi t up to a certain amount, at which has many contracts with sponsors and the teams compete. For example, point the additional profi ts are shared programmers, including ESPN and athletics must pay for maintenance with Penn State Athletics. Outsourcing ABC, of which the portions are equally and renovations/expansions to Beaver the majority of the sponsorships allows distributed to each school in the Big Ten. Stadium. Moreover, while the Bryce PSA to have stability in their budget The conference media agreements also Jordan Center is operated by the Penn through constant revenue, and without include revenue gained from post-season State Housing and Food Services hiring additional employees to sell the football bowl appearances and other division, Penn State Athletics must rent sponsorship deals. These deals include NCAA events. the offi ce and storage space inside, as local radio and TV rights, promotional well as pay for both basketball teams to inventory, and other on-site and media use the facility for practice, games, and opportunities. Outside of Learfi eld, PSA locker room space. has direct sponsorship from Nike and

8 Ticket Sales: Expenses: & Promotion, Events, Compliance, Finance, and more. The ever-increasing PSA charges admittance to seven of the Scholarships: 29 varsity sports. These sports include cost of salaries, insurance, and other Each scholarship that PSA awards to a football, men’s and women’s basketball, benefi ts is a large operating expense for student-athlete includes paid tuition and women’s volleyball, men’s and women’s the Athletic Department. board. The thought that other students gymnastics, and wrestling. Football pay for the scholarships of student- makes up approximately 94% of the Stadium Upkeep and Operations: athletes is false. PSA pays Penn State for ticket revenues, basketball combined PSA is responsible for the upkeep and the scholarships, including out-of-state makes up about 4%, and volleyball, maintenance of Beaver Stadium and tuition scholarships. This is a signifi cant gymnastics, and wrestling make up the certain other athletic facilities. In expense to the Athletic Department. remaining 2%. addition to the upkeep, PSA must pay for utilities, such as water and electric, Team Travel and Equipment: Parking and Concessions: signifi cant expenses for sports facilities. Team travel, which includes lodging, Concession revenue can only be counted food, and transportation, is also a from PSA facilities. This means that Club and IM Sports: very costly expense to the Athletic revenue can not be collected from the While it is true that students do pay fees Department. Additionally, each team Bryce Jordan Center, because it is a for the IM sports, and that club sports is provided with top of the line medical Housing and Food Services venue. are partially funded via measures outside supervision, equipment, and other However, Beaver Stadium concessions from PSA, PSA subsidizes both of these gear. are counted towards the PSA revenues. programs. PSA must help support the Additionally, parking is charged only IM sports that student revenue does not Employee Salary: for football games, while other sports completely fi ll. PSA also helps the club Penn State hires the best coaches and parking is free in designated university sports such as hockey and rugby. assistant coaches for each of its 29 varsity lots. sports. In addition to the coaches, — Jon Hammarstedt, LionTrader Staff there are over 240 employees in various offices, including Administration, Athletic Communications, Marketing

9 STUDENT RESEARCH PAPER Hurricanes and Insurance

he damage caused this past insurers are able to spread the losses to (more money paid out in claims than September and October by even more customers than they would be made in premium dollars). From that THurricanes Katrina and Rita is able to do in a solely domestic insurance point, the federal government reimburses likely to have a long-reaching effect upon market. This means that people all over the companies for any losses that they the insurance industry. The insurance the world experience a premium hike, may suffer. Because the government is consulting branch of Towers Perrin but it has proven to be much smaller funding this program through a new estimates that the total fi nancial cost than expected. Treasury bond issue, the Senate has to the industry is $40 billion to $55 allowed the National Flood Insurance billion. Assuming that this estimate is The federal government has reacted to Program to borrow up to $8.5 billion accurate, Hurricane Katrina is now the the Katrina disaster by introducing a to cover its losses. It should be noted, most expensive disaster in the history of change to the federally-subsidized fl ood however that this may not be enough. the insurance industry. insurance program. This proposal, David Maurstad, director of the fl ood sponsored by Senator Trent Lott and program, said that the agency may need Insurance companies are using a Congressman Gene Taylor, both of “up to $22 billion.” variety of methods to cope with the Mississippi, would allow people who losses associated with Katrina. Some suffered fl ood losses due to Hurricane A second disaster for the insurance corporations, particularly re-insurers, are Katrina to retroactively purchase fl ood industry occurred shortly after Katrina issuing stock to raise money. According insurance. Should this bill pass, a large ravaged the Gulf Coast—Hurricane to Reuters, the reason for this trend is number of fl ood claims may immediately Rita. Thankfully, Rita made a much that these companies are “expected to be fi led with private insurers that would smaller dent in the industry than raise rates” and that “companies with indemnify homeowners who were not Katrina. According to the Financial more capital can write more policies.” prepared by having flood insurance. Times, “analysts estimate that Rita will This may result in the disaster becoming While this will infl ate the paper losses cost insurers between $3 billion and $6 a source of long-term profi ts for these of the insurance sector, the companies billion.” This equates to roughly 10% of companies by allowing them to invest themselves will not suffer greatly. the damage associated with Hurricane the extra capital and ultimately earn a Katrina. sizable return. Fortunately for insurers, the federal government is still picking up most of the — Daniel Gibbs, LionTrader Staff The damage done by the hurricane will tab. Flood insurance works identically to also have an international effect. Due standard insurance policies until the to the global markets for insurance, the private insurer suffers underwriting loss

10 A Day in the Life A collection of internship and co-op experiences

Investment next morning to the management of a $4 billion company. I Banking immediately canceled my dinner plans in anticipation of a long and eventful evening. This past summer, I worked in at I hung around the offi ce for a few hours and helped out several a premier bulge-bracket colleagues with some presentations that they were working on. investment bank. My first When the books were fi nally ready at 3 a.m., I walked sluggishly week consisted of training, down to the printing station to pick them up. I carefully fl ipped where Wall Street experts through each of them to ensure that there were no mistakes, lectured incoming summer placed them on my associate’s desk, and made my way out of analysts on corporate fi nance, the offi ce just before 6 a.m. On my way out, I saw a good friend accounting, , and and fellow Penn Stater who was interning in Sales & Trading, Ryan K. Miller the use of various software refreshed and ready to start the new day. While her second packages. Most memorable day was just beginning, my fi rst day had just ended – only 62 to me, or rather more alarming, was the segment on the do’s and days left to go. don’t’s of banking. I was not exactly encouraged by the endless horror stories of past summer analysts costing the fi rm millions I would not say that my fi rst day was typical, but a banker can of dollars. Hopefully, I could learn from these mistakes rather expect an average work week of 70 – 90 hours. This dynamic than making them myself. differentiates Investment Banking from most other positions at a bulge-bracket investment house. Banking necessitates During training, every meal was complimentary, with delicious much longer hours, and the day-to-day work is completely snacks and cold beverages in between every lecture. In the unpredictable. evening, the incoming class of analysts gathered for socials, cocktail parties, and various sports activities. These were nice Although the hours seem intimidating, the day goes by quickly opportunities to meet analysts, senior bankers, and many of when you are working with smart, fun, and enthusiastic people the PSU alumni that had participated in the same program. who truly love what they do. And the professional experience Training was great. Unfortunately, this lifestyle deceived is phenomenal. You work with some of the most talented many of the summer analysts, as work began on the following minds in the business world, and develop fi nancial modeling Monday at 9 a.m. skills and unmatched analytical ability. I enjoyed the job, and without reservation, I would strongly encourage anyone My fi rst day of actual work started off slow—learning the interested in fi nance and accounting to pursue investment ropes, meeting colleagues, etc. By the end of the day, I was banking as a career. Bear in mind, though, that the lifestyle well-situated in my offi ce and had a solid understanding of my is not for everyone. responsibilities. Feeling comfortable, I made plans to meet my roommates, who were both Sales & Trading interns, for dinner. — Ryan K. Miller, LionTrader Editor I was excited to see my roommates to discuss our fi rst day of work. At around 6 p.m., just as I was getting ready to leave, an analyst approached my desk. I was fl attered that an analyst Last Spring I interned as a co-op with Johnson & Johnson would take the time to walk all the way over from his offi ce to in their fi nance department. I worked primarily in fi nancial speak with me. Unfortunately, this analyst did not come to reporting with the global expense team. Spending six months my desk to chat. Rather, he needed me to stay overnight to fl i p with J&J, I got a fi rst-rate feel for what a full-time position in books for a presentation to be given by our senior bankers the continued on page 12

11 A Day in the Life continued corporate fi nance entails. My main responsibility was to provide Private Wealth fi nancial support and information to the Human Resources, Management Communications, and Customer Service departments. I Private wealth management compared what they had spent so far this year to what they is becoming an increasingly had budgeted. I was responsible for fi nding answers as to why important area of investment there were variances between their actual spending and their , not only for growth, forecast. For instance, if a department was $150,000 over but also for maintaining stable their salary budget, what was the cause? This involved doing profi ts. Revenue from sales research and calling the necessary people who could provide and trading and other market valuable information. The spending discrepancy may have been sensitive areas can fl uctuate caused by the hiring of an additional employee or an increase from quarter to quarter. in bonus and salary for a particular employee, just to give a However, the consistency of few examples. After speaking to other employees and doing John M. Beberus private wealth management the proper research, being able to provide my business partners to generate consistent revenues is making it a more attractive with an answer and sometimes a solution gave me a tremendous fi eld to enter. As an intern for ten weeks in private wealth feeling of accomplishment. management, I was able to experience fi rst-hand what makes Another of my primary the division such a vital part of any investment bank. responsibilities was to At the time, I had a very broad view of the fi nancial markets provide the Board and upper and was unsure as to what opportunities there were. After a management with monthly series of interviews, the opportunity to work in private wealth fi nancial reports. The fi nancial management was offered. The only way to describe my summer reports are a snapshot of the experience is to say that it was “fi fteen feet wide and ten feet entire company’s financial deep”. In other words, in private wealth you gain experience position. These reports are in all different markets, but have the opportunity to only go essential to J&J and were used so far in-depth. as a reference by all fi nancial analysts and management. Constructing asset allocations for clients was a major task of Other responsibilities included mine this summer. The clients that I worked with all had a DJ Venn general ledger submissions, minimum liquid net worth of at least $30 million. These clients travel expense reports, capital have the chance to invest in funds and other areas not available account reconciliations, and expense accruals. Although most to your average investor. Along with multiple equity strategies, of these reports and accruals were only completed on a monthly including hedge funds, fi xed-income funds, and commodities, basis, my average work days normally consisted of preparing clients also have the opportunity to invest in real estate and these reports for that month’s deadline. Although a month seems private equity. Multiple conference calls were held each week like a long time, in the corporate world it fl ies by. to discuss new strategies investors could use that were entering the platform as well as to discuss past performance. Conference The main difference between corporate fi nance and the other calls were also held with prospective clients to discuss future fi nance professions, such as investment banking and private strategies, and as my responsibility grew, I was put in charge of wealth management, is that corporate fi nance focuses more on dealing with the clients directly. reporting, rather than investing and forecasting. The majority of my responsibilities included reporting and accruing, which Teamwork was emphasized to the fullest extent. I worked with is accounting intensive. I feel that this separates corporate a well-established group of investment professionals who took fi nance from the investing fi nance that is normally associated me under their wings and showed me the ropes. Teamwork with Wall Street. they said was tantamount to building a strong and productive workforce for the clients. I will never forget a dinner with one The six months I spent with J&J was invaluable. It gave me of the professionals on my desk telling me, “It’s so important to real world experience that a classroom cannot provide. Before construct a good team. I’ve seen clients lost because of poor team I began my co-op, I thought the only for fi nance majors performance.” The investment professional, client analyst, and was Wall Street, but everyone should know that corporate fi nancial analyst must all be aligned when trying to exceed the fi nance offers excellent opportunities as well. client’s expectations. However, the team wasn’t always free from —DJ Venn, LionTrader Staff confl ict. I received assignments from the three professionals

12 on my desk, often creating issues on whose project should be After training I reported to my fi rst desk, Bank Loan Trading, completed fi rst. Prioritization was crucial to being successful at 6 a.m., exhausted as my body adjusted to waking up before on the desk this summer. sunrise. I saw numerous deals enter the marketplace and watched frenzied traders scamper to exit positions after ratings When one thinks about the divisions of an investment bank downgrades and suspected fraud. talk was peppered and which ones are the most stressful and require the longest with choice four-letter words as I stood off to the side trying to hours, usually it is investment banking that comes to mind, not learn as much as possible about the situation. private wealth management, but within two days my team had two client reviews, and a prospective client entering the offi ce. My next three weeks were spent on the fl oor of the American Due to the training of the new full-time analyst, I became the Stock Exchange. The atmosphere there was considerably full-time analyst for part of the summer. I was forced to hit different from the conventional trading desk. The culture of the ground running and learn very quickly. the American Stock Exchange is best depicted by the attire of the traders—ties and sneakers. Employees certainly didn’t fi t —John M. Beberus, LionTrader Staff the description of a white shoe investment banker.

My fi nal rotation was with Economic Derivatives, a product launched by Goldman Sachs in October 2002 to hedge “Each day, I had to decide whether to walk through the risk associated with economic indicators such as non-farm mortgage trading desks. These traders emitted such evil vibes payroll numbers and the consumer price index. Being such that I carved a wide loop around them every day. They were a new product, much of the group’s activities were devoted to known for hurling phones at the heads of trainees and were said marketing these derivatives. It was extremely exciting being a to have installed extra-long cords to increase their range,” recalls part of such an entrepreneurial group. Michael Lewis in his best selling novel, Liar’s Poker. The trading The program was intense, yet rewarding, as I was challenged fl oor is the pressure cooker of Wall Street, where millions of both mentally and emotionally. I gained a sense of confi dence dollars change hands at the blink of an eye. It is a fast-paced, that I never knew I had after constantly presenting in front dynamic environment where only the most business-savvy and of large groups who questioned my ideas and opinions. I not outspoken people survive. only learned about the products being traded, but also about Sales and Trading is the the mindset and personality of a trader. I learned the value of portion of Wall Street devoted strong relationships and immediate information. In the place to keeping a liquid secondary where cash is king and greed rules, Sales and Trading is not for market in which investors those with thin skin. can buy and sell securities. —Eugene E. Weissberger, LionTrader Staff This past summer I had the opportunity to intern in Goldman Sachs’ Sales and Trading program where I rotated through Bank Loan Trading, the floor of the American Stock Exchange, Eugene E. Weissberger and Economic Derivatives.

The program started with a week of training, where summer analysts were taught about fi nancial concepts, the culture of Goldman Sachs, compliance issues, and how an investment bank operates. We heard speakers from all across the fi rm, and had numerous networking events. While this was the only formal training we had, every Wednesday was “Curriculum Day,” where we heard numerous traders and salespeople speak about the products that they work with. Every Thursday ended with “Open Meetings,” where interns were grilled on their market knowledge and kicked out of the room if they gave incorrect answers.

13 STUDENT RESEARCH PAPER Airlines: The forces that keep air carriers from crashing into liquidation

ince September 11, 2001, it seems effective February 2006, after 30 months are right—the market will find its as though the airline industry has under Chapter 11 protection. equilibrium when supply is diminished; Sbeen on a perpetual downturn. i.e. a carrier or two fi le for Chapter 7 Airlines, subsequently, have been a Ultraconservatives and Libertarians have bankruptcy. drag on fi scal government spending— been screaming to let the market solve subsidized as they have been through the airline industry’s dilemma. They say Chapter 7 bankruptcy occurs when a emergency relief ($2.5 billion was that there is currently an over supply of company does not emerge, but liquidates awarded to the airlines for the effects air travel provided by large American its assets to pay off creditors. Those of the post-September 11 grounding) international and domestic carriers, who have purchased bonds or secured and excessive application of Chapter like Delta, United, and Northwest, debt are the fi rst to be paid off in the 11, a form of bankruptcy used when a the three most recent airlines to fi le for liquidation, but usually not dollar for company wants time to restructure their Chapter 11. When a market is out of dollar. There are six major forces keeping business and their debts so they can stay equilibrium and there is an over supply, bankrupt airlines from Chapter 7. Some in business and eventually emerge from are compelled to reduce prices of them are interrelated, as you will see, bankruptcy. For example, United only in order to stay competitive. In the which only makes them harder to break recently fi led a restructuring plan, scope of a pure capitalist society, these through. Ultraconservatives and Libertarians

14 Politics: days. Regrettably, though, if an airline per gallon of jet fuel. In the fi rst six Let’s start with the most obvious deterrent was to liquidate, the fl ood of planes into months of 2005, when the average price to any airline liquidation, politics. At the the market would create an over supply of crude oil was 51.505, Delta paid an time this article was written, President and send the value of used aircraft average of $1.51, a 50% increase over Bush was riding the deepest trough of his plummeting, thus placing the lessors in last year. job approval ratings ever—37 percent. a disadvantageous position. Unfortunately, for airlines, the full With such low numbers, President increase in fuel price spikes is not passed Bush, nor any other politician for that Credit Card Issuers: on to their customers. This is because matter—democrat or republican— The most ubiquitous, yet unnoticed, if short-term price spikes cause sharply wants to oversee the extermination of industry affected by the airlines is the rising ticket prices, less people will travel. over 60,000 jobs by the liquidation of credit card industry. One indication The result is that ticket prices increase one of the nation’s airlines. of the interdependence of airlines and less than the increase in fuel prices, credit card companies is the amount of and margins decline. Unprofitable Lenders: frequent fl ier miles accumulated to date. airlines, therefore, become increasingly The Economist estimates that by the end The growing role of aircraft lessors unprofi table. has been a resilient life preserver for of 2004, almost 14 trillion frequent fl ier the airline industry. General Electric’s miles had been accumulated world-wide; This explains the effects of fuel on the Commercial Aviation Services (GECAS) a value of about 700 billion dollars1. airline industry, but what about the is one such lessor. Not only is GE the effects of the ailing airline industry on Banks with credit cards that offer air leading maker of jet engines, but it is also their fuel suppliers? Delta and United mile programs clearly have a substantial the leading lessor within America. Over each consume more than 2 billion interest in keeping their respective airline half of its roughly 1,350 planes are with gallons of jet fuel annually6. If one in the air. One industry estimate links 40 American carriers. “At the end of 2004, such airline were to liquidate, before percent of Citigroup’s credit card revenue GE had 150 aircraft fi nanced to a value other airlines could pick up its routes, to American Airline’s frequent flier of $2.6 billion with US Airways alone,” there would be a surge in jet fuel supply program2. It is quite easy to understand, cites a May 19, 2005 article from The resulting in decreasing fuel prices—jet then, why American Express paid a $500 Economist. It is no wonder then that GE fuel suppliers would lose money daily. million advance to Delta Airlines3 in has been bending over backwards for the order to support them through these airline industry as it fi ghts through this Manufacturers: turbulent times. economic impasse. “The company led a Aircraft manufacturers represent another syndicate that lent up to $630 million Fuel: industry hugely affected by airlines. on a secured basis to Delta [and] has Manufacturers such as Boeing and In years to come, the immediate agreed to contribute $140 million to Airbus depend on airlines to continually economic wake of Hurricane Katrina US Airways through loans and deferrals update their fleets. Airplanes are not will be characterized by record high on lease/loan payments. Counting only cheap, so most airlines do not pay for commodity prices. Post Katrina crude US Airways, ATA, Aloha Airlines, and new craft with cash. For example, in oil, gasoline, and natural gas prices United, GE’s exposure is $5.4 billion,” 2004, customer financing accounted surpassed $69/bbl, $2.50/gallon, and reports the same Economist article. for $10.4 billion of Boeing’s long-term $14/Mbtu, respectively. As the price of assets7. Airlines either lease planes or As a safeguard for lessors, a provision crude oil rises, the price of its refi ned enter into purchase agreements for in Chapter 11 allows aircraft lessors to products rise in tandem. In 2004, when several years into the future. At the end repossess aircraft if an airline is unable the price of crude oil was 41 dollars per of 2004, Delta had 55 aircraft under to pay their lease obligations within 60 barrel4, Delta paid an average of $1.16 purchase agreements. To the dismay of manufacturers, purchase agreement or no 1 “Flying on Empty”, The Economist, print edition, May 19, 2005; “Frequent Flier Miles Soar Above purchase agreement, a liquidated airline Sterling,” Guardian Newspapers, August 1, 2005 cannot purchase airplanes. 2 “Flying on Empty”, The Economist, print edition, May 19, 2005 3 “Flying on Empty”, The Economist, print edition, May 19, 2005 Assuming that manufacturers did not 4 http://octane.nmt.edu/marketplace/prices/Default.asp anticipate one of their major customers 5 http://octane.nmt.edu/marketplace/prices/Default.asp liquidating, the market for new airplanes 6 Delta Air Lines 2004 annual report, 10-K would immediately experience a supply 7 Boeing 2004 annual report, 10-k; Delta Air Lines 2005 second quarter report, 10-q; United Air Lines surplus, depressing new aircraft prices 2004 annual report, 10-k; United Air Lines 2005 second quarter report, 10-q and, consequently, manufacturer margins. continued on back page

15 Airlines continued from page 15

Other airlines would need to move in and pick up the routes are unable to make the pension payments they promised to left behind. That would likely require the remaining airlines their employees, would be forced to pick up some of the tab. to purchase more planes. Even if the remaining airlines The maximum pension that the PBGC pays out is $45,000 per chose to purchase all new planes rather than used ones, the year, an amount less than the median income of every state9. manufacturers would be left with the fewest bargaining chips This assumes that the employee has reached a pension status at the table. that allows them the maximum. To be conservative, we will assume that every employee has reached that status. This would Employees and Unions: translate into $3.11 billion and $2.75 billion paid annually to By far the most publicized and well-known stakeholders in the Delta and United employees, respectively—roughly half of the airline industry are its employees and their unions. Politically, combined annual wages of the two airlines. In the end, $5.66 unions have tremendous power. Combined, Delta and United billion of consumer buying power would be stripped out of the employ over 125,000 pilots, mechanics, fl ight attendants, and economy in one fell swoop. others. U.S. labor organizations represent 80 percent of United’s With everything at stake—jobs, wages, political careers, 61,000 employees and 18 percent of Delta’s employees8. and industries that would be exposed to turbulent market Economically, employees represent the single largest cost to the conditions—it is no wonder that everyone works together to industry. From total revenues of $15 billion and $16 billion, keep the sky buzzing with air traffi c. The industry has effectively Delta and United paid $6.34 billion and $4.98 billion in created a web of support, which they can continue to fall “salaries and related costs,” respectively. This means that if Delta back on when times get tough. But what about the cost to the or United were to liquidate, billions of dollars in wages would be federal government and ultimately the American people? Just as siphoned out of the economy. However pensions would remain. businesses pass on increased costs to consumers through higher The Pension Benefi t Guarantee Corporation (PBGC), the prices, in time shouldn’t we expect the federal government to federal government’s pension safety net for employers who pass on these costs in the form of taxes? -Daniel M. Kokini, LionTrader Editor, with John Beberus, LionTrader Staff

8 Delta Air Lines 2004 annual report, 10-K 9 http://www.usdoj.gov/ust/bapcpa/bci_data/median_income_table.htm

CO-EDITORS-IN-CHIEF STAFF TECHNICAL ADVISERS Daniel M. Kokini Daniel Gibbs Suzanne Wayne Staff Ryan K. Miller Jon Hammarstedt Meredith Kwiatek, intern Morgan D. Samet D.J. Venn COPY EDITOR Leslie C. Vitale Ryan R. Ward This publication is available in alternative media on request. John M. Beberus Penn State is committed to affi rmative action, equal opportunity, and the diversity of its workforce. Eugene E. Weissberger U.Ed. BUS 06-42 MPC85307jlg

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